HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE

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PREPARED FOR

HOW TO APPRAISE AN ASSISTED LIVING RESIDENCE

By: Zach Bowyer, MAI

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Industry Overview

Valuation Overview

Market Analysis

Income Approach

Sales Comparison Approach

Allocation of the Going Concern

Final Considerations

How to Appraise an Assisted Living Residence

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INDUSTRY OVERVIEW

Shelter Activities Transport,

Laundry Meals Basic Care Services ADL Care Services Specialized MC Long-Term Chonic Care 55+ IL AL MC NC

Source: NIC Investment Guide

Real Estate Component Services Component

Real Estate Component Services Component Real Estate Component

Real Estate Component Services Component

Real Estate Component Services Component

Summary of Property Types

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INDUSTRY OVERVIEW

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INDUSTRY OVERVIEW

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INDUSTRY OVERVIEW

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INDUSTRY OVERVIEW

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Implied Market Values

INDUSTRY OVERVIEW

0 200 400 600 800 1,000 1,200 1,400

Seniors Housing Hotels Apartments

Billions

Skilled Nursing Assisted Living Independent Living

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Transaction Volume 1Q 2008 - 3Q2013

INDUSTRY OVERVIEW

$0 $2 $4 $6 $8 $10 $12 2008 2009 2010 2011 2012 2013 User/Other Public Private Institutional

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Property Level Returns

INDUSTRY OVERVIEW

0 2 4 6 8 10 12 14 16 18

1 Year 3 Years 5 Years 8 Years

Seniors Housing Apartment Retail Industrial Office Total

Source: NCREIF & NIC

% L e v er ed R e tu rns

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Capitalization Rate Trends

INDUSTRY OVERVIEW

Source: The Senior Care Investor

6.0% 7.0% 8.0% 9.0% 10.0% 11.0% 12.0% 13.0% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

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Average Price Per Unit (AL & IL)

INDUSTRY OVERVIEW

Source: The Senior Care Investor

$0 $20,000 $40,000 $60,000 $80,000 $100,000 $120,000 $140,000 $160,000 $180,000 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Average Price Per Unit (AL and IL)

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Publicly Announced Seniors Housing Acquisitions 1994 - 2013

INDUSTRY OVERVIEW

Source: The Senior Care Investor

0.0 50.0 100.0 150.0 200.0 250.0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

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2014 2H Investor/ Developer Survey

INDUSTRY OVERVIEW

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10-Year Treasury Vs. Seniors Housing Cap Rates

INDUSTRY OVERVIEW

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Capitalization Rate Trends & Outlook

INDUSTRY OVERVIEW

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INDUSTRY OVERVIEW

Demographic Trends

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INDUSTRY OVERVIEW

Do the Math

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Seniors Housing Demand Vs. Supply

INDUSTRY OVERVIEW

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Inventory Growth as % of Stock

INDUSTRY OVERVIEW

Source: Green Street Advisors, NIC MAP

3.1% 0% 2% 4% 6% 8% 10%

During the last supply wave , supply growth exceeded 8%, nearly

bankrupting the industry

Jump in inventory resulting from current elevated construction levels, but still moderate

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Industry Overview

Valuation Overview

Market Analysis

Income Approach

Sales Comparison Approach

Allocation of the Going Concern

Final Considerations

How to Appraise an Assisted Living Residence

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Appraisal Process

VALUATION OVERVIEW

Definition of the Problem

Scope of Work

Data Collection and Analysis

Market Analysis

Highest and Best Use

Application of Approaches to Value

Income Approach

Sales Comparison Approach

Cost Approach

Reconciliation of Value Indicators and Final Value Opinion

Report of Defined Value Opinions

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Approaches to Value

VALUATION OVERVIEW

Income Approach

• The underlying operations of the business are what drives overall value of the real estate

• Most appraisals will assume experienced and capable management

•Utilized as primary determinant of value

Sales Comparison Approach

• Primarily utilized to extract market pricing and a test or reasonability for the conclusions

derived from the income approach

• Utilized Paired Sales, NOI Analysis, and EGIM Analysis

• Comparables are selected from a regional if not national geography

Cost Approach

• Least reliable and often omitted

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VALUATION OVERVIEW

Property Rights Appraised

Seniors housing is primarily valued based on the

fee simple interest of the going concern

, which is

the premise of this presentation. Leased Fee valuation is summarized in the Allocation of Going

Concern.

Going Concern: A going concern is a business having the ability to continue functioning as a business entity in the future. In accounting, a business is considered to be a going concern if it is likely to continue functioning 12 months into the future.

One of the premises under which the total assets of a business can be valued; the assumption that a company is expected to continue operating well into the future (usually indefinitely). Under the going-concern premise, the value of the tangible assets and the value of the intangible assets, which may include the value of excess profit, where asset values are derived consistent with the going-concern premise.

 Land

 Real Estate

 FF & E

 Business or Enterprise Value

Business (Enterprise) Value: The value contribution of the total intangible assets of a continuing business enterprise such as marketing and management skill, an assembled workforce, working capital, trade names, franchises, patents, trademarks, contracts, leases, customer base, and operating agreements.

Real Estate Tax Assessments are typically based in the tangibles. Source: Dictionary of Real Estate Appraising, 5th Edition, The Appraisal Institute, Chicago, IL, page 98

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VALUATION OVERVIEW

Ownership Structure

Identifying the correct ownership structure can often be complicated, yet essential in identifying

the proper ownership rights.

