LeadingAge Missouri Annual Conference
Update on FHA LEAN – HUD Financing for Senior Living Providers
September 19, 2013
Offering Financial Advice and Solutions to Health Care, Senior Living, and Housing Providers.
Financing Progress
Agenda State of the Capital Markets
FHA/HUD Financing Update
Financing Option Comparison
Case Studies
2
Financing Progress
State of the Capital Markets – 2008 - 2012
• Short-term rates spiked during the financial crisis
• Credit spreads widened on municipal default predictions and
fund outflows
• Letter or Credit providing banks were downgraded. Many have
not returned to sufficient strength
• The risks of some traditional debt structures were illuminated
(specifically letter of credit backed bonds)
2008 – 2012 were challenging times….
3
Financing Progress
Source: Bloomberg
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
SIFMA Libor1M
Short Term Tax-Exempt and Taxable Rates
4
Financing Progress
Health Care Credit Spreads Have Tightened
Source: Bloomberg
%
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
BBR A3 20 Yr HC BBB1 20 Yr HC
5
Financing Progress
10‐Year Treasury Yield – Near Historic Lows
6
High = 15.68%9/25/81
Low = 1.45%6/1/2012
9/6/2013, 2.93%
Average since 1962, 6.57%
Average since 1984, 5.95%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Jan-
62
Jan-
64
Dec
-65
Dec
-67
Dec
-69
Dec
-71
Dec
-73
Dec
-75
Nov
-77
Nov
-79
Nov
-81
Nov
-83
Nov
-85
Nov
-87
Nov
-89
Oct
-91
Oct
-93
Oct
-95
Oct
-97
Oct
-99
Oct
-01
Oct
-03
Sep-
05
Sep-
07
Sep-
09
Sep-
11
Sep-
13
Wee
kly
Dat
a
Source: Bloomberg
Financing Progress
State of the Capital Markets – Today
• Historic action by the Fed continues to support historically low short
and long-term rates (although we are beginning to see rates increase)
• Credit spreads have narrowed
• Alternative bank options have emerged (direct purchases)
• Agency mortgage programs has become very attractive as investors
seek high-quality debt offerings (FHA, USDA, FNMA) and borrowers
look to eliminate some of the risks of traditional structures
Fast Forward, Mid 2011-2013. The situation has improved…
7
Financing Progress
Unemployment Rate Forecast
8
7.00%
6.00%
5.10%
7.50%
6.90%
6.40%
7.70% 7.70%
7.30%
5%
6%
7%
8%
9%
10%
11%
2013 2014 2015
12-M
onth
Ave
rage
Source: Bloomberg Survey, September 2013
Financing Progress
Fed Funds Forecast
9
0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%
1.00%
1.50%
0.0%
0.5%
1.0%
1.5%
2.0%
Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15
Fore
cast
s as
of M
onth
End
Source: Bloomberg Survey, September 12, 2013
Financing Progress
10-Year Treasury Yield Forecast
10
2.30%2.10% 2.20% 2.30%
2.65% 2.71% 2.67%2.75% 2.85%3.00% 3.10% 3.20%
3.36% 3.46%3.24%
3.76%3.93%
4.21%4.36%
4.52%4.29%
0%
1%
2%
3%
4%
5%
6%
Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15
Fore
cast
s as
of M
onth
End
Source: Bloomberg Survey, September 12, 2013
Financing Progress
Accessing Capital – The Goals, Needs, or Opportunities
Disadvantageous existing debt structure Expiring letter of credit or bank downgrade
Onerous financial or operating covenants
Savings or permanency Economic refinance (interest savings)
Lock into fixed rates while at historic lows or provide predictable debt service and avoid refinance risk (permanency)
Campus or organizational expansion A new memory care or Medicare rehab wing
Replace an aging facility
An entirely new campus in a ripe market to expand the mission
11
Financing Progress
Traditional & Alternative Options
Decision to Borrow
AlternativeTraditional
Banks Tax-Exempt Fixed Rate
• Private Placement or Loan
• LOC Enhancement
• Public bond sale on the organization’s credit
FHA /HUD Mortgages
USDA & FNMA Loan
Programs
• Private mortgage loans insured by FHA/HUD
• Loans made directly or a portion guaranteed
12
Financing Progress
• HUD/FHA 232 Program • New Construction or Sub Rehab
