Lean Asset Management (Section 232) SMAC May 15, 2014 11:00 AM

1. Lean Asset Management(Section 232)SMACMay 15, 201411:00 AM ‹#›

2. Section 232 PortfolioAs of 4/21/14 • 2892 Projects - $21.5 Billion Outstanding Principal Balance • 153 Categorized as “Troubled” in HUD’s system • Concentration in servicing: • 50 total lenders servicing Section 232’s. • $18.5 Billion (86%) is being serviced by 13 lenders • Portfolio Interest Rate: • Currently = 4.20%; 2 Years Ago = 5.35% ‹#›

3. Full Claims (by FY)

4. Section 232 Claims

5. Partial Payment of Claim(s) • Last Resort • 4 PPC’s Completed in FY 2013 • 1 in 2012 and 1 in 2011 • 1 in FY 2014 and another 3 Being Contemplated • Average Structure on PPC: • 65% of Claim - Restructured 1st Mortgage • 35% of Claim – Soft 2nd Mortgage

6. Primary Reasons For Claim Last 5 Years of Data Market or Rate Issues: 54% Operator or Survey Issues: 27% Money Follows the Person: 19%

7. Takeaways • 8 of 14 Claims Since 2012: MI Population • Money Follows the Person • Initiative to move tenants to less institutionalized homes. • New Construction Remains Highest Risk: • 52% of Projects on Priority Watch List vs. • 24% of Portfolio are/were NC

8. Asset Management Specialization • Loan Modifications – done – success! • Next up…… • TPA’s • R4R Reviews • Non-Critical Repair Escrow Reviews ‹#›

9. Asset Mgmt Process Re-Engineering • Checklist and Punchlists • Starting with High Volume • Standardization and Transparency • Partner Involvement • Electronic • Asset Management Portal ‹#›

10. Section 232 Healthcare Portal ‹#›

11. Proposed Components • Operator Financials: See Other Slides • Asset Management Transaction/Requests Portal and Tracking: • Just Began Development • All Asset Mgmt Processes and Requests • Electronic – Better Tracking • Development Application Portal and Tracking: • Slated to begin development after 1st 2 phases complete. 11

12. Phase I: Operator Financials

13. Background • Accountability Rule Change: 10/9/12 • 24 CFR Part 5.801 • Required Quarterly Operator Financials • FY’s Beginning 60 Days After HUD Publishes CFR Notice Announcing Our System • Applies to All Section 232’s • No Lease: Mortgagor = Operator ‹#›

14. Background, Continued • Quarterly: Must be submitted to HUD within 30 Days of the End of the Quarter • FYE: Must be submitted to HUD within 60 Days of the End of the FY • Pursuing Reg. Waiver – 60/90 – also flexibility • Operator Certified Financials OK. • Mortgagor Annual Audited Financials Still Required. ‹#›

15. Logistics • Operators will submit quarterly financial reports to their servicing lender. •  HUD is not dictating format • The lender will populate a standard excel template with key financial information on the Section 232’s they service. ‹#›

16. Draft Entry Items for Lenders on Spreadsheet • Operating Cash • Investments • R4R Balance • AR • Current Liabilities • Amortization Expense • Net Income • FHA Interest Expense • Rent/Lease Expense • Depreciation Expense • Current Assets • Total Expenses • FHA Principal Pymt. • MIP ‹#›

17. Logistics, Continued • Lender uploads spreadsheet to a portal. • Can upload spreadsheet in batches. • Lender will be able to view and run reports on ratios: • DSCR • Several Liquidity Measures • AR and AP Measures ‹#›

18. Logistics, Continued • Work in Progress: • HUD generates an overall financial risk score for each project. • Determine how to follow-up on perceived weaker financial projects. • Lender on front lines ‹#›

19. CURRENT DESIGNS OF PORTAL - LENDER VIEWS ‹#›

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29. Beta Testing with Several Volunteer Lenders • In June 2014 - Duration one hour on a specific date • Testing will include: • Log In to Test Site • Retrieving and populating an Excel Template • Uploading Files • Reviewing uploaded files for data integrity. •  Lenders that want to participate send email to: • LeanThinking@HUD.gov • Subject line: 232 Healthcare Portal – Pilot (by 5/20/14) ‹#›

