An Opportune Time to Make Strategic Decisions
Offering Financial Advice and
Solutions to Health Care,
Senior Living, and Housing
Providers
Chris Blanda
Vice President
Lancaster Pollard
Indiana Health Care Association
Annual Conference
August 2015
Agenda
• The Current Environment creates an Opportune Time
• Interest Rates
• Industry Fundamentals
• Cap Rates and Values
• Sources of Capital
• Commercial Banks
• Specialty Finance Companies
• Agency Mortgage Programs
• REITs
• Other
• Legacy (or retirement) Planning
• Transfer or Sell?
• Selecting the right way to market your asset
• Case Studies / Strategic Choices
2
Investment Banking
Lancaster Pollard & Co.
• Debt Underwriting• Financial Consulting• Financial Derivatives• Private Placements• Remarketing• Buy & Sell-Side M&A
Advisory
Mortgage Banking
Lancaster Pollard Mortgage Company
• FHA-Insured Mortgage Loans
• GNMA Issuer/ Servicing• Mortgage Loan Servicing• USDA-Guaranteed
Mortgage Loans• Fannie Mae Multifamily &
Affordable & Seniors Housing Lender/Servicer
Private Equity
Propero™ Seniors Housing Equity Fund, LLC
• Senior Living Focused• Partnership with Best-in-
Class Operators• New Development and
Acquisitions• 100% Equity Investment• Triple Net Lease with
Pre-Negotiated Purchase Options
Balance Sheet Lending
Lancaster Pollard Finance Company
• Construction Financing• Term Debt• Bridge Loan Financing• Mezzanine Debt• Preferred Equity
Introduction to Lancaster Pollard
• Founded in 1988; independently owned
• Strict focus: senior living and acute care providers
• Four areas of expertise: investment banking, specialty finance, private equity
• Offices in Columbus, Atlanta, Austin, Kansas City, Philadelphia and Los Angeles
Interest Rates – Fed Funds
Fed Rate Projections – Timing of First Increase
Fed Rate Projections – Timing of First Increase
Futures-Implied Timing of Rate Increases
Interest Rates – 10-Year Treasury
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Ja
n-7
1
De
c-7
2
No
v-7
4
Oct-
76
Sep
-78
Sep
-80
Au
g-8
2
Ju
l-8
4
Ju
n-8
6
Ju
n-8
8
Ma
y-9
0
Ap
r-9
2
Ma
r-94
Ma
r-96
Feb
-98
Ja
n-0
0
De
c-0
1
No
v-0
3
No
v-0
5
Oct-
07
Sep
-09
Au
g-1
1
Au
g-1
3
Ju
l-1
5
Weekly
Data
Source: Bloomberg, National Bureau of Economic Research
Interest Rates - Flight to Quality
• In times of global uncertainty, investors tend to seek out investments
perceived as safe
• U.S. Treasury securities often seen as the most safe, stable investment options for
international investors
• Increase in demand and stable supply leads to a rise in prices, pushing interest rates
lower
Historical Example: Russian Debt Default and Collapse
of LTCM (Aug-Sep 1998)
10-Year Rates fall 100+ bps
Source: Bloomberg
What Does the Past Tell Us?
10-Year Treasury Forecast
1.85% 1.80%1.90% 1.85%
1.65%
2.00% 2.00%2.15%
2.32%2.50%
2.65%2.83%
2.97%
3.18%
2.60%
3.00%
3.30%
3.80%4.00%
4.20%4.40%
0%
1%
2%
3%
4%
5%
Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16
Fore
casts
as o
f M
onth
End
Source: Bloomberg Survey
Catalysts for Higher Rates
• Stable economic growth
• Unemployment rate in-line with long-term target
• More hawkish Fed in 2016
• Potential for increasing inflation
Catalysts for Lower Rates
• Economic slowdown
• Strong U.S. Dollar
• Harsh domestic weather conditions
• Changes to Fed policy
• Event risk
• Defaults/financial turmoil in EU
• China growth slowdown
Senior Housing Fundamentals Remain Strong but…
• Demographics (growing senior age populations and fewer children to care
for their parents)
• Ratio of Caregivers (age 45-60) to those over 80 projected to shrink from
7:1 to 4:1 by 2050 (AARP study)
• Inventory growth highest in six years
• Occupancy declined for 2nd consecutive quarter
• Forecasts suggest occupancy may be plateauing
• Absorption accelerated from first quarter
• Seniors Housing investment activity at all-time high
15
Future Demographics…be patient
16
Source: U.S. Census Bureau
What Is Driving Inventory Growth?
