NIC Seniors Housing Boot Camp: An Interactive Workshop on the Art of Assessing a Deal

Workshop Agenda:Presentations• Industry Overview• Introduction of Case Study• Market Assessment• Sales & Marketing• Care & Staffing• Investment Assessment & Operations Strategy• Financing Terms & Debt Placement• Review of Considerations & Valuation Table DiscussionsValue Review & Full Group Discussion

Bre GrubbsSVP, New Business Development

What is the Primary Reason for Your Attendance Today?

a.Learn more about a particular portion of the acquisition process

b.Learn more about how to value an opportunity

c. Network and meet other new entrants to the industry

d.I heard the snacks are pretty awesome

Lana PeckSenior Principal

• Real Estate Cycles• General Market

Fundamentals• Occupancy• Inventory growth• Development• Asking Rent Growth

• Transactions• Valuations

Seniors Housing Today:

Real Estate Cycles and Where Are We Today?

7

Trough

Hyper Supply PhaseDeclining OccupancyFalling ValuesRAPID ConstructionOVERBUILDING Saturated Market

Recovery PhaseRising OccupancyRising RentsRising ValuesNO new construction BUY

Recession PhaseFalling OccupancyFalling ValuesNO new construction

Expansion PhaseRising OccupancyRising RentsRising ValuesNEW ConstructionBUILD AND SELL

Boom Market

Assisted Living Occupancy Far Lower Than Independent LivingOccupancyPrimary Markets | 1Q06-2Q17

Source: NIC MAP® Data Service

83%

84%

85%

86%

87%

88%

89%

90%

91%

92%

93%

2Q2006 2Q2007 2Q2008 2Q2009 2Q2010 2Q2011 2Q2012 2Q2013 2Q2014 2Q2015 2Q2016 2Q2017

IL AL Srs Hsg

-1%0%1%2%3%4%5%6%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

-1%0%1%2%3%4%5%6%

Annual Inventory GrowthAnnual Absorption

Annual Inventory Growth Outpacing Annual AbsorptionAnnual Inventory Growth Rate and Annual AbsorptionPrimary Markets | 1Q06 - 2Q17

Source: NIC MAP® Data Service

Assisted Living

Independent Living

Where Did Inventory Growth Occur During the Last 4 Qtrs?Seniors Housing Annual Inventory GrowthPrimary & Secondary Markets | As of 2Q17

Source: NIC MAP® Data Service

0%

2%

4%

6%

8%

10%

12%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 20170

4,600

9,200

13,800

18,400

23,000Assisted Living

Construction as a Share of Inventory Remains High

0%

2%

4%

6%

8%

10%

12%

0

4,600

9,200

13,800

18,400

23,000Spaces Under Construction (L)

Construction as % of Inventory (R)

Spaces Under Construction and Construction as Percent of InventoryPrimary Markets | 1Q06 - 2Q17

Source: NIC MAP® Data Service

Independent Living

Twelve Markets Have More Than 10% of Their Inventory U/CSeniors Housing ConstructionPrimary & Secondary Markets | As of 2Q17

Source: NIC MAP® Data Service

Annual Same-Store Rent Growth Generally Strong

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Annual Asking Rent Growth / Avg. Hourly Earnings*Primary Markets | 4Q06 – 2Q17

Assisted Living EmployeesAsking Rent - Assisted LivingAsking Rent - Independent Living

*Wage data as of 1Q17Source: NIC MAP® Data Service, U.S. Bureau of Labor Statistics

Closed Seniors Housing & Care Dollar Volume: $1.4Bn for 2Q17

Seniors Housing & Care Transactions Volume1

U.S. | 1Q08 – 2Q17

1. Preliminary Data

Source: NIC MAP® Data Service, Real Capital Analytics

Rolling 4-Qtr

Rolling 4-Qtr

Seniors Housing

Pricing Remains Relatively StableSeniors Housing & Care Transactions Rolling 4-Quarter Price Per Unit1

U.S. | 1Q08 – 2Q17

1. Preliminary Data

Source: NIC MAP® Data Service, Real Capital Analytics

Nursing Care

16

Assisted Living Occupancy Far Lower Than Independent LivingOccupancyPrimary Markets | 1Q06-2Q17

Source: NIC MAP® Data Service

83%

84%

85%

86%

87%

88%

89%

90%

91%

92%

93%

2Q2006 2Q2007 2Q2008 2Q2009 2Q2010 2Q2011 2Q2012 2Q2013 2Q2014 2Q2015 2Q2016 2Q2017

IL AL Srs Hsg

Has the Macro Overview Changed Your Opinion about Your Development or Acquisition Plans at All?