Management Co. Related Parties

(therapy, home care, etc)

Subject

Real Estate Owner Operating Entity

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Industry Overview

Valuation Overview

Market Analysis

Income Approach

Sales Comparison Approach

Allocation of the Going Concern

Final Considerations

Seniors Housing Valuations & Trends

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Quantifying Net Market Demand

MARKET ANALYSIS

A Primary Market Area (PMA) can be identified by a radius, node(s), submarket(s), zip code(s), county(s) or township(s), or any variety of such defining terms.

We define a PMA as representing where approximately 80% of the residents currently occupying the subject resided prior to moving in to the subject property.

In analyzing a market, CBRE employs two quantitative methods, each independent of the other

1. Penetration Analysis

• Competitive Supply / Age Qualified Households

• Simple, yet allows for apples-to-apples comparison to other markets

• Requires comparable local, regional, and national data-points to understanding of the extracted rate • The penetration must be considered with occupancy to properly understand full meaning

• Used to determine market depth and impact of future supply on current market balance

2. Demand Coverage Analysis

• Delineates PMA by age and income qualified population

• Recognizes healthcare or ADL (Activities of Daily Living) requirements specific to each care level • Identifies Net Demand in terms of actual number of units by property type

• Identifies impact of state subsidies and +/- net immigrations outside market norm • PMA specific

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Case Study – Proposed Memory Care Addition

MARKET ANALYSIS

The reported market statistics for the subject’s specific property type respective to the NIC MAP Primary

Market Average, and the identified MSA for the subject are summarized as follows.

SENIORS HOUSING MARKET STATISTICS

Category Subject's PMA Subject MSA MAP Primary

Assisted Living

Stabilized/Average Occupancy 87.39% 92.20% 90.40%

Average Monthly Rent $4,726 $4,251 $4,304

Property Count 22 54 2,545

Inventory (Units) 1,746 4,686 200,044

Construction (Units) 90 526 10,750

Projected 3-Year Inventory Growth 5.15% 2.40% 2.10%

Penetration 10.30% 5.70% 4.80%

Source: NIC MAP

2014 2019

Assisted Living

Age Qualified Households (75+) 16,949 19,280 Total AL Supply 1,746 1,836

Indicated AL/MC Penetration Rate: 10.30% 9.52% Compiled by CBRE

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Case Study – Proposed Memory Care Addition

MARKET ANALYSIS

Penetration Rates Alone Have Multiple Meanings:

Low Penetration/ High Occupancy: Local population is accepting the subject’s product type, significant room for expansion, higher than typical ratio of residents emanating from outside the defined PMA. Expect strong occupancy levels, stable rent growth, and healthy absorption for proposed properties. Most favorable.

Low Penetration/ Low Occupancy: Local population is either not accepting the subject property type or are traveling outside the defined PMA to obtain their respective needs. Market opportunity does exist, but will likely require additional marketing efforts in order to achieve a stabilized occupancy level.

High Penetration/ High Occupancy: Equally as attractive as low penetration with low occupancy. Competitive market, yet presumes the local population is generally receptive and well educated with the respective property type. Requires less marketing efforts in terms of product education, but may require more resources from an overall competitive standpoint or the offering of something unique to the market, such as superior quality or affordable rents. Prevalence of state subsidies are also common in this market (MA).

High Penetration/ Low Occupancy: This combination is the least favorable and depicts a saturated market. Decreasing rental rates, prevalence of concessions, and less than favorable occupancy can be expected.

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Case Study – Proposed Memory Care Addition

MARKET ANALYSIS

2014 AL 65 - 74 Population 30,453 75 - 84 Population 16,023 85+ Population 8,319

Age Qualified Population 54,795

2019 AL

65 - 74 Population 41,510

75 - 84 Population 18,789

85+ Population 8,819

Age Qualified Population 69,118

Source: Compiled by CBRE

DEMAND BY POPULATION SEGMENT

AL

Base Market Rent (Monthly) $3,050

Base Market Rent (Annual) $36,600

Allocated % of Annual Income 80.00%

Indicated Base Income Retuirement $45,750

Average Home Value $297,851

Estimated Equity @ 75% of Home Value $223,388

Rate of Return 4.00%

Home Equity Contribution $8,936

Adjusted Income Requirement $36,814

Concluded Base Income Requirement $35,000 BASE INCOME REQUIREMENT

A demand coverage analysis can serve as a more calculated way of understanding specific supply and demand characteristics of a primary market area. This method begins by identifying the age and income qualified portion of the population. Whereas the penetration analysis utilizes the 75+ population, this analysis utilizes the 65+ population.

Though it is not typical for people between the ages of 65 to 74 to require ADL (Assistance with Activities of Daily Living) services, this demographic is included in this analysis. Hence, this analysis considers the 65 to 85+ age cohort as age-qualified demand.

In order to understand the base income requirement, the minimum rent charged for each care level from a competitive set should be utilized.

The base rent represents the lowest rent charged in the market, respective of the subject’s property type, which is utilized to income-qualify the population based.

