Financing & Development Opportunities in Affordable Living ProjectsRod Burkett | CEO, Gardant Management Solutions

Jerry Finis | CEO, Pathway Senior Living, LLC

Steve Kennedy | Senior Managing Director, Lancaster PollardWayne Smallwood | Executive Director, Affordable Assisted Living Coalition

Picture the “Silver Tsunami”

65+ 65 to 74 75 to 84 85+

2000 35.0 18.4 12.4 4.2

2010 40.2 21.5 13.0 5.7

2020 54.8 32.3 15.9 6.6

2030 72.1 38.8 24.6 8.7

2040 81.2 36.9 30.1 14.2

2050 88.5 40.1 29.4 19.0

*In Millions

Administration on Aging

U.S. Department on Health and Human Services

Additional Cost to the Big Picture

The typical AL resident is an 87 yr. old woman that needs assistance with 2-3 ADLs. She would also have 2-3 of the Top 10 Chronic conditions. (NCAL)

-- High Blood Pressure: 57% -- Osteoporosis: 21%

-- Alzheimer’s disease & dementia: 42% -- Diabetes: 17%

-- COPD & Allied C Conditions: 15% -- Depression: 28%

-- Heart Disease: 34% -- Depression: 28%

-- Cancer: 11% -- Stroke: 11%

-- Arthritis: 27%

Stable Housing Leads to Better Health Outcomes

“Housing with integrated health services is an important solution toward bending the healthcare cost curve.”

New study shows Medicaid costs fell by 12 percent (1 year) when people moved into affordable housing (1625 people – 145 properties) in Portland, Oregon.

• Used more primary care

• Had fewer ER visits

• Accumulated lower medical expenses by 12%

• Better access to and quality of healthcare

Enterprise Community Partners & Center for Outcomes Research and Education

Financial Challenges for Older Adults

• 3 out of 5 Seniors cannotafford Assisted Living

• Household income for nearly 61% of 75+ population in the U.S. is less than $35,000(Nielsen 2014)

• Of those over 65 with annual incomes above $20,000, only 16% have private LTC insurance. (M Cohen-2013)

The New Frontier

• Federal and State Governments struggling to deal with cost containment in Medicare and Medicaid

• PP and ACA led to creation of Medicare and Medicaid Coordination Office

• “The New Frontier” is the promotion of innovative programs/partnerships –seems like almost anything goes

• The CMS Innovation Center (innovation.cms.gov) has 68 models across 7 categories

State by State Analysis of Affordable Assisted Living

A - Regulatory

B - Medicaid payment

C - Resident Medicaid eligibility

D - Medicaid capacity

E - Gate Keepers

1. Any Certificate of Need (CON) process?

2. Are there any onerous licensure or staffing regulations?

3. What is timetable of building licensure and Medicaid provider certification?

4. Resident age restrictions?

A. Regulatory

1. Rate-per diem? Average inclusive rate, tiered acuity steps, geographic variances?

2. Cycle/timing of payments?

3. History of increases?

B. Medicaid Payment

C. Resident Medicaid Eligibility

1. How is the application processed?

2. What is application processing time?

3. Is there retroactive eligibility based on submittal date?

D. Medicaid Capacity

1. Number of unduplicated Medicaid waiver slots?

2. Current utilization of waiver slots?

3. Is waiver slot facility specific or follow the residents?

4. History of any wait lists?

1. Specific AL capacity or shared with other waiver programs?

E. Gatekeepers

1. Is there a 3rd party resident prescreening agency involved?

2. Qualifying acuity threshold/pre-screen assessment tool?

3. Physician certification required?

4. Care management scenario?

5. Any formal State contracted Managed Care Organizationinvolvement?

Financing Factors

Financing Decision

Credit Profile

Mix of Cash and

Debt

Scope and Size

of Project

Scope and Size

What is our competition doing?

Where are opportunities to improve?

What are the demand expectations for the improvements?

Mix of Cash and Debt

How much equity should we invest?

What is our cost of capital at different debt vs. equity

allocations?

Credit Profile

How does the financing structure impact our corporate

credit profile – both current and future?

What collateral can be offered?

How much debt can we comfortably afford?

There are various options to finance projects, but the decision on which path to pursue is based on several criterion

Business / Property Capitalization - “The Capital Stack”

Equity Capital(20-40%)

“Mezzanine” Capital(10-15%)

Senior Debt Capital(60-80%)

Total

Business

Capitalization

(100%)

The cash versus debt decision is influenced by the terms and costs associated with various forms of capital

Business / Property Capitalization - Types

Senior Debt Mezzanine Capital Equity Capital

% of the Capital Stack 60-80% 10-15% 20-40%

Cost of Capital Least Expensive (3-9%)Second Most Expensive (12-

20%)Most Expensive (20%+)

Security Position First Lien Second or Unsecured None

Cash Flow Claim First Claim for Repayment Second ClaimResidual Claim (after expenses

and debt service)

Ownership? None Some Convertible Features Full Ownership

Risk to Capital Provider Least Second Most High

Number of Capital Providers Many Few Moderate

Terms and costs associated with various forms of capital differ in a competitive market

Financing Structures

A snapshot of common traditional and alternative financing structures

Traditional

Bank Financing

Specialty Finance Companies

REIT

Alternative

FHA/HUD

GSE

Propero

Alternative Capital for Projects

FHA/HUDNon-recourse

Long-term low fixed rates

Matching term and amortization

New construction, refinance, acquisition

GSENon-recourse

Speed

Refinance risk

No new construction

ProperoLease guarantee

Minimal equity

Ultimate ownership

Valuation creation required

Alternative structures to fund affordable assisted projects

AL/IL Valuations

Although senior housing valuations remain near all-time highs, momentum has shifted away from AL/IL to SNFs.

Driven by a rise in the top and upper quartile sales, both assisted living communities and independent livingcommunities set new average price per unit records in 2014.

Demand is particularly high for high end facilities (a sale valued over $500,000 per unit was recorded for the first time),increasing the spread between the average and median per unit values.

For the first time since 2009, cap rates are higher and per unit values declined year-over-year for the senior housingsector, signifying the market could be peaking.

Source: The Senior Care Acquisition Report, Twentieth Edition, 2015

$0

$50,000

$100,000

$150,000

$200,000

$250,000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

AL/IL Combined Average & Median Per Unit

Average Price Per Unit Median Price Per Unit

Valuation Drivers

What are Buyers Looking for?

Financial

Performance

As expected, buyers pay a premium for well operated and financially sound

facilities

Buyers are apprehensive to pay for performance enhancements or synergies

that they believe they can bring to the table

Size and Scale Buyers are consistently looking for increased scale and 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

Contact Info

Rod BurkettPresident & CEOGardant Management Solutionsrod.burkett@gardant.com815-935-1992 x230

Jerry FinisCEO Pathway Senior Living, LLC JFinis@pathwaysl.com312-837-0704

Steven Kennedy Senior Managing PartnerLancaster Pollardskennedy@lancasterpollard.com614-224-8800 x117

Wayne SmallwoodExecutive DirectorAffordable Assisted Living Coalitionwsmallwood@aalconline.org217-525-0700 x 124