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Ep. 126: Rich Lerner

Rich Lerner is a partner in Housing and Healthcare Finance (HHC), the nation’s leading FHA lender to the multifamily and senior housing sector. He discusses the senior housing market and impact of COVID on hospitals and skilled nursing.


Lucas: Welcome to Bridge The Gap podcast, the senior living podcast with Josh and Lucas. Got an awesome show on deck today. We have got Rich Lerner. He is a partner at HHC. Welcome to the program. 

Rich: Thank you. Thanks for having me. 

Lucas: Well, we’re glad to have you on here.

Rich: As a guest, I’ve liked a bunch of these before.

Lucas: Right. You’re one of our deepest longtime listeners. I appreciate that, right?

Rich: Pleasure. 

Lucas: And so you’re also a board of trustees at Inglewood Hospital and Medical Center. 

Rich: Chairman of the Board. 

Lucas: Right, right. So you’re involved in a lot of things, as well as a very accomplished musician. We see the bass guitar in your background. You and I have actually played onstage together at the House of Blues. 

Rich: Yes. Sweet home Chicago. 


Lucas: That’s right. We had, we had a blast with that. What have you been playing your whole life?


Rich: I have not. I started about three and a half, four years ago. 


Lucas: What started that?


Rich: I always wanted to, and a friend of mine who was in the graphics industry was out of work and decided he wanted to take a break and teach music to some people. And I was like, oh, I always wanted to learn bass, can you teach me bass? He said sure. And that was it. 


Lucas: Well, we’ve had a lot of fun with that whole senior living band thing. I know that you guys are good friends with the people at Blueprint and I’ve heard some of that backstory. That’s great. 


So Rich, give us some of your background that has gotten you into the finance space and then specifically into senior housing and healthcare. 


Rich: Well, I was an English major, and economics- I doubled. I got an internship by luck and happenstance at First Boston while I was still in college, on the trading floor and worked for some bond traders. And the first thing I ever did when I was not even interviewing, but got to meet the guy was helping him bid on a pool of FHA mortgages backed by, in that case it was multi-families, but there was probably one assisted living in there even though they probably weren’t many assisted livings in existence back then. And I traded all different types of product in the fixed income world and mainly the mortgage world, but always stayed with that FHA, which now is Ginnie Mae background. 


Stayed at first Boston till 1997, where I went quickly to Adila. If you remember, in ‘98, the skilled health care and assisted living world went through a bit of a blip and there were few people lending and I started writing bridge loans for all my FAJ originators to get their borrowers from acquisition to HUD. And it became a little bit of a niche business. And then I went to DLJ and we started with the Life Care Center of America loan, $480 million loan in 1999 to bridge them out of Metta trust into HUD. And I certainly was a senior housing expert and that became a large business in Credit Swiss. And we did about $10 billion of go-private and bridge lending on skilled and assisted living. And I was a banker. I was really a trader in bankers clothing at Credit Swiss. And left there in 2008 when I saw the market’s falling apart and did a quick detour to help the bankruptcy courts on the Sunwest bankruptcy, and then joined Eric Lindenauer.  I helped him create this company and he, and I bought it out of cap source. And we’ve been doing this ever since. 


Lucas: Wow. Man. Okay. That’s quite a list of accomplishments. Were you, were you involved in NIC back in the day?


Rich: Not at the beginning, but Forrest Preston walked me around my first NIC conference in 2002, I think. So, yeah, I’ve been going to NIC since 2001. 


Lucas: A lot of changes since then. 


Rich: Yeah. A lot changes, although FHA still lends on skilled healthcare.


Lucas: Gotcha. Yeah. So Josh, having Rich on, you know, it’s, it’s a really fun for us to talk to people that have been doing this for awhile because we’ve got such great context. And one thing I like about Rich is that he’s not a status quo guy. Like he’s willing to take on many different challenges and continue to pivot. And so Rich, let’s talk about what is transpired in the marketplace, given the COVID disruption. I know that you guys have your own perspective and things that have gone on at your own company, but give us some market updates on what’s been taking place.


Rich: It’s interesting. I’m not sure we really have a clear picture. The market so far, but if you look first at our portfolio, it’s healthy. We had quite a few people take advantage of HUD’s offer to use replacement reserves to make debt service payments. And there’s probably going to be some facilities that have some issues. And depending on where you are in the country, there have been some precipitous occupancy drops in certain facilities. Now the parts of the country we’ve seen business as usual and strangely within even a market, you can see facilities that are more or less where they were six months ago. And some facilities that have, as I said, I have 50 empty beds out of 220 where they normally don’t. And I think it’s too early to tell because the government did get, they were a little slow to do it, but they did provide quite a bit of cash in at least the short term to facilities. So most of our borrowers have more cash on hand than they ever have.


