LeadingAge Missouri Annual Conference

Update on FHA LEAN – HUD Financing for Senior Living Providers

September 19, 2013

Offering Financial Advice and Solutions to Health Care, Senior Living, and Housing Providers.

Financing Progress

Agenda State of the Capital Markets

FHA/HUD Financing Update

Financing Option Comparison

Case Studies

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Financing Progress

State of the Capital Markets – 2008 - 2012

• Short-term rates spiked during the financial crisis

• Credit spreads widened on municipal default predictions and

fund outflows

• Letter or Credit providing banks were downgraded. Many have

not returned to sufficient strength

• The risks of some traditional debt structures were illuminated

(specifically letter of credit backed bonds)

2008 – 2012 were challenging times….

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Financing Progress

Source: Bloomberg

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

SIFMA Libor1M

Short Term Tax-Exempt and Taxable Rates

4

Financing Progress

Health Care Credit Spreads Have Tightened

Source: Bloomberg

%

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

BBR A3 20 Yr HC BBB1 20 Yr HC

5

Financing Progress

10‐Year Treasury Yield – Near Historic Lows

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High = 15.68%9/25/81

Low = 1.45%6/1/2012

9/6/2013, 2.93%

Average since 1962, 6.57%

Average since 1984, 5.95%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Jan-

62

Jan-

64

Dec

-65

Dec

-67

Dec

-69

Dec

-71

Dec

-73

Dec

-75

Nov

-77

Nov

-79

Nov

-81

Nov

-83

Nov

-85

Nov

-87

Nov

-89

Oct

-91

Oct

-93

Oct

-95

Oct

-97

Oct

-99

Oct

-01

Oct

-03

Sep-

05

Sep-

07

Sep-

09

Sep-

11

Sep-

13

Wee

kly

Dat

a

Source: Bloomberg

Financing Progress

State of the Capital Markets – Today

• Historic action by the Fed continues to support historically low short

and long-term rates (although we are beginning to see rates increase)

• Credit spreads have narrowed

• Alternative bank options have emerged (direct purchases)

• Agency mortgage programs has become very attractive as investors

seek high-quality debt offerings (FHA, USDA, FNMA) and borrowers

look to eliminate some of the risks of traditional structures

Fast Forward, Mid 2011-2013. The situation has improved…

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Financing Progress

Unemployment Rate Forecast

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7.00%

6.00%

5.10%

7.50%

6.90%

6.40%

7.70% 7.70%

7.30%

5%

6%

7%

8%

9%

10%

11%

2013 2014 2015

12-M

onth

Ave

rage

Source: Bloomberg Survey, September 2013

Financing Progress

Fed Funds Forecast

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0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%

1.00%

1.50%

0.0%

0.5%

1.0%

1.5%

2.0%

Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15

Fore

cast

s as

of M

onth

End

Source: Bloomberg Survey, September 12, 2013

Financing Progress

10-Year Treasury Yield Forecast

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2.30%2.10% 2.20% 2.30%

2.65% 2.71% 2.67%2.75% 2.85%3.00% 3.10% 3.20%

3.36% 3.46%3.24%

3.76%3.93%

4.21%4.36%

4.52%4.29%

0%

1%

2%

3%

4%

5%

6%

Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15

Fore

cast

s as

of M

onth

End

Source: Bloomberg Survey, September 12, 2013

Financing Progress

Accessing Capital – The Goals, Needs, or Opportunities

Disadvantageous existing debt structure Expiring letter of credit or bank downgrade

Onerous financial or operating covenants

Savings or permanency Economic refinance (interest savings)

Lock into fixed rates while at historic lows or provide predictable debt service and avoid refinance risk (permanency)

