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

2. 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%

3. Section 232 Overview (continued)

4. Section 232 Overview (continued)

5. 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

6. 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

7. 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

8. 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.

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

10. 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

11. 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 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.

12. Questions?

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 2017 Industry Updates – SNF Cap Rates
Source: Senior Care Acquisition Report 2017, 22nd Edition
Valuation and Information Group | September 28, 2017

20. 2017 Industry Updates – AL/IL Prices Per Bed
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