A Primer on the Not For Profit Senior Living Industry. April 2015

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Full text

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April 2015

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Focus.  Depth.  Certainty.

Overview

2

Page

I. Introductions and Objectives of Session II. A Provider Perspective

III. An Issuing Authority Perspective IV. A Capital Markets Perspective

V. Not for Profit Senior Living Industry Trends VI. Financing Trends

VII. Closing Thoughts

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Focus.  Depth.  Certainty.

Panelists

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NCMCC– Christopher B. Taylor, CPA – Assistant Secretary 

• 35 Years of Experience in the North Carolina DHHS as an Auditor, Financial Advisor, and now Assistant Secretary • Member of the American Society of Certified Public Accountants

• Graduate of North Carolina Wesleyan College , magna cum laude

BB&TCM ‐John Franklin – Managing Director / Manager

• Leads the BB&T Capital Markets NFP Finance Group

• During his 25 year career Mr. Franklin has completed over 250 senior living and hospital financings in 20  states totaling more than $10 billion

• Mr. Franklin received his B.S. with honors from Randolph‐Macon College and an M.B.A. from the  University of North Carolina at Chapel Hill

Kendal Corp.– Tim Myers– Chief Financial Officer

• 20 years experience in retirement community financial management and consulting, development,  repositioning, and acquisitions • Tim came to Kendal in 2007 from New Life Management & Development, Inc. He served in various  capacities including  Principal, CFO and Director of Management Services • Prior to that, Mr. Myers served as Director of Special Projects for Marriott Senior Living Services for a  year and as a Senior Manager in the National Long‐term Care practice of KPMG in Harrisburg,  Pennsylvania for ten years.  • Mr. Myers  earned his Bachelor of Arts in accounting from Lycoming College in Williamsport,  Pennsylvania and is a CPA. He is a frequent presenter at investment banking conferences for CFOs.

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Objectives

cu

 Gain an Understanding of not‐for‐profit senior living industry from perspective of:

 Provider

 Issuer

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Focus.  Depth.  Certainty.

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The

 

Kendal

 

System

 The Kendal system was founded in 1971 and is composed of 11 affiliates serving 

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Focus.  Depth.  Certainty.

What

 

is

 

a

 

CCRC?

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 A Continuing Care Retirement Community (“CCRC”) is an organization that provides all 

or several of the various levels of care (independent living, assisted living, skilled 

nursing, memory support, therapy, etc.) on a single campus.

 CCRCs offer services through a variety of contract types.

 One of the benefits of a CCRC is that it allows residents to transition through the 

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CCRC

 

Contract

 

Types

 Typically, a CCRC will offer one or more of the following contract types to an incoming 

resident:

 Type A (“Life Care”) – Resident pays a one time fee (an Entrance Fee) and continued monthly fees for the 

duration of their residency.  Should the resident transition to a higher level of care, their monthly fee 

remains equivalent to what would be paid in independent living.

 Type B (“Continuing Care” or “Modified Life Care”) – Resident pays a one time fee and continual monthly 

fees.  Upon transferring to a higher level of care, the resident will pay a reduced or market rate for those 

services.

 Type C (“Fee‐for‐service”) – Resident pays a one time fee and continual monthly fees.  Upon transition to 

a higher level of care, the resident will pay the full market rate for those services.

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Focus.  Depth.  Certainty.

How

 

CCRC

 

Fees

 

Are

 

Charged

10Entrance Fee –

this is a one time fee paid prior to entry into the CCRC.  Entrance Fees may be 

partially refundable to the resident at termination of the contract (i.e. the resident 

is guaranteed to receive at least xx% of their original fee back at contract 

termination) OR it may be non‐refundable.  Entrance Fees vary by refund type and 

unit size.

Monthly Fees –

Fee is paid monthly by the resident and is adjusted (typically) on an annual basis.  

Monthly fees vary by unit size and often by contract type.

Health Center Fees –

These include Assisted Living, Memory Support, and Skilled Nursing services.  

These fees are billed, typically, based on a daily rate multiplied by the actual days 

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Sample

 

CCRC

 

Fees

Type A Life Care Type B Continuing Care Type C Fee-for-service Type D Rental Entrance Fees: 90% Refundable $750,000 $600,000 $550,000 -50% Refundable $500,000 $420,000 $390,000 -Non Refundable $350,000 $280,000 $255,000 -Monthly Fees Independent Living $4,200 $4,200 $3,750 $5,350 Assisted Living $4,200 $5,400 $6,000 $6,000 Memory Support $4,200 $6,480 $7,200 $7,200 Skilled Nursing $4,200 $9,090 $10,100 $10,100

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Focus.  Depth.  Certainty.

