A Primer on the Not For Profit Senior Living Industry. April 2015

Transcription

1 A Primer on the Not For Profit Senior Living Industry April 2015

2 Overview I. Introductions and Objectives of Session Page 3 II. A Provider Perspective 6 III. An Issuing Authority Perspective IV. A Capital Markets Perspective V. Not for Profit Senior Living Industry Trends VI. Financing Trends VII. Closing Thoughts

3 I. Objectives of Session

4 Panelists Kendal Corp. Tim Myers Chief Financial Officer 20 years experience in retirement community financial management and consulting, development, repositioning, and acquisitions Tim came to Kendal in 2007 from New Life Management & Development, Inc. He served in various capacities including Principal, CFO and Director of Management Services Prior to that, Mr. Myers served as Director of Special Projects for Marriott Senior Living Services for a year and as a Senior Manager in the National Long term Care practice of KPMG in Harrisburg, Pennsylvania for ten years. Mr. Myers earned his Bachelor of Arts in accounting from Lycoming College in Williamsport, Pennsylvania and is a CPA. He is a frequent presenter at investment banking conferences for CFOs. NCMCC Christopher B. Taylor, CPA Assistant Secretary 35 Years of Experience in the North Carolina DHHS as an Auditor, Financial Advisor, and now Assistant Secretary Member of the American Society of Certified Public Accountants Graduate of North Carolina Wesleyan College, magna cum laude BB&TCM John Franklin Managing Director / Manager Leads the BB&T Capital Markets NFP Finance Group During his 25 year career Mr. Franklin has completed over 250 senior living and hospital financings in 20 states totaling more than $10 billion Mr. Franklin received his B.S. with honors from Randolph Macon College and an M.B.A. from the University of North Carolina at Chapel Hill 4

5 Objectives cu Gain an Understanding of not for profit senior living industry from perspective of: Provider Issuer Capital Markets 5

6 II. A Provider s Perspective

7 The Kendal System The Kendal system was founded in 1971 and is composed of 11 affiliates serving approximately 4,200 residents in 8 states. 7

8 What is a CCRC? A Continuing Care Retirement Community ( CCRC ) is an organization that provides all or several of the various levels of care (independent living, assisted living, skilled nursing, memory support, therapy, etc.) on a single campus. CCRCs offer services through a variety of contract types. One of the benefits of a CCRC is that it allows residents to transition through the continuum of care on a single campus. 8

9 CCRC Contract Types Typically, a CCRC will offer one or more of the following contract types to an incoming resident: Type A ( Life Care ) Resident pays a one time fee (an Entrance Fee) and continued monthly fees for the duration of their residency. Should the resident transition to a higher level of care, their monthly fee remains equivalent to what would be paid in independent living. Type B ( Continuing Care or Modified Life Care ) Resident pays a one time fee and continual monthly fees. Upon transferring to a higher level of care, the resident will pay a reduced or market rate for those services. Type C ( Fee for service ) Resident pays a one time fee and continual monthly fees. Upon transition to a higher level of care, the resident will pay the full market rate for those services. Type D ( Rental ) Same as Type C, except there is no Entrance Fee. 9

10 How CCRC Fees Are Charged Entrance Fee this is a one time fee paid prior to entry into the CCRC. Entrance Fees may be partially refundable to the resident at termination of the contract (i.e. the resident is guaranteed to receive at least xx% of their original fee back at contract termination) OR it may be non refundable. Entrance Fees vary by refund type and unit size. Monthly Fees Fee is paid monthly by the resident and is adjusted (typically) on an annual basis. Monthly fees vary by unit size and often by contract type. Health Center Fees These include Assisted Living, Memory Support, and Skilled Nursing services. These fees are billed, typically, based on a daily rate multiplied by the actual days of service used. 10

11 Sample CCRC Fees Type A Life Care Type B Continuing Care Type C Fee-for-service Type D Rental Entrance Fees: 90% Refundable 50% Refundable Non Refundable $750,000 $600,000 $550,000 - $500,000 $420,000 $390,000 - $350,000 $280,000 $255,000 - Monthly Fees Independent Living Assisted Living Memory Support Skilled Nursing $4,200 $4,200 $3,750 $5,350 $4,200 $5,400 $6,000 $6,000 $4,200 $6,480 $7,200 $7,200 $4,200 $9,090 $10,100 $10,100 There are almost an infinite number of ways to structure these fees. 11