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Case Study – Proposed Memory Care Addition

MARKET ANALYSIS

2014 AL

Income Qualified 65 - 74 Population 11,943

65 - 74 Required Care Factor 3.20%

65 - 74 Age/ Care Qualified Demand 382

Income Qualified 75 - 84 Population 5,240

75 - 84 Required Care Factor 8.10%

75 - 84 Age/ Care Qualified Demand 424

Income Qualified 85+ Population 1,992

85+ Required Care Factor 18.80%

85+ Age/ Care Qualified Demand 375

Total Age/ Care Qualified Demand 1,181 AGE AND INCOME QUALIFIED DEMAND

2019 AL

Income Qualified 65 - 74 Population 16,218

65 - 74 Required Care Factor 3.20%

65 - 74 Age/ Care Qualified Demand 519

Income Qualified 75 - 84 Population 6,272

75 - 84 Required Care Factor 8.10%

75 - 84 Age/ Care Qualified Demand 508

Income Qualified 85+ Population 2,181

85+ Required Care Factor 18.80%

85+ Age/ Care Qualified Demand 410

Total Age/ Care Qualified Demand 1,437

Care Factor Source: U.S. Department of Health and Human Services Compiled By: CBRE

The next step is delineating the income qualified portion of the age qualified population. As Claritas only reports income levels by households, a household to population factor must be applied. According to the Assisted Living Federation of America, 76.60% of the seniors population are widowed, or living alone prior to moving in to an assisted living residence.

The final step in estimating demand is delineating the percentage of the age and income population that will require care, respective of the subject property type. The U.S. Department of Health and Human Services reports the percentage of the population requiring care levels respective of each type of seniors housing property type.

These factors have been applied to the previously determined age and income qualified cohort as follows:

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Case Study – Proposed Memory Care Addition

MARKET ANALYSIS

2014 AL

Total Demand 1,181

Frictional Vacancy 12.61%

Total Adjusted Demand 1,352

Total Supply 1,746

Net Surplus Demand (Units) -394

Market Balance Over Supply

2019 AL

Total Demand 1,437

Frictional Vacancy 12.61%

Total Adjusted Demand 1,644

Total Supply 1,836

Net Surplus Demand (Units) -192

Market Balance Over Supply

Compiled By: CBRE

DEMAND COVERAGE

Once an adjustment for frictional vacancy is applied, the adjusted demand can be applied to the indicated supply. The difference between the adjusted demand and market supply yields the net surplus in demand. This calculation is summarized below.

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Case Study – Proposed Memory Care Addition

MARKET ANALYSIS

2014 2019

Total Demand - AL and MC 1,181 1,437

MC Utilization Ratio 42.00% 42.00%

Total Demand - MC 496 604

Frictional Vacancy 7.70% 7.70%

Total Adjusted Demand - MC 537 654

Total Supply - MC 269 359

Net Surplus Demand (Units) 268 295

Market Balance Under Supply Under Supply

Compiled By: CBRE

MEMORY CARE DEMAND COVERAGE

The above analysis only applies to the overall assisted living market. As a portion of the subject’s assisted living units will be utilized as memory care, specific demand characteristics relative to standard assisted living and memory care must be further understood.

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Case Study – Proposed Memory Care Addition

MARKET ANALYSIS

Market Conclusion ?

A penetration analysis and a demand coverage analysis were performed. Each analyses is independent of the other, with each yielding similar conclusions. Based on this analysis, the overall assisted living market is considered to be highly competitive and slightly saturated. However, there does appear to be significant unmet demand for Memory Care.

This analysis does conclude that sufficient market demand does exist to support the proposed Memory Care addition. As detailed above, net demand actually increases with the addition of the subject and the other memory care property that is currently under construction.

The location of the subject with favorable economic and population trends, along with superior physical and operational attributes, being located adjacent to an existing independent and assisted living community (Harvard Square) suggest that the subject will capture the appropriate share of the market to obtain a stabilized occupancy level above, or at the high end, of current market indications for stabilized memory care properties.

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Industry Overview

Valuation Overview

Market Analysis

Income Approach

Sales Comparison Approach

Allocation of the Going Concern

Flags and Considerations for Assessment Purposes

How to Appraise an Assisted Living Residence

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General Overview

INCOME APPROACH

The income capitalization approach reflects the subject’s income-producing capabilities.

 The 'active management' component is viewed as adding incremental risk and complexity versus the conventional commercial real estate asset classes, which translates into higher return expectations by investors

-Property Management will “make or brake” market value

 Market value appraisals involving not-for-profit or government, and poor operators should reflect the likely buyers’ perspective, and in most cases, that would be from the perspective of for-profit entities, which may take a different view of future operations

 Proper rental comparables and operating expense comparables are essential in achieving accurate underwriting

-Per resident day is the most accurate unit of measure for underwriting purposes

- % of EGI can have multiple meanings depending on property specific operating format and should only be used as a secondary test of reasonableness

 The direct capitalization method is the most commonly used in deriving an estimate of market value per this approach

 The market derived capitalization rate is applied to the subject’s stabilized EBITA, which includes replacement reserves and management fees

-Management Fee – 3% to 7% of EGI

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Revenue Projections

INCOME APPROACH

Assisted living revenue is typically derived from the following sources

:

 Base monthly rent

-All inclusive or Base + LOC services -Typically includes meals and utilities -Primarily Private Pay

-Some states offer Medicaid/ Affordable -GAFC and SSI in MA (flat rates)