of licensed SNFs & ALFs
• HUD/FHA 232/241 Program• 2nd Mortgage Program for
expansion of existing HUD-insured Facilities
• HUD implemented LEAN program in 2008, to reduce processing time and improve predictability
• LEAN moved the 232 program to the Office of Healthcare Programs in DC
• HUD provides mortgage insurance through the 232 program (not direct loans from government) – HUD insures loans made by private LEAN-approved lenders
Construction / Sub Rehab Refinance / Acquisition • HUD/FHA 232/223f Program
• Refinance or Acquisition of licensed SNFs & ALFs
• HUD/FHA 232/223a7 Program• Refinance of existing HUD-
insured mortgage
HUD 232 LEAN – Overview
13
Financing Progress
• Long Term Fixed Rate• Up to 35 year (40 year for
construction) matching term/amortization
• Eliminates refinance/renewal risk
• Government Guarantee• Eliminates both health care sector
and credit pricing spreads• “AAA” like debt
• Fixed Guarantee Fee• Unlike banks, does not consider
risk-based pricing• 0.65% refinance / 0.77%
construction / 0.72% for 241
• No Financial Covenants• No on-going Debt Service
Coverage, Days Cash on Hand or other financial ratio covenants
• Non-Recourse• Keep “Dry Powder” and silo
risk
• Loan is Assumable• Transfer of Physical Asset
(“TPA”) through HUD
• Low, long-term fixed interest rates
HUD 232 Program– Basic Terms
14
Financing Progress
HUD 232 LEAN Program
• The LEAN program – HUD is no longer the “lender of last resort”
• Demand and lack of staff from 2009-2011 resulted in long “queue”• Increased staffing and hired independent contractor (Summit
Consulting)
• Efforts to eliminate the “queue” have been successful
• Current deal timeframe, rates
• Max LTV 80% (programmatic = 85%)
• Third party reports and application process
15
Financing Progress
HUD 232 LEAN – Other Considerations
• Permanency of financing (intended time horizon, prepayment flexibility)
• Senior lien on assets and land
• Replacement reserves
• Master lease
• DACA/DAISA
• AR financing
16
Financing Progress
HUD 232 LEAN – Other Considerations
• Recent Changes:• Swaps – permitted to refinance swap termination liabilities up to 10%
of the new mortgage amount • Quarterly operator-certified financials, applies to existing HUD facilities• Non-profit regulatory agreement update
• Distribution considerations• Debt service reserve fund
• Expanding view on CCRC’s• Traditionally capped unlicensed IL units at 25% of total units in a
section 232 loan• Cap has been removed
• Must be rental (non-entry fee)• Must provide services to “frail elderly”
17
Financing Progress
HUD 232 LEAN – Construction Options
• 232 new construction/sub rehab:• More equity, proven owner/operators, exceptionally strong market studies• 25-35% “equity” required• HUD prefers SNFs (ideally replacement) and ALZs over ALFs – HUD is
sensitive to new AL construction in states with high single family mortgage default rates
• Davis-Bacon prevailing wage requirement
• Repairs and renovations as part of a refinancing:• Up to 15% of appraised value• Double square footage rule
• 241 Supplemental Loan update:• Supplemental loan program used for substantial renovations/expansions• 90% LTC• No prevailing wage requirement if not used during original construction
18
Financing Progress
Traditional Structure Comparison – Tax-Exempt Unenhanced
• Tax-Exempt bonds issued to the market on provider’s own credit strength
• Rated or Non-rated• Term: 25-35 years• Rates: Credit and market driven
• 2010 – 2012 were challenging times for the Muni Markets• Mid 2011 – Today, the market has materially improved
• Other considerations• Timing (3 – 4 months)• Financial Covenants
19
Financing Progress
Traditional Structure Comparison – Bank Private Placements
• Tax-Exempt bonds structured and privately placed (sold) to a bank or banks
