March 6, 2009

1. Financing and Operational Strategies for Surviving an Economic Downturn March 6, 2009 Joe Mulligan Managing Director Cain Brothers jmulligan@cainbrothers.com 314-800-0441 Amy Hayman Managing Director Cain Brothers ahayman@cainbrothers.com 312-604-0578

2. Today’s Discussion Topics Current State of the Capital Markets Strategies for Operating Efficiently in Tough Economic Times Strategies for Financing, Securing Bank LOC Extensions and Growth Appendix A: Specific Financing Strategies for Senior Living Facilities

3. Review of Capital Markets

4. Taxable and Tax-Exempt Interest Rates (1990 – Present) Historical Interest Rates (1990 – Present) 3

5. Taxable and Tax-Exempt Interest Rates (2008 – Present) Recent turmoil leads to dislocations in tax-exempt markets 4

6. Long Term Tax-Exempt Fixed Rates Credit spreads widen 5

7. Significant Investment Write-offs at Banks Bond Insurer Rating Downgrades Failure of Auction Rate Securities Restructuring of Auction Rate Securities Failure of Variable Rate Demand Bonds Recent Events in the Capital Market- The Big Picture Subprime Mortgage Loan Defaults 6 6 6

8. Timeline of Credit Crisis • September 8th: Fannie Mae and Freddie Mac receives government assistance • September 15th: Lehman Brothers files for Chapter 11 bankruptcy • September 15th: Government lent AIG $85MM • September 15th: Bank of America acquires Merrill Lynch for $50billion • September 26th: JPMorgan purchases some of Washington Mutual assets • October 6th: Stock Market closes below 10,000 for first time in 4 years • October 24th: PNC announces purchase of National City Bank • November 14th: Capital Purchase Program announced -$250 billion equity in US Banks-9 of the largest banks were given $25 billion each • December 16th: Fed Funds rate lowered to a range between 0 and 0.25% • December 19th: Auto rescue plan passes, $13.4 billion to auto industry • January 9th: Unemployed rises to 7.2%, highest level in 16 years • January 16th: Merrill posted $15 bn in Q4 losses and Bank of America received $20 billion • January 20th: Dow down 4%, largest drop on inauguration day due to bank fears • January 29th: New Homes Built fell by 331,000 in December, lowest level since 1963 • February 10th: Financial Stability Plan announced • February 27th: 4th quarter GDP reported a 6.2% decline, steepest since 1982 • March 2nd: AIG announced $61.7 billion in losses and Dow dropped below 7,000 in first time since 1997 • March 6th: Unemployment rises to 8.1% 7

9. Investment Banking Losses $750 Billion and Counting – Total writedowns and charges since the beginning of 2007, although driven by the collapse of the subprime mortgage market, also incorporate losses that do not stem from high-risk home loans. 8 Source of Data: Bloomberg – February 4, 2009

10. Major Credit Rating Events 9

11. Banks Over the last few months, there has been considerable liquidity tightening and bank market narrowing Merrill Lynch Acquired by Bank of America Fifth Third Bank downgraded from ‘A1’ by Moody’s Sovereign Bank Acquired by Bank Santander JPMorgan downgraded to ‘AA’- by S&P National City Bank Acquired by PNC Bank Morgan Stanley downgraded to ‘A’ by S&P Wachovia Acquired by Wells Fargo RBS Citizens Bank downgraded to ‘A+’ by S&P Allied Irish Bank rated ‘Aa2’, but on negative watch by Moody’s Bank of America downgraded to ‘Aa2’ by Moody’s KBC on negative outlook by Moody’s, currently rated ‘Aa2’ Bank of Scotland acquired by Lloyds Bank Major Credit Events 10

12. 89 86 67 56 36 35 34 33 27 26 25 22 22 18 17 13 13 12 9 7 7 5 3 3 2 1 Market cap ($bn) 2007 (12/31/07) 2009 (1/22/09) Current State of the Capital MarketsMarket Capitalization of Major Banks, 2009 versus 2007 229 198 176 135 147 95 35+ 98 92 73 67 65 65 56 55 Market Capitalization ($bn) 21-35 147 89 67 67 22 17 31 0—20 25 22 20 9 7 Source: Bloomberg, Yahoo Finance. Please note that Bank of West is a subsidiary of BNP Paribas and Union Bank of California is a subsidiary of Union Bank Corp. Market cap information for Union Bank is unavailable. While J.P. Morgan considers this information to be reliable, we cannot guarantee its accuracy or completeness. Note: Wells Fargo includes Wachovia and Bank of America includes Merrill Lynch 11

