EXPERT OPINION: A Conversation with Laca Wong-Hammond
January 12, 2015
January 12, 2015. In this Expert Opinion, Laca Wong-Hammond, Managing Director, Duff & Phelps, discusses predictions for 2015, long-term care, and foreign investment in U.S. health care assets.
Laca Wong-Hammond is a managing director in the firm’s Healthcare M&A Practice, specializing in real estate transactions. Laca has more than 15 years of real estate advisory experience including acquisition and divestiture of assets, sale/leasebacks, developer selection, strategic planning and capital placement of debt and equity. Her clients include hospitals, healthcare systems, physicians, operators, developers, private equity organizations, and publicly-traded companies.
Prior to joining Duff & Phelps, Laca was the leader of the healthcare real estate practice at Raymond James and joined through its predecessor companies Shattuck Hammond Partners and Morgan Keegan. She has also held positions at JP Morgan’s real estate and lodging investment banking group, iStar Financial, and at Merrill Lynch. Laca is a FINRA series 7 and 63 representative.
Laca graduated with honors from Cornell University and studied at the London School of Economics and Harvard Law School. She served as a Co-Chair of the 2013-2014 Building Owners and Managers Association (BOMA) Medical Office Buildings and Healthcare Facilities Committee. She was selected by Real Estate Forum as a 2012 Woman of Influence for her work as the leader of real estate in the healthcare investment banking group, and named one of NAAAP’s most influential APIA New Yorkers in 2013. Laca also is a member of the Board of Trustees at Chen Dance Center, a not-for-profit performing arts school, theatre and dance company in New York.
Read the Interview Transcript:
The markets are still going pretty crazy in the long-term care area, and I’m happy to be here today with Laca Wong-Hammond. She’s Managing Director at Duff & Phelps.
Laca, you made the switch from Raymond James to Duff & Phelps a few months ago. What’s your focus at D&P going to be on the long-term care side of the business?
Thanks, Steve, for your time, and I appreciate this conversation. Duff & Phelps, what drew me to them is that Duff & Phelps is a well-known, long established firm, a powerhouse in the corporate finance and valuation business, founded in 1932. In 2013, management and a consortium of private equity funds, including the Carlyle Group, took the company private. Over the years, it’s really grown, deepening its services offered in its industry groups, including consumer, energy, technology, industrials, real estate and healthcare.
For me, it felt very synergistic to move my healthcare real estate practice over to Duff & Phelps, taking advantage of this deep industry expertise. The service we offer within my practice includes the buy side or sell side advisory on businesses, its real estate, capital finance, debt and equity, and joint venture formation.
We start at the strategic level first, soup to nuts on transaction advisory, all the way from due diligence to closing. Within my service line we also cover the other spectrum of care, including hospitals, physician practices, and other end users of real estate including the recent developers. In value-based healthcare, they are becoming great partners with long-term care operators.
So the synergies are very deep, with 50 plus healthcare experts in the firm and 80 plus in real estate.
But are your marching orders at Duff & Phelps going to be to kind of work on the long-term care side of the business and beef that up?
I’m certainly focusing a large part of my efforts there. As you know, my clientele is broader than just long-term care. We also cover hospitals, physician practices and other users and occupants of real estate. So they run the entire gamut of healthcare real estate.
My services are very complementary to the larger healthcare M&A practice, since we cover all the healthcare subsectors within this corporate finance function.
How are you splitting your time between the M&A side and financing side? Are you focused more on one or the other?
Sure, there’s actually demand on both sides. We actually closed a number of transactions on the sell side within healthcare. Within my specific healthcare real estate practice, we’re actually bringing to market a couple of M&A transactions in the first quarter of next year, so stay tuned.
We get a lot of calls on the financing front as well. The capital providers are still very cautious in their underwriting of the borrowers. So depending on the risk appetites and the objectives of our clients, we may or may not take on an assignment unless we know that their objectives are what current market offerings are copasetic with. We will structure and customize a financing solution for them, both on the debt and/or equity front.
What are you advising clients? Interest rates, as we all know, are still so low. They’re low for fixed. They’re really low for floating. Are you advising clients to go fixed now, or stay and take advantage of the low floating rates?
