EXPERT OPINION: A Conversation with Doug Korey

March 16, 2015

March 16, 2015.  In this Expert Opinion, Doug Korey, President, Lancaster Pollard Finance, discusses financing options, bridge loans and balance sheet lending...

Read the Transcript

Doug KoreyDoug Korey is the president of Lancaster Pollard Finance Co., LLC, a finance company that offers balance sheet lending and investing to the seniors housing and health care industries. Prior to joining Lancaster Pollard, Korey was a co-founder, partner and managing director of Contemporary Healthcare Capital, LLC. There he was responsible for the day-to-day management and oversight of all activities, including the formation and management of seven health care funds and three licensed small business investment companies. He has over 25 years of structured finance experience and has financed over $1 billion of debt and equity to the senior housing and long-term care industry throughout his career.

 

 

Read the Interview Transcript:

Steve Monroe

Lancaster Pollard, as many people know, has been doing a lot of financing in senior's housing and care, and they have just formed very recently a new company, Lancaster Pollard Finance, which is going to be doing balance sheet financing, which they haven't done.  I'm here with Doug Korey.  He is the president of the new company.  So, we're going to talk about financing.

You've been lending to this industry for a long time.  Now you are basically president of a balance sheet lender.  What are your plans for this?  

Doug Korey

You know, it's an interesting time in the cycle of the overall industry.  We've been through how many together, and I think it's a terrific opportunity to bring this type of capital of leveraged financing to the small and mid-sized market, utilizing Lancaster Pollard's very unique origination platform.  I think it's still under-utilized today in terms of the types of products.  We see a lot of equity.  We see a lot of cheap bank debt.  But we just don't see the in-between size, particularly for the small company.  So, we plan to grow this event in a very controlled but large scale over the next several years.  

Steve Monroe

Yeah, how much do you think—on an annual basis, how much do you think you can grow it?  

Doug Korey

I think easily a couple hundred million dollars a year to a sizeable platform.  It's just without anybody in the market today.  

Steve Monroe

And all balance sheet, that you keep it on the balance sheet?  

Doug Korey

For the most part.  Where there's opportunities to sell off some pieces in senior capital because I think there's a considerable number of buyers for that type of product, we'll do that.  But we're really in the market and have an expertise in holding leverage, managing leverage, mezzanine, preferred equity and the types of products that aren't as readily financed across the board.  Skilled nursing in particular is under utilized today, under served.  Acute, assisted.  Anything that has a true health care expertise, almost from an investment banker perspective and operating perspective, can certainly use this type of walk through a facility and understand it.  

Steve Monroe

Now, Lancaster's been very active in the HUD market and Fannie, Freddie, tax-exempt bonds.  So, you're coming in as a balance sheet lender.  Are you almost going to be competing against your new colleagues at Lancaster Pollard?  

Doug Korey

No.  In fact, we took some time to walk through this opportunity together, and I came away with the fact that the bankers are already doing this type of structure in a lot of parts.  They treat each client individually through their full cycle of growth.  And so, agency certainly was the product that they are so well known for, but whenever there was a capital product that they needed, the banker would try and arrange that type of financing.  We did quite a bit of this.

In fact, the finance company, although it's relatively new to the market in terms of name, has been going on for about a year now, and they've done a few bridge financings that have been I think fairly creative.  And so, I'm here to raise that level of structure in terms of scope and types of products.  But the bankers already have a real head start on this.  

Steve Monroe

Is the focus going to be across the spectrum, SNFs, AL, IL, acquisition, refi, development financing, everything?  

Doug Korey

Yes.  

Steve Monroe

Anything you think you might—or where you see the greatest need?  

Doug Korey

Again, I think the acute side, or more the acuity side, has more need.  I think the skilled side for sure.  Probably Lancaster Pollard has financed—in terms of an overall portfolio has financed more skilled, but is I think very well balanced between assisted living, memory care and skilled.  And IL to the extent that we're part of a campus perspective.  

Steve Monroe

And now as a balance sheet lender with your risk, any concern about where values are going in the market with cap rates continuing to compress?  I heard today that people are expecting—a lot of people are expecting another 25, 50 basis points drop in 2015 in cap rates.  

Doug Korey

I think we always have a concern over value, but we're—in this type of cycle.  But I think we're more about creation of value, so we're not going to get into, other than on our true bridge and agency products, any sort of refinancing activity, something that's attained full value or close to full value.  So, not to take interest rate risk and cap rate compression.

Where we will excel and continue to excel is in value creation construction and turnaround financing and substantial renovation, things where operators actually have to put in some money to work and put their expertise to work.  I would expect that all of our products will get refinanced out as opposed to a sale, and I think it will feed directly into our agency and exit expertise quite nicely.

In fact, we've already closed since I've gotten here, and there are loans going directly into the agencies from customers who have never done this this way with Lancaster Pollard, but for the fact that this product now is drawing them to the platform.  

Steve Monroe

And what about on the development side?  Because as a balance sheet lender you can do construction financing, and I assume you will be doing some—

Doug Korey

I think it will be a good-sized component of what we do.  

Steve Monroe

Are you concerned about the uptick in development, really in the assisted living, memory care side of the business?  

Doug Korey

There are some markets we're concerned about, but I think overall from the small-, mid-sized operator perspective there are many markets that are still dating back to the '90s that haven't been touched in a substantial way.  So, I think that there's still a lot of opportunity out there.  Skilled certainly has a lot of upside for redevelopment, replacement facilities, new facilities in many states that we're still seeing a very aged component.

And we're going to be selective in the major metros that have seen a tad of over- building or approaching that.  

Steve Monroe

How about the skilled side?  I would think that now you've become a balance sheet lender, I'm sure you've got clients that are 30-, 40-year-old nursing homes, so you're putting $2, $3, $4 million into their market for pre-renovation capital which you do on balance sheet, and then once everything has kind of settled down, then your loan gets taken out with a refi.  Is that—do you think that would be in the plan?  

Doug Korey

It's a perfect opportunity for our bankers.  They get to touch the client through the entire cycle of capital process, from that initial creation of the value through the exit.  And I think that that's exactly what the customer wants.  They want the expertise.  They want people to take risk with them.  And I think that's what our specialty is.  

Steve Monroe

Well, I know you know risk because you've done a lot of high-leverage mezzanine financing in your previous life, so you are—over those years, you were very comfortable with that risk.  

Doug Korey

Very comfortable.  

Steve Monroe

You know how to measure it and how to price it.  

Doug Korey

That's right.  And I think that for operators today, they have a choice of taking on fairly—although less expensive today than years ago but still very dilutive equity from the outside, typically in small and mid-sized groups who don't have large private equity firms chasing them.  Or traditional refinancing coming in.  If you want to own a facility, the stack structure of using mezzanine and preferred is really a preferable way for many owners to obtain that.  Then within three to four years refinance through an agency or a long-term hold, that's a very cheap form of exit.  

Steve Monroe

Yeah.  Well, good luck.  I'm sure you're going to have—there's just so much going on.  I'm sure you're going to have one hell of a busy 2015.  

Doug Korey

We're really excited, Steve.  Thanks.  

Steve Monroe

All right.  Good.  Nice chatting with you.  

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