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 Discussions Value Review & Full Group Discussion Bre Grubbs SVP, 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 Peck Senior Principal • Real Estate Cycles • General Market Fundamentals Seniors Housing • Occupancy Today: • Inventory growth • Development • Asking Rent Growth • Transactions • Valuations Real Estate Cycles and Where Are We Today?
Boom Hyper Supply Market Phase Declining Expansion Phase Occupancy Rising Occupancy Falling Values Rising Rents RAPID Rising Values Construction NEW Construction OVERBUILDING BUILD AND SELL Saturated Market Recovery Phase Recession Phase Rising Occupancy Falling Occupancy Rising Rents Falling Values Rising Values NO new construction NO new construction BUY Trough
7 Assisted Living Occupancy Far Lower Than Independent Living
Occupancy Primary Markets | 1Q06-2Q17 IL AL Srs Hsg 93%
92%
91%
90%
89%
88%
87%
86%
85%
84%
83% 2Q2006 2Q2007 2Q2008 2Q2009 2Q2010 2Q2011 2Q2012 2Q2013 2Q2014 2Q2015 2Q2016 2Q2017
Source: NIC MAP® Data Service Annual Inventory Growth Outpacing Annual Absorption
Annual Inventory Growth Rate and Annual Absorption Primary Markets | 1Q06 - 2Q17 6% Independent Living Annual Inventory Growth 5% Annual Absorption 4% 3% 2% 1% 0% -1%
6% Assisted Living 5% 4% 3% 2% 1% 0% -1% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: NIC MAP® Data Service Where Did Inventory Growth Occur During the Last 4 Qtrs? Seniors Housing Annual Inventory Growth Primary & Secondary Markets | As of 2Q17
Source: NIC MAP® Data Service Construction as a Share of Inventory Remains High Spaces Under Construction and Construction as Percent of Inventory Primary Markets | 1Q06 - 2Q17 Independent Living 23,000 12% Spaces Under Construction (L) 10% 18,400 Construction as % of Inventory (R) 8% 13,800 6% 9,200 4% 4,600 2% 0 0%
Assisted Living 23,000 12%
18,400 10% 8% 13,800 6% 9,200 4% 4,600 2% 0 0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: NIC MAP® Data Service Twelve Markets Have More Than 10% of Their Inventory U/C Seniors Housing Construction Primary & Secondary Markets | As of 2Q17
Source: NIC MAP® Data Service Annual Same-Store Rent Growth Generally Strong
Annual Asking Rent Growth / Avg. Hourly Earnings* Assisted Living Employees Primary Markets | 4Q06 – 2Q17 Asking Rent - Assisted Living Asking Rent - Independent Living
6%
5%
4%
3%
2%
1%
0%
-1%
-2% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
*Wage data as of 1Q17 Source: 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
Rolling 4-Qtr
Rolling 4-Qtr
1. Preliminary Data Source: NIC MAP® Data Service, Real Capital Analytics Pricing Remains Relatively Stable
Seniors Housing & Care Transactions Rolling 4-Quarter Price Per Unit1 U.S. | 1Q08 – 2Q17
Seniors Housing
Nursing Care
1. Preliminary Data Source: NIC MAP® Data Service, Real Capital Analytics Assisted Living Occupancy Far Lower Than Independent Living Occupancy Primary Markets | 1Q06-2Q17 IL AL Srs Hsg 93%
92%
91%
90%
89%
88%
87%
86%
85%
84%
83% 2Q2006 2Q2007 2Q2008 2Q2009 2Q2010 2Q2011 2Q2012 2Q2013 2Q2014 2Q2015 2Q2016 2Q2017 Source: NIC MAP® Data Service
16 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 Firestone Senior Managing Director Susannah Myerson VP of Senior Housing Finance Wells Fargo Bank Price
S
D Quantity Demand Supply Overall Demographics of the PMA Inventory in PMA • Qualified seniors • Existing seniors housing facilities • Qualified adult children • Other age-restricted projects or “NORCs” • Median home value & income • New planned competitors • Economic drivers of the PMA • Occupancy rates • Growth forecasts The Demand Side of the Equation: Demographics
* NICMAP * Nielsen *Environics * ESRI
Sample below from NIC MAP “Site Information Report” Demographics is Destiny….and It’s all Relative
5-mile Demographics SITE 2nd Site Portfolio Average
Median Household Income (All Ages) $70,965 $62,514 $59,684 Median Home Value $281,326 $214,623 $203,587
2017 Households Age 75 - 84 12,459 17,778 10,564 2017 Households Age 85+ 6,542 9,300 5,847 2017 Total Households Age 75+ 19,001 27,078 16,411 Projected growth rate over next 5 years 6.1% 3.8% 4.2%
2017 HHs 75+ with incomes over $35,000 9,400 10,650 8,169 Projected growth rate over next 5 years 12.1% 8.1% 8.6%
Percent of 75+ HHs who are "Qualified" ($35,000+) 49.5% 39.3% 49.8%
2017 Total Households Age 45 - 64 51,241 104,224 50,644 Projected growth rate over next 5 years -3.1% 2.7% -1.2%
2017 HHs Age 45 - 64 with incomes $100,000+ 22,628 34,977 20,478 Projected growth rate over next 5 years 6.4% 10.8% 3.6%
Percent of Child HHs who are "Qualified" ($100,000+) 44.2% 33.6% 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
Stabilized Construction Construction Metro Properties Units Penetration Occupancy Units vs. Inventory 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 9,400 Qualifed Senior HHs # of qualified adult child HHs 22,600 Qualifed Child HHs Projected Growth over 5 years Higher than average
$70,965 / $281,326 Median Income and Home Values Higher than other sites/average Higher than State and overall US
Overall Metro Market Health Occupancy lower than others; Compared to Other Markets new construction significantly higher
95% AL Occupancy and Age of Local Comps 78% MC (86% stabilized) Avg age = 26 years
Impressions of most competitive supply Market Visit TBD Site positioning Based on Market Factors, I Would:
1. Proceed with the memory care conversion as specified in the OM 2. Definitely NOT proceed with the memory care conversion as specified in the OM 3. Proceed with the memory care conversion, but alter the lease-up and rate assumptions 4. I’m not quite sure yet, I’d need to see/know more Allison Pendroy SVP & Director The Big Picture
The Good… The Bad…