Campus or organizational expansion A new memory care or Medicare rehab wing

Replace an aging facility

An entirely new campus in a ripe market to expand the mission

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Financing Progress

Traditional & Alternative Options

Decision to Borrow

AlternativeTraditional

Banks Tax-Exempt Fixed Rate

• Private Placement or Loan

• LOC Enhancement

• Public bond sale on the organization’s credit

FHA /HUD Mortgages

USDA & FNMA Loan

Programs

• Private mortgage loans insured by FHA/HUD

• Loans made directly or a portion guaranteed

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Financing Progress

• HUD/FHA 232 Program • New Construction or Sub Rehab

of licensed SNFs & ALFs

• HUD/FHA 232/241 Program• 2nd Mortgage Program for

expansion of existing HUD-insured Facilities

• HUD implemented LEAN program in 2008, to reduce processing time and improve predictability

• LEAN moved the 232 program to the Office of Healthcare Programs in DC

• HUD provides mortgage insurance through the 232 program (not direct loans from government) – HUD insures loans made by private LEAN-approved lenders

Construction / Sub Rehab Refinance / Acquisition • HUD/FHA 232/223f Program

• Refinance or Acquisition of licensed SNFs & ALFs

• HUD/FHA 232/223a7 Program• Refinance of existing HUD-

insured mortgage

HUD 232 LEAN – Overview

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Financing Progress

• Long Term Fixed Rate• Up to 35 year (40 year for

construction) matching term/amortization

• Eliminates refinance/renewal risk

• Government Guarantee• Eliminates both health care sector

and credit pricing spreads• “AAA” like debt

• Fixed Guarantee Fee• Unlike banks, does not consider

risk-based pricing• 0.65% refinance / 0.77%

construction / 0.72% for 241

• No Financial Covenants• No on-going Debt Service

Coverage, Days Cash on Hand or other financial ratio covenants

• Non-Recourse• Keep “Dry Powder” and silo

risk

• Loan is Assumable• Transfer of Physical Asset

(“TPA”) through HUD

• Low, long-term fixed interest rates

HUD 232 Program– Basic Terms

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Financing Progress

HUD 232 LEAN Program

• The LEAN program – HUD is no longer the “lender of last resort”

• Demand and lack of staff from 2009-2011 resulted in long “queue”• Increased staffing and hired independent contractor (Summit

Consulting)

• Efforts to eliminate the “queue” have been successful

• Current deal timeframe, rates

• Max LTV 80% (programmatic = 85%)

• Third party reports and application process

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Financing Progress

HUD 232 LEAN – Other Considerations

• Permanency of financing (intended time horizon, prepayment flexibility)

• Senior lien on assets and land

• Replacement reserves

• Master lease

• DACA/DAISA

• AR financing

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Financing Progress

HUD 232 LEAN – Other Considerations

• Recent Changes:• Swaps – permitted to refinance swap termination liabilities up to 10%

of the new mortgage amount • Quarterly operator-certified financials, applies to existing HUD facilities• Non-profit regulatory agreement update

• Distribution considerations• Debt service reserve fund

• Expanding view on CCRC’s• Traditionally capped unlicensed IL units at 25% of total units in a

section 232 loan• Cap has been removed

• Must be rental (non-entry fee)• Must provide services to “frail elderly”

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Financing Progress

HUD 232 LEAN – Construction Options

• 232 new construction/sub rehab:• More equity, proven owner/operators, exceptionally strong market studies• 25-35% “equity” required• HUD prefers SNFs (ideally replacement) and ALZs over ALFs – HUD is

sensitive to new AL construction in states with high single family mortgage default rates

• Davis-Bacon prevailing wage requirement

• Repairs and renovations as part of a refinancing:• Up to 15% of appraised value• Double square footage rule

• 241 Supplemental Loan update:• Supplemental loan program used for substantial renovations/expansions• 90% LTC• No prevailing wage requirement if not used during original construction

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Financing Progress

Traditional Structure Comparison – Tax-Exempt Unenhanced

• Tax-Exempt bonds issued to the market on provider’s own credit strength

• Rated or Non-rated• Term: 25-35 years• Rates: Credit and market driven

• 2010 – 2012 were challenging times for the Muni Markets• Mid 2011 – Today, the market has materially improved