1. Nope, seniors housing is where it’s at!

2. Yes, it has made me more cautious about development in the short-term

3. Yes, it has made me less bullish on seniors housing in the short-term

Ben FirestoneSenior Managing Director

Susannah MyersonVP of Senior Housing Finance

Wells Fargo Bank

DemandOverall Demographics of the PMA• Qualified seniors • Qualified adult children• Median home value & income• Economic drivers of the PMA• Growth forecasts

SupplyInventory in PMA• Existing seniors housing facilities • Other age-restricted projects or “NORCs”• New planned competitors • Occupancy rates

Quantity

Price

S

D

* NICMAP * Nielsen *Environics * ESRI

The Demand Side of the Equation: Demographics

Sample below from NIC MAP “Site Information Report”

Demographics is Destiny….and It’s all Relative

5-mile Demographics SITE

Median Household Income (All Ages) $70,965Median Home Value $281,326

2017 Households Age 75 - 84 12,4592017 Households Age 85+ 6,5422017 Total Households Age 75+ 19,001Projected growth rate over next 5 years 6.1%

2017 HHs 75+ with incomes over $35,000 9,400Projected growth rate over next 5 years 12.1%

Percent of 75+ HHs who are "Qualified" ($35,000+) 49.5%

2017 Total Households Age 45 - 64 51,241Projected growth rate over next 5 years -3.1%

2017 HHs Age 45 - 64 with incomes $100,000+ 22,628Projected growth rate over next 5 years 6.4%

Percent of Child HHs who are "Qualified" ($100,000+) 44.2%

2nd Site

$62,514$214,623

17,7789,30027,0783.8%

10,6508.1%

39.3%

104,2242.7%

34,97710.8%

33.6%

Portfolio Average

$59,684$203,587

10,5645,84716,4114.2%

8,1698.6%

49.8%

50,644-1.2%

20,4783.6%

40.4%

How to Estimate Demand Based on Given Demographics

No consensus on the right way to estimate demand. Feasibility experts use: • Penetration rates • Occupancy rates • Capture rates • Disability/frailty rates (number of ADLs)• Dementia prevalence rates

In order to estimate demand, you have to fully understand the supply!

The Supply Side – Metro Area

The Supply Side – Comparison to Other Metros

Metro Properties UnitsStabilized

OccupancyConstruction

UnitsConstructionvs. Inventory Penetration

Detroit, MI 70 5,244 89.6% 1,581 30.1% 2.7%St. Louis, MO 72 4,647 89.2% 795 17.1% 3.7%Chicago, IL 151 14,610 87.8% 2,443 16.7% 4.1%Washington, DC 95 7,248 91.8% 963 13.3% 3.9%Kansas City, MO 54 3,392 84.7% 442 13.0% 4.2%Atlanta, GA 151 9,958 87.8% 1,263 12.7% 7.0%Orlando, FL 57 4,367 89.2% 500 11.4% 5.2%Tampa, FL 112 9,525 88.1% 1,017 10.7% 5.6%PRIMARY MARKETS 3,024 248,319 89.4% 21,365 8.6% 4.5%Minneapolis, MN 161 13,201 91.7% 1,130 8.6% 10.4%Miami, FL 81 7,942 86.9% 663 8.3% 2.6%Cincinnati, OH 36 3,636 91.2% 222 6.1% 4.2%Boston, MA 136 10,430 90.8% 607 5.8% 5.1%New York, NY 225 22,227 92.4% 894 4.0% 2.6%Philadelphia, PA 117 9,664 86.9% 391 4.0% 3.6%Cleveland, OH 54 5,121 86.7% 158 3.1% 4.7%Pittsburgh, PA 96 6,666 89.2% 72 1.1% 4.5%Baltimore, MD 56 4,225 90.9% 0 0.0% 3.6%

The Supply Side – Within the PMA

Property Advisor Report

Comp Set Characteristics

Properties: 16

Operators: 11

Average Age: 26

Total Units: 2,249

Segment Data Inventory 1Q2017 Ann. Change

IL 1,360 81.5% -744 bps

AL 671 95.2% +312 bps

MC 218 78.4% -385 bps

The Supply Side – Market Visit

No substitute for an on the ground visit, to assess and rate: • The most likely competitors based on:

• Pricing • Programming• Age • Location

• The proposed site itself, based on: • Access/visibility • Neighborhood • Surrounding uses• Nearby medical facilities/hospitals

Demand & Supply Summary

METRIC SITE VALUE RATING

# of qualified 75+ HHs and# of qualified adult child HHsProjected Growth over 5 years

9,400 Qualifed Senior HHs22,600 Qualifed Child HHsHigher than average

Median Income and Home Values$70,965 / $281,326Higher than other sites/averageHigher than State and overall US

