IRHA Annual Meeting The Landscape of Hospital Finance – 2013 & Beyond: How Borrowers Will Access Capital August 20

1. IRHA Annual Meeting The Landscape of Hospital Finance – 2013 & Beyond: How Borrowers Will Access Capital August 2013

2. Agenda • State of the Capital Markets • Accessing Capital – The Goals, Needs, or Opportunities • Accessing Capital – The Process • Traditional Sources of Capital • Tax-Exempt Bank Placements or Letter’s of Credit • Tax-Exempt Unenhanced Fixed Rate • Alternative Sources of Capital • FHA/HUD Mortgage Insurance Programs • USDA & FNMA Loan Programs • Successful Outcomes

3. State of the Capital Markets – 2008 - 2012 • Short-term rates spiked during the financial crisis • Credit spreads widened on municipal default predictions and fund outflows • Letter or Credit providing banks were downgraded. Many have not returned to sufficient strength • The risks of some traditional debt structures were illuminated (specifically letter of credit backed bonds) • 2008 – 2012 were challenging times….

4. State of the Capital Markets – Short Rate Spike

5. State of the Capital Markets – Credit Spreads

6. State of the Capital Markets – Today • Fast Forward, Mid 2011-2013. The situation has improved… • Historic action by the Fed continues to support historically low short and long-term rates • Money is flowing into municipal bond funds • Credit spreads have narrowed • Alternative bank options have emerged (direct purchases) • Agency mortgage programs has become very attractive as investors seek high-quality debt offerings (FHA, USDA) and borrowers look to eliminate some of the risks of traditional structures

7. State of the Capital Markets – 2013 Short Rates

8. State of the Capital Markets – 2013 Long Rates

9. Accessing Capital – The Goals, Needs, or Opportunities • Disadvantageous existing debt structure • Expiring letter of credit or bank downgrade • Onerous financial or operating covenants • Savings or Permanency • Economic refinance (interest savings) • Lock into fixed rates while at historic lows or provide predictable debt service and avoid refinance risk (permanency) • Facility Replacement, Expansion, or Renovation

10. Accessing Capital – The Process • Determine your broad physical and economic goals • Assess your credit profile • Compare financial ratios to investment grade medians • Assess cash flow and value to determine debt capacity • How much can you afford and how many viable options do you have? • Combine Steps 1 & 2 to prioritize • Are there immediate opportunities through lower rates, obtain more favorable structures, or an opportunity to improve your overall profile through prudent borrowing? • Do physical needs or expansion opportunities come first? • Refine a plan of finance – usually multi-track, initially running a couple structures in parallel for greatest optionality and outcome

11. Decision to Borrow Traditional Alternative FHA 242 Mortgages Tax-Exempt Fixed Rate Banks Traditional & Alternative Options Today USDA Loan Programs • Loans made directly or a portion guaranteed • Private mortgage loans insured by FHA/HUD • Private Placement or Loan • LOC Enhancement • Public bond sale on the organization’s credit

12. Traditional Structures – Bank LOC Enhancement Very popular structure up to 2008 • Publicly issued variable rate bonds • A highly rated (A1/P1) commercial bank provides enhancement through a Letter of Credit (LOC) • Investors buy the bank not the provider (rates sub 0.20% today) The financial crisis illuminated several risks • Bank downgrades • Put risk and failed remarketing Crisis gave way to current supply/demand dynamic • Less qualified banks available = Reduced Supply • Basel III capital requirements & Bank risk aversion = Reduced Supply • Historic 2007-2008 issuance up for renewal in 2012-2014 = Increased Demand • All of the Above = Reduced availability and higher pricing for providers

13. Traditional Structures – Bank Placements Tax-Exempt bonds structured and privately placed (sold) to a bank • No A1/P1 rating requirement = opens bank universe • Reduces impact of Basel III capital requirements Term: Market and credit driven, typical 3-10 years Amortization: 20-30 years Rates: Fixed or variable (“Index Floaters”), up for negotiation and specific to each bank • Bank Qualified (“BQ”): Allows the bank to write of a portion of the carrying cost = savings passed on to borrower with lower rates • Limited to $10MM per issuer per year • Non-Bank Qualified (“Non-BQ”): No carrying cost reduction = slightly higher than BQ rates • Unlimited issuance / purchase amount • Little difference between BQ & Non-BQ rates today