They’ve used it to pay down their receivable lines. We’ll see if their occupancy can recover and if there’s issues or cracks in the market. I don’t expect them to show up for another couple of months, but we’ve seen some lenders pulling back on the bridge loan side, but we’ve seen a lot of lenders still staying where they were and now writing slightly lower leverage and maybe a little bit extra spread on their deals, but there’s one large deal we’ve been working on with a bridge lender. It’s in excess of a hundred million dollars and the deal is expected to progress. And the bridge lender is still standing by their commitments. And that’s not unique. It’s just one I’m talking about on the skilled healthcare side. I think it’s too early to tell exactly where we’re going to roll out. But I think when it comes down to it, we provide a service and I’ve been on this soap box since 1998. When I had to convince the rating agencies that we could do a skilled healthcare securitization. And they didn’t understand what skilled healthcare did, but we provide a service at the lowest cost that is necessary. The government’s decided they’re paying for it. And if the government’s paying for it, they’re going to go to the lowest cost they can find, but they’re not going to send seniors home without care and no one to take care of them. And that means they’re going to be in skilled healthcare facilities and it’s going to be there for a long time. And it’s a necessary service. People are going to continue to age. They’re going to continue to need the assistance that’s provided. And no one has yet figured out a better option.


There might be one and we need to figure it out probably, but as of now, no one has, and that’s going on for 45-50 years. And if you really want to understand it, look at what happened after 2000, when there was the change to PBS as a payment model from cost plus and the government overcut and put five in the seven public companies out of business. They pivoted, they gave you the extra 25 bucks they had over cut back so that everyone didn’t go bankrupt. The big guys did the little guys didn’t, but since then it BFA puts out a report every year on Medicaid rates. And they tend to project about a third of the States cutting their Medicaid rate every year. And then when you go back and look at their next report, usually one or two actually cut their rates. Almost all of them end up raising their rates every year because they still pay less than it really costs and it’s a necessary service. So that little dance has been going on for 20 years where everyone goes, Oh, we’ve got to cut the Medicaid budget and they go to cut it, but they know if they cut it, they’re going to be shutting down homes. And there’s going to be nowhere to house very ill, elderly people, and they restored the budget. And I think we’re in the same place.


So there’ll be some short term blips. There’s going to be some pain because of some occupancy pressures that COVID’s cost, but people are getting older. And the other thing that’s been fascinating to watch, when I started in this industry in a real way in ‘99, 2000, everyone was talking about the baby boomers turning 65. Even back then I knew that was silly because Sam Zell was talking about it. And I think he was 76 at the time and still running his public companies. So why he thought 65 was a senior housing age, I have no idea, but clearly it’s not. But we are reaching the point now where we finally have more people turning 83, 84 than the year before. And so you’re beginning to see the demographics really hit the industry and we have been talking about it for 25 years, but it’s here and we haven’t even talked about that. 


Josh: So Rich, on the topic that’s a lot of great information, but on the topic of occupancy the decreases that we’ve started seeing a little bit of, what do you mainly attribute that to? Do you think it’s more mandated around regulatory environments or is that due to the consumer waiting and holding out, putting their loved ones or making that decision to move or a little combination of both?


Rich: So the other problem we have sometimes as an industry is we’ve grouped two very different businesses into the sand bucket. Private pay, senior housing and skilled healthcare. And the drivers are very different and the payment source is very different. It’s like private insurance versus government, verses Medicare. So I think that on the senior housing side, it’s definitely not the majority consumer driven. If you can’t do a tour, you’re not going to have a move in. If people don’t want to go out, you’re not going to have them move in. If they’re reading in the press, that when you’re in a communal setting, you’re going to get COVID, they don’t want to move their elderly loved one. A little bit of this also affects senior housing, but on the skilled healthcare side, some of it is you just weren’t allowed to accept new patients if you had COVID in the building. A lot of it was the press around nursing homes, especially in the Northeast where there were horrible breakouts. We can talk about who’s at fault for that. I don’t think it’s the industry to a large degree, but it’s worth discussing and infection control is always something worth discussing. But when you shut down elective procedures of hospitals, that’s your pipeline for your rehab and a lot of your longterm stay clients because elective surgery isn’t oh, I have something on my hand and I want to have it removed. Elective surgery could be a heart procedure that considered elective because I could do it this week, or I could do it next week, or I could do it in three weeks. But if I don’t do it for four months, I’m probably not gonna make it.


