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Disclaimer and Acknowledgement

National Federation of Municipal Analysts The Bond Buyer Introduction to CCRC Analysis February 11,2008. Disclaimer and Acknowledgement.

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  1. National Federation of Municipal AnalystsThe Bond BuyerIntroduction to CCRC AnalysisFebruary 11,2008

  2. Disclaimer and Acknowledgement • The attached PowerPoint slide show and all verbal comments made by the various presenters represent their personal opinions and views.  They do not necessarily represent the opinions or views of their respective organizations.  Nor do they necessarily represent the opinions and views of the NFMA or The Bond Buyer.  This educational effort was voluntary and involved an amalgam of industry representatives who belong to the NFMA.  The Task Force members thank The Bond Buyer for providing the venue and the facilities to present this educational endeavor. • The members of the task force involved in bringing these classes to fruition included: • Ed Merrigan – Co Chair • Marie Pisecki – Co-Chair • Stephen Infranco • Bruce Johns • Sara Kisner • Gary Lasman • Ron Mintz • Chuck Nellans • Kristin Stephens • Robert Wetzler • Mark Wuensch

  3. Sector Introduction Definitions & Jargon Outline

  4. By: Chuck Nellans Sector Introduction

  5. What is a CCRC? • A Continuing Care Retirement Community (CCRC) is a collection of facilites that includes independent living and at least one other level of care—assisted living or nursing—on the same campus • While the above definition is widely used, CCRCs are not regulated and the term is not legally defined so industry data is comprised of best estimates • A full service CCRC campus would include the following: • Independent living units (ILUs) • Assisted living units (ALUs) • Memory care units (MC) or Alzheimer units (ALZ) • Skilled nursing care beds (NCBs or a SNF) • Common areas (such as dining, fitness center, library, auditorium)

  6. Lifestyle Choice • Residents move into a CCRC independent living unit as a lifestyle choice • The primary product sold is hospitality driven, not need based • The availability of health care (usually upscale) is often a secondary consideration • Direct move-ins to assisted living and nursing, rather than transferring to those levels of care from an independent living unit, may not be permitted, either due to state licensing constraints or community-specific policies • In contrast to a CCRC, we note the following: • stand-alone nursing and assisted living facilities offer a need driven product and usually have high rates of annual turnover (short lengths of stay) • stand-alone senior housing with services is usually a rental product, while most CCRCs collect upfront entrance fees; rentals cannot be pre-marketed

  7. Fitness center Private dining room Indoor swimming pool Spa Game Room Formal dining room Convenience Store Gift shop Beauty/Barber shop Bank Chapels Shuttle Service Gallery/Exhibit area Coffee shop Bar and grill Billiard room Computer room Greenhouse Gardening area Library Walking trail Arts and crafts studio Woodworking shop Golf course Types of Amenities

  8. Background • Continuing Care Retirement Communities provide a continuum of care to individuals who desire to age in place (on the same campus, but not necessarily the same unit) as frailty increases • CCRCs have been in existence since at least the late 1890’s • Most early CCRCs were church sponsored; a common practice included residents turning over all of their assets in exchange for life-time care • The industry has grown steadily in recent decades, but remains a small niche business with about 2,500 communities nationwide • Typical age of entry is 78-79 years of age, making it a complementary product to age restricted housing rather than a competitor

  9. 1 to 25 26 to 50 51 to 75 76 to 100 Over 100 None Estimated CCRCs 1,821 Total CCRCs VT - 2 31 5 4 3 NH - 16 49 22 48 MA - 30 44 18 3 RI - 7 40 186 CT - 29 60 19 140 NJ - 43 1 114 54 DE - 13 2 4 53 30 47 139 68 21 MD - 42 58 DC - 5 25 20 40 32 8 11 21 4 15 8 88 HI - 3 100 Market size has doubled since 1991!! From Senior Living Research of Ziegler Capital Markets

  10. Investment Characteristics • CCRC debt is issued by conduitissuers or authorities via revenue bonds • Not-for-profit 501(c)(3) CCRCs are the true obligor, not the issuer • The majority of bond obligors are single-site CCRCs, but a still sizable 33% are multi-site systems; two or more separately located campuses • The majority of CCRCs have below investment grade credit characteristics • The ratio of rated to non-rated CCRCs is estimated at 3:1 • An unrated CCRC should be treated as a high yield investment with all of the risk characteristics of any other high risk revenue bond • Because of strong retail demand for this product, the offered yield may not be an accurate indication of credit risk