-Detailed rent roll is essential

 Activity of Daily Living Services (ADLS) -Billed based on levels (LOC), or a la carte

 Community Fee

 Second Resident Fee

 Other Income

- Late fees, transportation, other add-on’s

OPERATING SUMMARY Reporting Year

Units/ Beds Occ. AMR Res Days

Assisted Living 82 96% 5,473 28,733

Memory Care 52 96% 6,402 18,221

Total 134 96% $5,834 46,954

Total % EGI $/Unit $/RD Income

Assisted Living Rent 5,385,900 54.3% $40,193 114.71 Memory Care Rent 3,994,560 40.2% $29,810 85.07 Level of Care Fees - 0.0% 0 0.00 Second Resident Fees 185,242 1.9% 1,382 3.95 Community Fees 219,974 2.2% 1,642 4.68

Other Income $140,861 1.4% 1,051 3.00

Effective Gross Income $9,926,536 100.0% $74,079 $211.41

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Operating Expense Projections

INCOME APPROACH

CBRE

Operating Expenses Stabilized 2014 Budg. 2014 T-12 2013 Actual 2012 Actual Min. Max. Avg.

Real Estate Taxes 11.04 11.24 10.97 11.74 25.02 7.42 10.09 8.91

Property Insurance 1.89 1.83 1.96 1.95 5.82 1.40 6.65 3.45

Electricity 5.04 5.30 4.78 5.04 14.74 4.60 6.24 5.16

Natural Gas 2.54 1.69 3.38 1.56 3.75 1.35 1.68 1.51

Water & Sewer 1.22 1.30 1.14 1.20 1.70 0.25 0.71 0.41

Admin & General 6.02 5.67 4.36 6.02 17.77 3.30 8.54 6.08

Bad Debt 0.25 0.51 0.00 0.26 0.67 0.00 0.01 0.00 Admin Payroll 6.87 7.57 6.16 7.28 22.60 5.45 7.96 6.81 Advertising 2.00 2.07 0.23 6.62 27.38 3.49 4.76 4.25 Advertising Payroll 5.05 5.05 4.62 7.73 18.78 2.29 4.40 3.09 Culinary Food 11.81 10.03 13.60 8.63 10.42 5.88 8.18 7.13 Culinary Supplies 2.46 0.96 3.95 1.15 3.99 1.07 1.45 1.21 Culinary Payroll 13.60 13.98 13.23 14.07 23.26 3.17 11.76 8.19

Laundry & Housekeeping 0.16 0.13 0.16 0.10 0.21 0.47 0.81 0.61

Laundry & Housekeeping Payroll 4.00 3.76 4.87 3.59 7.95 2.32 6.03 3.85

Resident Care 0.50 0.05 0.94 0.99 0.98 0.19 0.50 0.40

Bed Tax 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Therapy Type A 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Therapy Type B 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Resident Care Payroll 9.00 7.25 6.22 6.20 12.43 8.32 12.01 10.17

Maintenance 4.60 3.60 7.68 6.09 7.41 3.12 8.56 5.36

Maintenance Payroll 5.50 6.47 5.40 6.11 13.05 1.40 2.32 1.76

Program & Rec 3.25 3.28 4.04 3.72 7.69 0.35 2.21 1.02

Program & Rec Payroll 4.50 4.43 3.57 4.20 11.21 2.64 12.48 8.55

Employee Payroll 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Payroll Taxes 4.50 4.44 5.13 4.56 9.28 3.34 5.06 4.41 Benefits 6.25 5.72 8.51 4.73 13.42 3.52 9.91 6.22 Other 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 SubTotal 112.05 106.33 114.90 113.54 259.53 104.84 112.41 109.37 Exp Ratio 58.67% 56.44% 61.05% 71.34% 145.01% 59.06% 62.88% 60.65% Exp. Comps Subject Operations

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INCOME APPROACH

OPERATING SUMMARY Reporting Period

Beds Occ. AMR Res Days Beds Occ. AMR Res Days Beds Occ. AMR Res Days

Total 120 76% $6,111 33,384 120 87% $7,489 37,979 120 92% $8,074 40,150

Total % EGI $/Unit $/RD Total % EGI $/Unit $/RD Total % EGI $/Unit $/RD Income

Skilled Nursing Private Pay $1,245,924 14.1% 10,383 $37.32 $1,635,200 15.0% 13,627 $43.06 $1,752,000 14.9% 14,600 $43.64 Skilled Nursing Medicaid 4,094,967 46.4% 34,125 122.66 4,578,034 42.0% 38,150 120.54 4,439,147 37.8% 36,993 110.56 Skilled Nursing Medicare 2,960,407 33.5% 24,670 88.68 3,749,280 34.4% 31,244 98.72 4,407,375 37.5% 36,728 109.77 Skilled Nursing Insurance 497,965 5.6% 4,150 14.92 822,256 7.5% 6,852 21.65 1,027,694 8.7% 8,564 25.60 Ancillary Charges 32,436 0.4% 270 0.97 124,885 1.1% 1,041 3.29 124,885 1.1% 1,041 3.11 Effective Gross Income $8,831,699 100.0% $73,597 $264.55 $10,909,655 100.0% $90,914 $287.25 $11,751,102 100.0% $97,926 $292.68 Expenses