And those cardiac surgeries and a lot of the orthopedic surgeries, those feed the Medicare side, and ultimately quite often the Medicaid side of the business. And unfortunately, we’ve also seen a trend where people are scared to go to the hospitals. Emergency room admits are down across the country. They’re down significantly in the Northeast where we had the first COVID scare. And you’re seeing more people, we call it pronounced in the field where the EMS shows up and they’ve passed away. That’s up somewhere between three and 400% in the tristate area, because people are scared to go to the hospital. They’re scared to go to their docs and they’re dying because of it. And hospitals never or rarely used to see someone come in with appendicitis, that’s completely ruptured and they’re septic because you get a really bad appendicitis pain. You go to the hospital. People were scared to go to the hospital and they’re suddenly showing up with ruptured appendicitis.


That’s leading to, you know, that’s the top of the funnel that feeds skilled healthcare. So that’s where a lot of this is coming. It’s gotta be temporary, sooner or later, people are gonna realize I gotta go to the hospital. People are going to realize, no, you’re not going to get sick at the hospital. If you want to look at infection, control hospitals, they’re good at it. They are very good at it. And I think you’re going to learn in the aftermath of this, that frontline hospital workers who were properly gowned and masked actually got COVID at a lower rate than the general population. I can tell you it’s true in our hospital. So it takes awhile for that to bubble into the psyche. But I think the occupancy’s gotta come back.


Josh: Well, you know, I appreciate you also kind of pointing out the differences that often get bundled together when we just say senior housing, I think, you know that is an issue to point out, both are greatly needed, but both are different in their own rights. I just got a study. I don’t know if you guys saw it. I just started thumbing through it. It came out yesterday from ASHA. And I think it was more geared towards the private pay senior living independent, assisted, memory care communities, but it seemed to show fairly favorable still perception, I guess, in the marketplace of people that are choosing still to move into senior living. It seemed like the people that were kind of on the fence of whether they were gonna move or not or take a tour, obviously have held on longer. But the people that already kind of knew they were looking and needed senior living haven’t delayed moving in. So I thought that maybe was an indication that maybe this occupancy thing is if we can get past this COVID is going to bounce back pretty quickly. Do you have any thoughts on that?


Rich: I think the demographics are there. I think we have habitually under estimated the demand in a market because even around here, they build a new one. It fills up maybe not as fast as people thought quite often the overbuild, but I think we’ve also involved, especially on the senior housing private pay side to really understand the service we provide and how to market that compared to where we were 20 years ago, when you saw that first overbuilding and massive, massive problems with fill up. People used to feel guilty about moving someone into a senior living facility. And we didn’t know how to market it. So you had Marriott out there thinking they were going to take the industry over cause they had their Marriott rewards program. Nobody realized that that’s not the way to fill a facility. The way to facility fill is to reach out to the community, find the docs, find the clergy, find the people who provide social services and explain to the caregivers and the loved ones that an elderly parent feels guilty when they’re imposing on their children. The children feel guilty when they feel like they’re not doing enough for their elderly parent. And it ends up being a really toxic environment when they’re home and they really can’t be cared for. And everyone ends up happier when they’re in the right facility with the right people and they know their own people and care that they need without feeling guilty about it. And we’ve learned the market then someone, a friend of mine in the industry pointed that out 10 years ago and it makes a big difference. And that’s why we regularly still underestimate the demand in the market and we know how to do that.


Now we know how to get the docs. The docs have seen, I’ve got an elderly patient. They’re not doing well living where they’re with their daughter, but they’ll do much better when they’re in a facility that knows how to care for what they need. That’s going to surround them with people, with their interests and get to take all of the pressure of both sides.


So I think we’re fine as an industry, especially on the senior housing side and the perception of assisted living is fine. You don’t read a lot of hatchet jobs in the press on assisted living. It’s that low hanging fruit, skilled healthcare, where they rent the hatchet jobs. And of course you have a frailer population in the skilled health care facilities. Now we have got acuity creep happening in assisted living. It’s happened significantly over 20 years. And I know, I hope that we don’t allow that to get to the point where you start getting bad stories of senior housing.


I like what ASHA’s doing and there you go. And I think they’re right, because the perception is very good, but you also said that. I just saw the American Healthcare Association program that they’ve rolled out with ads and a campaign to try to get people to understand what skilled healthcare does and how much of a vital service they provide and just how unsung those frontline workers are in skilled healthcare. Because through this pandemic, the people that work in our nursing homes, we were doing parade drive-bys for the hospitals. They were doing the same thing and the skilled healthcare facilities with just as many patients who were almost, if not, just as sick without enough PPE quite often. And in our area, we were delivering the meals to them just like in the hospitals. But I can’t tell you that they were getting the same type of recognition as the hospital workers were, which is a shame.