  11. Buyer Demand • Low interest ratesin 2006 and 2007led municipal investors to search for alternative yield opportunities, bringing new buyers into the high yield market and narrowing spreads • CCRCs that sold atan 8% interest rate in 2001 sold at a 5.5% interest rate in early 2007 • However, with the weakening economy, a flight to quality began in late 2007 that, at this point, has reversed this trend • By the early spring of 2008, the housing price bubble burst, causing fixed rate issuance to effectively cease • As we go to video production, 2008 issuance has been almost exclusively Bank LOC-backed debt, with little or no fixed rate deals • Furthermore, most recently, the issuance markets have been frozen and little-to-no deals are being priced

  12. Ratings in the CCRC Sector • About 25% of CCRCs with bonded debt are rated and 75% sold on an unrated basis • Construction and fill-up risk is a frequent constraint to gaining investment grade status, but many stabilized CCRCs also fail to meet rating agency standards

  13. New Ratings History

  14. Rating Distribution • RATED BOND ISSUES • THROUGH 12/30/08 • S&P: 89 • Fitch: 78 • Moody’s: 3 • 170* • *18 organizations have debt rated by more than one rating agency. Therefore, there are a net total of 152 organizations with rated debt.

  15. Default Risk in CCRCs • FitchRatings believes that CCRCs have a Category 3 default rate, its highest default rate category (Default Risk and Recovery Rates on U.S. Municipal Bonds, January 2007) • In comparison, hospital revenue bonds were considered to be a Category 2 risk • Fitch concluded that CCRCs have essentially the same default risk as a corporate bond within the same rating category • Nevertheless, Fitch assigned a relatively high 90% recovery rates for CCRCs

  16. Hospitality/Amenity Component Healthcare Component Market Area Demographics Demand Management Other Financing Participants Financial Profile Security Structure Disclosure Multi-Faceted Analysis

  17. Not-for-Profit vs. For-Profit • Roughly 80% of CCRCs are sponsored by a not-for-profit entity • The dominance of the not-for-profit sector may be due to the following: • historical origins of the sector by religious and other organizations whose goal was to offer a supportive environment for the elderly • capital intensive nature of campuses making it difficult for the for-profit sector to offer a competitive product using taxable financing

  18. Why Tax-Exempt? • Despite this industry’s origins of serving the poor, many CCRCs today are reflect relatively high home sale values in their entrance fees. Amenities rivaling resorts are present. As a result, some have questioned why they enjoy tax-exempt privileges; in Federal income tax exemptions, as well as local property, school, and sales tax exemptions • The primary goal of a taxable CCRC is to maximize profits to shareholders • The primary goal of a tax-exempt CCRC is to fulfill its mission of serving the elderly, which usually includes a charity care component • a not-for-profit CCRC will not eject a resident for an inability to pay the monthly fee should a resident outlive his or her money • Despite tax-exempt financing, some localities have imposed a property tax or payment in lieu of taxes obligation on CCRCs

  19. Putting CCRCs into Context • In 2007, long-term municipal bond issuance totaled about $430 billion • Of that, only about 1% or $5.5 billion was comprised of continuing care retirement community bonds. There was another $1.7 billion in nursing and assisted living debt, with the remainder of the $49 billion healthcare sector largely comprised of hospital bonds • Virtually all CCRC bonds are issued as revenue bonds, with no local property, income or sales tax backing

  20. Number of Issues Par Volume Senior Living Capital Trends Senior Living Tax-Exempt Volume 291 240 340 335 284 218 216 216 194 201 171 191 86 241 223 277 202 98 145 159 153 186 20 34 98 46 63 43 103 SOURCE: Thomson Financial Securities Data as of 1/12/09

  21. Senior Living Capital Trends New Money & Refinancing • Trends for refinancings have followed interest rate movement • Over 50% of Ziegler 2007 volume was refinancing; big change in 2008 • Average new money per year for last five years was approximately $2.8 billion but new money in 2008 well below the $2.0 billion mark Last period ofexceptionallylow relative long term rates 1996-1999 Significant marketdisruption 2000-2001