17
Source: NIC MAP
New Construction Continues (Units Under Construction)
18
Source: NIC MAP
Seniors Housing Transaction Volume at Record Pace
19
Source: NIC MAP/ Real Capital Analytics
Seniors Housing Price Per Unit- Last 12 Months
20
Source: NIC MAP/ Real Capital Analytics
Cap Rate Dispersion
21
Source: NIC MAP/ Real Capital Analytics
Cap Rate Averages through Q2 2015
22
Source: NIC MAP
Current Environment Summary
• Capital remains cheap and readily available
• Construction activity is heavy into AL and MC
• M&A activity is at record highs (cap rates at record lows, value at record
highs)
= An Opportune Time to explore strategic options and / or access
capital to grow
Capital Sources – Commercial Banks
• Type of Capital Provided = Senior Debt
• Typical Terms / Attributes
• Mismatch of Term and Amortization
- 3-10 year terms
- 20-30 year amortization periods
• Rates = 3-7% depending on term and credit, floating or fixed
• Mortgage Pledge = Loan to Value limitations (70-80% max)
• Guarantees = Typically personal, but corporate can replace if credit is strong
enough
• Redeeming Qualities / Best Use
• Efficient closing (2-4 months)
• Best used for short / medium term situations and new construction
• Most commonly used for maturity refinances, new construction, and acquisitions
as a bridge to permanent financing (i.e. FHA/HUD)
Capital Sources – Specialty Finance Companies
• Type of Capital Provided = AR Financing, Senior Debt, Mezzanine
• Typical Terms / Attributes
• Mismatch of Term and Amortization
- 3-5 year terms
- 20-30 year amortization periods
• Rates = Usually floating. 1 month LIBOR (with a floor) as the base plus a spread
(300-600 bps)
• Mortgage Pledge = Loan to Value limitations (80% max)
• Guarantees = Typically personal, but corporate can replace if credit is strong
enough
• Redeeming Qualities / Best Use
• Very Efficient closing (2-3 months)
• Very Flexible (equity outs, recapitalizations, story or turnaround acquisitions).
Sometimes used for complete new construction.
• An efficient yet more expensive solution for riskier
• Used a lot like commercial bank capital, but the typical situation is more
challenging and a takeout plan is much more important
Capital Sources – Agency Mortgage Programs
• FHA / HUD 232 Program
• Type of Capital Provided = Senior Debt
• Typical Terms / Attributes
• Matching Term and Amortization of up to 35 years
• Rates = 3.00-3.60% depending on mix of refinance and construction
• Mortgage Pledge = Loan to Value limitations (80% max)
• Guarantees = None. Non-recourse debt with “bad act” carve-outs
• Used for construction, acquisition, refinance, or a combination
• Redeeming Qualities / Best Use
• No financial covenants
• Non-recourse
• Most commonly used as a permanent takeout for stabilized / performing facilities
currently financed with shorter term senior debt capital
- 2 year seasoning on equity out / 3 year seasoning on new construction
- Trailing twelve months cash flow must be strong and support debt service
coverage and valuation
Capital Sources – Agency Mortgage Programs
• FNMA Seniors Housing Program
• Type of Capital Provided = Senior Debt
• Typical Terms / Attributes
• Mismatch of Term and Amortization
- 5-18 year terms
- 20-30 year amortization periods
• Rates = 3.00-5.00% depending on term and credit, floating or fixed
• Mortgage Pledge = Loan to Value limitations (75% max)
• Guarantees = None. Non-recourse debt with “bad act” carve-outs
• Redeeming Qualities / Best Use
• Quick close for agency financing (3-4 months)
• Non-recourse
• Most commonly used as a semi-permanent, flexible, senior debt solution for senior
housing properties (only AL/IL properties qualify)
- Can extract equity in a refinance
- Only minimal construction (just repairs) allowed in a transaction
- Can serve as non-recourse bridge to more permanent HUD
- capital
Capital Sources – REITs
• Type of Capital Provided = Equity, Mezzanine, Senior Debt
• Typical Terms / Attributes• A REIT’s main objective is to own real estate long-term and collect income
• Equity = Triple Net Leases with annual 2-2.5% escalators
• Senior Debt = 3-5 year term loans at high rates (looking for challenging high yield
opportunities, i.e. “loan to own”)
• Mezzanine = High yield (10% + rates) and desire at least a $10-15MM transaction size
• Personal or corporate guarantees required on leases and debt
• Redeeming Qualities / Best Use• Can provide 100% financing at a reasonable blended cost of capital (their 7-9% lease
rate)
• Most commonly used to monetize existing real estate or develop / acquire with minimal
initial capital needed from an operator
- Cash from monetization equal to 100% of a usually very high value
- Retaining the operations also has value
- The REITs blended cost of capital (7-10% lease rate) is often more efficient than an
operator’s blended debt and equity cost
- Leases are hard to break and annual escalators can be painful….
Capital Sources – Other…
• Type of Capital Provided = Equity, Mezzanine, Senior Debt
• Commercial Mortgage Backed Securities (CMBS)
• Coming back for AL/IL, could soon be for SNF
• Senior debt that has Agency-like attributes without some of the agency issues
• Private Equity Funds
• An equity provider interested in RE ownership but has a short horizon compared to
a REIT
• Developer
• JV with a real estate developer
• Share the initial equity, retain the operations, structure attractive buyout options
Legacy Planning
• Do I have a strong negotiating
position?
