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

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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

3 6 23 33 35 39 50

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Focus. Depth. Certainty.

Panelists

4

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?

8

 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

10  Entrance 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

12

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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

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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)

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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

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

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

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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

Nashville, TN

Richmond, VA - Headquarters.

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

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

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%

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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

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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)

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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)

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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

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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

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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)

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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

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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

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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%

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Historical 30‐year "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

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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

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Current

Senior

Living

Capital

Markets

Environment

 Low Fixed Interest Rates

 Low Credit Spreads

 Significant appetite from commercial lenders (Banks)

 NFP organizations have dated product

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