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David takes aim at the Goliaths of health care

Size does matter. Just ask John K. Delaney, chief executive officer and chairman of Chevy Chase, Md.-based HealthCare Financial Partners Inc. and HealthCare Financial Partners REIT. As the former owner of a home health care service, Delaney knows first-hand how difficult it can be for smaller health care service providers to find suitable financing. So, when he formed his own health care finance company in 1993, Delaney knew what client group he would target.

"We saw [that] the small to mid-sized providers are underserved," says Delaney. "The dominant banks such as First Union and NationsBank often turn down specialty businesses such as health care. The loans that small health care businesses want are below the minimum dollar amount that these banks have for loans."

Financing the "little guy" seems to be paying off. Since its inception in September 1993, HCFP has provided nearly $2 billion to clients in 600 transactions, with loans ranging from $100,000 to $10 million. In that time, the firm has not experienced a single loss. Since its initial public offering in November 1996, HCFP has seen its stock go from $12.50 per share to $53.75. To top off a busy year, HCFP recently initiated HealthCare Financial Partners REIT, of which Delaney will also serve as CEO.

Delaney's foray into the health care field began in 1990 when he and Ethan D. Leder, HCFP's president and vice chairman, formed American Home Therapies Inc., a home health care and home infusion therapy service. Delaney and Leder sold their company to a subsidiary of W.R. Grace & Co. in 1992. Delaney, Leder and Edward P. Nordberg Jr., HCFP's chief financial officer, formed HCFP as a general partner of two limited partnerships, HealthPartners Funding L.P. and HealthPartners DEL, L.P., in 1993. HCFP was formed when the September 1996 IPO bought the assets of these partnerships.

FINDING THAT ELUSIVE NICHE The three Georgetown Law graduates saw a well defined niche in health care financing: Despite their growing numbers, smaller health care operators often fall between the cracks when it comes to financing. "The small to mid-sized operators get caught up in this situation where the local lender doesn't really understand their business, and the national specialty lending groups, they're too small for them," Delaney says. "You don't get a lot of the leverage associated with building the big operations."

The search for a lender who is familiar with health care typically leads smaller operators to a local branch of a national lender. "I might go to their small to mid-sized lending group and say, 'I own 10 nursing homes. Give me a loan,' " says Delaney. "They'd say, 'If you were a retail business, a light manufacturing business or a service business, we'd be able to help you out. Why don't you go talk to our health care specialist in Charlotte?' "

"I would talk to someone in Charlotte and they'd know the business really well, and they'd conclude by saying, 'The loan you're looking for is too small. We have a $20 million minimum,' or whatever it is."

It may sound like a lot of trouble to bother with loans of several hundred thousand dollars. But Robert P. Napoli, vice president of equity research at Chicago-based ABN AMRO Inc., sees a real shortage in lending institutions that are willing and able to invest in the smaller health care services. "There are not a lot of people who really understand the small and middle-sized health care provider," says Napoli. "Their cash flows are unique to understand and there are very few lenders who take the time to become expert at health care financing."

NO INVESTMENT TOO SMALL Delaney sees even the smallest transaction as a potential to earn new clients through word of mouth. "There are a lot of benefits with a high-volume operation," Delaney says. "Every time you do a deal you meet the client, you meet their attorney (who is usually a health care attorney), you meet their accountant (who is usually a health care accountant) and maybe a broker. By doing small deals, your relationships become part of your network and that in turn may produce a larger deal."

The size of deals at HCFP has been rising lately, averaging about $1.4 million, up from $700,000 a few years ago. Napoli expects HCFP to continue to target smaller health care providers, no matter how successful the company may become. "I think that as they become larger, and they have been growing, they will move up in size a little bit," says Napoli. "But I don't know that they'll ever be looking to finance the largest providers out there."

This type of niche financing carries with it an inherent risk: maturation. As HCFP's clients grow, some will eventually need greater financing than the company provides. Some clients will undoubtedly move up to traditional lenders. "There will be a number of companies that grow beyond their size where they can go to a major bank and get a loan at LIBOR plus 50 basis points," says Napoli. "That's not the business these guys [HCFP] are in."

The formation of HCFP's REIT gives the company a new vehicle for investing, primarily in nursing homes, assisted living facilities and hospitals. Delaney is not worried about overbuilding, for the most part. "There are no overbuilding possibilities for nursing homes," Delaney says. "The supply of nursing homes is significantly limited by state regulators. There's a very strong demand, tight supply, a very good dynamic."

Delaney adds: "There's very little new building going on in hospitals. The challenge of hospitals is in assessing the viability of existing hospitals. But I think there is a risk of overbuilding in assisted living."

A MARKET TO THEMSELVES In spite of the "sky's the limit" attitude among commercial real estate investors, very few financial institutions have opted to cater to the growing number of small to mid-sized health care providers. "The competition has not increased noticeably for HCFP," Napoli says. "Normally you would see a lot of new companies [investing in smaller providers] when you see a company that has done as well as these guys have."

In case you haven't heard of HCFP, don't worry. Neither have most people outside the health care industry. Management at HCFP may be less worried about public relations than about growing businesses. Unlike the stereotypical chief executive, Delaney must be talked into sending pictures of himself to the media. But make no mistake: Delaney may enjoy financing the little guys, but he want to challenge the big guys in his field.

"HCFP is already the dominant health care finance company. We want to be the dominant health care REIT."

The price per share of Health Care Financial Partner's stock rose from $12.50 in the November 1996 IPOto almost $50 by March 1998.

HealthCare Financial Partners finances non-traditional health care service providers:

* Home health care

* Assisted living centers

* Disease state management

* Subacute care

* Clinical labs

* Home infusion therapy/DME

* Telemedicine

* Supplemental staffing companies

* Diagnostic centers

* Urgent care

* Behavioral health

* Outpatient surgery

* Medical transportation providers

* Physician groups

* Managed care organization

* Rehabilitation facilities

* Skilled nursing

* Nursing homes

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