Seniors Housing: Better With Age

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Seniors Housing Better With Age?

• Capital Formation in the Seniors Housing Industry

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Seniors Housing Better With Age?

• Capital Formation in the Seniors Housing Industry
• October 2, 2009
• By Angela Mago
• National Manager
• KeyBank Real Estate Capital
• Healthcare Group

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Capital Formation in the Seniors Housing Industry
Seniors Housing Better With Age?

• Debt Markets Overview
• Who are the Players?
• Commercial Banks
• Finance Companies/Mortgage Banks
• GSEs (Fannie, Freddie, HUD)
• REITs
• Whats Happening today (whos lending)?
• Underwriting and Credit Considerations
• Future Trends and Expectations

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Capital Formation in the Seniors Housing Industry
Seniors Housing Better With Age?
A. Who are the Players?
Note If data was unavailable as of 6/09, 12/08
was used. Source CMSA Compendium, FNMA, FHLMC,
FHA, Public Filings, other.
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Capital Formation in the Seniors Housing Industry
Seniors Housing Better With Age?
A. Who are the Players?

• Top 8 Lenders that report data to NIC (includes
  FNMA FHLMC)
• UPB 3/31/09 Permanent (gt10 yrs) Short Term (lt10
  yrs) Total
• Billions
• ILF 5.5 7.4 13.3
• ALF 6.7 6.5 13.5
• SNF 0.5 3.8 4.3
• CCRCs 0.3 0.9 1.3
• Total 13.0 18.6 32.4

Production Q109 Permanent Short
Term Construction Total Millions ILF
25.2 21.5 0 46.7 ALF
56.7 197.9 0 254.6 SNF 0
22.1 0 22.1 CCRCs 0
0 0 0 Total 81.9
241.5 0 323.4
Source NIC
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Seniors Housing Better With Age?
Capital Formation in the Seniors Housing Industry
B. Whats Happening Today?

• Commercial Banks
• Highly fragmented Bank and Market Specific
• Smaller one-off transactions getting financed
  including some new construction
• Syndicated bank debt market has seen little to no
  activity in 2009
• Banks with significant housing or CRE exposures
  still working through losses
• Cost of capital and liquidity varies by Bank and
  affects competitiveness and capital availability
• Libor floors 2-3 300-400 bps spreads lt75 ltv
  existing sustainable cash flow
• More bank failures on horizon WAMU, Guaranty
  Bank and Colonial Bank were all active in Seniors
  Housing

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Seniors Housing Better With Age?
Capital Formation in the Seniors Housing Industry
B. Whats Happening Today?

• Finance Companies/Mortgage Banks
• Fewer players active
• Several active players sidelined in 2009 due to
  financial difficulties (reliance on wholesale
  funding, debt maturities, loan losses)
• Several applied for and received bank holding
  company status
• 3-5 years, up to 70 ltv, L500 w/ floor (6.5-7
  all in)
• AL and SNF primarily IL selectively (infill
  markets)

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Seniors Housing Better With Age?
Capital Formation in the Seniors Housing Industry
B. Whats Happening Today?

• Government Sponsored Enterprises Fannie Mae
  Freddie Mac
• Annual Seniors Housing Production

Source Fannie Mae, Freddie Mac
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Seniors Housing Better With Age?
Capital Formation in the Seniors Housing Industry
B. Whats Happening Today?

• Government Sponsored Enterprises Fannie Mae
  Freddie Mac
• 2009 volume down significantly due to low MA
  activity and refinance volume, tightened
  underwriting criteria, rising cap rates
• Still writing business for IL/AL/ALZ limited
  SNF (max 20 beds NOI)
• Fixed Variable Rate Executions for terms of
  5yrs and up
• Fannie Mae MBS Freddie Mac Portfolio (On
  Balance Sheet)
• Differentiated underwriting standards for cash
  out vs refinance loans, 5 yr vs 10 yr loans,
  Amortizing and Interest Only loans
• Enhanced focus on property type, property
  performance, market area
• Continued focus on Sponsor strength (cash flow,
  liquidity, NW)
• Greater scrutiny of Sponsor debt maturities,
  overall portfolio performance
• Loan proceeds most affected by value/cap rates

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Seniors Housing Better With Age?
Capital Formation in the Seniors Housing Industry
B. Whats Happening Today?

