An Opportune Time to Make Strategic Decisionsfiles.cmcglobal.com/C.Blanda.pdf · • Term Debt •...

An Opportune Time to Make Strategic Decisions

Offering Financial Advice and

Solutions to Health Care,

Senior Living, and Housing

Providers

Chris Blanda

Vice President

Lancaster Pollard

Indiana Health Care Association

Annual Conference

August 2015

Agenda

• The Current Environment creates an Opportune Time

• Interest Rates

• Industry Fundamentals

• Cap Rates and Values

• Sources of Capital

• Commercial Banks

• Specialty Finance Companies

• Agency Mortgage Programs

• REITs

• Other

• Legacy (or retirement) Planning

• Transfer or Sell?

• Selecting the right way to market your asset

• Case Studies / Strategic Choices

2

Investment Banking

Lancaster Pollard & Co.

• Debt Underwriting• Financial Consulting• Financial Derivatives• Private Placements• Remarketing• Buy & Sell-Side M&A

Advisory

Mortgage Banking

Lancaster Pollard Mortgage Company

• FHA-Insured Mortgage Loans

• GNMA Issuer/ Servicing• Mortgage Loan Servicing• USDA-Guaranteed

Mortgage Loans• Fannie Mae Multifamily &

Affordable & Seniors Housing Lender/Servicer

Private Equity

Propero™ Seniors Housing Equity Fund, LLC

• Senior Living Focused• Partnership with Best-in-

Class Operators• New Development and

Acquisitions• 100% Equity Investment• Triple Net Lease with

Pre-Negotiated Purchase Options

Balance Sheet Lending

Lancaster Pollard Finance Company

• Construction Financing• Term Debt• Bridge Loan Financing• Mezzanine Debt• Preferred Equity

Introduction to Lancaster Pollard

• Founded in 1988; independently owned

• Strict focus: senior living and acute care providers

• Four areas of expertise: investment banking, specialty finance, private equity

• Offices in Columbus, Atlanta, Austin, Kansas City, Philadelphia and Los Angeles

Interest Rates – Fed Funds

Fed Rate Projections – Timing of First Increase

Futures-Implied Timing of Rate Increases

Interest Rates – 10-Year Treasury

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

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1

De

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2

No

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4

Oct-

76

Sep

-78

Sep

-80

Au

g-8

2

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l-8

4

Ju

n-8

6

Ju

n-8

8

Ma

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0

Ap

r-9

2

Ma

r-94

Ma

r-96

Feb

-98

Ja

n-0

0

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1

No

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3

No

v-0

5

Oct-

07

Sep

-09

Au

g-1

1

Au

g-1

3

Ju

l-1

5

Weekly

Data

Source: Bloomberg, National Bureau of Economic Research

Interest Rates - Flight to Quality

• In times of global uncertainty, investors tend to seek out investments

perceived as safe

• U.S. Treasury securities often seen as the most safe, stable investment options for

international investors

• Increase in demand and stable supply leads to a rise in prices, pushing interest rates

lower

Historical Example: Russian Debt Default and Collapse

of LTCM (Aug-Sep 1998)

10-Year Rates fall 100+ bps

Source: Bloomberg

What Does the Past Tell Us?

10-Year Treasury Forecast

1.85% 1.80%1.90% 1.85%

1.65%

2.00% 2.00%2.15%

2.32%2.50%

2.65%2.83%

2.97%

3.18%

2.60%

3.00%

3.30%

3.80%4.00%

4.20%4.40%

0%

1%

2%

3%

4%

5%

Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16

Fore

casts

as o

f M

onth

End

Source: Bloomberg Survey

Catalysts for Higher Rates

• Stable economic growth

• Unemployment rate in-line with long-term target

• More hawkish Fed in 2016

• Potential for increasing inflation

Catalysts for Lower Rates

• Economic slowdown

• Strong U.S. Dollar

• Harsh domestic weather conditions

• Changes to Fed policy

• Event risk

• Defaults/financial turmoil in EU

• China growth slowdown

Senior Housing Fundamentals Remain Strong but…

• Demographics (growing senior age populations and fewer children to care

for their parents)

• Ratio of Caregivers (age 45-60) to those over 80 projected to shrink from

7:1 to 4:1 by 2050 (AARP study)

• Inventory growth highest in six years

• Occupancy declined for 2nd consecutive quarter

• Forecasts suggest occupancy may be plateauing

• Absorption accelerated from first quarter

• Seniors Housing investment activity at all-time high

15

Future Demographics…be patient

16

Source: U.S. Census Bureau

What Is Driving Inventory Growth?

