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Strategic Positioning of Your Community for the Future

Strategic Positioning of Your Community for the Future. Tuesday, March 11, 2014. Bill Wilson Senior VP & Central States Regional Manager Lancaster Pollard & Co. Agenda. Senior Housing Trends Skilled Nursing Assisted Living Independent Living Access to Capital Funds HUD/LEAN

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Strategic Positioning of Your Community for the Future

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  1. Strategic Positioning of Your Community for the Future Tuesday, March 11, 2014 Bill Wilson Senior VP & Central States Regional Manager Lancaster Pollard & Co.
  2. Agenda Senior Housing Trends Skilled Nursing Assisted Living Independent Living Access to Capital Funds HUD/LEAN Private Placements USDA
  3. State of Senior Housing Markets Skilled Nursing remains under continued reimbursement pressure Q3 & Q4 2013 Senior Housing performance indicators indicate steady occupancy and absorption rates Increased construction activity focused on ALF 3
  4. Skilled Nursing Sector
  5. Skilled Nursing – Eljay, Inc. Report Provider taxes - States are using existing, new, and expanded provider taxes have been used to mitigate Medicaid rate reductions. Between 2011 and 2013, seven states implemented new provider taxes for nursing centers and in 2013, eight states increased the provider tax rate for nursing centers. Shift to Managed Care – Slow adoption by states. However, trend is increasing and emphasizes home and community-based services (HCBS) over center-based services. This will continue to drive down occupancy rates, offset by growing senior aged population (per Kaiser Commission on Medicaid 2014) Reimbursement Shortfalls – Medicare “subsidizing” Medicaid Shortfalls shrinking. Additionally, $1.2 Trillion in Medicare cuts starting March 2013 through 2021 from sequestration
  6. 2013 State of Seniors Housing – Operating Margins
  7. Occupancy by Property Type
  8. Aggregate Rent Growth
  9. Units Under Construction
  10. Common New Construction Features Proximity to public transportation and medical services Large Multi-purpose rooms Library/Information Center Dedicated Meeting Spaces/Conference Rooms Coffee Shop/Grab n Go and Bistros Salons Spiritual Centers Fitness, Indoor Pool and Rehab Space
  11. Access to Capital Funds
  12. HUD/FHA 232 LEAN Program The LEAN program – HUD is no longer the “lender of last resort” Demand and lack of staff from 2009-2011 resulted in long “queue” Increased staffing and hired independent contractor Queue eliminated 12
  13. HUD 232 LEAN – Key Considerations Long Term Fixed Rate Up to 35 year (40 year for construction) matching term/amortization Eliminates refinance/renewal risk Government Guarantee Eliminates both health care sector and credit pricing spreads Fixed Guarantee Fee Unlike banks, does not consider risk-based pricing 0.65% refinance / 0.77% construction / 0.72% for 241 No Financial Covenants No on-going Debt Service Coverage, Days Cash on Hand or other financial ratio covenants Non-Recourse Keep “Dry Powder” and silo risk Loan is Assumable Transfer of Physical Asset (“TPA”) through HUD (1% fee) Enhance Enterprise Value Current Rate Environment
  14. HUD 232 LEAN – Other Considerations No Equity Take-out or Partner Buy-out without loan seasoning 2 years Prevailing wage (“Davis-Bacon”) required for construction Three year “seasoning” of new construction not financed via HUD Cash distributions – more flexibility (positive working capital requirement) Real estate holding company “silo” Evolving policy, new loan docs Permanency of financing (intended time horizon, prepayment flexibility) Replacement Reserves 14
  15. HUD 232 LEAN vs. Bank Capital HUD Advantages Long Term / Amortization Period Fixed Rate Non-recourse (no personal guarantees) No on-going financial covenants Challenges Averse to new construction Improving but relatively slow Won’t fund equity take-outs Prevailing wage for new construction Bank Capital Challenges Term Debt Re-pricing or refinance events Recourse (personal guarantees) On-going covenants and banking requirements Advantages Receptive to new construction Quick to close Will fund equity take-outs No prevailing wage
  16. PRIVATE PLACEMENTS Direct placement of bonds with local, regional, or national bank(s), or non banking finance entity Implemented through a competitive bidding process Capitalize on local relationships Requires knowledge of local, national, and international banks’ investment interests Pros Description 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 Refinance risk present Banks may require depository relationship Cons 17
  17. Private Placement Comparisons 18
  18. Short Term Rates Have Remained Low % Source: Bloomberg
  19. USDA PROGRAMS Community Facilities Program Requirements Direct loans, with some limited grants Must be at least 50% new money For populations of <20,000 Terms Current interest rate of 4.375% Up to 40-year amortization One-time 1% guarantee fee Construction Financing 2-3% construction rate Generally funded on draw-down basis 20
  20. USDA Opportunity
  21. Critical Underwriting Steps 22

  22. QUESTIONS?

    Bill Wilson bwilson@lancasterpollard.com Lancaster Pollard 1201 Wakarusa Drive, Suite A-4 Lawrence, KS 66049 Phone (785) 841-3700 Cell (785) 550-5683
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