• Government Sponsored Enterprises HUD
• Annual 232 Mortgage Insurance Commitments

Source HUD
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Seniors Housing Better With Age?
Capital Formation in the Seniors Housing Industry
B. Whats Happening Today?

• Government Sponsored Enterprises HUD Section
  232 232/223(f)
• SNF, ICF, ALF, Board Care New construction,
  substantial rehabilitation, acquisition and
  refinance
• LEAN processing in effect September 1, 2008
• Goal Make 232 process client friendly, reduce
  processing time, improve consistency, web based
  submission
• Volume is up substantially as of 9/05/09 227
  applications received, 111 commitments issued, 75
  loans closed
• Firm application to commitment and closing for
  223(f)s reduced by over 100 days
• Revised third party appraisal requirements to a
  market appraisal
• Non-recourse, competitive fixed rates, up to
  35-40 years, up to 85-90 ltv
• Escrows, Davis Bacon wages, limitation on
  distributions, inter-creditor agreements ,
  audited financial statements, PCNA requirements

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Seniors Housing Better With Age?
Capital Formation in the Seniors Housing Industry
B. Whats Happening Today?

• REITs
• 9 REITs active in Seniors Housing with combined
  market capitalization of 26.8B and a combined
  enterprise value of 41.3B as of 9/10/09
• 2009 volume has been modest focus has been on
  liquidity, debt maturities and tenant operating
  fundamentals
• Operating performance varies (needs based
  facilities outperforming lifestyle communities)
  but predominance of triple net leases keeping
  earnings stable
• Leverage is lowest in REIT-land (5.1 x debt to
  EBITDA v. 7.5 x for REITs overall) debt
  maturities manageable
• Healthcare REITs have raised 2.2B in equity
  capital in 2009 and have accessed low cost debt
  through GSEs
• REITs positioned for opportunistic growth (late
  2009-2010) fewer distressed opportunities in
  sector versus rest of CRE
• Sale-leaseback 100 Financings 10-15 year
  initial lease term with renewals 8.5-10 lease
  yields with escalators operating partnership
  units

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Seniors Housing Better With Age?
Capital Formation in the Seniors Housing Industry
C. Underwriting and Credit Considerations

• Operator Quality
• Asset Quality
• Market Depth
• Cash Flow Credit Support
• Determine sustainable underwritten cash flow
  (UWCF)
• UWCF Influences Operational Factors
• Market Factors
• Sponsor Analysis
• Liquidity, cash flow, market NW, debt maturities,
  portfolio performance
• Underwriting Cap Rates (increased 150-200 bps
  from market peak)
• IL 8.5 9.5
• AL 9.0 10.0
• SNF 13
• CCRC 9.5-10.5

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Seniors Housing Better With Age?
Capital Formation in the Seniors Housing Industry
D. Future Trends and Expectations (next 12-18
months)

• Agencies should continue to be active source of
  capital can afford to be selective and will
  maintain tightened underwriting criteria
• HUDs volume should continue to grow
  significantly as processing efficiencies through
  LEAN are achieved
• REITs with strong liquidity and low debt will be
  poised for opportunistic growth
• Commercial banks will begin to return to sector
  but underwriting will be conservative, favoring
  deals with little execution risk
• Very little new development is expected more
  equity, higher returns, strong sponsorship
  required
• Healthy finance companies will be opportunistic,
  especially those with competitive cost of capital
• Debt maturities could cause some stress in
  sector, particularly assets underwritten at peak
  of market (2006-2007) where refinance gaps may
  exist
• MA activity will pick up as capital flows
  increase