  22. Senior Living Capital Trends Credit Structure Approx 20% with underlyingratings • Through the mid-90s, unenhanced debt was utilized the most by non-profits • As industry grew in sophistication, ratings began to unfold • Ratings brought credit enhancement opportunities and by 2000, credit enhancement applied to majority of tax-exempt financings • New campuses also driving LOC volume SOURCE: Thomson Financial Securities Data as of 1/12/09

  23. Market Growth • The number of CCRCs has grown to about 2,240, according to the American Association of Homes and Services for the Aging’s (AAHSA) web site; this compares to an estimated 520 CCRCs in 1970 • The National Investment Center for the Seniors Housing and Care industry (NIC) estimates that 5% of the senior market consists of CCRCs • The precise number of CCRCs is not known because there is no legal definition or national tracking mechanism; different organizations therefore have different estimates • Future growth will be supported by baby boomers hitting retirement age between now and 2025; however, • as the number of age and income qualified people grows, so will the competitive landscape • remaining attractive to a changing and increasingly demanding marketplace may be a challenge, despite favorable demographic trends

  24. AAHSA A to Z 100 - New Campuses New CCRC Projects

  25. Sector Strengths Generally improving financial position in the past few years Good availability of capital, in part due to low interest rates More sophisticated management practices, including greater use of consultants and financial benchmarking Greater economies of scale as systems expand Sector Weaknesses Use of seed money for start up CCRCs increases the cost of borrowing Trend toward high refund plans increases the cost of units Deterioration in the real estate market may make higher priced units less marketable, negatively impacting occupancy Mature CCRCs must address deferred capital needs to remain competitive Trends in the CCRC Market

  26. Definitions & Jargon

  27. CCRC Related Organizations • CARF-CCAC: Commission on Accreditation of Rehabilitation Facilities (CARF)/ Continuing Care Accreditation Commission (CCAC) • provides annual CCRC financial ratios and trend analysis for the sector • provides accreditation to about 322 CCRCs (11% of the sector) • www.carf.org • AAHSA: • 5,700 member group of not-for-profit organizations who offer various levels of aging services, including: adult day services, home health, local community services, senior housing, assisted living residences, continuing care retirement communities and nursing homes • www.aahsa.org

  28. Independent Living Units (ILUs) ILU: Independent living units are for residents who do not require any health-related assistance, but who wish to enjoy the benefits and amenities of an all-senior residential community. ILUs may include apartments, duplexes, villas and/or cottages. Units can be large with some over 2,000 square feet.

  29. Assisted Living Units (ALUs) ALU: Assisted living units are small apartments or single rooms for seniors who need assistance with some activities of daily living (ADL), such as bathing, dressing, toileting, mobility, and/or eating. ALUs typically range from 300-600 square feet.

  30. Alzheimer (ALZ) • ALZ or Memory Care Unit: A memory care unit is located in a secured area for individuals afflicted with Alzheimer's or related disorders causing memory impairments. Memory care units are often grouped together with ALUs.

  31. Nursing Care Beds or SNF • SNF: SNF stands for Skilled Nursing Facility. While that term can sometimes be used generically, nursing care beds in a CCRC may or may not be certified as skilled. Only a skilled facility can be certified by Medicare so that patients are covered by this insurer. The beds can be private or semi-private and will usually be the smallest square footage-sized units on a CCRC campus.

  32. Deposits • A cash deposit is used to reserve a unit that may not be ready for immediate occupancy, usually due to new construction; deposits are fully refundable, less a small administrative fee • Priority Deposit: Some developers collect a small, flat fee (often $1,000) to demonstrate an indication of interest on projects in a preliminary marketing phase (two or more years from permanent financing) • Deposit: As the project gets closer to permanent financing, a more sizable deposit, usually 10% of the entrance fee, will be collected • Pre-Sale: A unit that has been reserved by a 10% deposit is known as a “pre-sale.” New units are typically 65% to 70% presold prior to permanent financing • Attrition: This represents the percent of presales whose deposits are refunded. Attrition of 35% is typical, with wide swings possible in both directions

  33. Entrance and Monthly Fees • Entrance Fee: • A fee paid upon occupancy of an ILU • In some cases, an ALU may also charge an entrance fee • Entrance fees can be refundable or non-refundable • A variety of refund options may include a 90% refund, 50% refund, and amortizing to a 0% refund over time • The refund may be contingent on reoccupancy of the unit • Refundable fees are higher than non-refundable fees • Entrance fees can vary widely in amount, in some cases reaching into the many hundreds of thousands of dollars • Monthly Service Fee: • Fees charged monthly to residents to maintain residency of their unit. Monthly fees are charges in addition to the entrance fee and are generally in the range of $2,000-$5,000, depending on amenities provided, service area tolerances and contract type