13. Equity Market Volatility Milestones Since September 2008 Fannie Mae & Freddie Mac receive assistance from the U.S. gov. Lehman files for Chapter 11; U.S. gov. lends AIG $85 billion; B of A acquires Merrill Lynch JP Morgan purchases Washington Mutual $700 billion federal bailout plan fails passage in Congress Bailout plan passes in Congress; DJIA closes below 10,000 DJIA at 8,100 after weeks of volatility Big Three ask U.S. gov. for capital for the first time Congress doesn’t approve Big Three bailout for the first time Dow hits lowest point (7,552) since 6/23/1997 Uncertainty surrounding the government aid for the ailing financial system Lawmakers near stimulus deal

14. Continued trends from the past 12 months Auction rate bond conversions – soaks up credit enhancement capacity Bond insurance – fewer survivors and less availability LOC banks – interest shifted to high grade credits LOC pricing has increased dramatically Tighter loan to value requirements Tighter operating covenants Trends over the past several months Stampede into T-Bills and T-Notes – “flight to quality” VRDB rates shot up and came back to normal ranges Most LOC banks continue to sit on the sideline Muni fund assets shrank by more than $50 billion in the last four months of 2008 Money flowing back into money market funds for the three weeks in a row Estimated $12-15 billion in healthcare waiting to price Credit spreads have ballooned in both the tax-exempt and taxable fixed income markets Municipal Bond Market Conditions 13

15. What Was The Impact on Senior Living Bond Issuance? Comparison of Non-Rated Fixed Rate Senior Living Bond Issuance Source: Cain Brothers Research * MMD = Municipal Market Data Scale daily index of generic AAA municipal bonds

16. Strategies for Operating Efficiently in Tough Economic Times

17. Option #1 – Uncle Sam’s Solution

18. Option #2 – Strategies For the Rest of Us Integrated Strategic Plan Market Competition Economy Technology Stakeholders Strong Leadership Setting a direction Aligning stakeholders Demanding Accountability Operational Efficiencies Performance Measurement System Balanced Scorecard Benchmarking 17

19. Planning and Budgeting: Set targets and goals Steps to achieve goals Allocate resources to achieve goals and meet targets Organizing and Staffing: Organizational structure Competent staff Communicate plan Delegate responsibility Monitor implementation Controlling and Problem Solving: Monitor results Identification those areas not meeting targeted projections Organize to solve the problems Transparency and Disclosure: Providing meaningful information to consumers and payers Articulating the difference that your services make in the lives of the persons served Leaders Must Manage Complexity 18 18

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21. Provides resources to reinvest in the enterprise Facilities Technology Staffing Programs Financial flexibility allows your organization to maintain your market niche and capitalize on strategic opportunities as appropriate Access to Capital Why Do Finances Matter? 20

22. Leaders Look for Steady Improvements Over Time • Consistency • Average Performance Is More Important than Boom and Bust Performance • Can maintain a level of performance that meets financial obligations, with a reasonable cushion • Consistency – including consistent and predictable rate increases as needed • Profit From Operations (not just from investment reserves) • Information • Cash is king • Financial Model Can Support Future Needs, Not Status Quo • Investment in plant is essential for future viability • Set financial goals consistent with your Organization’s program and capital plans and changing industry standards • Monitor progress against budget and multi-year plan 21 21

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24. You can’t improve what you can’t measure! Identifies areas of strength or weakness for an organization Allows alignment of strategic activities to strategic plan. Provides a rational basis for selecting what business process improvements to make first. Allows managers to identify best practices in an organization. Supports better and faster budget decisions and control of processes in the organization, reducing risk. Provides accountability and incentives based on real data, not subjective judgments. Top Reasons for a Performance Measurement System 23

25. “People and their managers are working so hard to be sure things are done right, that they hardly have time to decide if they are doing the right things.”….Steven R. Covey “The definition of insanity is doing something the same way…while expecting a different result.” ……..Albert Einstein Performance and Improvement Measurement 24

26. Reliability: Process of obtaining information in a consistent or reproducible manner, usually when the process is administered under similar circumstances. Validity: Appropriateness meaningfulness, and usefulness of a measure and the inferences made from it. Commonly regarded as the extent to which a test measures what is intended to be measured. What you are Measuring Must be Reliable and Valid 25

27. Strategies for Financing, Securing Bank LOC Extensions and Growth

28. Commercial Bank Letters of Credit – An Overview In the near term, only cash-rich credits have ready access to bank LOC support Many existing bank LOCs are not being renewed due to both weakened bank and faciliity balance sheets Banks have reduced per borrower credit exposure Banks demanding commercial business as a lending prerequisite Exceptions: Local community banks Projects with strong sponsorship/parental guarantees or that serve specific constituencies Isolated aggressive banks looking to grow market share

29. Today’s Capital Markets : Bank LOC Refinancings While bank LOC renewal credit is difficult to get, when available, “overall debt costs” are <5% Variable rate debt and swap rates are at historic low costs LOC fees have increased, terms have shorted Borrowing covenants have been greatly tightened: Cash is King, cash to debt thresholds have increased dramatically with 50%+ common An unprecedented number of LOCs are not being renewed