• Currently performing community • Aged community • Stabilized occupancy • Limited product offering • Pricing in line with market • Cash flowing • Solid margins • Desirable market Value Add Strategies
1. Modernization of Units 2. Unit Reconfiguration 3. Introduction of additional levels of care • Expanded Assisted Living Services • Memory Care Wing Think About…
Modernization of Units Unit Reconfiguration Additional Levels of Care
• Aged product • Validation of contractor pricing • Additional AL services • 53% of units still unrenovated • Burn down of AL occupancy in order • Determine what they need to be • Evaluate long-term plan to modernize to free up units for conversion to • Evaluate market demand facility Memory Care • Establish pricing • Units & Common Space • Pricing concessions • Evaluate adequacy of Plant / • Written Marketing Action Plan • Short term effect on occupancy Maintenance and Cap Ex $ • MC is different than AL • Need a long-term plan • Understand MC licensure • Forging new market process • Will require substantial investment relationships • Return on $ invested – pricing lift? • MC staffing and expense implications • Are pricing bands well positioned? • Exercise diligent review of 3rd party property condition reports Business Plan / Investment Thesis
• 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 Investment Categorization
Core
Core Plus
Value Add
Opportunistic The Biggest Opportunity in Acquiring Older Assets is Usually?
1. Shifting to higher acuity to increase revenue 2. Managing/decreasing expenses 3. Updating the building and then increasing rates to market levels 4. Partnering with the right operator to assess and implement a solid business plan that is tailored to specific investment goals Melissa Owens Director 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 Lukas VP of Operations Key Considerations
Know Who You Are Know What (and Who) You Need • Consider your levels of care • Staffing levels/ratios/skill sets • Any additional services vary based on LOC and acuity provided (bundled vs. • What kind of schedules will unbundled) your staff work (based on • What does your acuity look services provided)? like? Consider your risk and • Charging appropriate based on regulatory environment 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! • Consider alternate work schedules o Be mindful of different regulatory Attracting & environments! Retaining Talent • Training for multiple areas o Make sure services and duties are clear (beware of service creep) • Opportunities for growth o Providing a career track Jason Dopoulos Managing Director How Am I Going to Pay for This? Debt Options
Debt 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% Property acquisition costs plus transaction costs; Bank may Bank will provide 70% of construction costs minus the provide additional funds to rehab and upgrade units, provide developer fee (if related party); If newconstruction, land Funding: cap-ex dollars for improvements and additions may/may not applied as equity
Non-recourse available for stabilized assets Full completion guaranty with burn-off to 50% at C/O with Guarantor Requirements: 25% - 50% recourse with burn-offs available upon achieving further performance burn-offs upon achieving stabilized stabilized metrics for value add; metrics (example: 1.0x DSCR, 85% Occupancy) Lease-Up (if adding/ transitioning units), Lease-up; Debt Service; Guarantor Covenants: Debt Service; Debt Yield, Guarantor Origination Fee; 300-400 Spread over LIBOR; Origination Fee; 350-450 Spread over LIBOR; Pricing: Interest-Only Period Interest-Only during initial term Pricing varies across lender types and project Pricing varies across lender types and project types types OPERATOR; Market; Sponsor; Experience; Relationship OPERATOR; Market; Sponsor; Experience; Relationship; Other Key Factors: Zoning; Assessing the Deal…and Potential Deal Killers
• Wage Pressures: Several cities and states continue to phase in minimum wage 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 as for escalating construction and renovation project costs also place upward pressure on wages.
• Non-Cancelable Contracts: Review all vendor contracts and leases carefully. Non-cancelable contracts for services you won’t use or with providers you don’t plan to keep can negatively impact EBITDAR projections. Assessing the Deal…and Potential Deal Killers
• Value Bifurcation: Different methodologies for separating operating business value vs. real estate value may lead to varying opinions for total asset value and purchase price.
• Permits & Licenses: Timing for licensure transfers or permits for construction 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:
$[ ] Presenters Introduction – Bre Grubbs, Leisure Care Industry Overview – Lana Peck, NIC Case Highlights & Investment Guidance – Ben Firestone, Blueprint Healthcare Real Estate Advisors Market Assessment – Susannah Myerson, Wells Fargo Bank Investment Assessment & Op Strategy – Allison Pendroy, LCS Sales & Marketing – Melissa Owens, Elmcroft Senior Living Care & Staffing – Sophia Lukas, HumanGood Financing Terms & Debt Payment – Jason Dopoulos, Lancaster Pollard
Facilitators Ryan Chase, Blueprint Real Estate Advisors [email protected] Brandi Healey, Sabra Health Care REIT, Inc. [email protected] Tony Hong, Senior Resource Group [email protected] Chris Kronenberger, Blue Moon Capital Partners, LLC [email protected] Joel Mendes, JLL Capital Markets [email protected] Justin Skiver, Welltower Inc. [email protected] Richard Wang, Belmont Village Senior Living [email protected] Kris Woolley, Avista Senior Living [email protected] Derek Zeller, BMO Harris Bank [email protected] 2017 NIC Fall Conference Investing in Seniors Housing and Care Properties