Great

 

Further

 

Reading

 

on

 

CCRCs

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How

 

Kendal

 

and

 

Issuing

 

Authorities

 

Are

 

Alike

 Kendal doesn’t own or control its Affiliates

 Kendal is only successful if our Affiliates are well governed, perform, and do what they 

should

 We enter into a long‐term relationship with our Affiliates and that relationship is 

based on mutual trust and understanding that each will perform into the future.

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Focus.  Depth.  Certainty.

What

 

Does

 

Values

 

Mean?

 The Kendal system has gone to great lengths to define our values – what we believe – and our practices – how we aspire to do things.

 The Kendal system has created a “Values and Practices” booklet.

 go to www.kendal.org to read it 

 All of the Kendal system affiliates adhere to the “Values 

and Practices” and endeavor to live those values every day.

 The “Values and Practices” is what binds our system 

together.

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Evaluating

 

A

 

New

 

Affiliation

 

Opportunity

 The Kendal system gets numerous requests for affiliation throughout the year.

 There are only a few that we look at deeply to see if there is a potential fit.

 Think of the Kendal evaluation process more like a dating process than a business 

mergers and acquisition process.

 The Evaluation process is composed of 5 steps…. 1. Do the values align?

2. Do the values really align? 3. Is there values alignment?

4. Are we sure the values are aligned? 5. Do the numbers work?

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Focus.  Depth.  Certainty.

Summarizing

 

the

 

Values

 

Fit

 Steps 1 through 4 are designed to evaluate whether the potential affiliate really 

embraced the “Values and Standards”.

 These steps may take up to a year to complete.

 At the end of that evaluation period, management, Board, and residents have come to 

know each other well.

 There is no ‘faking it’ after that level of exhaustive interaction.

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What

 

Makes

 

a

 

Good

 

Affiliate?

 Knowing why that organization exists.

 Determining that there is a long‐term commitment to serve (there is a not a real 

estate transaction disguised like a CCRC).

 A commitment to innovative service in the future (not to be stuck in the present)

 An ability to make decisions in a consensus format.

 There must be a values fit.

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Focus.  Depth.  Certainty.

Step

 

5

 

– Do

 

the

 

Numbers

 

Work?

 Unlike how others may evaluate an affiliation opportunity – this step is not the most 

important.

 The financial evaluation is to determine whether the potential affiliate has or will have 

the ability to survive long‐term financially.

 Not all potential affiliates have a stellar financial performance when approaching 

Kendal (most don’t).

 It is important to recognize that Kendal does not buy or own its affiliates.  There is no 

financing event when a new affiliate joins the system – there is no exchange of cash or 

financial resources in either direction

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Using

 

Financial

 

Ratios

Kendal

 

uses

 

financial

 

ratios

 

from

 

an

 

industry

 

accreditation

 

organization

 

(CARF/CCAC).

The

 

key

 

ratios

 

used

 

are:

These

 

are

 

also

 

the

 

ratios

 

used

 

to

 

measure

 

the

 

financial

 

health

 

of

 

our

 

existing

 

 Operating Related:

 Net Operating Margin

 Net Operating Margin, Adjusted

 Operating Ratio

 Operating Margin Ratio

 Total Excess Margin

 Capital Related:

 Cash to Long Term Debt

 Days Cash on Hand

 Debt Service Coverage Ratio – Rev. basis and w/ Entrance Fees

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Focus.  Depth.  Certainty.

Reporting

 

CARF/CCAC

 

Data

 The key to successfully reporting the CARF/CCAC Ratios is to keep reporting as simple 

as possible

 The entire Kendal system receives a one page concise and uniform CARF/CCAC Ratios 

report for each Affiliate

 The reporting focus is on the CARF/CCAC Ratio percentile for each of the 10 ratios 

measured – NOT on the actual calculated result

 This is the same methodology used for evaluating potential affiliates.

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Financing

 

Growth

There

 

is

 

never

 

a

 

financing

 

event

 

when

 

an

 

affiliate

 

joins

 

the

 

Kendal

 

System

There

 

is

 

constant

 

growth

 

at

 

Kendal’s

 

affiliates.