Real Estate Taxes $131,274 1.5% 1,094 $3.93 $137,822 1.3% 1,149 $3.63 $137,822 1.2% 1,149 $3.43 Property Insurance 13,712 0.2% 114 0.41 13,772 0.1% 115 0.36 13,772 0.1% 115 0.34 Utilities 237,055 2.7% 1,975 7.10 283,330 2.6% 2,361 7.46 283,330 2.4% 2,361 7.06 Administrative & General 848,181 9.6% 7,068 25.41 1,330,361 12.2% 11,086 35.03 1,422,942 12.1% 11,858 35.44 Advertising & Leasing - 0.0% 0 0.00 120,000 1.1% 1,000 3.16 120,000 1.0% 1,000 2.99 Resident Care 4,141,173 46.9% 34,510 124.05 3,416,400 31.3% 28,470 89.95 3,613,500 30.8% 30,113 90.00 Ancillary Services 518,596 5.9% 4,322 15.53 550,000 5.0% 4,583 14.48 600,000 5.1% 5,000 14.94 Culinary Services 719,014 8.1% 5,992 21.54 607,360 5.6% 5,061 15.99 642,400 5.5% 5,353 16.00 Laundry & Housekeeping 516,977 5.9% 4,308 15.49 379,600 3.5% 3,163 9.99 401,500 3.4% 3,346 10.00 Repairs & Maintenance 138,760 1.6% 1,156 4.16 140,000 1.3% 1,167 3.69 150,000 1.3% 1,250 3.74 Program & Recreation 123,616 1.4% 1,030 3.70 140,000 1.3% 1,167 3.69 140,000 1.2% 1,167 3.49 Payroll Taxes & Benefits 780,541 8.8% 6,505 23.38 580,000 5.3% 4,833 15.27 625,000 5.3% 5,208 15.57 Other 347,794 3.9% 2,898 10.42 350,000 3.2% 2,917 9.22 350,000 3.0% 2,917 8.72 Operating Expenses $8,516,693 96.4% 70,972 $255.11 $8,048,645 73.8% $67,072 211.92 $8,500,266 72.3% 70,836 211.71 Net Operating Income $315,006 3.6% 2,625 $9.44 $2,861,010 26.2% 23,842 $75.33 $3,250,835 27.7% 27,090 $80.97 Management Fee ¹ - 0.0% - $0.00 545,483 5.0% 4,545.69 $14.36 584,928 5.0% 4,874 $14.57 Reserves for Replacement 42,000 0.5% 350.00 1.26 42,000 0.4% 350.00 1.11 42,000 0.4% 350.00 1.05 Adjusted Operating Expenses 8,558,693 96.9% 71,322 $256.37 8,636,128 79.2% 71,968 $227.39 9,127,194 77.7% 76,060 $227.33 Adjusted Net Operating Income $273,006 3.1% 2,275 $8.18 $2,273,527 20.8% 18,946 $59.86 $2,623,908 22.3% 21,866 $65.35 Source: Propertyoperating statements & buyer proforma

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Case Study – Passive vs. Active Management

INCOME APPROACH

Skilled Nursing Facility

 120-bed, purpose built skilled nursing facility, developed in 1973, second generation family owned and operated.

 Good quality property in average condition. Excellent bones and design.  Buyer was regional owner-operator with properties MA, NY, NJ, and PA and

looking to expand their presence in New England.  Buyer contacted the seller directly. No broker on deal.

 Above market operating expenses. Did not use part time staff - paid overtime to full employees.

 Below market occupancy and quality mix- recognized by seller.  Below market private pay rates – recognized by buyer.

 Not maximizing Medicare utilization.

 Favorable rated market by NIC MAP in high barrier to entry location in close proximity to a number of hospitals.

 Seller executed with buyer due to comfort level and trust.

 Buyer’s short term goal to increase operating efficiencies. Invest an additional $3mm and offer more sub acute rehab services.

 Seller’s goal - retire.

Property Summary Year Built 1973 Beds 120 Care Level SNF Purchased $6,000,000 Date June 2013 2012 NOI $273,006 Buyer Y2 NOI $2,623,908

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Case Study – Revenue Projections

INCOME APPROACH

Occupancy Census Mix

Daily Private Pay Rates Effective Gross Income Per Resident Day

61% 60% 59% 57% 14% 11% 13% 13% 17% 21% 19% 22% 8% 8% 9% 8% 0% 20% 40% 60% 80% 100%

Subject Comps Buyer Current

Other Medicare Private Medicaid $270 $320 $278 $375 $363 $265 $100 $150 $200 $250 $300 $350 $400 Current Buyer NIC 31 NIC Metro Comps Subject $265 $262 $296 $273 $293 $293 $100 $150 $200 $250 $300

Subject Comp Min. Comp Max.Comp Avg. Buyer Current

85.00% 92.00% 91.40% 90.10% 91.00% 76.00% 20% 40% 60% 80% 100% Current Buyer NIC 31 NIC Metro Comps Subject

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Case Study – Expense Projections and NOI

INCOME APPROACH

Operating Costs Per Resident Day (PRD) Expense Ratio (Before Mgt Fee & Reserves)

Profit Margin (Before Mgt Fee & Reserves) NOI PRD (Before Mgt Fee & Reserves)

16.00% 27.70% 8.60% 22.40% 17.80% 3.60% 0% 5% 10% 15% 20% 25% 30% 35% Current Buyer Comp Min. Comp Max. Comp Avg. Subject $8 $32 $59 $36 $60 $40 $0 $10 $20 $30 $40 $50 $60 $70