• Is the target sales price in line with the
valuation?
• Are solid management and financial
structures in place that will be
appealing to potential buyers?
• How will the process affect the
residents and staff?
• Do the organizational cultures match?
Selling to an independent third
party
Transferring the business to
family member
• Who is the successor?
• Is the successor ready to assume
control?
• How will the business be paid for?
• Will there have to be equalization
among other family members?
• What will the tax ramifications be?
• What will the legal ramifications be?
• How will the transition affect the
residents and staff?
1. Negotiated Transaction
• Seller has a very clear sense of one (1) logical
buyer
• Typically seller has a strong negotiating position
• Quickest potential sale process
2. Targeted Solicitation
• Logical when there are a small number (2-10)
potential candidates
• Higher level market test with a formal process
• Careful screening of candidates with heightened
confidentiality
3. Broad Auction
• Logical when there is a large universe (10+) of
potential candidates
• Full market test with a formal process
• Reduced confidentiality
Higher
Lower
Less
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rsMore
Less
Pri
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isco
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More
Co
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y
Legacy Planning (Continued)
What Drives Value?
• Financial Performance
• Well operated and financially sound facilities attain premium pricing
• Buyers are apprehensive to pay for performance enhancements or synergies that they can bring to the table
• Size
• Buyers will pay a premium for larger facilities with more perceived economies of scale
• Construction Quality
• Facilities are generally divided into A or B categories based on facility age and condition and buyers will pay a premium for assets determined to be of superior quality
• Demographics & Occupancy
• Buyers are highly focused on facility demographics and occupancy and pay a premium for desirable locations with strong occupancy
• Regulatory & Reimbursement Environment
• Recent and proposed regulatory changes pertaining to state evaluations and Medicaid reimbursement have buyers very focused on payor mix and State reimbursement policies
STRATEGIC CHOICES
Growth/repositioning – Equity Investment
33
• Equity funding provided majority of capital needed
• 10-year NNN lease with client-controlled tenant
• Purchase option schedule – predetermined (not
market) prices
• New development of assisted living (AL) and
Alzheimer’s care facility
• Minimize amount of capital committed while still
sharing in value creation
• Development funded with minimal equity from client
• Negotiated purchase price can be exercised
beginning of second year of operations
• Purchase option prices projected to be below market
prices
Client Objectives
Financial Solution
Outcome
Facility Type: AL/MC
Project Objective: New
development
Sources of Funding: Propero™
Seniors Housing Equity Fund
STRATEGIC CHOICES
Growth/repositioning – Secured Debt
34
• Use the FHA Sec. 232 Program
• Obtain early commencement approval
• Obtain construction financing
• New construction of two AL/MC facilities
• High LTV ratio
• Long term
• No recourse to borrower
• Construction and lease up expedited by 15 months,
saving on construction costs and interest payments
• Nonrecourse loans have 40-year terms and low fixed
rates
• Ongoing reserve requirements reduced – perpetual
savings
Client Objectives
Financial Solution
Outcome
Financing Amount: $34.4 million
Facility Type: AL/MC
Project Objective: New
construction
Sources of Funding: Taxable,
fixed-rate notes insured by the
FHA Sec. 232 Program
STRATEGIC CHOICES
35
Taxable, fixed-rate notes insured by the FHA Sec.
232/223(f) program
• Refinance existing HUD mortgages and internal notes
to former family owners
• Fund new therapy enhancements at each building
• Create the financial flexibility and credit strength to
continue to capture select acquisition / development
opportunities
• Annual cash flow savings of over $3MM to fund
growth objectives
• Nearly $14 million to fund state-of-the-art therapy
additions at all 11 properties.
Client Objectives
Financial Solution
Outcome
Financing Amount: $68 million
Facility Type: Portfolio of more
than ten SNFs
Project Objective: Improve cash
flow and liquidity while making
needed competitive
improvements
Sources of Funding: Taxable,
fixed-rate notes insured by the
FHA Sec. 232/223(f) program
Improving cash flow and liquidity
STRATEGIC CHOICES
36
• Conducted discreet process to identify and screen
potential buyers
• Developed comprehensive divestiture book
highlighting The Groves’ attributes and its place in
the community and identifying opportunities for
increased cash flow
• Divest CCRC’s real estate and operations and
redeploy resources
• Ensure residents would continue to be provided for
• The church divested itself of a non-core asset while
keeping the sale confidential
• The property sold for higher than its appraised value
• The new operator has the skills and resources to
carry out the church’s vision of quality senior services
• The church will redeploy its financial resources to its
worldwide mission while maintaining its ministry for
residents of The Groves
Client Objectives
Financial Solution
Outcome
Facility Type: Continuing Care
Retirement Community
Project Objective: Divestiture
Divesting non-strategic assets
www.lancasterpollard.com
Lancaster Pollard65 East State Street, 16th FloorColumbus, OH 43215Phone (614) 224-8800Fax (614) 224-8805