Josh: Lucas, me and you have talked about that a lot. You know, through the years. And one of the reasons why we started this podcast was to help shine a light and educate and change the public perception because you know, those longterm care workers, those senior living workers have always been heroes. And this pandemic and these difficulties, I think it creates in some ways an awesome opportunity because kind of that spotlight has been shining down on us. I think we have a real opportunity as Rich, you’ve pointed out many of the things that these great healthcare heroes have been doing if we can continue to get that message out there and hopefully even today’s show helps to further that.


Lucas: Rich, one of the things that we talked about just before we got started that I think again, hitting this public perception, you’re up in the Northeast, there’s been a lot that’s been going on related to COVID. We see stories that come out against nursing homes, skilled nursing, they title them nursing home. There’s a difference between nursing home and assisted living, independent living. We all know that, but the typical population doesn’t know that. And what are your thoughts on what was taking place from the hospital system? Discharging COVID positive patients into skilled nursing in the skilled nursing communities not having the option to make a choice on whether they take that person?


Rich: It clearly was an ill thought policy and caused a lot of problems. We did have the issue that we run at our hospital 325 ish bed facility, we usually have a census around 2 and change. At one point we had over 200 COVID-positive patients in the hospital. And we were on top of it, I think to a degree that some hospitals around us were not, of course I’m going to be very congratulatory of my staff, but I think we did a very good job in very, very difficult circumstances. But there really was a point where there were people who just, you didn’t have room for them in the hospital. So I understand the concept, but the idea that you are going to discharge into the setting that is a skilled healthcare facility, knowing that they didn’t have the equipment they needed, or the other resources they needed to really handle an infection or a virus that’s as infectious as this one is without giving them the resources they needed, actually giving them no resources. Horrible policy.


I used a stronger word when we were talking, not for the record, but I won’t use that word on the record, but horrible, horrible policy. I think it cost lives. And I think some states actually did it very well and they’re, they’re not handling it very well down in Florida right now, but on the skilled healthcare side, I think the reaction to COVID was amazing. The government went the other way. They approached the national guardian to help staff and equip the nursing homes. They took skilled healthcare facilities, designated some of them as COVID positive facilities, cohorted the patients together within the same facility so that they didn’t get them spread into facilities that didn’t have COVID. They were on top of it. And it worked, I mean, the incidents of COVID in the skill healthcare facilities, according to what I know, what data I’ve gotten was lower. And anecdotally in the portfolios, we were looking at both on our bridge loan program and in our portfolio, there were much, much less in the way of negative effects on the facilities than in the Northeast.


Lucas: So let’s transition back more into your wheelhouse. Well, your wheelhouse seems large which is great. I love having a very diverse topical conversations around diverse topics. Let’s go back into finances. We round out the show, talk to us, give our listeners number one, tell us the makeup of what your portfolio deals look like and the type of loans that you do. And then give us a forecast going forward.


Rich: We do a predominantly FHA lending on senior housing. We are experts at senior housing for quite awhile it’s about all we did, even though we say housing and healthcare finance. We brought a large team in headed by Tom Peters about a year ago to focus on multifamily and affordable. So we went from having about a 90% senior housing pipeline to having about a 60% senior housing pipeline, 40% affordable, complex, affordable construction multi-family. Then we also have a very active brokerage platform where we place bridge loan debt. We have a joint venture with congressional for loans under 20 million on receivable and bridge. And then we’ve placed I think last year was approaching a billion dollars in original and product in skilled healthcare space with various different lenders. We’ve got a three and change billion dollar servicing pipeline of FHA so far performing well.


As I said, we had some people use the HUD option to take their replacement reserves and use it to pay debt service. But our portfolio is performing, our delinquencies look about what they normally would and our pipeline is extremely healthy. We’re seeing more demand than ever. HUD is being careful about COVID. We do COVID checks on occupancy checks or we get a commitment from HUD. And then before we close about a week beforehand, we all give another report to HUD about occupancy and COVID prevalence within the facility before they close. Our ability to sell the bonds we create the street is still extremely robust. They are looking a little more carefully than in the past at what the underlying asset is. They are going to be careful about a facility in a COVID hotspot, and they want to know what the occupancy there is too, but we successfully placed a $60 million loan in Queens last week.