30. Timeline Goals • Beta Test w/several Lenders: 6/14 • All Lender Training: 7/14 • Deployment: Voluntary Reporting: 8/14 • CFR Notice: No Later Than 10/31/14 • Mandatory Use: Fiscal Years Beginning after 12/31/14 ‹#›

31. Loan Modifications ‹#›

32. ORCF – Interest Rate Reductions (IRRs) • IRRsare Loan Modifications proposing to simply lower the existing interest rate on performing loans (vs. Default Loan Mods) • Lender Checklist and Lender Analysis are posted on HUD.gov: http://portal.hud.gov/hudportal/HUD?src=/federal_housing_administration/healthcare_facilities/residential_care/loan_servicing ‹#›

33. IRR Loan Modifications • Dedicated Email Box for Electronic Submissions: ORCFLoanModification@hud.gov • Specialized Team in Asset Management • Quick accurate Preliminary Reviews (generally within 2 weeks) • COMMUNICATION IS KEY- applies to lenders and lender counsel! ‹#›

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36. IRR Loan Modifications Lender includes a Letter from GNMA if loan in GNMA pool to address investor consent. • Project must be out of prepay lockout • Project must pay any required prepayment penalties • GNMA recognizes the Issuer of Record and provides letter to that entity • New prepayment premium schedule is acceptable in modification document ‹#›

37. IRR Loan Modifications (cont’d) Other Considerations: • RfR Balance: If below $1000/per unit – address • Sprinklers: If SNF check that it is Fully Sprinklered per CMS Requirements • Troubled: If loan is still below 1.11 DSCR after IRR – address (Plan of Action) • CMS Star Ratings: If SNF and poor history or quality of care – address • Whether a PCNA is due ‹#›

38. IRR Loan Modifications (cont’d) PCNAs • Submit if >10 years since last PCNA • Note in Lender Analysis if change in RfR Payments • Describe sources of funds and timeline for any required repairs. • Propose Special Conditions if applicable ‹#›

39. IRR Loan Modifications Trade Premiums Cannot cover: • Borrower Counsel • Organizational Costs • 3rd Party Reports (e.g. PCNA) ‹#›

40. IRR Loan Modifications Trade Premiums can cover: • Any portion not retained by Lender can be applied to Lender Costs (Lender Counsel, GNMA commitment fee),Title/Recording or defray prepayment premium. • Remaining can be applied to RfR Balance • Please indicate use of Trade Premium in Sources and Uses and Lender Analysis Narrative ‹#›

41. General Ideal Process Flow of Interest Rate Reductions in ORCF Prelim Review Finalize Mod Docs and Submit (30 Days) Submit IRR Package Final Review Execute Close IRR, Submit Recorded Docs (45 Days) ‹#›

42. IRR Loan Modifications Common Issues Slowing Down IRRs: • Incorrect calculations (check: DSCR, Sources & Uses) • Quality Control (Exhibits must be internally consistent) • Letter from GNMA not included • Lack of Communication ‹#›

43. IRR Loan Modifications • As of February 21, 2014, we have received 37 requests for IRRs • Fully Processed approximately 25 to date projected to realize over $3 million annual savings • Streamlined Process; Specialized Team; OGC on board. ‹#›

44. Section 232 Draft Handbook ‹#›

45. Handbook Timeline • OIG Audits: Considerable Pressure to Issue • Latest on Timeline for Issuance • Grandfathering Period? • Necessary revisions will be made after issuance – similar to 242 handbook. ‹#›

46. Details Operator and Lender Responsibilities, Including…… ‹#›

47. Dealing With Issues on Section 232’s • Failure to make Lease Payment • Serious issues with State Inspections/Licensing • Substantial Legal Judgments/Penalties/Fines • Large PLI Claims • Bankruptcy ‹#›

48. Continued…. • Delinquent Mortgage Payments • Default of Master Lease • Significant HUD Compliance Issues: • Poor REAC Scores • Department Enforcement Center Actions ‹#›

49. HUD Intends to Provide an Optional Standardized Format for Reporting These: • What the Issue Entails • Actions Being Taken to Address ‹#›

50. Lender Responsibilities • Quarterly, proactively Monitor CMS’s Special Focus List. • Annually, proactively Monitor PLI and Fidelity Bond Coverage. • Quarterly Operator Financials • Discussed in more detail later. • Review and submission of Asset Mgmt Actions/Transactions ‹#›