Transcript Bringing Creativity to Your Financings

The Senior Living Industry
& Capital Markets
Today & Tomorrow
February 25, 2015
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WELCOME
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Moderator
William Sims, Managing Principal, HJ Sims
Panel
Aaron Rulnick, Managing Principal, HJ Sims
Jeffrey Sands, Managing Principal / General Counsel, HJ Sims
Anthony Luzzi, President, Sims Mortgage Funding
Opening
• 80th Birthday Video
• 2014 Highlights
• Marketing Senior Living Communities With Income
Investing
• 2015 Outlook and Upcoming Sessions
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2014 Highlights
FINANCED RIGHT IN ACTION
• Maximizing Retail Distribution
• Bringing Creativity to Your Financings
• Utilizing Our Board and Ownership Perspectives
• Providing Sage Advice and Aggressive Execution
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Maximizing Retail Participation
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Maximizing Retail Participation
• How it helps clients
− Lower cost of capital
− Higher loan to cost
− Structure and covenant flexibility
• How it helps investors
− Liquidity for institutional investors
− Liquidity for private placement investors
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Maximizing Retail Participation
Execute marketing strategies
on a national and local scale
Develop marketing vehicles
that reach the targeted
investor group
Determine investor audience
for the bond issuance
(retail & institutional)
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Maximizing Retail Participation
Marketing Vehicle
How it is used
Brochure
• Provides extensive detail about the offering
and Community
Postcard for an Event
• Details about an onsite event that promote
the investment opportunity
• Used for targeted retail investors to bring
them to the site
Print Campaign
• Advertisements for the investment placed in
local, regional and national print media
• Advertisements can be adjusted for digital
media opportunities
Online Presence
• Creation of a new website just for the bond
issuance
• All email and digital advertising are directed
to this site
• Can be linked via other websites including
HJ Sims and client website
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Maximizing Retail Participation
Marketing Vehicle
How it is used
Email
• Access to current HJ Sims clients &
prospects
• Create email advertisements for potential
local contacts
Direct Mail
• Tool to be used with the client to reach a
targeted group of residents and impact
investors
Seminar Event
• Target Audience includes HJ Sims clients,
potential residents, friends of the client
• Invitation is sent 2 weeks prior via email or
direct mail
• Event materials will include the Brochure,
the Preliminary Offering Statement and a
Response Card
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Maximizing Retail Participation
Case Study:
The following is an overview of a recent Marketing Plan for the Sinai Residences
of Boca Raton:
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Construction of a new CCRC located in Palm Beach County, Florida in
association with the Jewish Federation of South Palm Beach County
$213.8 million of new issue tax-exempt, non-rated bonds
Combination of long-term fixed-rate bonds and entrance fee principal
redemption bonds
The Investor Audience consisted of:
− Institutional Buyers including mutual funds and insurance companies
− Individual Investors:
 HJ Sims existing clients
 Members and associates of the Jewish Federation of South Palm
Beach County
 Jewish community outside of Palm Beach County and the Jewish
Federation
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Brochure
Sample
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Groundbreaking
Postcard
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hjsims.com/sinai
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Branded
Print
Ads
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Maximizing Retail Participation
Results:
The following were the results of the comprehensive marketing plan for the
Sinai Residences of Boca Raton:
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Over 200 phone inquiries from the print ads
130 leads assigned to HJ Sims Income Advisors
80+ attendees at the Investor Seminar Event
Over 1,000 unique page views to the website:
− Average time spent on the site was over 10 minutes
− 21% of the visitors downloaded the brochure
− 24% of the visitors downloaded the Preliminary Official
Statement
$76 million of bonds sold through HJ Sims Income Advisors
The balance of the bonds sold through 37 Institutional Investors
Lowered annual debt service by $1,000,000
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Bringing Creativity to Your Financings
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Bringing Creativity to Your Financings
• New products and services financed
− Draw-Down Bonds
− Maximizing HUD Proceeds
− Proprietary Ownership with Non-Profit Participation
− Geriatric Psychiatric Facility
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Bringing Creativity to Your Financings
Draw-Down Bonds
Riverview Senior Resort
• $29,365,000 financing for start-up rental
• $24,910,000 first mortgage bonds
• $4,455,000 subordinate bonds
• $4,310,000 equity plus liquidity support
• Land also contributed
