Long Term Strategies for Accessing Capital:

“The Right Tool for the Right Job”

South Texas HFMA Valley ForumOctober 22nd, 2015

Offering Financial Advice and Solutions to Health Care, Senior Living, and Housing Providers.

Scott C. Blount, CFAVice PresidentLancaster Pollard & Co.sblount@lancasterpollard.com

Financing Progress

Lancaster Pollard

Founded in 1988; independently owned

Strict focus: senior living and acute care providers

Three areas of expertise: investment banking, mortgage banking and investment advisory

Nationally recognized expert in senior living and healthcare finance

Offices in Atlanta, Austin, Columbus, Kansas City, Los Angeles & Philadelphia

Registered with SEC, member FINRA, SIPC, MSRB

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Financing Progress

Items for Discussion

• Capital Markets Update

• Alternative Funding Options

• Q&A

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Financing Progress

Bond yields have decreased and credit spreads remain stable

Lack of supply in the municipal market has led to very attractive pricing

Financial Regulation effect taking hold (Basel III)

Governmental programs continue to provide solid execution

Consolidation, consolidation, consolidation

10-Year UST has moved from 3.00% last January (2014) to approximately 2.00% today

Timing of Fed Activity (raising the Fed Funds Rate)

Capital Markets Update

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Financing Progress

10 Year US Treasury Yield

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High = 15.68%9/25/81

Low = 1.45%6/1/2012

10/02/2015, 1.99%

Average since 1962, 6.42%

Average since 1984, 5.72%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Jan

-62

Ap

r-6

4

Jun

-66

Sep

-68

Dec

-70

Mar

-73

Jun

-75

Sep

-77

Dec

-79

Mar

-82

May

-84

Au

g-8

6

No

v-8

8

Feb

-91

May

-93

Au

g-9

5

No

v-97

Feb

-00

Ap

r-0

2

Jul-

04

Oct

-06

Jan

-09

Ap

r-1

1

Jul-

13

Oct

-15

Wee

kly

Dat

a

Source: Bloomberg

Financing Progress

Rating Agency Outlook - Negative

Not-for-profit health care outlook remains negativedespite a glimmer of relief. We expect downgrades toexceed upgrades in 2015.

The 2015 sector outlook is negative for nonprofithospitals due to the on-going uncertaintiessurrounding the continued implementation andlegality of the Affordable Care Act and the movementtowards value-based payment models. The ratingsoutlook for the sector remains stable.

Our negative outlook for the US not-for-profithealthcare sector reflects our expectations that thefundamental business, financial and economicconditions in the sector will remain weak over the next12-18 months.

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Financing Progress

General Sector Overview – S&P US Not-For-Profit Rating Actions

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Financing Progress

General Sector Overview – S&P Ratings Outlook

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Financing Progress

Historical Healthcare Issuance

• Overall issuance has been down significantly since the peak in 2008

• 2008 spike was due largely in part to the need to refinance existing auction rate securities into a more stable funding mechanism

• 2013-14 saw a fractured market with little to no new money offerings

• Lack of total supply creates a market opportunity for borrowers preparing to enter the marketplace

Source: The Bond Buyer

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Financing Progress

Healthcare Bond Data (2015 Bond Buyer Mid-Year Review)

• Large increase in issuances in 2015

• Majority of the increase is not new money (i.e. refundings)

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Financing Progress

Trends in Hospital Finance

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Financing Progress

Access to Capital

• Lack of new money supply has created scarcity opportunity for Unenhanced Bonds (Rated & Non Rated / Investment Grade & Non-Investment Grade)

• Financial regulation (Basel III) has made it less desirable for banks to provide letters of credit for bond enhancement

• Momentum shifted to a direct purchase of bonds

• Eliminates the need for an underlying bond rating or a highly rated commercial bank

• Flexible: Interest rate can be fixed or variable

• Commercial banks have “free deposits” to lend

• No public disclosure required (less time and money), although this is becoming a hot issue

• Federal enhancement through the FHA Section 242 mortgage insurance program

• Can provide “AAA/AA” rating of the U.S. Government but takes much longer

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Financing Progress

Private Placements - Bank

• Limited public disclosure and administrative paperwork

• Flexible terms • Draw-down construction bonds

can reduce costs

• Must fit with bank’s needs• Limited long term fixed-rate

options• Difficult for projects >$35M• Refinance risk (3-10 Yr. Term)

• Tax-Exempt bonds structured and privately placed (sold) to Banks as opposed to the Letter of Credit enhanced bond structure

• Can be structured as “multi modal”

• Bank-qualified designation can increase bank interest in buying

• Competitive Bidding is recommended

Cons

ProsDescription

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Financing Progress

Unenhanced Fixed Rate Bonds

• No enhancement fees• Fully amortizing structure• Fixed rate for life of the loan

• Prepayment limitations• Locks in current credit profile• Debt service reserve fund• Gap between investment-

grade and non-IG borrowers

• Tax-Exempt bonds issued to the market on provider’s own credit strength

• Rated or Non-rated

• Term: 25-35 years

• Rates: Credit Driven• True Interest Cost (TIC) based

on a hospital’s overall credit profile and project

Cons

ProsDescription

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Financing Progress

Healthcare Baa/BBB Tax Exempt Bond Rates

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Financing Progress

• AAA / AA interest rates (<4.00%)• MIP is a flat 0.5% annually• Special criteria for CAHs• Up to 25 years amortization• No renewal risk• No financial covenants• Non-recourse

• Must meet financial qualification tests

• Longer lead time to close• Davis-Bacon union wages

• For new construction, renovation and refinance

• For hospitals of all sizes• A mortgage loan made by a private

sector mortgage lender, insured by FHA / HUD

• Term & Amortization: 25 years• Key Qualifiers –242 Program

• New mortgage must contain at least 20% new money uses

• Aggregate positive operating margin or last three fiscal years

Cons

Pros

FHA Insured Mortgage – FHA Section 242

Description

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Financing Progress

FHA 242 - Refinance

• “AAA / AA-like” Offering

• Term & Amortization: 25 years

• Rates: Approx. 3.50%

• Key Qualifiers – 242f Program

• New mortgage must be at least 80% refinance• Aggregate positive operating margin or last three fiscal years• Average 1.40x coverage over last three fiscal years• Must meet 3 of 7 tests all focused on interest savings and the

disadvantages of an applicant’s current structure (“need tests”)

FHA 242/223f

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Financing Progress

USDA Programs

• Direct and guaranteed loans

• Terms up to 40 years

• Direct CF Interest Rate is currently 3.25% Fixed

• No min/max loan amount

• For populations of <20,000

• One-time 1% fee

• Cannot use for 100% refinance (at least 51% of funds for new construction/renovations)

• All facilities and care types are eligible (non-profit entities)

• It’s estimated at least $2.2 billion will be allocated for FY 2015

• Permanent debt – requires need to secure short-term construction financing

• Bond Anticipation Notes• Bank Construction Loan

Community Facilities Program

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www.lancasterpollard.com

Summary / Questions

Scott C. Blount, CFAVice President

Lancaster Pollard

sblount@lancasterpollard.com

(512) 327-7400 x 4

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