OCTOBER 14, 2003 - The leading financial, regulatory and operating experts from the seniors housing industry are gathering this week at the 13th Annual National Investors Center conference to discuss the state of the industry and share key strategies they've used to grow their investments. MHN's associate editor, Maria Siakavellas, spoke with Kevin McMeen, senior vice president of real estate for GE Healthcare Financial Services, shortly before the conference began to find out more about some of the issues that are likely to be hot-button topics for the executives in attendance there.

MHN: How is the overall health of the long-term care industry these days?

McMeen: Right now, the seniors housing industry is in a period where it has hit bottom and has been bouncing along that bottom of the cycle for the last six to 12 months. It is poised for [upward] movement in terms of better performance at the individual market level as well as the individual company level. That is [the case] with both independent living and assisted living.

So what we are anticipating is that things will continue to improve over the course of the coming years, and, as a result of that, it is a very attractive market for us to be in. We have been there in the seniors market consistently for the past seven years or so.

On the skilled-nursing side, there is a similar situation. There is some relative stability, but you have some challenging situations that remain. The state governments have addressed some issues they had at the budgetary level, and they have gone back and looked at possibly cutting Medicaid rates. But as the economy goes, so go some reimbursement levels with Medicaid.

So that is something that is still an unknown--whether the economy will improve to the level that state budgets need to improve--which will in turn have a positive, or at least not a negative impact, on Medicaid reimbursement. From the Medicare stand, which is a federal reimbursement, you are finding that is a more stable situation. [But] you still have issues in terms of liability and how to insure against it on an operational level. So those things are creating some challenges for that part of the industry.

MHN: Which of the long-term care sub-sectors are lenders increasingly comfortable with?

McMeen: What we are finding is more sporadic toe dipping, if you will, by different lenders back into the market [in the independent living and assisted living sectors]. It is a challenging place typically to lend into because it is a specialty business within the real estate industry. And you need to have a certain level of expertise, a resident expert within your lending institution, to really be successful.

What is happening is some of the lenders recognize that the market has hit bottom. They anticipate it will improve, they want to lend there, but they don't necessarily have the expertise so they are doing it rather cautiously.

On the skilled-nursing side, though, it is much more infrequent in terms of the deals being done out there.

MHN: What types of lenders are displaying interest in seniors housing transactions?

McMeen: You will find some local banks and regional banks that are getting involved. There were some institutions that specialized in seniors housing in the past and did a lot of business, then basically stopped originating business over the last few years. Now as they work through issues in their portfolio, they are starting to return to the market again somewhat cautiously.

In contrast to that, our business has been growing significantly over the past several years as we have been able to provide consistent capital to our customers. Even as the market turned south and occupancy started to decline, we have that resident expertise within GE Healthcare Financial Services that can really go out and understand the market, be successful in structuring and originating transactions to serve our customers.

MHN: What criteria are lenders structuring transactions against?

McMeen: Lenders are looking for stable cash flows from the properties they are financing and they are looking at relative stability within the individual marketplaces that properties are located in. [Also] they are looking to assess operators' financial wherewithal and their ability to be successful going forward.

I think that there is more of an attention to those criteria since the slowdown. In the past, there was a lot of overbuilding in the sector. What happened was lenders generally became a little bit less focused on their underwriting criteria as they were competing for transactions. There was a lot of capital in the market, and when that happens there is a tendency at times to lose sight of some of your credit criteria and do some things that maybe you shouldn't be doing. I think today people are much more focused on that credit or underwriting criteria and they are not deviating from that just to win an individual transaction.

What is critical to the ongoing success of any institution that lends into this environment is that expertise [in long-term care]. GE Healthcare Financial Services has a significant amount of infrastructure, has been in the business for a long time and continues to finance its customers when there is both a very strong market with a lot of competition as well as when there is a weak market. So if you are an operator, stability on the part of your lender is very important. What some operators find is that as lenders suffer with bad deals they've done, they have a tendency to want to exit the marketplace and that can be a very challenging situation for an operator. So expertise in your capital provider is very important.

MHN: What financing products does GE Healthcare Financial Services offer the long-term care industry?

McMeen: We really have two primary products. First there is an interim, floating-rate product, which is anywhere from three to five years in term, and yet it is designed to finance seniors housing facilities individually or collectively as a portfolio. We also have a fixed-rate product, which is longer in term, about seven to 10 years. It is designed to provide a stabilized facility and operator of seniors housing with a long-term solution to finance that stable asset. Relative to the competition, really the only source of long-term fixed-rate financing is through agencies such as Fannie Mae or Freddie Mac or FHA. On the floating-rate side, it is typically going to be local or regional players who provide that type of debt. We don't provide construction financing and there are not really any national players out there that do. It is more of a local-lender-type financing environment.