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Bringing Creativity to Your Financings
Draw-Down Bonds
Riverview Senior Resort
• $24,910,000 first mortgage bonds
− Sold to institutional investor
− Draw-down feature saved .61% or 61 basis points on
interest
− First draw = $630,000
− 7 year call feature
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Bringing Creativity to Your Financings
Draw-Down Bonds
Riverview Senior Resort
• $4,455,000 subordinate debt
− Sold by Sims to its retail clients
− 25 year maturity
− 10 year fixed rate
− 3 year call feature
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Bringing Creativity to Your Financings
Maximizing HUD Proceeds
Scottish Rite House, Philadelphia, PA
• Background
− 126 unit elderly project located in Center
City
− Built in 1985; financed under HUD Section
202 Direct Loan program
− 100% subsidized with Section 8 Housing
Assistance Payment (HAP) Contract
− Owned/Sponsored by local not-for-profit
− Sister facility across the street financed by
HUD Section 202/811 PRAC program
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Bringing Creativity to Your Financings
Maximizing HUD Proceeds
Scottish Rite House, Philadelphia, PA
• Challenges
− Building needed capital improvements that could not be
financed through annual cap ex
− Sister facility also needed capital improvements but had no
viable options for funding
− HUD’s refinance options for Section 202 properties was in
“state of flux” creating uncertainty about what would be the
best option to refinance
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Bringing Creativity to Your Financings
Maximizing HUD Proceeds
Scottish Rite House, Philadelphia, PA
• SMF Approach
− Identify solution based not on “either-or” but “both of” owner’s
goals
− Analyze correctly HUD’s “conflicting” refinance guidelines to
ensure financing approach would be approved
− Develop application for refinance designed to meet owner’s
dual objectives
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Bringing Creativity to Your Financings
Maximizing HUD Proceeds
Scottish Rite House, Philadelphia, PA
• The Results
− SMF originated $9,586,700 loan insured under Section 223(f)
program
− Transaction processed under MAP guidelines and approved in
71 days
− Loan proceeds used to:
• Prepay existing debt
• Fund $523,700 in Cap Ex reserves
• Fund $2,523,900 in Repair Escrow
• Fund $1,000,000 for sister facility
• Fund $1,438,000 for Developer Fee
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Bringing Creativity to Your Financings
Maximizing HUD Proceeds
Scottish Rite House, Philadelphia, PA
• How We Pulled It Off
− Careful analysis of HUD’s evolving guidelines to ensure success
− Close cooperation with appraiser establishing proper valuation
− Constant dialogue with HUD staff regarding extra loan proceeds
− Coordination with Sponsor, Mortgagor, Management Agent and
Contractor
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Bringing Creativity to Your Financings
Proprietary Ownership With Non-Profit Participation
The Springs of South Biscayne
• New rental community
− On Church campus
− Owned by a proprietary corporation
− Share of operating profits to Church
− Church may serve and minister to senior living
community’s residents and staff
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Bringing Creativity to Your Financings
Proprietary Ownership With Non-Profit Participation
The Springs of South Biscayne
• $24,500,000 financing for start-up rental
• $21,800,000 first mortgage
• $2,700,000 subordinate bonds
• $5,600,000 equity plus liquidity support
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Bringing Creativity to Your Financings
Proprietary Ownership With Non-Profit Participation
The Springs of South Biscayne
• $21,800,000 first mortgage bonds
− Draw-down bonds
− 34 year maturity
− 6¾ year call feature
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Bringing Creativity to Your Financings
Proprietary Ownership With Non-Profit Participation
The Springs of South Biscayne
• $2,700,000 subordinate bonds
− 34 year maturity
− 6¾ year fixed rate
− 6¾ year call feature
− Sold by Sims to its retail clients
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Bringing Creativity to Your Financings
Geriatric Psychiatric Facility
• Sims financed a new transitional care and geriatric
psychiatric facility for VOA Rehabilitation Center, a
subordinate affiliate of Volunteers of America
National Services
• Geriatric Psychiatric
− Patients = 65+
− Required research by Sims and communication
of new service to investors
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Bringing Creativity to Your Financings
Geriatric Psychiatric Facility
• Best research available = Demand of 0.5 beds per
1,000 population aged 55+
• No Medicaid
• 80% Medicare – $900/day
• 10% Managed Care – $500/day
• 8% Commercial Insurance – $500/day
• 2% Private Pay
• Hospital license but skilled nursing home staffing
• Substantial savings to payers drives demand
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Utilizing Our Board
and Ownership Perspectives
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Utilizing Our Board
and Ownership Perspectives
• Ability to visualize how Board members will react to
various proposals and how to respond to their
concerns
− As Board members, what questions would we ask?