  

That

 

growth

 

is

 

financed

 

(22)

Focus.  Depth.  Certainty.

Conclusion

 The “Values and Practices” of a potential Affiliate is the key determinant of any 

eventual affiliation.

 The greater the relationship and exchange of views at all levels of decision making 

(Board, management, and resident) the better the eventual outcome.

 Saying no to a good affiliate opportunity is much better than saying yes to a bad one.

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Focus.  Depth.  Certainty. Focus.  Depth.  Certainty.

1.

Quality

 

Project

2.

Quality

 

Process

3.

Compliance

 

Program

Tax

Exempt

 

Debt

 

Issues

 

– What

 

Works

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 The Medical Care Commission (“MCC”) has been in existence since 1945.

 First issuance of tax‐exempt debt for a CCRC was in 1984 for Penick Village.

 MCC has issued $20.9 billion in debt (455 issues) and has $7.1 billion outstanding (137 issues).

 MCC has issued $3.3 billion in debt for CCRCs (147 issues) and has $1.1 billion outstanding (57 issues ).

 The MCC has no Issues in Monetary Default.

 6 of the twenty‐six CCRCs for which MCC has outstanding debt are rated

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Focus.  Depth.  Certainty. Focus.  Depth.  Certainty.

1.

Rule

 

making

2.

Issuance

 

of

 

tax

exempt

 

debt

 

to

 

finance

 

qualifying

 

projects

3.

Compliance

Medical

 

Care

 

Commission

 

Functions

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Why

 

MCC

 

started

 

financing

 

CCRCs

Startups

Refundings

Expansions

 

and

 

Renovations

 

(the

 

20

 

year

 

phenomenon)

(28)

Focus.  Depth.  Certainty. Focus.  Depth.  Certainty.

 The Application  The Guidelines

 Certificate of Need, Construction, Licensure and Certification Issues  Financial Viability‐‐‐Feasibility Study and Investment Grade Rating  Corporate Structure‐‐‐The  legal entity and the boards 

 Backing‐‐‐Churches and Community Groups

 Community Benefits (MCC Requirements and GS105)  Diversity and lack thereof (Board and Residents)  The Debt ‐Legal Structure and Covenants

 Types of debt structure‐‐‐ Fixed rate, Variable rate , LOC ,Bank bought deals, Investment Grade rated, non rated 

and denominations.

 NC Department of Insurance Involvement (Construction and License)  Approvals‐‐‐MCC Preliminary and Final, Local Government Commission

The

 

MCC

 

Process

(29)

Construction

 

Compliance

 

Examination

‐‐‐

The

 

Findings

 

for

 

CCRCs

Annual

 

Reports

 

to

 

MCC

Community

 

Benefits

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Focus.  Depth.  Certainty. Focus.  Depth.  Certainty.

To

 

Protect

 

the

 

integrity

 

of

 

the

 

program

Preservation

 

of

 

the

 

integrity

 

&

 

reputation

 

of

 

the

 

program

 

benefits

 

everybody

 

who

 

borrows

 

through

 

the

 

tax

exempt

 

bond

 

program

 

operated

 

under

 

GS131A

To

 

prepare

 

CCRCs

 

for

 

an

 

IRS

 

Audit

To

 

facilitate

 

financial

 

and

 

operational

 

integrity

To

 

preserve

 

the

 

tax

exemption

 

of

 

the

 

bonds

To

 

facilitate

 

awareness

 

of

 

the

 

other

 

issues

 

including

 

SEC

 

disclosure

To

 

address

 

concerns

 

of

 

the

 

Commission

Compliance

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 Per the FYE 2013 audited financial statements, of the 26 CCRCs with outstanding 

MCC debt, the following information was reported:

 6 had an operating loss

 4 had a decrease in unrestricted net assets

 3 had a decrease in net assets

 0 had a decrease in net cash provided by operations

 10 had a decrease in cash and cash equivalents

 24 had long term debt coverage ratio of 1.2x or better

(32)

Focus.  Depth.  Certainty. Focus.  Depth.  Certainty.

The

 

continued

 

rising

 

cost

 

of

 

healthcare

 

&

 

the

 

decreasing

 

ability

 

of

 

people

 

to

 

pay

 

for

 

it

Challenges

 

to

 

the

 

preservation

 

of

 

the

 

tax

exempt

 

status

 

from

 

both

 

Federal

 

&

 

State

 

governance?