Overall Metro Market Health Compared to Other Markets

Occupancy lower than others; new construction significantly higher

Occupancy and Age of Local Comps95% AL 78% MC (86% stabilized)Avg age = 26 years

Market Visit Impressions of most competitive supplySite positioning

TBD

Based on Market Factors, I Would:

1. Proceed with the memory care conversion as specified in the OM2. Definitely NOT proceed with the memory care conversion as

specified in the OM3. Proceed with the memory care conversion, but alter the lease-up

and rate assumptions4. I’m not quite sure yet, I’d need to see/know more

Allison PendroySVP & Director

The Big Picture

The Good…

• Currently performing community• Stabilized occupancy• Pricing in line with market• Cash flowing• Solid margins• Desirable market

The Bad…

• Aged community• Limited product offering

1. Modernization of Units2. Unit Reconfiguration3. Introduction of additional levels of care

• Expanded Assisted Living Services• Memory Care Wing

Value Add Strategies

Think About…

Modernization of Units

• Aged product• 53% of units still unrenovated• Evaluate long-term plan to modernize

facility• Units & Common Space• Evaluate adequacy of Plant /

Maintenance and Cap Ex $• Need a long-term plan

• Will require substantial investment• Return on $ invested – pricing lift?• Exercise diligent review of 3rd party

property condition reports

Unit Reconfiguration

• Validation of contractor pricing

• Burn down of AL occupancy in order to free up units for conversion to Memory Care

• Pricing concessions• Short term effect on occupancy• Understand MC licensure

process• MC staffing and expense

implications

Additional Levels of Care

• Additional AL services• Determine what they need to be• Evaluate market demand• Establish pricing

• Written Marketing Action Plan • MC is different than AL• Forging new market

relationships

• Are pricing bands well positioned?

• This deal is a revenue play• “Repositioning” Facilitated by Way of:

• Modernization • Reconfiguration• Expanded Levels of Care

• 32% ($1,462) lift in underwritten REVPOR• However, don’t lose sight of expenses

Business Plan / Investment Thesis

Investment Categorization

Core

Core Plus

Value Add

Opportunistic

The Biggest Opportunity in Acquiring Older Assets is Usually?

1. Shifting to higher acuity to increase revenue2. Managing/decreasing expenses3. Updating the building and then increasing rates to market levels4. Partnering with the right operator to assess and implement a

solid business plan that is tailored to specific investment goals

Melissa OwensDirector of Sales & Marketing

Lease Up Considerations – Development

• Plan ahead for an adequate pre-sale effort, 6-9 months prior to community opening

• Recruiting of sales talent and development of incentive plan • Minimum 50% of units or beds pre-sold before community opening• Determine lease up timeline and monthly sales goals for achieving

stabilization (95%) considering turnover rate, 57.8% median turnover rate Assisted Living Residences (NIC, SOSH 2016)

Lease Up Considerations – Acquisition

• Evaluate sales talent and sales effort based on key sales metrics• Monthly move-in average over last 12 months• Inquiry volume and sources• Inquiry to tour ratio• Tour to move-in ratio

• Evaluate competitors in the market and establish community position

• Determine lease-up timeline and monthly sales goals as reviewed previously, apply the appropriate turnover rate by property type

Keys to Sales Success

• Sales Talent – the most critical component, recruit the best in the market, focus on competitive compensation and incentive programs that drive volume

• Sales Process/System and CRM–Implement a well-defined sales process for the sales team to follow that allows for successful coaching and accountability

Keys to Sales Success (Cont’d)

• Pricing–understand inventory available in the market and market pricing by product and unit type (NIC Map is a great resource for this) as well as community position

• Utilization of concessions –accelerate absorption rate by offering concessions

Advertising and Marketing Strategy

• Referral agencies - determine the need and reach agreements with those agencies, both local and national, that will drive your business.

• External business development – establish relationships with key professionals in the market to gain high quality referrals

• Traditional advertising vs digital advertising – more than 50% of all inquiries now come from a digital source, so you should focus your dollars in that area

Advertising and Marketing Strategy (Cont’d)

• Advertising effectiveness by product type: Consider the primary customer

• What is the total cost of a move in? Median marketing and advertising expenses per bed are $601 for AL and $1,006 for AL/MC (NIC, S0SH 2016)

A Reasonable Tour to Move-in Ratio for a Well-Performing Sales Team Is:

1. 20 – 25%2. 10 – 15%3. 35 – 40%4. 5 – 10%

(IL Avg is 20%, AL Avg is 22% according to Bild)

Sophia LukasVP of Operations

Key Considerations

Know Who You Are

• Consider your levels of care• Any additional services

provided (bundled vs. unbundled)

• What does your acuity look like? Consider your risk and regulatory environment

Know What (and Who) You Need

• Staffing levels/ratios/skill sets vary based on LOC and acuity

• What kind of schedules will your staff work (based on services provided)?

