Transcript Evaluating Communities for Loans, Acquisitions and Sales February 25, 2015 Moderator Jeffrey Sands, Principal/General Counsel Panel Gerald Grant, President/COO ACTS Retirement-Life Communities, Inc. Curtis King, Senior Vice President HJ Sims Anthony.

Evaluating Communities for
Loans, Acquisitions and
Sales
February 25, 2015
1
Moderator
Jeffrey Sands, Principal/General Counsel
Panel
Gerald Grant, President/COO
ACTS Retirement-Life Communities, Inc.
Curtis King, Senior Vice President
HJ Sims
Anthony Luzzi, President
Sims Mortgage Funding
David Passero, Senior Principal
HTG Consultants, LLC
Jeffrey Sands, Principal/General Counsel
HJ Sims
Gerald (Jerry) Grant, President/COO
ACTS Retirement-Life Communities, Inc.
Table of Contents
I.
ACTS History & Evolution of Growth
II. Why Affiliation as a Desired Growth Model?
III. Acquisition Criteria & Considerations
IV. Common Elements of Affiliation Opportunities
V. Valuation Methodology & Flexible Deal Terms
ACTS History
• Founded in 1971; Suburban Philadelphia
• Non-denominational; Christian Heritage
• 23 CCRC’s – 8 Eastern United States
− First 16 communities – Construction Development
− Final 7 communities – Affiliation/Acquisition
6
ACTS History
PA (8)
FL (6)
NC (2)
1970s
1980s
1990s
Ft.Washington Estates
Gwynedd Estates
SpringHouse Estates
Southampton Estates
Lima Estates
Normandy Farms
Estates
Granite Farms
Estates
Brittany Pointe
Estates
St. Andrews Estates
Edgewater Pointe
Indian River Estates
Plantation Estates
2000s
2010s
Azalea Trace*
Tryon Estates
SC (1)
Park Pointe
Village*
GA (1)
Lanier Village
AL (1)
Magnolia
Trace*
DE (3)
Cokesbury Village*
Country House*
Manor House*
MD (1)
Heron Point*
* Affiliation/ Acquisition
7
ACTS History
• Organizational Overview
2014
# of Retirement Communities
• Independent Living Units
• Assisted Living Units
• Skilled Nursing Beds
23
5, 711
907
1,433
# of Residents
8,437
# of Employees (ft & pt)
6,100
8
ACTS History
• Most Recent Credit Rating
Acts Obligated Group
9
Why Affiliation as a Desired Growth Model?
• Industry Consolidation
− Opportunities are Abundant
• Economic Advantage
− Construction and Capital Costs Remain High
• Accelerated Timeline
• Less Development Risk
− Eliminates Construction, Presales & Fill-up Risk
• Avoid Target Market Saturation
10
Acquisition Criteria & Considerations
• ACTS Board of Directors
− Shares Common Mission & Values
− Falls Within Defined Geographic Markets
− Product Offering Reaches ACTS Target Audience
− Not Directly Competitive with Existing Communities
− Offer Multiple Levels of Continuing Care
− Will Benefit from ACTS Infrastructure
− Financial / Operation Challenges Require Limited Financial and
Management Resources
− Serves to Enhance ACTS Overall
11
Common Elements of Affiliation Opportunities
• Financial Motivation
− Distressed
− Debt Violations
− Capital Needs
• Operational Challenges
− Marketing Issues / Declining Occupancy
− Revenue & Expense Management
12
Common Elements of Affiliation Opportunities
• Governance Frustrations
− Change in Leadership / Management Issues
− Need to Reposition
− Strategic Challenges
− Liability Concerns / Increased Complexity
13
A Look Inside ACTS Affiliations
“What did we discover?”
ATI
PPV
MT
PUMH
H.P.
Parent
Consolidation
Campus
Expansion
Assisted
Living
Addition
Affiliates
Needed
Support
Resident
Contract
Offering
Most Challenged Area:
• Financial Viability
• Legal/Credit Issues
• Operations
• Marketing/Sales
• Governance/Mgmt.
• Deferred Capital
• Other Issues
14
Key Business Terms
“Meeting Objectives of Both Parties”
• Take advantage of Non-Profit Structure
− Motive is not to derive highest value
− Valuation Models provide check & balance
• Debt Assumption & Credit Support is predominant format
− Limitations on use of Tax-Exempt Debt to fund Acquisition
Activity
• Influential factors
− Existing resident care obligations
− Amount of deferred capital investment
15
A Look Inside ACTS Affiliations
“Being Flexible with the Deal Terms”
ATI
PPV
MT
PUMH
H.P.