− As Board members, where would we see the risks and
opportunities?
− As Board members, would we agree that the proposed
recommendations are furthering the mission and
strategic plan of the organization?
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Utilizing Our Board
and Ownership Perspectives
Conservative and Aggressive
• In your shoes
− We understand many of the wide variety of issues you
face
− Better able to communicate your views to multiple
parties
− Better able to craft financial solutions to put your
organization in the best possible position
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Utilizing Our Board
and Ownership Perspectives
• Ownership activities are through a Sims’ affiliate, HJ Sims
Investments (“HJSI”)
• HJSI raises capital through private placements sold to “accredited
investors”
• Investments are either preferred equity or mezzanine debt
• 103 deals placed in last 12 years with a par amount of $514 million
• Currently HJSI has $234 million invested in 43 separate investment
ventures
• Current investment portfolio includes 108 properties worth over
$1.5 billion
• HJSI currently owns over 1,325 units of senior housing outright
• HJSI oversees all of its investments and operates through 3rd party
management all of the units it owns
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Utilizing Our Board
and Ownership Perspectives
• Advantages to clients and investors
− Keeps us tuned into the day to day issues facing our clients
− Allows us to provide real advice to our clients
− Helps us to better analyze and underwrite transactions
− Helps us understand the real time needs of our clients when
structuring deals
− Allows us to spot problems early and help owners solve them
− Provides us with on-the-ground expertise to advise on issues
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Utilizing Our Board
and Ownership Perspectives
Sims Invests $4.35 Million of Equity For the Acquisition of 57-unit Assisted
Living Community in Carmel, California
Background
• Distressed project which was in default on its HUD debt
• Seller was under pressure from HUD to divest but was resisting
• Sims was approached by the Freshwater Group and Watermark
Management to assist in an acquisition strategy
Challenges
• Many broken pieces – Sims needed to underwrite Watermark’s new
business plan which was a radical departure from the current operating
model
• Because of default situation, any participant (including Sims) needed to be
acceptable to HUD and meet HUD borrower requirements
• Needed to accommodate the interests of the Seller who wished to remain
as a minority partner in the deal
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Utilizing Our Board
and Ownership Perspectives
Results
• Sims position as an approved HUD borrower put it in a unique position
to participant in the deal
• Because we have owned and operated communities like Carmel, we
became actively engaged in shaping the turnaround plan and were able
to successfully underwrite Watermark’s ultimate business plan.
• Even after the closing, we continue to try to be a “value added” partner.
• Successfully utilized preferred equity to meet HUD’s limiting
parameters
• Worked collaboratively to establish a structure that allowed the Seller
to share in some “upside” if the deal meets certain performance goals.
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Providing Sage Advice
and Aggressive Execution
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Providing Sage Advice
and Aggressive Execution
• “The best thing about Sims is not that their relationships
with banks and bond institutions guarantee that you will get
the best possible terms and rates, nor that their fees are
competitive. The best thing about Sims is having the
absolute confidence that the advice they give follows only
one mandate…What is best for the client.”
— Neil Volder, CEO/Executive Director, Harbor’s Edge
• Financed Right
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Providing Sage Advice
and Aggressive Execution
• Harbor’s Edge
− High-rise CCRC in Norfolk,VA
• 163 IL apartments; 33 AL;
17 memory support; 33 SNF
• Considering $100+ million expansion
Funded $6.5 million of pre-development capital with
proceeds from $56.06 million refinancing/new
money bond issue in December 2015
» Key Considerations
• Minimize cost of capital
• Eliminate refinancing risk
• Maximize alternative use if no Phase II
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Providing Sage Advice
and Aggressive Execution
• Harbor’s Edge
− Reviewed and commented on third
party market study to verify preliminary
development plan
 Pricing considerations
» Views
» Housing values
» Income considerations
» Affordability
− Healthcare repositioning
» Scope
» Delivery model
» Competition
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Providing Sage Advice
and Aggressive Execution
• Chapin Home for the Aging, Queens, NY
− Background
Skilled nursing facility containing 220 beds
Client of Sims since early 90s
First HUD-insured loan closed in 1991; refinancing in
2004
Owned/operated by a local not-for-profit established in
1860s
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Providing Sage Advice
and Aggressive Execution
• Chapin Home for the Aging, Queens, NY
− Challenges
 Low interest rates and intense competition for HUD financing
