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BHI Sector Outlooks

March 2024
C&I

While higher inflation and interest rates continue to alter the dynamics of how companies operate across the Commercial and Industrial sector, BHI firmly believes that the strong balance sheets of our clients and diversified fields with which they operate provide this segment of the market with a favorable outlook ahead.

As a commercial lender servicing many clients across the middle market segment, we’ve ‘stuck to our knitting,’ keeping to a philosophy that has prioritized amassing a portfolio filled with well-established companies that are generating recurring revenue with strong cash flow.

Over the years—whether you look at the financial crisis or during the height of COVID—these fundamentals have continued to be strong indicators for a segment’s ability to stabilize and thrive in any environment.

Furthermore, the broad spectrum of businesses that this sector entails—from high tech and renewable energy project finance which continue to project for almost unlimited growth potential; to food & beverage, which exploded ’20, ’21, and ’22 and then started to normalizing last year–provides our bank with a diversified exposure to mitigate risk while maximizing potential returns.

Relationships are paramount in this business. We learned during the financial crisis, through COVID and the ensuring inflationary environment that your financial institution fares well when you have good relationships with sponsors and companies.

Maintaining a sound financing strategy that emphasizes the five C’s of credit: character, capacity, capital, conditions and collateral—while also continuing to prioritize our strong working relationship with partners—will ensure that all parties are rowing in the same direction and positioned to navigate all environments ahead.

Technology

The shockwaves in the banking sector in Q1 2023 drove a flight to safety and quality. BHI, a rated financial institution with over $200 Billion in assets and a proven track record of prioritizing continued growth while adhering to prudent portfolio management, found ourselves well-positioned to operate in this environment.

We believe in the resilience of the Tech Sector, and we continue to provide VC or PE backed Tech companies with the financing solutions needed to support their growth.

Food & Beverage

There’s a saying that ‘we eat and drink during good times and we eat and drink a lot more in bad times’. The economic uncertainty surrounding the global pandemic and its residual impact drove a flurry of activity across 2020, 2021 and 2022. Last year the sector began normalizing, however, when we assess credit applications, we evaluate the long-tail spectrum of the sector, comparing the spikes of recent years to the environment of 2019 and beyond to obtain a more well-rounded picture of secular trends.

Granted, companies are now responding to these developing trends in a rate environment that’s markedly different than five years ago and potentially grappling with how to retool their operations (whether it be packaging, sourcing, distribution, logistics etc.). Navigating these changes hasn't been without its challenges. Operators face increased costs, supply chain disruptions, and the need for swift adaptability. However, our financial institution recognizes the resilience and determination of the Food and Beverage industry. As financing partners, we understand that these challenges are also opportunities for growth and innovation.

Looking ahead, we remain optimistic about the sector's prospects. The lessons learned from recent years have spurred innovation and efficiency improvements. Operators are embracing sustainability, adopting advanced technologies, and diversifying their offerings. As a leading financial institution, we are committed to supporting these endeavors. Our focus on evaluating robust balance sheets and fostering strong partnerships positions us to empower businesses in the Food and Beverage industry for long-term success. In this ever-evolving landscape, we see potential for our clients not just to recover, but to thrive and lead in the changing dynamics of the market.

Healthcare

Healthcare continues to forecast as a very high growth platform, driven by the demographics of a rising senior population, sometimes referred to as a “Silver Tsunami”. Demand is not only rising for facilities to assist people living with chronic conditions, but an added emphasis is being placed on developing facilities that embody the essence of a hotel just as much (or even more so) than they do that of a hospital.

In the last few years, we’ve seen an uptick in ‘active adult/over 55’ facilities targeted for empty nesters. They offer the opportunity to be part of a community focused on activities from hiking to yoga, often providing concierge service similar to all of the amenities one would expect with a hotel’s offerings.

This helps construct a new model across healthcare that places a greater emphasis on the ‘continuum of care’ and building facilities in close proximity, almost like a campus, and ensuring that they are aesthetically congruent across all phases of community living from ‘active adult’ (over 55) to independent living (over 65) on throughout as their care needs develop and potentially necessitate a move to assisted living or memory care.

Staffing is always the number one priority for this industry, but the situation has improved from where it was a year ago and we’re seeing a lot of pay increases across the board. In the coming decade we anticipate legislative officials continuing to explore ways to incentivize more re-training of professionals to enter assisted living / nursing / healthcare fields. In the meantime, however, we’ve seen a lot of creativity from facility operators—pre-hiring and paying for schooling—to help encourage more people to get nursing certifications.

Over the course of the year, we’ve seen our clients reduce their reliance on agency or temp staffing in favor of full-time staff wherever possible, which typically increases the quality of care and the culture of a facility.

Some clients are dealing with higher interest rates and inflation, however, while reimbursements vary across states, typically they’re based off of expenses, so those factors are not as outsized as they otherwise would be.

It’s projecting to be an interesting year in the lending arena as well. There’s been plenty of M&A ongoing despite those wondering if higher interest rates would shift deal flow down. Other financiers have also pulled out—not because of the sector and its health—but because of other liquidity or capital issues, so we’re not seeing as much competition as before. All told, deal flow can be derived from a multitude of areas, from direct clients coming with repeat businesses to brokers. We’re even experiencing an uptick in having other lenders pull us into deals. There’s currently a lot of overlap and business to be had across the board.

As a financial institution, BHI is well-capitalized and well-positioned to help our clients adjust and adapt to whatever changing dynamics develop in their industry.

 
CRE

Across the 5 major ‘food groups’ in commercial real estate—multifamily, industrial, hospitality, office, and retail—BHI, as a financial institution, has always preferred to fill the majority of its ‘plate’ with multi-family assets. Multifamily has proven to be resilient with a very developed and broad capital marketplace. This segment is heavily influenced by demographics—population growth, household formation, immigration, people moving from northern regions of the country to the South—which can combine to serve as drivers for housing demand.

And while the residential segment is still trying to find its equilibrium between the inertia of existing homeowners, locked in place with their lower rates, and the uncertainty of prospective homebuyers, grappling with higher interest rates, new supply in the multifamily segment is starting to come online and provide an intriguing outlet for the demand.

The housing market remains undersupplied in high-demand areas such as the NYC metro and LA, and we’re beginning to observe outer layer suburbs benefitting in those markets as developers and consumers look for more space. Additionally, more and more suburbs have started to show a willingness to approve denser developments, with smaller towns realizing the benefits of having new housing and bringing more vitality to downtowns.

The industrial segment has become more attractive as the market has grown less crowded, providing opportunities in certain subsets like self-storage and data centers.

Overall, our exposure to office and retail segments remains minimal as part of our investment thesis. And while the near-term outlook for these sectors does not appear to be primed for outperformance, the market will eventually find some footing. Hyper-specialized subsets like medical offices or life sciences and biotechnology are not enough to counteract the compressive forces facing the overall office space class, but they showcase pockets doing well against the larger macro trend.

BHI is the U.S. division of Bank Hapoalim B.M.  Bank Hapoalim provides its clients access to a broad array of products and services available through its bank and non-bank affiliates. Not all products and services are provided by all affiliates or are available at all locations.  All credit products are subject to credit approval. Nothing contained herein should be construed as a commitment to lend by BHI or any of its affiliates.

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