  34. First and Second Generation Fees • First (or “Initial”) Generation Entrance Fees: The first time a new unit is occupied, the entrance fee associated with that move-in is known as a “first generation entrance fee” • First generation entrance fees are used to pay down debt, subsidize working capital deficits, and build up cash reserves • They are generally not used for routine operating expenses because they are not sustainable • Second (or “Turnover”) Generation Entrance Fees: When a unit turns over (vacated due to resident move-out or death), the entrance fee from the next move-in is known as a second generation entrance fee • Depending on the age of the community, about 10% of units are likely to turn over in any given year

  35. Residency Contracts Offered • There are four general contract types, with lots of variations possible within each. Many systems offer multiple contract options. • Type A: Life Care • Type B: Modified Life Care or Modified Fee for Service • Type C: Fee for Service • Type D: Rental • The primary difference between contract types is: • the amount monthly rates increase as residents move through the continuum of care • The amount of entry fee that is paid

  36. Type A: Life Care • Type A Residency Agreement (Life Care): With this type of agreement, a resident moving into assisted living or nursing will pay essentially the same monthly rate as a resident occupying an independent living unit • Life care entrance fees are higher than other types of agreements • the CCRCuses the extra entrance fee to subsidize the cost of care as the resident moves through the continuum, losing money on an annual cash flow basis and drawing down cash balances in those years • CCRCs with Type A agreements generally have higher liquidity due to the larger size of entrance fees. As a result, reliance on investment income also tends to be higher compared to other communities

  37. Type B: Modified Agreement • Type B Residency Agreement (Modified Agreement): Residents with this type of agreement are allotted a certain amount of long-term nursing care (e.g. 30 days per year) • During the set time period, residents pay the same monthly fee for assisted living or nursing care as they would for their independent living unit. After the set period expires, residents pay higher, prevailing market rates • The distinction between a Type A contract and a Type B contract is not always clear. CCRCs that refer to themselves as life care often have a Type B contract • Type B contracts are sometimes call modified life care and sometimes called modified fee for service

  38. Type C: Fee for Service; Type D: Rental • Type C Residency Agreement (Fee for Service): Residents with this type of contract pay the daily prevailing market rate for each level of care • While a periodic actuarial study will be conducted for a CCRC to insure that future healthcare subsidies have been adequately pre-funded, fee for service CCRCs more closely align monthly revenue with monthly expenses • Rental Community: Rental communities do not charge entrance fees. Residents pay monthly (rental) fees only based on market rates • Rental communities have lower liquidity and lower cash flow volatility compared to entrance fee CCRCs • New units cannot be pre-sold with an entrance fee deposit so demand is more difficult to judge for a start-up or expansion

  39. Entrance Fee Refund Structures • Most CCRCs offer multiple refund options; a few possibilities include the following: • Non-refundable: the amount of refund amortizes down to 0% over a relatively short period of time (e.g. 50 months) • 90% refundable contracts: the amount of refund will be no less than 90%; may be contingent on resale of the unit • 50% refundable contracts: Same as 90% contract except amortization of the entrance fee is to 50% • Other: May have 100% refund, 95% refund, 45% refund, etc. • The higher the refund plan, the higher the entrance fee. Theoretically, the CCRC would set fees at a level where management would be indifferent which refund plan is chosen by the consumer. In practice, CCRCs often offer a discount on the higher refund plans

  40. Seed Capital • Seed Capital: significant funds are needed (millions of dollars) to bring a start-up CCRC or expansion to market for a permanent financing • Pre-construction costs include land purchase, marketing to reach 65% to 70% pre-sales, developer fees, architect fees, and numerous other costs • These funds may be obtained from contributions or cash on hand from the sponsor or financed with a “seed capital” raise • Seed capital is high cost debt that will be repaid at the time of permanent financing • Seed capital financing will increase the overall cost of a CCRC, but funds must be expended to get to the pre-sale level necessary to do a permanent financing