17

Source: NIC MAP

New Construction Continues (Units Under Construction)

18

Source: NIC MAP

Seniors Housing Transaction Volume at Record Pace

19

Source: NIC MAP/ Real Capital Analytics

Seniors Housing Price Per Unit- Last 12 Months

20


Cap Rate Dispersion

21


Cap Rate Averages through Q2 2015

22

Source: NIC MAP

Current Environment Summary

• Capital remains cheap and readily available

• Construction activity is heavy into AL and MC

• M&A activity is at record highs (cap rates at record lows, value at record

highs)

= An Opportune Time to explore strategic options and / or access

capital to grow

Capital Sources – Commercial Banks

• Type of Capital Provided = Senior Debt

• Typical Terms / Attributes

• Mismatch of Term and Amortization

- 3-10 year terms

- 20-30 year amortization periods

• Rates = 3-7% depending on term and credit, floating or fixed

• Mortgage Pledge = Loan to Value limitations (70-80% max)

• Guarantees = Typically personal, but corporate can replace if credit is strong

enough

• Redeeming Qualities / Best Use

• Efficient closing (2-4 months)

• Best used for short / medium term situations and new construction

• Most commonly used for maturity refinances, new construction, and acquisitions

as a bridge to permanent financing (i.e. FHA/HUD)

Capital Sources – Specialty Finance Companies

• Type of Capital Provided = AR Financing, Senior Debt, Mezzanine



- 3-5 year terms


• Rates = Usually floating. 1 month LIBOR (with a floor) as the base plus a spread

(300-600 bps)

• Mortgage Pledge = Loan to Value limitations (80% max)

• Guarantees = Typically personal, but corporate can replace if credit is strong

enough


• Very Efficient closing (2-3 months)

• Very Flexible (equity outs, recapitalizations, story or turnaround acquisitions).

Sometimes used for complete new construction.

• An efficient yet more expensive solution for riskier

• Used a lot like commercial bank capital, but the typical situation is more

challenging and a takeout plan is much more important

Capital Sources – Agency Mortgage Programs

• FHA / HUD 232 Program



• Matching Term and Amortization of up to 35 years

• Rates = 3.00-3.60% depending on mix of refinance and construction


• Guarantees = None. Non-recourse debt with “bad act” carve-outs

• Used for construction, acquisition, refinance, or a combination


• No financial covenants

• Non-recourse

• Most commonly used as a permanent takeout for stabilized / performing facilities

currently financed with shorter term senior debt capital

- 2 year seasoning on equity out / 3 year seasoning on new construction

- Trailing twelve months cash flow must be strong and support debt service

coverage and valuation

Capital Sources – Agency Mortgage Programs

• FNMA Seniors Housing Program




- 5-18 year terms


• Rates = 3.00-5.00% depending on term and credit, floating or fixed


• Guarantees = None. Non-recourse debt with “bad act” carve-outs


• Quick close for agency financing (3-4 months)

• Non-recourse

• Most commonly used as a semi-permanent, flexible, senior debt solution for senior

housing properties (only AL/IL properties qualify)

- Can extract equity in a refinance

- Only minimal construction (just repairs) allowed in a transaction

- Can serve as non-recourse bridge to more permanent HUD

- capital

Capital Sources – REITs

• Type of Capital Provided = Equity, Mezzanine, Senior Debt

• Typical Terms / Attributes• A REIT’s main objective is to own real estate long-term and collect income

• Equity = Triple Net Leases with annual 2-2.5% escalators

• Senior Debt = 3-5 year term loans at high rates (looking for challenging high yield

opportunities, i.e. “loan to own”)

• Mezzanine = High yield (10% + rates) and desire at least a $10-15MM transaction size

• Personal or corporate guarantees required on leases and debt

• Redeeming Qualities / Best Use• Can provide 100% financing at a reasonable blended cost of capital (their 7-9% lease

rate)

• Most commonly used to monetize existing real estate or develop / acquire with minimal

initial capital needed from an operator

- Cash from monetization equal to 100% of a usually very high value

- Retaining the operations also has value

- The REITs blended cost of capital (7-10% lease rate) is often more efficient than an

operator’s blended debt and equity cost

- Leases are hard to break and annual escalators can be painful….

Capital Sources – Other…

• Type of Capital Provided = Equity, Mezzanine, Senior Debt

• Commercial Mortgage Backed Securities (CMBS)

• Coming back for AL/IL, could soon be for SNF

• Senior debt that has Agency-like attributes without some of the agency issues

• Private Equity Funds

• An equity provider interested in RE ownership but has a short horizon compared to

a REIT

• Developer

• JV with a real estate developer

• Share the initial equity, retain the operations, structure attractive buyout options

Legacy Planning

• Do I have a strong negotiating

position?