Question

 

for

 

both

 

CCRCs

 

and

 

Issuers

Is

 

providing

 

services

 

to

 

an

 

aging

 

population

 

enough

 

to

 

justify

 

the

 

tax

exempt

 

status?

 

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Focus.  Depth.  Certainty. Focus.  Depth.  Certainty. 34

BB&T Corporation

Founded in 1872

Among 15 largest US financial services companies

One of two banks that passed the “stress test” following 

financial crisis

$186.8 billion in total assets (as of June 30, 2014)

Largest/leading lender to non‐profit senior living sector

 $8.7 billion committed to the healthcare sector

BB&T Capital Markets

26 capital markets offices across the United States

100 sales, trading and underwriting professionals on 11 sales 

and trading desks 

Over 75 years and $12 billion of collective senior living financing 

experience for refinancings, expansions, repositionings and start‐ups

 National senior living and healthcare practice

 12 Healthcare and Senior Living Investment Bankers

 5 offices across the U.S.

Edmond, OK

Memphis, TN

Winston

San Francisco, CA New York, NY

Nashville, TN

Boca Raton, FL Winston

-San Francisco, CA New York, NY

Knoxville, TN Boston, MA Atlanta, GA Birmingham, AL La Jolla, CA Jacksonville, FL Reston, VA Edmond, OK Memphis, TN Winston

San Francisco, CA New York, NY

Nashville, TN

Richmond, VA - Headquarters.

Boca Raton, FL Charlotte, NC Winston-Salem, NC

San Francisco, CA New York, NY

Knoxville, TN Boston, MA Atlanta, GA Birmingham, AL La Jolla, CA Jacksonville, FL Reston, VA Philadelphia, PA Columbia, MD Denver, CO Kansas City, MO Dallas, TX Houston, TX Mobile, AL Nashville, TN Orlando, FL Ft. Lauderdale, FL Tampa, FL Naples, FL Norcross, GA Charleston, SC Greenville, SC Raleigh, NC Norfolk, VA Baltimore, MD Washington, D.C. Pittsburgh, PA Columbus, OH Louisville, KY Indianapolis, IN Chicago, IL Milwaukee, WI Madison, WI Minneapolis, MN Edmond, OK Memphis, TN Winston

San Francisco, CA New York, NY

Nashville, TN Boca Raton, FL Winston -San Francisco, CA Knoxville, TN Boston, MA Atlanta, GA Birmingham, AL La Jolla, CA Jacksonville, FL Reston, VA Edmond, OK Memphis, TN Winston San Francisco, CA Nashville, TN Richmond, VA - Headquarters. Boca Raton, FL Charlotte, NC Winston-Salem, NC San Francisco, CA Knoxville, TN Boston, MA Atlanta, GA Birmingham, AL La Jolla, CA Jacksonville, FL Reston, VA Philadelphia, PA Columbia, MD Denver, CO Kansas City, MO Dallas, TX Houston, TX Mobile, AL Nashville, TN Orlando, FL Ft. Lauderdale, FL Tampa, FL Naples, FL Norcross, GA Charleston, SC Greenville, SC Raleigh, NC Norfolk, VA Baltimore, MD Washington, D.C. Pittsburgh, PA Columbus, OH Louisville, KY Indianapolis, IN Chicago, IL Milwaukee, WI Madison, WI Minneapolis, MN Shelton, CT Red Bank, NJ Hasbrouck Heights, NJ

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Focus.  Depth.  Certainty. Focus.  Depth.  Certainty.

Today’s

 

Retirement

 

Options

36 # of  Communities # of Units % NFP CCRCs 1,926 676,000 81% IL 1,500 179,000 2% AL 22,000 851,000 22% MC 1,060 51,000 21% Nursing Homes 15,700 1,669,100 31%

(37)

CCRC

 

National

 

Listing

 1,926 CCRCs nationally

 Size

 More than 50% have < 250 units

 Average number of units is 280

 Geography

 Top 10 States: PA, OH, CA, IL, FL, TX, KS, IN, IA, and NC

 Most CCRCs are located in Metropolitan areas 

 Average age of resident = 78 years

 61% of CCRCs are part of systems

 39% are single sites

 51% are faith based

(38)

Focus.  Depth.  Certainty.