14. Traditional Structures – Tax-Exempt Unenhanced Tax-Exempt bonds issued to the market on provider’s own credit strength Rated or Non-rated Term: 25-35 years Rates: Credit and market driven • 2010 – 2012 were challenging times for the Muni Markets • Record Muni mutual fund outflows • Predictions of mass Muni defaults • Federal and State fiscal concerns • Mid 2011 – Today, the market has materially improved • Muni fund inflows • Threshold I.G. and Non-I.G. credits getting priced • Market experience says that investment grade providers can borrow at below 5% • Completely market, credit, and project driven

15. Traditional Options – Unenhanced Fixed Rates

16. Alternative Structures – Agency, FHA 242 A mortgage loan made by a private sector mortgage lender, insured by FHA / HUD “AA-like” Offering Term & Amortization: 25 years Rates: Depending on if funded as taxable or through tax-exempt bond sale. Also dependent on % of new money vs. refinance. • Mostly new money = 3.50% • Mostly refinance = 3.00% - 3.25% Key Qualifiers – Traditional 242 Program • New mortgage must contain at least 20% new money uses • Aggregate positive operating margin or last three fiscal years

17. Alternative Structures – Agency, FHA 242f Just re-released 02/04/2013 Like 242, a mortgage loan made by a private sector mortgage lender, insured by FHA / HUD. However, 242f is a refinance directed program “AA-like” Offering Term & Amortization: 25 years Rates: Approximately 3.00-3.25% 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”)

18. Alternative Structures – USDA Loan Programs USDA Community Facilities (“CF”) Program • For the long-term takeout of construction projects (outside construction financing required) • Direct Loans – Approx. 3.00% for 40 years • Guaranteed Loans – up to 90% guarantee on a bank loan • Populations of 20,000 or less • At most 50% refinance USDA Business & Industry (“B&I”) Program • Like CF, permanent funding • Guaranteed Loans – 80% from $1-5MM, 70% from $5-10MM, 60% greater than $10MM • Populations of 50,000 or less with preference given to < 25,000 • Can do 100% refinance

19. Successful Outcome #1 184-bed provider with financial ratios consistent with BB+ to BBB- peers (“threshold investment grade”) Existing Structure = $27MM in LOC enhanced bonds with a swap • LOC expiring in 12/2012 • Current LOC priced at well less than 1.00%, provided by a large institution • Swap carries a large mark to market liability In advance of the expiration the hospital elected to go out to market for re-structuring alternatives (found out late in the process that the existing LOC bank did want to renew under any terms). They explored: • FHA 242 – Good candidate, but the process would take longer than the time to expiration • Tax-Exempt Unenhanced – Threshold investment grade ratios and large swap market to market made other options more favorable • Bank Placement = Chosen alternative. Achieved a 5 year term with a variable rate (65% of LIBOR + 1.30%) and no call provisions. Allowed the swap to remain outstanding and preserved flexibility for more long-term financing options in the future.

20. Successful Outcome #2 196-bed provider with financial ratios consistent with BBB+ peers Existing Structure = LOC enhanced bonds with a swap • LOC expiring in 2013 • Current LOC priced attractively, provided by a large institution In advance of the expiration the hospital elected to go out to market for re-structuring alternatives driven by their stand alone strength and the supply / demand factors in the LOC market. They explored: • FHA 242 – Good candidate, but the process would take longer than they time to expiration • Bank Private Placement – Heavily considered, but the hospital’s stand alone investment grade strength and improving bond markets warranted accessing more permanent debt • Tax-Exempt Unenhanced = Chosen alternative. $54MM issue rated Ba2 (BBB equivalent) with a total interest cost of 4.60%. The hospital refunded the existing bonds plus $8.5MM for new projects

21. Conclusion The capital markets have significantly improved since the financial crisis. Most all debt structures contain the ability to access historically low interest rates for debt restructuring / funding new projects. Organizations should assess their goals, needs, and opportunities before going to market for debt financing. Most organizations should explore both traditional and alternative structures in tandem, arriving at the structure best suited for their organization.

22. Chris Blanda Vice President - Indiana / Kentucky Market Head Lancaster Pollard & Co. and Lancaster Pollard Mortgage Company 65 East State Street, 16th Floor Columbus, OH 43215 Phone (614) 224-8800 cblanda@lancasterpollard.com