Financial Support
• Cash Consideration
•Equity Investment
• Line of Credit
•Debt Assumption
$11.5m
N
N
$35m
N
$5m
$2m
$13m
$27.25m
$3m
$2m
N
N
N
N
$68m
N
N
$3m
$30m
Healthcare Obligation
• Lifecare Liability
•Refundable Ent. Fees
$11.0m
$12.0m
$1.1m
$5.8m
$2.0m
$15.1m
$44.6m
$9.5m
$13.6m
$12.2m
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A Look Inside ACTS Affiliations
“Being Flexible with the Deal Terms”
ATI
PPV
MT
PUMH
H.P.
Governance
• Req’d BOD Membership
N
N
N
Y
N
Management & Staff
• Restrict Changes
N
N
N
N
N
Y
Y
Y
Y
Y
Y
Y
N
Y
Y
Resident Contract
• Honor Existing Contract
•Offered Conversion to
ACTS Lifecare Contract
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A Look Inside ACTS Affiliations
“Closing the Deal”
Regulatory
Approvals
Creditor
Approval Req’d
ATI
PPV
MT
PUMH
H.P.
Moderate
Minor
Unique/
Difficult
Moderate
Difficult
N
Y
N
Y
Y
13
5/1/2010
FY End
13
5/1/2010
FY End
Closing Timeline
• Duration (months)
13
• Effective Date 2/1/2003
• Determined by Negotiated
12
14
8/1/2005 5/30/2008
Bank
Bankruptcy
Driven
Driven
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The Financial Transformation
“Immediate & Continual Improvements”
• Acquisition Accounting applied to Affiliation Transactions
− Balance Sheet items are Reset at Fair Value
• Adjustments made using Property Appraisals; Actuarial
Valuations, and Market Rates
• Operating Efficiencies enhance over time as processes are
transitioned
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Balance Sheet
Apr. 30,
2010
Dec. 31,
2010
Dec. 31,
2013
Total Assets
Cash & Reserves
Property & Equipment
132.2
145.3
163.6
31.8
95.4
31.8
109.2
45.9
114.1
Total Liabilities
Long Term Debt, net
Unearned Entrance Fees
135.5
134.7
138.9
65.4
54.5
64.0
54.4
64.5
65.0
(3.3)
10.6
24.7
(in millions)
Total Net Assets
ACTS & PUMH Affiliation Effective 5/1/2010
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Balance Sheet
Liquidity
4/30/10
Unrestricted Cash & Reserves
12/31/10 12/31/13
$20.1M
$22.6M
$34.8M
185
218
325
2.0x
2.7x
3.6x
Debt to Assets
49.5%
44.0%
39.5%
Operating Ratio
93.2%
87.6%
90.5%
Operating Margin
-1.4%
8.9%
6.4%
Days Cash on Hand
Capital Structure
Debt Service Coverage
Profitability
ACTS & PUMH Affiliation Effective 5/1/2010
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A Look Inside ACTS Affiliations
“So how have we done”
ATI
PPV
MT
PUMH
H.P.
n.a.
Y
Steady
Y
Y
• Physical Plant
Y
Y
Y
Y
In Process
•Expense Savings
Y
Y
Y
Y
Y
Upgraded
(BBB+)
Initial
Rating
(BBB)
n.r.
Initial
Rating
(BBB)
n.r.
Improvements:
• Occupancy/Sales
• Credit Rating
22
A Look Inside ACTS Affiliations
“Overall Assessment”
Open Issues
ATI
PPV
MT
None
ILU
Expansion
Occupancy
Improvement
Time Needed
to Improve
Reputation
C
Surprise
Issues
None
Prospects
Resist
Crossing
State Lines
Overall
Assessment
A+
A
PUMH
H.P.
None
Capital
Improvements
(Ongoing)
None
Regulatory
Challenges
A
B
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Curtis King, Senior Vice President
HJ Sims
Table of Contents
I.