Capital

 

Markets

 

Municipal

 

Volume

38 $400 Billion

Total Muni Issuance (Mostly Highly Rated)

$25 Billion Healthcare (Mostly Rated)

$2.5 Billion NFP Sr. Living (Mostly Non Rated)

(39)
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Focus.  Depth.  Certainty. Focus.  Depth.  Certainty.

$

 

Volume

 

of

 

Senior

 

Living

 

Financings

40 $0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000 Vo lu m e   ($ M illio n s)

(41)

Retail Investors (Individuals)

 Shorter Maturities (Serial and 

Intermediate Term Bonds)

 Prefer NR bonds for extra yield

 $5K denominations

 Will accept 5 year call feature

 Capacity to purchase is limited

Purchasers

 

of

 

Fixed

 

Rate

 

Bonds

Institutional Investors (Mostly Mutual 

Funds)

 Buy short and long, but preference for 

longer term maturities

 Buyers change depending on credit 

quality

 $5K ‐ $100K denominations

 Typically buy in multi‐million dollar 

blocks

 Prefer 10 year call feature

 Purchasing is supply/demand driven

(42)

Focus.  Depth.  Certainty.

Basic

 

Tax

Exempt

 

Debt

 

Structures

Two Primary Tax‐exempt Financing Structures 

1. Publicly sold, Fixed Rate Bonds

 Sold to investors

 Interest Rates are locked in at issuance for the life of the securities (up to 30 or 35 years)  Terms (rates, covenants, etc.) are structured by an underwriter and sold to the public  Construction Escrow funded fully at closing (negative arbitrage)

 Non‐rated rates are at 5.00% ‐5.50% 2. Privately placed, Bank Bonds

 This structure is a securities offering sold directly to a commercial bank

 Interest rates can be variable or fixed; current rates are 2.5% ‐3.5% for fixed, and even lower for 

variable

 Typically 25 year amortization with 7 – 15 year renewal

 Particularly attractive for construction projects – “Draw‐down” feature reduces negative arbitrage

(43)

Direct

 

Bank

 

Placements

 

Replacing

 

VRDBs

$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 Vo lu m e   ($ M illio n s)

(44)

Focus.  Depth.  Certainty.

For

 

More

 

Information

 

on

 

Direct

 

Bank

 

Placements…

 Go to…

www.BBTcapitalmarkets.com

 In the top left, under “Industry Expertise,” click “Healthcare”

 Scroll toward the bottom

 You will find a 3 part video series explaining the mechanics of tax‐exempt direct bank 

placements

(45)

Financial

 

Challenges

 

from

 

Financial

 

Crisis

The financial crisis left a lasting impact

 4% default rate prior to 2008 (as a % of par issued)

 6% default rate post crisis

(46)

Focus.  Depth.  Certainty.

Financing

 

Access

 

and

 

Cost

 

– Credit

 

Profile

 

is

 

Key

46

Financial

 

Ratios – Rating

 

Snapshot

Fitch “A”

Medians

Fitch “BBB”

Medians

Minimum

 

NR

Thresholds

DSCR

3.7x

2.0x

>

 

1.40x

DCOH

692

 

days

408

 

days

> 150

 

days

Cash/Debt

127.2%

60.2%

>

 

.

 

25%

Debt/Adj.

 

Cap

46%

59%

< 65%

(47)

Historical 30year "AAA" MMD 2.00% 2.50% 3.00% 3.50% 4.00% 4.50% 5.00% 5.50% 6.00% 6.50% 7.00%

30Y MMD 1‐Yr Average 5‐Yr Average 20‐Yr Average

Fixed

 

Tax

Exempt

 

Interest

 

Rates

Meredith Whitney Report Published

Fixed Rates are near all time lows

Fed announces tapering Of Treasury Purchasing

Program Financial Crisis

(48)

Focus.  Depth.  Certainty.

NFP

 

Growth

 

Falling

 

Behind

48  ‐  2,000  4,000  6,000  8,000  10,000  12,000  14,000  16,000 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Un it s   Un d e r   C o ns truc ti on NFP For Profit

(49)

Current

 

Senior

 

Living

 

Capital

 

Markets

 

Environment

Low Fixed Interest Rates

 Low Credit Spreads

 Significant appetite from commercial lenders (Banks)

 NFP organizations have dated product

(50)

Focus.  Depth.  Certainty.

Figure

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References

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