Subject Comp Min. Comp Max.Comp Avg. Buyer Current

$253.12 $211.92 $228.06 $240.32 $204.39 $255.51 $100 $150 $200 $250 $300 $350 Current Buyer Comp Avg. Comp Max. Comp Min. Subject 97% 78% 81% 83% 72% 84% 0% 20% 40% 60% 80% 100%

Subject Comp Min. Comp Max.Comp Avg. Buyer Current

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Case Study - Results

INCOME APPROACH

At Purchase (June 2013)

Current

(Oct 2013 Ann.) Buyer’s Stabilized NOI $273,006 $1,108,218 $2,623,908

Purchase Price $6,000,000 $6,000,000 $6,000,000

CapEx & Cary --- --- $3,000,000

Total Cost --- $6,000,000 $9,000,000

Indicated Value @ NIC Average Cap Rate N/A $50,000/ Bed $8,500,000 $71,000/ bed $20,200,000 $168k/ bed Return on Cost 4.55% 18.47% 29.15%

The “current” data points detailed in the following table represents

four months

of property operations

by the buyer

.

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Case Study II - Cradle to Grave Value Add

INCOME APPROACH

Senior Living Property by Lincoln Street Capital

 130-unit, purpose built seniors property, developed in 1984, and operated as a “seniors apartment building” by a large, public REIT on a 3rd party

management contract basis.

 ADL (activity of daily living) services were provided a la carte through a 3rd

party healthcare provider due to HUD regulations.

 57-units subsidized by Project Based Section 8, with remaining 73-units not income restricted (but rents were regulated by HUD).

 Deed was encumbered by a Land Use Restriction Agreement governed by HUD restricting all rents and fees charged for meals and services to be approved by HUD.

 Property was acquired with free and clear title, LURA was terminated, Project Based S8 was Noticed for Termination.

 2007 NOI: $267,000 with Weighted Average Revenues/Occupied Unit/Month: $1,501 (Market Comps: $3,000+).

 Located in high barrier market, top NIC MAP rated, with competitive market occupancy averaging 98%.

 Rents were concluded to be 80-100% below market on an improved basis.

HUD had not approved a rent increase since 1984.

Property Summary

Year Built 1984 Units 130

Care Level Independent Living Purchased $5,250,000

Cap/ Carry $6,000,000 Sold $19,000,000

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Case Study II - Results

INCOME APPROACH

$5.25mm ($40k/ Unit) • 68% Occupied • $267,000 NOI • Rent Restricted • $1,501 AMR • Average Condition • 3rdParty Management $6mm in CapEx/ Carry • New Management • Replaced Management • Stalled Housing Market • Great Recession $19mm ($146k/ Unit) • Carlyle Group • 79% Occupied • $1.23mm NOI • 73% Market Rent • $2,508 AMR • 20% IRR/ 37% Leverage • ROC 11% $2mm – 3mm CapEx • Add AL and MC • Reduce to 128 Units • Replace Mgt. • +$1.8mm Stabilized NOI Acquisition March 2008 Reposition Program 2008 - 2013 Sale October 2013 Reposition Program 2014 (Per OM)

Post-Closing: The Operator has far greater influence over the outcome of the investment than the Investor believes or market supports.

Christopher Arruda, Lincoln Street Capital, Managing Member

(46)

Summary of Operating Metrics

INCOME APPROACH

IL AL CCRC SNF

Occupancy (4Q13) 92% 91% 89% 87.6%

Average Length of Stay 29.2 Months 21.7 Months 71 Months 3.2 Months

Total Revenues PRD $72.07 $151.55 $137.12 $268.93

Operating Expenses PRD $44.39 $104.67 $95.51 $232.23

Operating Margin 38.4% 30.9% 30.3% 13.6%

Average FTE PRD 0.22 0.45 0.48 0.98

Debt Coverage Ratios 1.5 2.0 ---

---ROI (Unleveraged) 6.5% 8.6% --- 14.8%

Change in OM (1994-2011) 29.37% 31.6% ---

---Source: NIC MAP, American Seniors Housing Assoc., & Irving Levin Assoc., CBRE Healthcare Investor Survey

Per Resident Day (PRD) is the most accurate unit of measure when underwriting a seniors housing property type. Expense ratio, profit margin, and per unit indicators are all used as secondary measures.

(47)

Industry Overview

Valuation Overview

Market Analysis

Income Approach

Sales Comparison Approach

Allocation of the Going Concern

Final Considerations

How to Appraise an Assisted Living Residence

(48)

Summary of Methodologies and Analysis

SALES APPROACH

Sales Comparison

 Regional/ national comp set is acceptable

 Adjustments are mostly qualitative and challenging to support

 Not utilized by market participants

Do not overlay NOI adjustments

NOI Analysis

 Provides most realistic pricing utilized by market participants

 Infers all physical property and locational differences

 Utilizes regression analysis to estimate a per unit/ bed indication

EGIM Analysis

Easy to extract from market

Does not include operating expenses in pricing

Select EGIM for subject by analyzing expense ratio of subject respective of comparable set

(49)