30. Today’s Capital Markets: Fixed Rate Bond Markets Institutional funds (high yield/high risk) do not have sufficient surplus capital to support new projects Many available funds are gravitating toward larger hospital debt issues There has been only one new fixed rate senior living bond issued in the last six months Mutual fund investors have sought safer, shorter term investments such as U.S. Treasuries Fixed rate bond lending will remain at the A- level or higher until private investors re-invest in “high yield” bond funds

31. Letters of credit will likely be more expensive and difficult to obtain Community banks will need to be looked at more closely when evaluating credit enhancement The challenging market will make it difficult for weaker projects to be financed Each project and financing needs to be assessed on a case-by-case scenario We expect strong projects for solid communities will continue to get funded A measured approach should be taken when evaluating the next steps: What were the original objectives with respect to the new project? Have any of them changed? What are the implications of postponing the Project? How do you best mitigate risks whenever you choose to proceed? What Does this All Mean? 30

32. Have you defined what you are waiting for? Trigger factors? Indicators or signs? Psychological or emotional factors? What are the implications to waiting? What are the other providers in the market doing? Would postponing the project now mean entering a more competitive environment in 2010? Will construction costs rise in 2010? When will the credit markets turn around? Questions Related to New Projects 31

33. Capital Markets So what financing strategies can work in today’s capital markets? The repurchasing of fixed rate debt that has been heavily discounted from par due to interest rate increases Federal Home Loan Bank wraps that enhance the credit strength of local community banks Debt restructuring where we attempt to renegotiate current loan conditions to more affordable levels Senior Living Specific: The use of federal programs (FHA, Fannie Mae, Freddie Mac) as a full or partial replacement for bank LOC linked balance sheet lending. See Appendix A.

34. Purchase Existing Fixed Rate Bonds at a Discount 30-year, fixed-rate, lower-grade bonds (5.5% to 6.5%) with 10+ years to maturity are selling at a 25% to 40% discount to par value as fixed rates have greatly increased Generally, a borrower can offer to repurchase its outstanding bonds in the secondary market from both institutional and retail bond funds But cash is king so “buy backs” should be considered as part of a larger refinancing strategy Can be 12 to 18 months later but need a strategy today for replenishing cash used in repurchasing your bonds For these reasons, we would suggest targeting the longer term bonds for repurchase

35. Federal Home Loan Bank Wraps In 2008, Congress gave the Federal Home Loan Bank (FHLB) expanded powers to “wrap” or guarantee the underlying LOCs of their member banks for a fee These wrap fees are quite affordable at 7 to 15 basis points and allow a FHLB corresponding bank to upgrade its current LOC rating to AAA Money market funds typically want A to A+> LOC credit guarantees AAA - FHLB wraps allow community bank LOCs to be remarketed to all tax-exempt money market funds While the FHLB provides considerable credit enhancement to the local community bank, first dollar risk remains with the local bank Thus, local banks participants will undertake considerable due diligence before committing to the program and will expect considerable commercial business in exchange for assuming risk Activity has been picking up with most FHLB deals remaining under $20 million due to this risk concentration factor

36. Debt Restructuring* A growing number of financings undertaken over the last five to seven years have never reached stabilized occupancy or positive cash-flow generation When a facility’s liabilities exceed its assets, the facility has entered the legal concept of the “Zone of Insolvency” When entering the Zone of Insolvency, Trustees and Management have a responsibility to creditors that equals that to residents and mission Trustees must make decisions that are in the best financial interest of all parties In many cases, that requires Trustees to approach lenders for debt relief and/or restructuring Most creditors will resist debt reducing/restructuring requests so borrowers must be persistent and establish a formal record of seeking such relief There is an established pattern for justifying a campus’s need for debt relief from a bank and/or institutional or retail bondholders *See handout, The Financial Crisis Hits The Senior Living Industry: Operational and Debt Restructuring Considerations for Trustees and Executives

37. Debt Relief Options Variable Rate Debt – Letter of Credit Banks: Reducing swap rates by lowering interest rates and extending terms Reducing LOC fee levels Not amortizing debt – paying interest only (only a 1- to 3-year strategy as debt reduction is a long-term necessity) Extending amortization term Actual debt reduction/forgiveness Fixed Rate Bond Holders Reamortizing debt back to 30 years, even 35 years Interest rate reduction Debt reduction Principal deferral All the above, through bifurcating bond issue (for example, taking 30-year bonds at 6.5% with 22 years of term remaining and re-amortizing 50% of those bonds to 30 years at a 5% interest rate)

