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Healthcare Asset Class: A Dubious CMBS Distinction for an Industry in Flux


Although healthcare properties have historically provided the smallest share of collateral used for backing CMBS transactions (currently only 0.47%), according to the most recent report from Moody's Investors Service, "healthcare edged out all other real estate asset classes as the worst-performing property type in Q2 2014."  This is a stark turn for the sector.  Between 1994 and 2013, healthcare, as a CMBS asset class, had the highest months to liquidation rate at 52.06 days, as compared to 26.71 days for hotel properties, 23.42 days for retail properties, 22.17 days for multifamily properties, 20.1 days for industrial properties, and 20.51 days for office properties.  To be fair, a major reason for the poor Q2 healthcare figures was the inclusion of the abnormally large "105% loss severity on the Senior Living Properties Portfolio, which liquidated with a $117.7 million loss from the GMACC 1998-C1 transaction."  However, although an outlier due to size, the Senior Living Properties Portfolio insolvency was linked to changes in Medicare and Medicaid reimbursements, a common refrain in the healthcare industry today attributed by many (in varying degrees) to the implementation of the Patient Protection and Affordable Care Act. 

The unpredictable nature of regulation and reimbursement in the industry has compelled many healthcare providers to try to modify their existing debt obligations and to attract new investment.  Additional liquidity is becoming increasingly necessary for facility upgrades, retraining or enhancing staff, and supplementing services offered in order to remain in compliance and/or to compete in a hurriedly consolidating industry.  Unfortunately, many healthcare providers have been unsuccessful in their quest for liquidity.  During 2012 and 2013, nine (9) and eleven (11) hospitals, respectively, filed for Chapter 11 bankruptcy. During the first three (3) months of 2014, seven (7) more hospitals followed suit.  Assisted living and continuing care retirement communities have also recently seen an atypical amount of bankruptcy and restructuring due to the rising cost of providing care and the derailed real estate markets to which they are strongly tied. Additionally, projections show that many of the 15,000 older skilled nursing facilities in business currently will be operating at a loss by 2019, triggering extensive defaults.

In a market undergoing swift change and facing harsh realities, lenders and servicers (as well as their service providers) are becoming more adept at analyzing how successful healthcare industry players drive revenue, achieve positive cash flow, and maintain competitive operating performance.  Perhaps more importantly, lenders and servicers are developing unflinching proficiency at quickly spotting those players who are not so successful.  The skillset utilized to evaluate when to fund loans for construction or meaningful mergers, when to determine that a certificate of need is the only viable asset left to leverage and protect, the viability of a population health management plan, and when to provide advances to implement a safe wind down strategy is becoming a commonly deployed tool in the lending and servicing professional's toolbox.


  • Morningstar, CMBS Commentary: Loss Timing and Severity Study, March 2014, page 9.
  • US CMBS Loss Severities: Q2 2014 Update.
  • Announcement: Moody's: Healthcare loan losses exceed other CMBS losses in Q2;  Global Credit Research - 11 Sep 2014
  • David Friend, et al, Changes in Long-Term Care Are Critical to Treating U.S. Healthcare Ills, p. 18-19
  • Thomas Buck, CTP, et al, Community Hospitals May Feel Pain Under the ACA, page 22
  • Michael Lane, et al., Healthcare M&A Intensifies as Providers Struggle for Survival, page 14.

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