Valuation Case Study – Overview
II. Valuation Case Study – Evaluating Market
III. Valuation Case Study – Projecting Revenue
IV. Valuation Case Study – Expenses
V. Valuation Case Study – Exit Strategy & Capital Structure
Valuation Case Study – Overview
Location
Units
Opening Date
Evaluation Date
Occupancy
Revenue
Net Operating Income
Avg. Rental Rate - AL
Avg. Rental Rate - MC
Affluent Market in CA
57 Units - 41 AL and 16 MC
Late 2011
January 2014
74.60%
$3,621,859
$906,026
$5,805
$5,717
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Valuation Case Study – Overview
• Identify the Team
• Evaluate Market
• Build an Operating Performa
− Need a capital expenditure plan that supports projections
• Evaluate Exit Strategies and Develop a Capital Structure
27
Valuation Case Study – Evaluating Market
• What are the age and income qualified demographics?
− How are they projected to change in the future?
• Adult Children
Community PMA
Radius (Miles)
5
Population (2013 Est.)
50,505
Projected Population (2018)
51,258
65+ Population %
25.0%
75+ Population %
12.9%
Average Household Income
$103,453
Median Household Income
$66,915
Median Housing Value
$613,877
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Valuation Case Study – Evaluating Market
• Who are the existing competitors and how are they performing?
− Case Study: 90%+ occupancy for competitors
• What is the Community’s competitive advantages?
− Case Study: Great location and New Building
− Case Study: New Operator Provides Extraordinary Care
• What are the barriers to entry for new supply?
− Case Study: Very Tough to Build?
− Case Study: Lack of Available Land
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Valuation Case Study – Projecting Revenue
• Can rates be increased (or do they need to be decreased)?
• What are the current rates relative to market?
− Case Study: 15% discount to market rate rents
• How fast can you lease up?
− Reputation
− Acuity of residents
− Marketing budget
30
Valuation Case Study – Projecting Revenue
Summary of Competitive Supply
Property
Community
Comp 1
Comp 2
Comp 3
Comp 4
Location
Year Opened
Quality
Condition
Best in PMA
2012
Excellent
Excellent
Good
1964
Above Average
Above Average
Good
2008
Good
Good
Good
1990
Good
Good
Good
Older
Average
Average
Unit/Bed Mix
AL Units
MC Units
41
16
70
20
54
41
135
11
35
30
Occupancy
AL
MC
67%
94%
100%
80%
94%
98%
98%
100%
100%
83%
Rate Range
AL
MC
$4,620-$7,350
$4,650-$6,650
$5,175-$6,420
$5,000-$6,500
Level of Care
AL Type
AL Range
MC Type
MC Range
Levels
$400-$1,500
Levels
$700-$1,500
Levels
$850-$2,125
Levels
$500-$1,000
$3,011-$4,715 $3,590-$4,890 $2,595-$3,345
$3,802-$5,536 $5,190-$5,190 $2,895-$4,145
Levels
$578-$3,042
Levels
$1,095-$3,954
Levels
$600-$2,350
Levels
$1,250
Levels
$700-$2,500
Levels
$700-$2,225
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Valuation Case Study – Expenses
• Number One Factor is Staffing
• Compensation
− Case Study: Increased Executive Director’s compensation 50%
• Programming/Marketing
− Case Study: Added temporary worker in marketing department
for first 30 months
− Case Study: Part-time worker for activities department
• Are you staffing appropriately for the acuity level?
32
Valuation Case Study – Expenses
• Marketing
− Lag effect
• Real Estate Taxes
• Worker’s Comp
• Insurance
• Supplies and other Contracted Services
• Capital Expenditures must match business plan
− Case Study: Despite being a new building, invested several
hundred thousand to create a “Community-Exclusive” feel
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Valuation Case Study – Exit Strategy & Capital
Structure
• Holding long-term or short-term?
− Long-term partners
− Sales Rights
• Capital structure needs to be consistent with Business Plan
− Case Study: Reserves funded upfront
− Case Study: Long-term debt which provided cushion
− Case Study: Equity investor familiar with HUD
• Capital Structure can create premium
− Case Study: Low interest rate upon modification
34
Valuation Case Study – Exit Strategy & Capital
Structure
Date
Today
Stabilization
January 2014
January 2015
Revenue
$
3,621,859 $
5,080,521
Expenses
$
2,715,833 $
3,224,611
Net Operating Income
$
906,026 $
1,855,909
Debt Service
$
1,399,000 $
1,158,194
Value at Appraiser's Cap Rate
$
13,422,611 $
27,494,954
• Purchase price + reserves of $26 million
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Anthony Luzzi, President
Sims Mortgage Funding
Table of Contents
I.
