Financing & Development Opportunities in Affordable Living Projects Rod Burkett | CEO, Gardant Management Solutions Jerry Finis | CEO, Pathway Senior Living, LLC Steve Kennedy | Senior Managing Director, Lancaster Pollard Wayne Smallwood | Executive Director, Affordable Assisted Living Coalition
Picture the “Silver Tsunami�
Administration on Aging U.S. Department on Health and Human Services
2000 2010 2020 2030 2040 2050
65+ 35.0 40.2 54.8 72.1 81.2 88.5
65 to 74 18.4 21.5 32.3 38.8 36.9 40.1
75 to 84 12.4 13.0 15.9 24.6 30.1 29.4
85+ 4.2 5.7 6.6 8.7 14.2 19.0 *In Millions
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 •
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3 out of 5 Seniors cannot afford 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
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PP and ACA led to creation of Medicare and Medicaid Coordination Office
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“The New Frontier” is the promotion of innovative programs/partnerships – seems like almost anything goes
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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
A. Regulatory
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?
B. Medicaid Payment
1. Rate-per diem? Average inclusive rate, tiered acuity steps, geographic variances?
2. Cycle/timing of payments? 3. History of increases?
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 There are various options to finance projects, but the decision on which path to pursue is based on several criterion Scope and Size
Mix of Cash and Debt
Scope and Size of Project
What is our competition doing? Where are opportunities to improve? What are the demand expectations for the improvements? Mix of Cash and Debt
Credit Profile
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
Financing Decision
credit profile – both current and future? What collateral can be offered? How much debt can we comfortably afford?
Business / Property Capitalization - “The Capital Stack”
The cash versus debt decision is influenced by the terms and costs associated with various forms of capital
Equity Capital (20-40%)
“Mezzanine” Capital (10-15%)
Senior Debt Capital (60-80%)
Total Business Capitalization (100%)
Business / Property Capitalization - Types
Terms and costs associated with various forms of capital differ in a competitive market Senior Debt
Mezzanine Capital
Equity Capital
60-80%
10-15%
20-40%
Least Expensive (3-9%)
Second Most Expensive (1220%)
Most Expensive (20%+)
Security Position
First Lien
Second or Unsecured
None
Cash Flow Claim
First Claim for Repayment
Second Claim
Residual 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
% of the Capital Stack Cost of Capital
Financing Structures A snapshot of common traditional and alternative financing structures
Traditional
Alternative
Bank Financing
FHA/HUD
Specialty Finance Companies
GSE
REIT
Propero
Alternative Capital for Projects
Alternative structures to fund affordable assisted projects
FHA/HUD
GSE
Propero
Non-recourse
Non-recourse
Lease guarantee
Long-term low fixed rates
Speed
Minimal equity
Matching term and amortization
Refinance risk
Ultimate ownership
New construction, refinance, acquisition
No new construction
Valuation creation required
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 living communities set new average price per unit records in 2014.
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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.
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For the first time since 2009, cap rates are higher and per unit values declined year-over-year for the senior housing sector, signifying the market could be peaking. AL/IL Combined Average & Median Per Unit $250,000 $200,000 $150,000 $100,000 $50,000 $0 2006
2007
2008
2009
2010
Average Price Per Unit
2011
2012
2013
2014
2015
Median Price Per Unit Source: The Senior Care Acquisition Report, Twentieth Edition, 2015
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 Demographics & Occupancy Regulatory & Reimbursement Environment
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 Buyers are highly focused on facility demographics and occupancy and pay a premium for desirable locations with strong occupancy 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 Burkett President & CEO Gardant Management Solutions rod.burkett@gardant.com 815-935-1992 x230
Steven Kennedy Senior Managing Partner Lancaster Pollard skennedy@lancasterpollard.com 614-224-8800 x117
Jerry Finis CEO Pathway Senior Living, LLC JFinis@pathwaysl.com 312-837-0704
Wayne Smallwood Executive Director Affordable Assisted Living Coalition wsmallwood@aalconline.org 217-525-0700 x 124