• Charging appropriate based on services provided (requiring skilled staff)

Pricing Appropriately

• How are you pricing? Levels, points, other methods

• Pricing should reflect services provided and skill level of team members

• Service creep without charging appropriately or offering services without adequate staffing are both concerns!

Attracting & Retaining Talent

• Consider alternate work scheduleso Be mindful of different regulatory

environments!

• Training for multiple areaso Make sure services and duties are

clear (beware of service creep)

• Opportunities for growtho Providing a career track

Jason DopoulosManaging Director

How Am I Going to Pay for This? Debt OptionsDebt Metrics Acquisition Loan Construction Loan

Term: 24-36 Months; One 12-month extension option 48 Months; One 12-month extension options

LTV: Maximum 75% of the As-Is Value Maximum 65-70% of the As-Stabilized Value

LTC: Maximum 75% Maximum 70-75%

Funding:

Property acquisition costs plus transaction costs; Bank may provide additional funds to rehab and upgrade units, provide

cap-ex dollars for improvements and additions

Bank will provide 70% of construction costs minus the developer fee (if related party); If new construction, land

may/may not applied as equity

Guarantor Requirements:Non-recourse available for stabilized assets

25% - 50% recourse with burn-offs available upon achieving stabilized metrics for value add;

Full completion guaranty with burn-off to 50% at C/O with further performance burn-offs upon achieving stabilized

metrics (example: 1.0x DSCR, 85% Occupancy)

Covenants: Lease-Up (if adding/ transitioning units),Debt Service; Debt Yield, Guarantor

Lease-up; Debt Service; Guarantor

Pricing: Origination Fee; 300-400 Spread over LIBOR; Interest-Only Period

Pricing varies across lender types and project types

Origination Fee; 350-450 Spread over LIBOR; Interest-Only during initial term

Pricing varies across lender types and project types

Other Key Factors: OPERATOR; Market; Sponsor; Experience; Relationship OPERATOR; Market; Sponsor; Experience; Relationship; Zoning;

Assessing the Deal…and Potential Deal Killers

• Wage Pressures: Several cities and states continue to phase in minimumwage increases. The City of Chicago is phasing in an increase of$2.00/hour to $13.00/hour by 2019. The presence of Unions as well asfor escalating construction and renovation project costs also placeupward pressure on wages.

• Non-Cancelable Contracts: Review all vendor contracts and leasescarefully. Non-cancelable contracts for services you won’t use or withproviders you don’t plan to keep can negatively impact EBITDARprojections.

Assessing the Deal…and Potential Deal Killers

• Value Bifurcation: Different methodologies for separating operatingbusiness value vs. real estate value may lead to varying opinions for totalasset value and purchase price.

• Permits & Licenses: Timing for licensure transfers or permits forconstruction and renovation work vary dramatically by city and county,and can delay or restrict your ability to implement your business plan.

Our Bid for Midway Meadows is:

$[ ]

PresentersIntroduction – Bre Grubbs, Leisure CareIndustry Overview – Lana Peck, NICCase Highlights & Investment Guidance – Ben Firestone, Blueprint Healthcare Real Estate AdvisorsMarket Assessment – Susannah Myerson, Wells Fargo BankInvestment Assessment & Op Strategy – Allison Pendroy, LCSSales & Marketing – Melissa Owens, Elmcroft Senior LivingCare & Staffing – Sophia Lukas, HumanGoodFinancing Terms & Debt Payment – Jason Dopoulos, Lancaster Pollard

FacilitatorsRyan Chase, Blueprint Real Estate Advisors rchase@blueprinthcre.comBrandi Healey, Sabra Health Care REIT, Inc. bhealey@sabrahealth.comTony Hong, Senior Resource Group tony.hong@srg-llc.comChris Kronenberger, Blue Moon Capital Partners, LLC ckronenberger@bluemooncp.comJoel Mendes, JLL Capital Markets joel.mendes@jll.comJustin Skiver, Welltower Inc. jskiver@welltower.comRichard Wang, Belmont Village Senior Living rwang@belmontvillage.comKris Woolley, Avista Senior Living kwoolley@avistaseniorliving.comDerek Zeller, BMO Harris Bank dzeller@bmo.com

2017

NIC Fall ConferenceInvesting in Seniors Housing and Care Properties