Office Of Residential Care Facilities Section 232: Lean Program Updates Midwest Lenders Conference September 28, 2017 Rita Dockery Loan Management Branch Chief Asset Management & Lender Relations

Section 232 Overview $26.1 billion in mortgage insurance Approximately 3,350 projects Breakdown of project types: Skilled Nursing Facilities: 68% Assisted Living Facilities: 29% Other: 3%

Section 232 Overview (continued)

Section 232 Overview (continued)

Recent Changes in ORCF Volume Applications received in the “Other” category As the chart shows, there has been a small drop in New Construction applications and a small increase in 241a applications over fiscal year 2016

241a Recent Trends Typically in high occupancy markets Adding greater care types to avoid moving residents Facilities are shifting away from semi-private units to more private units A small number are for refurbishment A couple are for energy improvement projects

What ORCF Looks for in 241a Submissions We look for existing operations that cover the total debt at more than 1.0 DSCR Strong ability and experience in the market Ability to minimize construction/lease-up risk by being able to support the project with ongoing cash flow

Highlights on the New 232 Docs Status on the PRA process: First round of public comments closed July 18, 2017, and are now being reviewed. Next steps in the renewal: Revised versions will be announced in the Federal Register for a second round of comments. Final versions will then go to OMB for approval before final publication.

Key Doc Changes from HUD Lender Narratives Underwriting docs Consolidated Certifications Asset Management Supplemental Loans (241a)

Highlights from the June 232 Lender Dialogue Sessions in Seattle Waivers Communication between UWs, C-UWs, Closers, and Lenders during reviews Corporate Credit Reviews APPS submissions

Breaking News… Training conducted week of September 18th for all Asset Management staff on use of recently developed standard work documents ORCF will send an Email Blast in the next few days regarding generators at facilities located in Florida—required by the Governor after the recent hurricanes. We’ll be following up individually with Lenders on this issue.

Questions?

Star Ratings (handout available) 2017 Industry Updates Star Ratings (handout available) Why its important now and going forward? Primary objective of helping consumers choose and compare nursing homes Based on 3 categories – state health inspections, staffing ratios and quality measures. State health inspections are weighted the highest out of the three categories. Based on a distribution of 20% 1-star, 70% 2, 3 and 4 star and only 10% 5-star. Staffing ratio is based on self-reporting nursing hours. One industry argument is that this does not promote technologies and other innovations from reducing staffing, specifically nursing hours. Quality category is also self-reported based on 11 measures. There has been lots of talks about tying reimbursement to the star rating or portions of the star rating. The industry is opposed to this since there are continual changes to the system, portions of the system are based on self-reporting data and state surveys are not all the same. Valuation and Information Group | September 28, 2017

2017 Industry Updates - Reimbursements UPL/IGT Bundled Payments and ACOs Managed Care VBP RCS-1 Approved in 2009 Indiana IGT - as of 2016 there were 469 NH in the program which represents 95% of the Medicaid facilities Historically, the agreement for the increased matching funds, the SNF would get 50% for participating with the hospital. More recently operators have renegotiated to splits close to 65%. Additionally, facilities that are not part of the program are likely to get 65% or higher. General rule for valuation is 20 to 30% cap rate. Managed care – increased significantly – Its about a $100 less a day compared to Medicare fee for service rate and the length of stay is about half. There has been studies done that indicate there is not a strong correlation between length of stay and outcome. Valuation and Information Group | September 28, 2017

Value Based Purchasing Program (VBP) Purpose – to reduce readmissions to hospitals Payment starts October 1, 2018 and will reward providers with financial incentives for low readmissions rates to hospitals Data collection started October 1, 2016 The program will be funded by a 2% reduction in the Medicare rate (60% to the program/40% to the fund) Posted on NH Compare October 2017 Valuation and Information Group | September 28, 2017

Resident Classification System, Version 1 (RCS-1) Budget neutral Based patient characteristics; not driven by therapy minutes Payment is the sum of four case mix adjusted components and one non case mix component Removes the 128% adjustment for HIV/AIDs; a 19% increase in the nursing component only This is not the Unified Post-Acute Payment System Valuation and Information Group | September 28, 2017

Industry Trends and Challenges Larger national owners/operators have been divesting to smaller regional operators Shorter ALOS Changes to reimbursement environment Narrowing networks Demographics - The oldest baby boomer is 71 this year Staffing: shortage as well as minimum wage pressure Technology Higher acuity Increased competition Valuation and Information Group | September 28, 2017

2017 Industry Updates – SNF Prices Per Bed The average price has almost doubled since 2011 and has tripled since 2003. Facility cash flow has been driving the higher prices. In 2016, there were 21 SNFs that sold for over $150,000 per bed and another 69 facilities that sold for over $125,000. The upper quartile was $143,300 which means 25% of the sales were above $143,300. The lower quartile was $63,150. The highest price in 2016 was $227,200 A number of new construction facilities that resemble rehab facilities with no Medicaid certification Valuation and Information Group | September 28, 2017

2017 Industry Updates – SNF Cap Rates Source: Senior Care Acquisition Report 2017, 22nd Edition Valuation and Information Group | September 28, 2017

2017 Industry Updates – AL/IL Prices Per Bed 2016 51 properties sold over $250,000 per unit and of these 26 sold for over $300 per unit 9 were over $500,000 per unit. AL/MC alone average price was $196,600, a 2.4% increase from 2015; 23 AL/MC communities sold over $300,000 unit with several over $500,000. However the median decreased to $156,250 due to several lower priced deals. Class A properties - $265,700 vs Class B $94,200 A – 8% and B – 9% Valuation and Information Group | September 28, 2017