Sales Comparison

SALES APPROACH

SENIORS HOUSING SALES ADJUSTMENT GRID

Comparable Number 1 2 3 4 5 6 7 8

Transaction Type Sale Sale Sale Sale Sale Sale Sale Sale Transaction Date Feb-13 Jan-13 Feb-12 Jan-14 Oct-13 Sep-13 Feb-14 Nov-11 Year Built 2000 1999 2003 2009 2009 1999 2001 2009

No. Units 640 172 70 185 149 193 293 140

Adjusted Sale Price 1 $289,999,831 $72,000,000 $32,500,000 $71,250,000 $59,000,000 $63,500,000 $104,500,000 $69,500,000

Price Per Unit 1 $453,125 $418,605 $464,286 $385,135 $395,973 $329,016 $356,655 $496,429

Occupancy 92% 90% 95% 98% 95% 97% 98% 93%

NOI Per Unit $29,121 $27,218 $30,178 $25,810 $21,317 $20,234 $22,184 $33,508 OAR 6.43% 6.50% 6.50% 6.70% 5.38% 6.15% 6.22% 6.75% Adj. Price Per Unit $453,125 $418,605 $464,286 $385,135 $395,973 $329,016 $356,655 $496,429

Property Rights Conveyed 0% 0% 0% 0% 0% 0% 0% 0%

Financing Terms 1 0% 0% 0% 0% 0% 0% 0% 0%

Conditions of Sale 0% 0% 0% 0% 0% 0% 0% 0%

Market Conditions (Time) 0% 0% 0% 0% 0% 0% 0% 3%

Subtotal - Price Per Unit $453,125 $418,605 $464,286 $385,135 $395,973 $329,016 $356,655 $511,322

Location 0% 10% 0% 10% 10% 10% 10% 0%

Project Size 0% 0% 0% 0% 0% 0% 0% 0%

Age/Condition 10% 10% 10% 0% 0% 10% 10% 0%

Quality of Construction 0% 0% 0% 0% 0% 10% 0% 0%

Avg. Unit Size 0% 0% 0% 0% 0% 0% 0% 0%

Project Amenities 0% 0% 0% 0% 0% 10% 0% 0%

Parking 0% 0% 0% 0% 0% 0% 0% 0%

Other 0% 0% 0% 0% 0% 0% 0% 0%

Total Other Adjustments 10% 20% 10% 10% 10% 40% 20% 0%

Indicated Value Per Unit $498,438 $502,326 $510,715 $423,649 $435,570 $460,622 $427,986 $511,322

1 Transaction amount adjusted for cash equivalency and/or deferred maintenance (where applicable)

(50)

Net Operating Income Analysis

SALES APPROACH

NET OPERATING INCOME ANALYSIS

Compiled by CBRE $396,517.13 $215,205 $265,205 $315,205 $365,205 $415,205 $465,205 $15,327 $20,327 $25,327 $30,327 P rice p e r U n it

NOI per Unit Comparable Sales

Subject Indication Trendline

(51)

EGIM Analysis

SALES APPROACH

EFFECTIVE GROSS INCOME MULTIPLIER ANALYSIS

Sale No. Occupancy OER EGIM

2 90% 48.61% 7.9 4 98% 56.19% 6.54 5 95% 64.25% 6.64 7 98% 59.88% 6.45 Subj. 96% 57.41% 6.65 Compiled by CBRE

(52)

Single Asset Transactions

SALES APPROACH

Transaction Description

Village at Proprietors Green, Marshfield, MA

• 149 units, IL and AL with MC, constructed in 2010 • $59,000,000 or $396k per unit

• Closed December 2013 to AEW Capital Management • 93% occupied yielding a 6.50% cap rate

• Stabilized operations

Forge Hill and Inn at Robbins Brook, Franklin and Acton, MA

• 193 units, AL with MC, constructed 1999 and 2002 • $63,500,000 or $329k per unit

• Closed November 2013 to Benchmark Senior Living JV with Health Care REIT • 93% occupied yielding a 6.15% cap rate, stabilized operations

• Purchased by seller 2010 at $222k per unit, 8.00% cap (4.5% YoY)

Longwood Place, Reading, MA

• 84 units, 63 AL and 21 MC, constructed in 1939 and converted to AL in 1990s • $16,620,000, $19,870,000 (adjusted) adjusted or $236k per unit

• Closed March 2014 to regional developer/ owner/ operator. Seller was local operator • 97% occupied yielding a 9.17% cap rate based on proforma, per reposition

(53)

Single Asset Transactions

SALES APPROACH

Transaction Description

Standish Village at Lower Mills, Dorchester, MA

• 85 units, 72 AL and 13 MC. Constructed in 1880, renovated with addition in 1994 • $15,550,000, or $183K per unit

• Closed Sept. 2013 to Healthcare REIT, operator (seller) remained in place • 98% occupied yielding a 8.40% cap rate on proforma

• Sale/ Leaseback with RIDEA, high Medicaid (GAFC) mix, operational value add

Bristol Portfolio – Seven Properties

• 880 AL and MC units, constructed between 2000 and 2006

• $290,000,000+ above market financing, or adjusted $453k per unit

• Closed Feb. 2013 to Engel Burman/ Harrison Street by Chartwell & Ingenia Communities • 95% occupied yielding a 6.89% cap rate

• Portfolio was purchased from Engel Burman in 2007 for $290.5mm

CNL Healthcare Portfolio – 12 Properties

• 2,186 IL, AL, MC units • Closed October 2013

• $457.3mm or $210k per unit • Replace Management

(54)

Industry Overview

Valuation Overview

Market Analysis

Income Approach

Sales Comparison Approach

Allocation of the Going Concern

Final Considerations

Seniors Housing Valuations & Trends

(55)

Methodologies

ALLOCATION OF THE GOING CONCERN

Cost Residual:The value of the business/intangibles are estimated by taking the market value of the subject and deducting the estimated personal property, land and real estate property value. The remaining value represents the contribution of the business/intangibles.