So the market’s there and that facility had some COVID, but not a lot. It was still covering fine. And we were able to play. I think the market’s good as I…it’s pretty compelling when you can finance a 12 and a half cap rate asset. If you’re talking about skilled healthcare, a you tell me the cap rate for assisted, but somewhere between 5.5-9, I don’t think any of those lower cap rate ones are going to HUD, but the higher cap rate ones do. And when you can finance that for 35 years at two and a half percent headline rate and 3% with your MIPS. So call it a 4-sih constant there’s a really nice cash on cash return in there. If you can operate it well and put that financing away and for skilled healthcare, not having a balloon, not having to have the risk that you’ve got a six month or one year window where you need to refinance. And that just happens to be the six months where the government decides to mess around with reimbursement or change reimbursement is a luxury that I think is well worth it. Now I’m doing a little advertising, especially because you’ve got flexible prepayment capabilities. So you can always prepay the loan, get a fee, but we can prepay it. And we can also figure out how to mitigate that fee quite often. So even though our norm is a 10 point penalty, declining by a point a year, you can always trade rate for a different prepayment structure. Does that answer your question or did I, did I move consciousness of my way out of it?


Josh: No, that’s great. That it was great.


Lucas: Josh, as you know, as an operator in the, in the industry, we think that the future of senior housing, I mean, I’m very optimistic about where this may all go. 


Josh: Yeah, absolutely. And, and hearing guys like Rich talk is very encouraging, I think most of us are remaining extremely optimistic. Like anything else there’s going to be people that cave under the pressure, that don’t adapt well to change, that didn’t have a good plan and didn’t have good operation going into COVID. And I think those will obviously be the ones that really struggle that would struggle with any difficult time. But there’s a ton of great operators out there that are committed to this space. The demographic, as Rich said, is there. And so I really feel positive about it and it’s very encouraging to hear that message from Rich with his wealth of experience as well.


Rich: And it’s I like what you said and it’s something I was lucky in that when I first got into this industry, I had some very good operators and what happened to encounter in the first place. They were good developers, but they were very good operators. They cared about the heads in the beds. They cared about the mission. And I learned very early on how important the operator is and the best credit guy I ever had, back in my original first Boston days said, ‘I don’t really care what I land on. I care who I lend to’. And even more so in this industry, it’s so much operational as opposed to real estate dependent and the people you have at the front lines, taking care of people and knowing how to operate the building that’s gonna make or break it. And we have a very small, and we’ve learned that.


We had a very good operator. And then we had a transition from that operator in a building we own to another operator who was not as good. And it went from being a very healthy building to being a very unhealthy building. Went through a bankruptcy, we put a good operator in place, and now that building is doing great again. The fascinating thing is the frontline workers in that building have been, I think the average tenure in the building is about 12 years. So they stayed in through all of it and they just had to suffer through bad leadership for a couple of years. But it’s all about the operators. It’s all about the people who run the day to day business. And thank you for everyone that does it. It’s not just a return, but it’s a mission. And we got to remember there are people’s lives on the other end of all these deals.


Lucas: Very well said. And really we’re, we’re in a time now where we’re trying to get back to normal as much as possible. So many of us, but for the people on the front lines, and the executive directors, the administrators, the people that are in these communities, they are still grinding this out. And for all the residents that you know, it’s just a very challenging time inside the communities. And so we hope to be a voice of light to each and every community to help support, let everybody know that we’re rooting for them. And they are heroes and they are not forgotten to us. They may not be getting the recognition on a national or global scale that they deserve, but for us in the industry, we know what they have been doing and continue to do. And you know, I can say for all of us on the program today is that we support them and then we care for them and sending our love and and rooting for their success for sure.


Rich: Great. Well said.


Lucas: Well, Rich, I lament that we won’t be sharing the stage in the fall at the NIC fall conference as it. So we may have to do, you know, since NIC’s going to be virtual, maybe we get creative and come up with our own little virtual concert. We may have to pre produce something from the Bridge the Gap production platform, come up with something we’ll have to get creative.


Rich:You’ve got the technology.


Lucas: Rich, great conversation, Josh, any final thoughts?


Josh: Man, it’s just encouraging thanks for your time rich. And as always we remain committed and positive. And thanks everyone for listening to Bridge the Gap. It’s so much fun to get the opportunity to learn from guys like Rich and be able to present that information to you.


Lucas: Rich, thanks for being on the show.


Rich: It was a pleasure and hope to see you guys soon in person when this is all blows over.


Lucas: We do too. And thanks to everybody for listening to another great episode of Bridge the Gap.


Ep. 126: Rich Lerner