• Is the target sales price in line with the

valuation?

• Are solid management and financial

structures in place that will be

appealing to potential buyers?

• How will the process affect the

residents and staff?

• Do the organizational cultures match?

Selling to an independent third

party

Transferring the business to

family member

• Who is the successor?

• Is the successor ready to assume

control?

• How will the business be paid for?

• Will there have to be equalization

among other family members?

• What will the tax ramifications be?

• What will the legal ramifications be?

• How will the transition affect the

residents and staff?

1. Negotiated Transaction

• Seller has a very clear sense of one (1) logical

buyer

• Typically seller has a strong negotiating position

• Quickest potential sale process

2. Targeted Solicitation

• Logical when there are a small number (2-10)

potential candidates

• Higher level market test with a formal process

• Careful screening of candidates with heightened

confidentiality

3. Broad Auction

• Logical when there is a large universe (10+) of

potential candidates

• Full market test with a formal process

• Reduced confidentiality

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Legacy Planning (Continued)

What Drives Value?

• Financial Performance

• Well operated and financially sound facilities attain premium pricing

• Buyers are apprehensive to pay for performance enhancements or synergies that they can bring to the table

• Size

• Buyers 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

STRATEGIC CHOICES

Growth/repositioning – Equity Investment

33

• Equity funding provided majority of capital needed

• 10-year NNN lease with client-controlled tenant

• Purchase option schedule – predetermined (not

market) prices

• New development of assisted living (AL) and

Alzheimer’s care facility

• Minimize amount of capital committed while still

sharing in value creation

• Development funded with minimal equity from client

• Negotiated purchase price can be exercised

beginning of second year of operations

• Purchase option prices projected to be below market

prices

Client Objectives

Financial Solution

Outcome

Facility Type: AL/MC

Project Objective: New

development

Sources of Funding: Propero™

Seniors Housing Equity Fund

STRATEGIC CHOICES

Growth/repositioning – Secured Debt

34

• Use the FHA Sec. 232 Program

• Obtain early commencement approval

• Obtain construction financing

• New construction of two AL/MC facilities

• High LTV ratio

• Long term

• No recourse to borrower

• Construction and lease up expedited by 15 months,

saving on construction costs and interest payments

• Nonrecourse loans have 40-year terms and low fixed

rates

• Ongoing reserve requirements reduced – perpetual

savings

Client Objectives

Financial Solution

Outcome

Financing Amount: $34.4 million

Facility Type: AL/MC

Project Objective: New

construction

Sources of Funding: Taxable,

fixed-rate notes insured by the

FHA Sec. 232 Program

STRATEGIC CHOICES

35

Taxable, fixed-rate notes insured by the FHA Sec.

232/223(f) program

• Refinance existing HUD mortgages and internal notes

to former family owners

• Fund new therapy enhancements at each building

• Create the financial flexibility and credit strength to

continue to capture select acquisition / development

opportunities

• Annual cash flow savings of over $3MM to fund

growth objectives

• Nearly $14 million to fund state-of-the-art therapy

additions at all 11 properties.

Client Objectives

Financial Solution

Outcome

Financing Amount: $68 million

Facility Type: Portfolio of more

than ten SNFs

Project Objective: Improve cash

flow and liquidity while making

needed competitive

improvements

Sources of Funding: Taxable,

fixed-rate notes insured by the

FHA Sec. 232/223(f) program

Improving cash flow and liquidity

STRATEGIC CHOICES

36

• Conducted discreet process to identify and screen

potential buyers

• Developed comprehensive divestiture book

highlighting The Groves’ attributes and its place in

the community and identifying opportunities for

increased cash flow

• Divest CCRC’s real estate and operations and

redeploy resources

• Ensure residents would continue to be provided for

• The church divested itself of a non-core asset while

keeping the sale confidential

• The property sold for higher than its appraised value

• The new operator has the skills and resources to

carry out the church’s vision of quality senior services

• The church will redeploy its financial resources to its

worldwide mission while maintaining its ministry for

residents of The Groves

Client Objectives

Financial Solution

Outcome

Facility Type: Continuing Care

Retirement Community

Project Objective: Divestiture

Divesting non-strategic assets

www.lancasterpollard.com

Lancaster Pollard65 East State Street, 16th FloorColumbus, OH 43215Phone (614) 224-8800Fax (614) 224-8805

An Opportune Time to Make Strategic Decisionsfiles.cmcglobal.com/C.Blanda.pdf · • Term Debt •...

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