Valuation Considerations for HUD-Insured Financing
a) Communities Eligible for HUD-Insured Loans
b) Activities that Qualify for HUD-Insured Loans
c) Valuation vs. Replacement Cost
d) Normalized Net Operating Income for Valuation
e) Refinance Transactions
f) Acquisition Transactions
g) Challenges to Valuations
Valuation Considerations for HUD-Insured Financing
• Communities Eligible for HUD-Insured Loans
− Skilled Nursing Facilities
− Assisted Living Facilities
− Combinations of SNF/ALFs
− Must be licensed
− Exceptions: a SNF or ALF project can contain unlicensed
independent living units provided the IL does not exceed 25% of
the total number of beds
− Age – restricted housing with no mandatory services
38
Valuation Considerations for HUD-Insured Financing
• Activities that Qualify for HUD-Insured Loans
− Refinance
− Acquisition
− Expansion
− New Construction
− Substantial Rehabilitation
39
Valuation Considerations for HUD-Insured Financing
• Valuation vs. Replacement Cost
− Some HUD-Insured Programs use replacement cost to
determine loan sizing; others use appraisals (valuation) to
determine loan amount
− Valuation – based: Section 232; Section 232/223(f); Section
223(f)
− Replacement Cost – based: Section 221(d)(4); Section 231
40
Valuation Considerations for HUD-Insured Financing
• Normalized Net Operating Income for Valuation
− Based on market expenses and rents
− Must include allowances for cap-ex; management fees; and, real
estate taxes, regardless of whether borrower is exempt from
paying taxes
− Second calculation of cap-ex used to determine debt service
coverage
− NOI based on stabilized occupancy in current dollars
− Application of capitalization rate directly to Normalized NOI; no
discounted cash flow method allowed
41
Valuation Considerations for HUD-Insured Financing
• Refinance Transactions
− Facility owned/operated by same entity looking to refinance
existing debt and make some capital improvements
− Three Years of Operating History
− Normalized Net Operating Income
− Trailing Twelve Months (TTM) Rules
− How much deviation from TTM is allowed in underwriting and
valuation?
− Navigating between Market Value and “TTM Value” is a
challenge
42
Valuation Considerations for HUD-Insured Financing
• Acquisition Transactions
− Arms-length change of ownership, operations and control of
property
− 3 years of Operating History
− Normalized Net Operating Income
− Trailing Twelve Months Still Rules
43
Valuation Considerations for HUD-Insured Financing
• Challenges to Valuations
− New ownership may have plans to change programs/services,
develop higher-acuity patient base, change payor mix, etc.
− Historical operating revenues and costs “baked into” TTM
− Prospective NOI based on new ownership, programs, etc.
− HUD’s comfort zone is TTM making prospective NOI a challenge
to underwrite; mitigations include escrows and debt service
reserve
− Bridge to HUD financing for acquisitions (and refinancings) a
viable option
44
David Passero, Senior Principal
HTG Consultants, LLC
Table of Contents
I.
Appraisal Methodology
II. Income Approach
III. Selection of Cap and Discount Rates
IV. Sales Comparison Approach
Appraisal Methodology
• General Issues
− As Is vs. Stabilized (Prospective)
− Market vs. Investment Value
− Approaches to Value
• Income and Sales Comparison Approaches
47
Income Approach
•
Occupancy Projection
− Types of Payor Sources
− Census Characteristics of Facility
− Market Characteristics
− Impact of New Development
48
Income Approach
•
Revenue Projection
− Market vs. Contract Rent
− Third Party Reimbursement
• Medicaid
• Medicare
− Ancillary Revenue
− Provider Tax
49
Income Approach
• Expenses
− Market vs. Historic
− Adjustments to Expenses
• Provider Tax
• Staffing Requirements
• Operational Changes
− Affect of Adjustments on Reimbursement
50
Selection of Cap and Discount Rates
• Capitalization and Discount Rates
− Development Methods
− Asset Quality and Location
− Weighted Average for CCRCs
− Single vs. Multi-Asset Transactions
51
Sales Comparison Approach
• Truly Comparable
− Transaction Variables
− Asset Quality and Location
− Operational Differences
52
THANK YOU
53
Comments/
Questions?
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