• Other considerations• Timing (3 – 4 months)• Financial Covenants

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Financing Progress

Traditional Structure Comparison – Bank Private Placements

• Tax-Exempt bonds structured and privately placed (sold) to a bank or banks

• Term: Market and credit driven, typical 3-10 years • Amortization: 20-30 years • Rates: Fixed or variable, and deal specific • Other Considerations:

• Timing (2 – 3 months)• Financial Covenants• Ancillary Business

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Financing Progress

Alternative Structure Comparison – USDA Loan Programs

• USDA Community Facilities (“CF”) Program• For the long-term takeout of construction projects (outside construction

financing required)• Direct Loans – 4.625% for 40 years (as of 10/1/2013)• Guaranteed Loans – up to 90% guarantee on a bank loan• Populations of 20,000 or less• At most 50% refinance

• USDA Business & Industry (“B&I”) Program• Like CF, permanent funding• Guaranteed Loans – 80% from $1-5MM, 70% from $5-10MM, 60% greater

than $10MM• Populations of 50,000 or less with preference given to < 25,000 • Can do 100% refinance

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Financing Progress

Alternative Structure Comparison – FNMA Loans

• A mortgage loan made by a private sector mortgage lender, guaranteed by FNMA• Refinance or acquisition with only minor construction funded• Seniors and affordable housing assets (max. 25% skilled nursing units)• Max. 75% LTV

• Term: Up to 12 years • Amortization: Up to 30 years• Other Considerations

• Fast (closing in 30-60 days)• No financial covenants• Non-recourse to a parent organization or foundation

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Financing Progress

Case Study – HUD 232 Refinance of LOC Enhanced Tax-Exempt Bonds

• Single-site CCRC • Existing Structure = $9MM in LOC enhanced variable rate bonds fixed with

and interest rate swap• Enhancing bank recently downgraded, causing need to restructure• Also desired to fund a major renovation and therapy expansion

• The FHA program provided permanent financing at historically low fixed rates (<3.00%)

• Allowed the renovation to be funded through the refinance program• Funded the unwind liability associated with the existing interest rate swaps.• FHA mortgage was concentrated on the higher acuity (SNF/ALF) leaving the

IL villas unencumbered from any debt.

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Financing Progress

Case Study – Bank Placement: Construction –> FHA Refinance

• 105 Unit Stand-Alone ALF • Aging 49 Bed SNF • Short Term Goal:

• New 20 Unit AL Memory Care• Replacement SNF

• Tax-Exempt Bonds sold directly to regional bank after competitive bidding process• Funded construction of replacement SNF (all private units) and AL

Memory Care Wing• 5-Year Term / 27-Year Amortization

• Long-Term Goal: • Refinance the debt into a long-term fixed rate debt through FHA

232/223(f) program 3 years after receipt of certificate of occupancy

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Financing Progress

Case Study - FHA for Renovation of Existing Physical Plant• Existing 153 Bed SNF• Plan:

• Reduce Facility to 133 Beds• Substantial Renovation of Four Wings

• Private Rooms• Expanded Therapy Space and Administrative Space• Exterior Remodeling

• FHA Section 232 Substantial Rehabilitation • Funded rehabilitation projects• Refunded existing LOC-backed variable rate bonds• 27.75 Year Term and Amortization• Low long-term fixed rate

• Result: Achieved organizational goal of 75:25 ratio of fixed-variable rate debt

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Financing Progress

Summary

• The HUD LEAN programs continue to provide efficient access to capital to senior living providers across the credit spectrum with several benefits:• Low, fixed rates• Extended term and amortization• Non-recourse• No financial covenants• Flat guarantee fee (not risk based pricing)

• Allows borrowers to eliminate some of the risks of traditional structures• Change to LEAN processing has improved the consistency and predictability

of the program • Organizations should explore both traditional and alternative structures in

tandem, arriving at the structure best suited for their organization

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www.lancasterpollard.com

Mike AshleyVice President – Missouri / Arkansas Market HeadLancaster Pollard & Co. and Lancaster Pollard Mortgage Company1201 Wakarusa Drive, Suite A-4Lawrence, KS 66049Phone (785) 841-3700mashley@lancasterpollard.com

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