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The health care real estate sector, for all its differences from more traditional categories such as office or retail, has suffered in the credit crunch in the last several months. As in every other category, many of the major players in this space have either pulled back entirely, or substantially, in lending. Also, credit spreads — which are traditionally wider than in other less risky asset classes — have widened even more after seven month of credit paralysis. Many deals that might have closed in the high 100s over Libor are now closing in the 300s, for instance.

To be sure, deals are still done. Earlier this month, one of the major private sector providers of debt and equity financing in this space, GE Healthcare Financial Services, underwrote a $160 million senior secured credit facility to Odyssey HealthCare, for its recent acquisition of VistaCare Inc., one of the largest providers of hospice care. Dallas-based Odyssey, which completed the acquisition of VistaCare on March 6, now operates approximately 110 Medicare-certified hospice care locations in 30 states.

But such deals have been more the exception than the rule lately. Acquisition finance activity is much lower, compared to a year ago, with most of the current deals focusing on recapitalizations. Still, though, there are signs that this sector – which includes skilled nursing and assisted living – is well-positioned to come out of the credit crunch with more efficient and streamlined sources of debt and equity.

One sign is that many regional banks have quietly become more active in lending in response to the pullback, without widening spreads even further, according to a source at one such bank. Also, at least one new entrant into the space is hopeful that lending practices will change to better reflect market realities in healthcare.

In the past, Richard Graham, group head and chief production officer for Green Park Financial’s newly formed health care unit, tells GlobeSt.com, when these companies needed to finance growth, the debt and equity lenders’ processes were so cumbersome that the borrowers often would fall back on cobbling together capital streams from one-off and small pool transactions – even if their portfolio contained hundreds of assets. When the dust from the credit crunch settles and the industry takes stock to see which players are still standing, “what I think we might see happen is a trend towards flexible credit facilities that give owners and operators more leeway in planning for growth,” Graham says. As one example, asset releases and substitution policies tend to be very rigid in the industry. By changing that, especially for recapitalizations, operators would have more financial room to maneuver.

These are the strategies Graham hopes to see deployed at Green Park, which last week introduced its new health care facility and named Graham to run it. For 2008, the company expects to make $500 million in investments nationally. Green Park Healthcare Finance will focus, at least initially, on independent-living, assisted-living and Alzheimer facilities. “The opportunity that I see and where I think the industry is headed is towards flexible credit facilities where a lender can partner with the company and help it grow and manage the risks,” he says.

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