12 Great Further Reading on CCRCs 12

13 How Kendal and Issuing Authorities Are Alike Kendal doesn t own or control its Affiliates Kendal is only successful if our Affiliates are well governed, perform, and do what they should We enter into a long term relationship with our Affiliates and that relationship is based on mutual trust and understanding that each will perform into the future. An Authority is entering into much the same relationship 13

14 What Does Values Mean? The Kendal system has gone to great lengths to define our values what we believe and our practices how we aspire to do things. The Kendal system has created a Values and Practices booklet. go to to read it All of the Kendal system affiliates adhere to the Values and Practices and endeavor to live those values every day. The Values and Practices is what binds our system together. 14

15 Evaluating A New Affiliation Opportunity The Kendal system gets numerous requests for affiliation throughout the year. There are only a few that we look at deeply to see if there is a potential fit. Think of the Kendal evaluation process more like a dating process than a business mergers and acquisition process. The Evaluation process is composed of 5 steps. 1. Do the values align? 2. Do the values really align? 3. Is there values alignment? 4. Are we sure the values are aligned? 5. Do the numbers work? 15

16 Summarizing the Values Fit Steps 1 through 4 are designed to evaluate whether the potential affiliate really embraced the Values and Standards. These steps may take up to a year to complete. At the end of that evaluation period, management, Board, and residents have come to know each other well. There is no faking it after that level of exhaustive interaction. 16

17 What Makes a Good Affiliate? Knowing why that organization exists. Determining that there is a long term commitment to serve (there is a not a real estate transaction disguised like a CCRC). A commitment to innovative service in the future (not to be stuck in the present) An ability to make decisions in a consensus format. There must be a values fit. Only then do we move to Step 5. 17

18 Step 5 Do the Numbers Work? Unlike how others may evaluate an affiliation opportunity this step is not the most important. The financial evaluation is to determine whether the potential affiliate has or will have the ability to survive long term financially. Not all potential affiliates have a stellar financial performance when approaching Kendal (most don t). It is important to recognize that Kendal does not buy or own its affiliates. There is no financing event when a new affiliate joins the system there is no exchange of cash or financial resources in either direction 18

19 Using Financial Ratios Kendal uses financial ratios from an industry accreditation organization (CARF/CCAC). The key ratios used are: Operating Related: Net Operating Margin Net Operating Margin, Adjusted Operating Ratio Operating Margin Ratio Total Excess Margin Capital Related: Cash to Long Term Debt Days Cash on Hand Debt Service Coverage Ratio Rev. basis and w/ Entrance Fees Average Age of Facility These are also the ratios used to measure the financial health of our existing Affiliates. 19

20 Reporting CARF/CCAC Data The key to successfully reporting the CARF/CCAC Ratios is to keep reporting as simple as possible The entire Kendal system receives a one page concise and uniform CARF/CCAC Ratios report for each Affiliate The reporting focus is on the CARF/CCAC Ratio percentile for each of the 10 ratios measured NOT on the actual calculated result This is the same methodology used for evaluating potential affiliates. 20

21 Financing Growth There is never a financing event when an affiliate joins the Kendal System There is constant growth at Kendal s affiliates. That growth is financed through a variety of vehicles that John will touch on later. 21

22 Conclusion The Values and Practices of a potential Affiliate is the key determinant of any eventual affiliation. The greater the relationship and exchange of views at all levels of decision making (Board, management, and resident) the better the eventual outcome. Saying no to a good affiliate opportunity is much better than saying yes to a bad one. Scientia potentia est Sir Francis Bacon and others 22

23 III. An Issuing Authority s Perspective

24 Tax Exempt Debt Issues What Works 1. Quality Project 2. Quality Process 3. Compliance Program 24

25 Brief History The Medical Care Commission ( MCC ) has been in existence since First issuance of tax exempt debt for a CCRC was in 1984 for Penick Village. MCC has issued $20.9 billion in debt (455 issues) and has $7.1 billion outstanding (137 issues). MCC has issued $3.3 billion in debt for CCRCs (147 issues) and has $1.1 billion outstanding (57 issues ). The MCC has no Issues in Monetary Default. 6 of the twenty six CCRCs for which MCC has outstanding debt are rated 25