A financing structure really has to mesh with the company and the client’s objectives in the longer term. Oftentimes, there’s an example I love using because it was a recent situation where our client had thought of levering up during the construction phase of a project, and they didn’t really think about long term gains harvesting.
What happened was, they created a structure where the leverage was very onerous, creating a high pre-payment penalty if one was to pay off the financing early on, which is what was required in a sell side situation. And instead of including an advisor on the front end to better structure this optionality, prepay optionality, they ended up netting out less profits than could have been otherwise.
So in that specific situation, they issued fixed, and it didn’t matter the range necessarily. But the structure of the financing was so onerous on the early prepay side that if an advisor was involved earlier on to help structure this optionality, they could have gotten a lot more profit.
So we’re seeing appetite in the market on both a fixed and floating basis, but it really depends on what a client’s objectives are.
Right, what makes the most sense. Now everyone is talking about this increased presence of foreign capital coming into the seniors housing market. What do you see out there?
There’s interest abroad from Europe, from Asia, and especially in the Middle East. Middle Eastern investors, especially pension funds and insurance companies, are particularly interested in U.S. real estate. This is not just for long term care, but also for other property types, including hospitality, residential, office, industrial and student housing.
On the debt front, what we find really interesting is that these pension insurance companies are particularly interested in this medium term vehicle, anywhere from three to seven years, say. And they don’t mind issuing, buying bonds at variable rates or fixed.
And what’s most interesting for our client base and your audience is actually greenfield projects, if pulled into a portfolio of stabilized projects, because both to-be-constructed and stabilized projects are of interest to this investor base. A to-be-constructed project could utilize these bonds to replace the mezzanine equity tranche of the capital stacks.
So essentially, a construction project could be 100 percent financed so long as the portfolio’s overall leverage does not exceed 75 percent. On a fixed rate base, that’s between three and seven years. This kind of debt vehicle offers rates under five percent or under six percent in current capital market conditions. So covenants are very flexible. It’s unsecured corporate debt. And this market is very, very interested in U.S. real estate, including long term care.
How about the M&A side? Are the Middle Eastern and foreign investors coming in much looking at acquisitions, as opposed to just financings?
Absolutely, and they’re looking at more portfolios than single assets, because their equity checks need to be in excess of $75 million or such. So as you can see then, $150 to $200 million portfolio really grabs the attention of these Middle Eastern investors, for instance. And they understand the healthcare real estate market fairly well. They understand there’s reimbursement pressures. We’re facing federal and state budgetary pressures. So they will underwrite that risk different than if an operator was more exposed to private pay, for instance.
When foreign investors are investing in the real estate as opposed to lending, are they coming in direct, or are they usually teaming up with a local private equity partner?
I’ve seen it done both ways. Some investors will come in direct because they’ve already created a relationship with a U.S. based advisor, but the investments are directly made 100 percent from the capital abroad. And more often than not, they will enjoy a relationship with a minority joint venture partner that is based and exposed in the U.S.
In either case, however, management is outsourced to a local partner in the United States. So if an asset was in Washington, D.C., they like a local property manager or an operator to be their eyes and ears and boots on the ground.
Which obviously makes a lot of sense. So what’s your prognosis for 2015? Are we going to basically see a repeat of 2014 in the deal activity, and more capital coming into the market?
I think the dynamics are very strong for both sellers and buyers. For sellers, it’s a really great market because cost of capital continues to be very, very low. Just think about the one financing example we just spoke about.
Sellers are, as a result, enabling themselves to enjoy unprecedented valuations across the spectrum of long-term care. For buyers, there’s so many new options for financing, not just traditional bank debt, agency debt or capital from U.S. based equity sources. So in both schematics, this creates unprecedented, very strong valuations in all of real estate, especially healthcare.
The U.S. healthcare market is still viewed as a very stable, high growth sector, benefitting from demographic tailwinds. So I really think 2015 holds great prospects.
Well, hopefully, some of your clients can tap your Middle Eastern pension fund financing. We’ll see what happens next year.
Well, keep us posted on your deals as you start closing them next year, and good luck at Duff & Phelps.
Thank you so much. Happy holidays.
Same to you.