  41. Standard Features First mortgage pledge Level Debt Service Fully funded Debt Service Reserve Fund $5,000 denominations 10-year par call Unusual Features These features indicate a riskier credit or a risk averse issuer Investor Restrictions: Qualified Institutional Buyer Accredited Investor, with Letter $100,000 denominations Construction Financing: Structure

  42. The Participants Financing a CCRC is complex, so an experienced team is important • Developer • Track record on prior projects • Marketing Consultant • Feasibility Consultant • Architect • Contractor • Construction Monitor • May or may not have for smaller construction projects • Underwriter • Management • In-house or outside management firm? • Level of sophistication

  43. Start up CCRCs now running well over $100 million A sample start-up unit mix ILUs: 242 ALUs: 35 SNFs: 45 A Greenfield CCRC is one that is built on vacant land (a green field) Typically, a not-for-profit sponsor works with a developer to take a new, start-up CCRC from conception to reality Because reaching 70% pre-sales is time consuming, many CCRCs are built in phases The first phase is designed as the smallest number of units that are self-sustainable Start Up CCRCs

  44. Reasons to expand: Capitalize on unmet demand for new ILUs Add memory care units Add amenities, such as an expanded fitness center or dining area Mature CCRCs will seek to expand on available land if market conditions permit since larger CCRCs tend to have better economies of scale and are more profitable Expansion Project CCRCs

  45. The reason to reposition is to meet changing market demands Older campuses may need to completely tear down existing buildings, particularly healthcare units, in order to properly redesign the product offering Repositionings often require revenue enhancements to pay for replacement facilities through: adding new units changes in contracts offered Typical repositioning CCRCs: Create larger ILUs through unit combinations Replace semi-private with all private nursing beds Replace dated common areas Repositionings

  46. Financial Forecast Vs. Projections • Feasibility study: If current operations are insufficient to cover new debt service, the capital markets usually require an independent feasibility study, to include: • Financial forecast • Market study • Community overview and costs • Entrance and Monthly Service Fees • Compilation report: A compilation is a management financial forecast assembled by an independent consulting firm, put into the same format as a feasibility study; a market study may or may not be included • Management projections: Management may provide their own projections, with no oversight on underlying assumptions from a consultant. Projections are less rigorous than a Forecast from an accounting perspective

  47. Feasibility Study Definitions • Primary Market Area (PMA): The primary market area is the geographic area from which a majority (more than 50%, and most often 75%) of the prospective residents live prior to moving to the community. • Example: An area extending 15 miles to the north and south, 10 miles to the east and west. The size of the market area can vary significantly in size and dimension from one market to the next • Penetration Rates: Penetration rates measure the degree to which the PMA is either under-served or saturated with senior living units. As penetration rates increase, units may become more difficult to fill. • Penetration Rate calculations are included in feasibility studies and therefore not calculated for a refunding issue

  48. Project Penetration Rate • Project Penetration Rate:The Project Penetration Rate is the percentage of age and income qualified households in the PMA the actual CCRC is expected to capture in order to achieve stabilized occupancy • Calculation methods vary widely, but conceptually consists of the following: Project ILUs Age and Income Qualified Households in the PMA • Project ILUs may include all units or only the new to be built units • # of ILUs could be reduced by the percentage expected to be drawn from the secondary market area; sometimes this might be a 20% reduction

  49. Market Penetration Rate • Market Penetration Rate:The Market Penetration Rate is the percentage of age and income qualified households the market is expected to capture in order for the market to achieve stabilized occupancy. This calculation is of particular significance when more than one CCRC is entering the market during the same timeframe Total # ILUs in the PMA Age and Income Qualified Households in the PMA • May only count unoccupied units (absorption rate) or could count all units • Planned as well as existing units will be included, but will be reduced by the percent draw from the PMA and percent occupancy

  50. Unit Mix and Turnover • Unit Mix: The proportion of unit types, or mix of ILUs, ALUs and SNF beds affects financial performance. Generally ILUs are the most profitable unit type. Unit mix can vary broadly, but the following are typical ranges: • ILUs: 60% to 75% • ALUs: 10% to 20% • SNF: 15% to 25% • Some CCRCs accept outside admittance into ALU/SNF/Memory Care, but generally these units are expected to be filled from transfers of ILU residents • ILU Turnover: The number of ILUs that are vacated and reoccupied in a given year is call turnover. For a just-opened community, turnover will be about 6% and steadily climb as the CCRC matures to typical range of 10%-15% or higher

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