SENIORS HOUSING PANEL

1. SENIORS HOUSING PANEL

2. Overview of Presentation • Industry overview and trends • Types of Senior Facilities • Valuation issues

3. Overview of Senior Facilities • Understanding of market and social objectives - costs vs services • Understanding the interconnection of residential real estate, hospitality and health care industries • Legislative issues - depending on type of facility • How does demographics play a role • Economic factors impacting seniors

4. Demand Factors

5. How to Estimate Demand?

6. Supply Factors • Barriers to Entry • Cost of Capital • location and diversifying risk • operational synergies that comes from management expertise

7. How to Estimate Supply? • Competitive Analysis • Existing ownership and locations • Demographics and geographic targets • number, type, mix and size of units • rental rates and occupancy rates, waiting lists and turnover, resident profiles • Government subsidies

8. Continuum of Care Independent Living Assisted Living Care Facility

9. How does Aging in Place Affect Senior Housing? • Design of buildings • Appraisers will need to keep this concept in mind when appraising older facilities and assess their functionality • Services offered • Could impact demand and vacancy

10. Types of Facilities Two Categories: • Independent Living • Facility Care

11. Example of “Independent Living” facility

12. Example of “Independent and Facility Care” facility

13. Example of a small scale “Facility Care” facility

14. Example of large scale “Facility Care” facility

15. Valuation Issues • Premise of Value • Example of a Going Concern Definition: • “The value created by a proven property operation; considered as a separate entity to be valued with a specific business establishment”. • The Dictionary of Real Estate Appraisal. Third Edition.

16. Valuation Issues Continued • Extraordinary assumptions: • Licensing is in place to operate # of beds • Management of the operation is reasonable and competent • Comments on the FF&E

17. Valuation Approaches • Cost Approach • Direct Comparison Approach • Income Approach

18. Cost Approach • Can provide a supportive role • Investors do not place much weight on this approach unless new construction • May have validity among lenders, insurers, and assessors • More relevant for new facilities

19. Cost Approach Advantages • Provides value estimates in the absence of other market evidence • Good tool to test financial feasibility on proposed projects • Good tool to test the economic benefits of a major upgrade/renovation

20. Cost Approach Weaknesses • Depreciation estimating • No recognition of business value • Reflection of full fee simple ownership when property may be leased • May not account for absorption on new construction

21. Direct Comparison Approach • Usually used to support income approach • Values are based on a per unit or per bed comparison • PCH may be based on per square foot • Comparisons should reflect whether the property is licensed or not • Properties vary significantly due to small number of transactions, and dissimilar properties

22. Other issues with DCA • Varying components to these facilities - land, building, FF&E, business interests • Motivations of large players - value of individual property plus accretive value to overall portfolio • Variation in age, design, types of services, licensing, funding, staffing, location, size and suite mix. • Limited access to market information and the lack of an efficient market.

23. Income Approach • Direct Capitalization • Discounted Cash Flow - more appropriate where an appraiser anticipates income fluctuations due to leasing or financing and/or where facility has not achieved full occupancy.

24. Income • Examine market rates and existing rent schedule • Suite mix/size/design of unit • Licensed (care level) • Operating beds • Examine on a rate per bed, per square foot, per room or per month rate. • Examine government funded beds (if combo facility)

25. Vacancy and Collection Loss Factors • Average age and care level of clients • Management • Proportion of funded beds vs private pay beds • Rental rates • Facility age, design, efficiency, and staffing attitudes/training • Food service • Social and activity programs

26. Expenses

27. Management • Three alternatives: • Direct management • Contract management • Partnership with service, care or amenity provider

28. Wages and Benefits • Larges expense • Can be up to 75% • Non-union vs union facilities • Can include management

29. Food and Medical • Include an allowance for dining room linen replacement and cleaning and tablecloth service • Calculate the # of meals and consider if single or double occupant • May also include an allowance for FF&E • Medical Costs

30. Other Expenses • Pay attention if there has been a tax grant or exemption - may have to adjust sales when developing an OCR. • Bank charges - exclude mortgage interest; include operation charges • Do not include capital expenditures as part of R&M • Reserve Replacements • Other expenses - billed to client or the care facility?

31. Capitalization Rates • Higher than multi-family or commercial properties • REITS and a more competitive market have drawn down cap rates more recently • One REIT makes acquisitions at 9% to 10% • Independent facilities range between 7.5% and 10% • Larger Facility Care facilities range between 8.5% and 11% • Some PCH in the Saskatoon region can range between 12-15%

32. Risk Factors for OCR’s • Competitiveness • Demographic trends • Recession stability • Growth strategies of large players striving for market share • Government funding • Depth of market for non-funded units • Competent management and operational competency • Health care regulations

33. CMHC Factors • CMHC may use a different cap rate than market derived cap rates • Usually higher (11% to 12%) • Due to their fiduciary responsibility to avoid mortgage loan default and foreclosure