• Term: Market and credit driven, typical 3-10 years • Amortization: 20-30 years • Rates: Fixed or variable, and deal specific • Other Considerations:
• Timing (2 – 3 months)• Financial Covenants• Ancillary Business
20
Financing Progress
Alternative Structure Comparison – USDA Loan Programs
• USDA Community Facilities (“CF”) Program• For the long-term takeout of construction projects (outside construction
financing required)• Direct Loans – 4.625% for 40 years (as of 10/1/2013)• Guaranteed Loans – up to 90% guarantee on a bank loan• Populations of 20,000 or less• At most 50% refinance
• USDA Business & Industry (“B&I”) Program• Like CF, permanent funding• Guaranteed Loans – 80% from $1-5MM, 70% from $5-10MM, 60% greater
than $10MM• Populations of 50,000 or less with preference given to < 25,000 • Can do 100% refinance
21
Financing Progress
Alternative Structure Comparison – FNMA Loans
• A mortgage loan made by a private sector mortgage lender, guaranteed by FNMA• Refinance or acquisition with only minor construction funded• Seniors and affordable housing assets (max. 25% skilled nursing units)• Max. 75% LTV
• Term: Up to 12 years • Amortization: Up to 30 years• Other Considerations
• Fast (closing in 30-60 days)• No financial covenants• Non-recourse to a parent organization or foundation
22
Financing Progress
Case Study – HUD 232 Refinance of LOC Enhanced Tax-Exempt Bonds
• Single-site CCRC • Existing Structure = $9MM in LOC enhanced variable rate bonds fixed with
and interest rate swap• Enhancing bank recently downgraded, causing need to restructure• Also desired to fund a major renovation and therapy expansion
• The FHA program provided permanent financing at historically low fixed rates (<3.00%)
• Allowed the renovation to be funded through the refinance program• Funded the unwind liability associated with the existing interest rate swaps.• FHA mortgage was concentrated on the higher acuity (SNF/ALF) leaving the
IL villas unencumbered from any debt.
23
Financing Progress
Case Study – Bank Placement: Construction –> FHA Refinance
• 105 Unit Stand-Alone ALF • Aging 49 Bed SNF • Short Term Goal:
• New 20 Unit AL Memory Care• Replacement SNF
• Tax-Exempt Bonds sold directly to regional bank after competitive bidding process• Funded construction of replacement SNF (all private units) and AL
Memory Care Wing• 5-Year Term / 27-Year Amortization
• Long-Term Goal: • Refinance the debt into a long-term fixed rate debt through FHA
232/223(f) program 3 years after receipt of certificate of occupancy
24
Financing Progress
Case Study - FHA for Renovation of Existing Physical Plant• Existing 153 Bed SNF• Plan:
• Reduce Facility to 133 Beds• Substantial Renovation of Four Wings
• Private Rooms• Expanded Therapy Space and Administrative Space• Exterior Remodeling
• FHA Section 232 Substantial Rehabilitation • Funded rehabilitation projects• Refunded existing LOC-backed variable rate bonds• 27.75 Year Term and Amortization• Low long-term fixed rate
• Result: Achieved organizational goal of 75:25 ratio of fixed-variable rate debt
25
Financing Progress
Summary
• The HUD LEAN programs continue to provide efficient access to capital to senior living providers across the credit spectrum with several benefits:• Low, fixed rates• Extended term and amortization• Non-recourse• No financial covenants• Flat guarantee fee (not risk based pricing)
• Allows borrowers to eliminate some of the risks of traditional structures• Change to LEAN processing has improved the consistency and predictability
of the program • Organizations should explore both traditional and alternative structures in
tandem, arriving at the structure best suited for their organization
26
www.lancasterpollard.com
Mike AshleyVice President – Missouri / Arkansas Market HeadLancaster Pollard & Co. and Lancaster Pollard Mortgage Company1201 Wakarusa Drive, Suite A-4Lawrence, KS 66049Phone (785) [email protected]
27