 Pretty straight forward approach

 Widely accepted and utilized in the appraisal industry

 Utilizes estimates contained in the Cost Approach which is considered the less reliable indication of value and often omitted due to various physical property attributes

 Not utilized by market participants

Management Extraction: Business Enterprise Value is calculated based upon the capitalized value of the management fee. The total value of the going concern is calculated with NO deductions for management fees or reserves. The Concluded business value and FF&E are then deducted to get to the real estate only allocation.

 Additional BEV is inherent in the operations, resulting in a possible omission of this allocation

 Capitalization rates applied to the Management Fee are difficult to accurately extract from the market with the applied rate considered to be highly subjective

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Methodologies – Lease Coverage Analysis

ALLOCATION OF THE GOING CONCERN

Lease Coverage Analysis: A market derived lease coverage ratio is applied to the concluded net operating income for

the subject. The result is an indicated annual market lease payment for the subject. A net lease cap rate is applied to the estimated lease payment in order to obtain the value attributed to the real estate.

 Lease Coverage Ratios and Net Lease Cap Rates are easily and accurately extracted from the market

 Only arm’s length leases should be utilized – no RIDEA

 Know where FF&E fits in. Part of Lease or owned separately by tenant

 Market lease coverage rations will range from 1.10 to 1.30 for IL and AL, and 1.50 to 2.00 for SNFs

 Net lease cap rates typically fall 200 to 300 bps below a going concern cap rate, all else equal

 Higher the coverage, higher the spread (lower risk)

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Methodologies – Lease Coverage Analysis

ALLOCATION OF THE GOING CONCERN

As Is on April 18, 2014

Concluded Stabilized NOI $4,325,432

Divided Lease Coverage Ratio 1.20

Inferred Market Lease Payment (Absolute Net) $3,604,527

Absolute Net Lease Cap Rate 5.75%

Inferred Leased Fee/ Real Property Value $62,687,420 Concluded Market Value of the Going Concern $69,200,000

FF&E $963,125

Inferred Leased Fee/ Real Property Value $62,687,420

Indicated Business Value $5,549,455

LEASE COVERAGE ANALYSIS

As Is on April 18, 2014

Real Property $62,687,420

FF & E $963,125

Business Value $5,549,455

Market Value of the Going Concern $69,200,000 ALLOCATION OF THE GOING CONCERN

(58)

Industry Overview

Valuation Overview

Market Analysis

Income Approach

Sales Comparison Approach

Allocation of the Going Concern

Final Considerations

How to Appraise an Assisted Living Residence

(59)

FINAL CONSIDERATIONS

Understand the property specific operations and understand the market; understand where your

property fits in the market; current property trend lines may not be telling the whole story. There is

no one size fits all.

Have boots on the ground and take the time to speak with the competition. The most sophisticated

analysis is useless of your inputs are not accurate, well researched, and understood.

The appraisal should identify the assets being valued and distinguish the assets not being valued

with the client in the development of the scope of work and in the report. This should reflect actions

taken by market participants.

Multiple entities often control the total assets of the business. Ownership structure must be fully

understood in order to fully understand value appropriate cash flows.

Market value appraisals involving not-for-profit entities or governmental entities should reflect the

likely buyers’ perspective, and in most cases, that would be from the perspective of for-profit

entities, which may take a different view of future operations.

Comparable sales should be verified directly with source. Purchase price reported on deeds rarely

reflect the total consideration with only the allocated real estate value being reported.

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FINAL CONSIDERATIONS

Only the specific sub-property type should be utilized for comparable purposes. Ie: don’t use

independent living sales to compare to memory care. This is even more critical SNF to assisted

and independent living sales, and applies to all comparable purposes (sales, operations, rents,

etc).

Standard commercial adjustments do not always apply and may in-fact be counterintuitive to what

we are taught as general commercial appraisers. Ie: size adjustments, expense rations an

indication of market operations.

Market participants do not contemplate the value by adding the value of the real estate to the

separate values of the tangible and intangible personal property; they focus on the overall value

which is derived by their expectations of cash flow and applied return requirement. In place cash

flow is considered, but often adjusted by the buyer for pricing purposes. The magnitude of the

adjustment will be reflected in the applied pricing rate.

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Seniors Housing Data Providers

FINAL CONSIDERATIONS

NIC (National Investment Center for the Seniors Housing & Care Industry)

ASHA (American Seniors Housing Assoc.)

American Health Care Association

Irving Levin & Assoc.

-

SeniorCare Investor

-

Senior Housing News

-

Annual SeniorCare Investor Report

CBRE Valuation & Advisory Services

(62)

For more information regarding this presentation please contact:

Zach Bowyer, MAI

Managing Director & Seniors Housing Practice Leader T +1 617 912 6878

zach.bowyer@cbre.com www.cbre.com

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References

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