38. Negotiating Principles Key debt restructuring negotiating principles: Any solution must allow for sufficient annual capital replacement funds to keep the campus marketable Transparency and honesty should guide all suggested operational improvement suggestions/evaluations. You must offer to pay what you can afford In cases where more than 10% of debt is held in retail hands, existing underwriter tends to have conflicts so good to switch Having take-out strategies such as FHA/Fannie Mae incentivizes existing debt holders to cut a deal as bondholders have learned that many “half-way” negotiated restructurings tend to return a few years later If debt holders fail to respond, keep regulators and the State’s Attorney General informed of your debt restructuring goals as they will not want to hear of a bankruptcy filing in the newspaper instead of from you and they may advocate on behalf of the residents

39. Appendix A: Specific Financing Strategies for Senior Living Facilities

40. Federal Government Agency Credit Enhancement Sources Cash to debt is the most important lending criteria in today’s capital markets. There are two ways to improve this ratio to current bank LOC lending standards: In the long run, make more money In the short term, reduce the amount of debt underwritten by the banks Banks want as much as 50%+ cash to debt ratios prior to offering or renewing LOCs Proposed strategy is to reduce bank debt by bifurcating existing CCRC bank LOC bond debt and allocating a portion into separate government agency financing As agency debt underwriting is cash-flow driven versus balance sheet based, it allows a borrower’s balance sheet to be fully committed to a smaller amount of bank LOC debt

41. How Does FHA Financing Work? The amount that FHA will lend is determined by the following formula: A third-party appraisal establishes value FHA will lend up to 85% of appraised value Appraised value is primarily determined by applying a capitalization rate to free operational cash-flow AL/dementia/SNF facilities typically have a combined capitalization rate of approximately 10% $1.5 million EBITDA divided by 10% results in $15 million of value at 85% = $12.7 million in FHA debt allowance The $12.7 million in new FHA debt is subtracted from the entire CCRC debt of $45 million leaving $32.3 million in debt guaranteed by the bank and allocable to the remaining CCRC housing and existing balance sheet alone All free cash-flow above FHA mandated 1.17 debt service coverage would be available to build the housing/CCRC’s balance sheet and to supplement the CCRC’s debt service payment

42. Overview of FHA Insured Debt Advantages Can be used for refinancing, acquisitions or new construction* Once issued, borrower’s exposure is not influenced by market collapse/change 100% non-recourse Underwriting is driven by cash-flow, not balance sheet, which allows excess cash > 1.17 debt service coverage to be up-streamed to parent Gains access to the U.S. Govt. AAA status 75 basis points credit enhancement is highly cost competitive Always available, with expedited processing resulting in a 4- to 6-month processing period Credit enhancement is “pay as you go” Disadvantages Can only insure fixed rate debt Deferred capital improvements must be funded based on physical needs assessment study At present primarily for SNF, assisted living, dementia only

43. Other FHA Advantages Responding to the credit crisis, the Feds have greatly expanded staffing for the FHA Section 232 program and centralized all application processing As they realize that some nonprofits treat their AL/SNFs as cost centers versus profit centers, they allow those campus components to mark expenses to revenue industry averages This is called mark-to-market appraising, thus allowing for more market-oriented operating budgets than the specific nonprofit’s actual operating experience which increases appraised value 85% expense to revenue for a SNF 65 to 68% expense to revenue for assisted living 70% expense to revenues for dementia care These ratios might compare to the 90%+ expense to revenue ratios for many nonprofits

44. Fannie and Freddie Mac While the FHA Section 232 program is AL/SNF-oriented, Fannie Mae and Freddie Mac credit enhancement programs are the Government Agency programs for independent and congregate housing credit enhancement These two housing agencies have gone from being semi-formal obligations of the federal government to full (AAA) guarantees Both agencies prefer communities that are predominantly independent living units with little supportive care (SNF, AL and residential dementia) Underwriting methodology is very similar to FHA with the following exceptions: Requires 1.35 to 1.4 times debt service coverage projections Will typically provide credit at only 80% loan to value with 85% allowed for exceptional nonprofit properties when tax-exempt bond debt is used Can be used in partnership with FHA (see following pages) or for acquisition financing

45. Overview of Fannie Mae/Freddie Mac Debt Advantages Can be used for acquisitions or refinancings Low interest rates 30-year amortization Can be fixed or variable rate debt Underwriting methodology is totally cash-flow driven and does not require minimum cash to debt Credit enhancement is “pay as you go” When used with FHA to fully refinance out of bank LOC debt or low rated fixed rate bonds on a nonrecourse basis, allows transference of all balance sheet assets onto a foundation or new entity Allows parent corporation to pledge these unencumbered assets in pursuit of acquisitions or expansion Disadvantages With some exceptions, is limited to rental projects – very modest entrance fee levels only Very limited acceptance of skilled nursing (less than 10% of total campus bed/units) Why often combined with FHA for multi-level campuses 30-year amortization but 10-year term re-set