26 Medical Care Commission Functions 1. Rule making 2. Issuance of tax exempt debt to finance qualifying projects 3. Compliance 26

27 History of Financing CCRCs in North Carolina Why MCC started financing CCRCs Startups Refundings Expansions and Renovations (the 20 year phenomenon) 27

28 The MCC Process The Application The Guidelines Certificate of Need, Construction, Licensure and Certification Issues Financial Viability Feasibility Study and Investment Grade Rating Corporate Structure The legal entity and the boards Backing Churches and Community Groups Community Benefits (MCC Requirements and GS105) Diversity and lack thereof (Board and Residents) The Debt Legal Structure and Covenants Types of debt structure Fixed rate, Variable rate, LOC,Bank bought deals, Investment Grade rated, non rated and denominations. NC Department of Insurance Involvement (Construction and License) Approvals MCC Preliminary and Final, Local Government Commission 28

29 Post Issuance Construction Compliance Examination The Findings for CCRCs Annual Reports to MCC Community Benefits 29

30 Compliance To Protect the integrity of the program Preservation of the integrity & reputation of the program benefits everybody who borrows through the tax exempt bond program operated under GS131A To prepare CCRCs for an IRS Audit To facilitate financial and operational integrity To preserve the tax exemption of the bonds To facilitate awareness of the other issues including SEC disclosure To address concerns of the Commission 30

31 Current Senior Living Capital Markets Environment Per the FYE 2013 audited financial statements, of the 26 CCRCs with outstanding MCC debt, the following information was reported: 6 had an operating loss 4 had a decrease in unrestricted net assets 3 had a decrease in net assets 0 had a decrease in net cash provided by operations 10 had a decrease in cash and cash equivalents 24 had long term debt coverage ratio of 1.2x or better 31

32 Topics for Issuers and CCRCs The continued rising cost of healthcare & the decreasing ability of people to pay for it Challenges to the preservation of the tax exempt status from both Federal & State governance? Question for both CCRCs and Issuers Is providing services to an aging population enough to justify the taxexempt status? 32

33 IV. Capital Markets Perspective

34 Who We Are BB&T BB&T Corporation Founded in 1872 Among 15 largest US financial services companies One of two banks that passed the stress test following financial crisis $186.8 billion in total assets (as of June 30, 2014) Largest/leading lender to non profit senior living sector $8.7 billion committed to the healthcare sector BB&T Capital Markets 26 capital markets offices across the United States 100 sales, trading and underwriting professionals on 11 sales and trading desks Over 75 years and $12 billion of collective senior living financing experience for refinancings, expansions, repositionings and start ups National senior living and healthcare practice 12 Healthcare and Senior Living Investment Bankers 5 offices across the U.S. San Francisco, CA La Jolla, CA Minneapolis, MN Milwaukee, WI Boston, MA Madison, WI Shelton, CT Hasbrouck Heights, NJ New York, NY Chicago, IL Pittsburgh, PA Red Bank, NJ Columbus, OH Philadelphia, PA Denver, CO Indianapolis, IN Columbia, MD Reston, Reston, VA VA Baltimore, MD Kansas City, MO Washington, D.C. Louisville, KY Richmond, VA - Headquarters. Winston - Norfolk, VA Knoxville, Nashville, Winston-Salem, TN NC Winston Nashville, TN Raleigh, NC Memphis, TN Knoxville, TN Charlotte, NC Greenville, SC Edmond, OK Birmingham, Norcross, AL GA Charleston, SC Dallas, TX Birmingham, AL Atlanta, GA Mobile, AL Jacksonville, FL Houston, TX Orlando, FL Tampa, FL Boca Raton, FL Naples, FL Ft. Lauderdale, FL 34

35 V. NFP Senior Living Industry Trends

36 Today s Retirement Options # of Communities # of Units % NFP CCRCs 1, ,000 81% IL 1, ,000 2% AL 22, ,000 22% MC 1,060 51,000 21% Nursing Homes 15,700 1,669,100 31% 36