business created a “feeding frenzy” of solicitations by HUD lenders
 Most – if not all – pitched a “standard” refinance transaction that
did not take into account specifics of Department of Health
requirements, Medicaid reimbursement and HUD guidelines
 Client knew they might benefit from a refinance but did not know
which option would produce the best results for them
 HUD’s refinancing protocols through a note modification were
evolving, also injecting some uncertainty into what would be the
best option
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Providing Sage Advice
and Aggressive Execution
• Chapin Home for the Aging, Queens, NY
− SMF Approach
 We took a closer look at current reimbursement structure with
Chapin’s auditors and determined that Department of Health’s
“typical rules” were not applicable
 Once HUD’s position on note modifications were clarified, we made
a careful analysis of best option: new loan versus note modification
 Once that was determined, we reached out to current loan
servicer/GNMA issuer to structure a working agreement on how to
develop refinancing
 This option reduced our revenue potential but was best deal for
client since it would create the most debt service savings; and, it
would result in them being exempt from several of HUD’s new
requirements
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Providing Sage Advice
and Aggressive Execution
• Chapin Home for the Aging, Queens, NY
− The Results
 Note modification proposal was approved by HUD in 13 days;
closing followed 46 days later
 Cash flow savings: $284,000 per year
 Cost to complete refinancing: $80,000
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Providing Sage Advice
and Aggressive Execution
• Newbridge on the Charles
− $457 million original bond issue in 2007 backed by letters
of credit from 7 banks (3 foreign banks)
− Start-up CCRC near Boston
− Opened during residential real estate recession
− Letter of credit due to expire in December 2014 with over
$240 million outstanding
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Providing Sage Advice
and Aggressive Execution
• Newbridge on the Charles
− Advice
 Improve cash flow through raising revenues and decreasing
expenses
 Increased cash flow resulted in higher appraisal
 Appraisal also raised through limited collateral provided by
Hebrew Senior Life, the sponsor
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Providing Sage Advice
and Aggressive Execution
• Newbridge on the Charles
− Execution
 Letter of credit eliminated
 10 banks purchase $244.5 million bonds, and one bank made a
taxable $12.5 million term loan
 Purchase amounts range from $12 million – $34 million
 88% of bonds purchased at 3.29% for 5 years
 Annual interest expense reduced by $1,200,000
 Hebrew SeniorLife collateral should be released in 3 years
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2015 Outlook
Interest Rates
Senior Living
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2015 Outlook
Interest Rates
Trend
Isolated Effect on the Bond Market
Improving Economy
Higher Interest Rates
Lower Unemployment Rate
Higher Interest Rates
End of the Federal Reserve’s
Quantitative Easing Program
Higher Interest Rates
Improving Consumer
Psychology
Higher Interest Rates
Stronger Dollar Currency
Lower Interest Rates
Low Labor Participation Rate
Lower Interest Rates
Lower Economic Growth
Outside of U.S.
Lower Interest Rates
Lower Commodity Prices
Lower Interest Rates
Low Inflation
Lower Interest Rates
European Union and Japanese
Monetary Easing
Lower Interest Rates
Republican Majority – U.S.
Senate
Not Sure
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2015 Outlook
• The advantages of investing in senior living bonds
− Sensible equity alternative
− Improving economy helps credit performance
− Maturity means principal repaid
− Keep income but shorten duration –
credit risk vs. duration risk
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2015 Outlook
*Mid-market swap rates have been adjusted to a BBB Investment grade credit level. Rates displayed above
are indicative only. For more accurate rates, please contact a Sims banker.
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2015 Outlook
Senior Living
• Technology
− Broadening relationships within your market
− Successful aging
− Revenue enhancements
− Staying at home becomes easier and more interesting
− “Broadening Senior Living Communities’ Appeal”
− “Positive Aging” – Dr. Jeste
− “Scientific Pricing” – Dr. Kuyumcu
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2015 Outlook
Senior Living
• More Recognition
− Population – 2nd and 3rd generations
− Investment community
− 17 x cash flow values – sub 6% capitalization rates
− “Evaluating Communities for Loans, Acquisitions and Sales”
− “Integrating Innovative Financing Strategies”
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2015 Outlook
Senior Living
• Affordability
− Value matters
− “What to Do When Things Are Not Going So Well”
− “Maximizing Value and Efficiency in Our Communities”
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2015 Outlook
Senior Living
“Let’s Hear From The Leaders”
Integrates All of the Concepts
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2015 Outlook
Senior Living
The First Baby Boomers Turn 75 in 2021 –
Six More Years to Go!
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