37 CCRC National Listing 1,926 CCRCs nationally Size More than 50% have < 250 units Average number of units is 280 Geography Top 10 States: PA, OH, CA, IL, FL, TX, KS, IN, IA, and NC Most CCRCs are located in Metropolitan areas Average age of resident = 78 years 61% of CCRCs are part of systems 39% are single sites 51% are faith based 19% have a debt rating 37

38 Capital Markets Municipal Volume $400 Billion Total Muni Issuance (Mostly Highly Rated) $25 Billion Healthcare (Mostly Rated) $2.5 Billion NFP Sr. Living (Mostly Non Rated) *Statistics are indicative, not precise 38

39 VI. Financing Trends

40 $ Volume of Senior Living Financings $8,000 $7,000 $6,000 Volume ($Millions) $5,000 $4,000 $3,000 $2,000 $1,000 $0 New Money Refunding 40

41 Purchasers of Fixed Rate Bonds Retail Investors (Individuals) Shorter Maturities (Serial and Intermediate Term Bonds) Prefer NR bonds for extra yield $5K denominations Will accept 5 year call feature Capacity to purchase is limited Institutional Investors (Mostly Mutual Funds) Buy short and long, but preference for longer term maturities Buyers change depending on credit quality $5K $100K denominations Typically buy in multi million dollar blocks Prefer 10 year call feature Purchasing is supply/demand driven In current market, 93% of a typical deal is sold to institutional investors 41

42 Basic Tax Exempt Debt Structures Two Primary Tax exempt Financing Structures 1. Publicly sold, Fixed Rate Bonds Sold to investors Interest Rates are locked in at issuance for the life of the securities (up to 30 or 35 years) Terms (rates, covenants, etc.) are structured by an underwriter and sold to the public Construction Escrow funded fully at closing (negative arbitrage) Non rated rates are at 5.00% 5.50% 2. Privately placed, Bank Bonds This structure is a securities offering sold directly to a commercial bank Interest rates can be variable or fixed; current rates are 2.5% 3.5% for fixed, and even lower for variable Typically 25 year amortization with 7 15 year renewal Particularly attractive for construction projects Draw down feature reduces negative arbitrage 42

43 Direct Bank Placements Replacing VRDBs $3,000 $2,500 $2,000 Volume ($Millions) $1,500 $1,000 $500 $0 LOC Backed Direct Tax Exempt Placements 43

44 For More Information on Direct Bank Placements Go to In the top left, under Industry Expertise, click Healthcare Scroll toward the bottom You will find a 3 part video series explaining the mechanics of tax exempt direct bank placements 44

45 Financial Challenges from Financial Crisis The financial crisis left a lasting impact 4% default rate prior to 2008 (as a % of par issued) 6% default rate post crisis The majority of defaults were Developer Driven financings 45

46 Financing Access and Cost Credit Profile is Key Financial Ratios Rating Snapshot Fitch A Medians Fitch BBB Medians Minimum NR Thresholds DSCR 3.7x 2.0x > 1.40x DCOH 692 days 408 days > 150 days Cash/Debt 127.2% 60.2% >. 25% Debt/Adj. Cap 46% 59% < 65% *Source:2014 Median Ratios for Nonprofit Continuing Care Retirement Communities (Sep. 25, 2014) 46

47 Fixed Tax Exempt Interest Rates Historical 30 year "AAA" MMD 7.00% 6.50% 6.00% 5.50% 5.00% 4.50% 4.00% 3.50% Financial Crisis Fed announces tapering Of Treasury Purchasing Program 3.00% 2.50% Meredith Whitney Report Published 2.00% Fixed Rates are near all time lows 30Y MMD 1 Yr Average 5 Yr Average 20 Yr Average Credit Spreads on lower rated Bond deals are at all time lows 47

48 NFP Growth Falling Behind 16,000 14,000 12,000 Units Under Construction 10,000 8,000 6,000 4,000 2, NFP For Profit 48

49 Current Senior Living Capital Markets Environment Low Fixed Interest Rates Low Credit Spreads Significant appetite from commercial lenders (Banks) NFP organizations have dated product Increase in Financing Needs 49

50 VII. Closing Thoughts