1. SENIORS HOUSING PANEL

2. Overview of Presentation  Industry overview and trends  Types of Senior Facilities  Valuation issues  Industry overview and trends  Types of Senior Facilities  Valuation issues

3. Overview of Senior Facilities  Understanding of market and social objectives - costs vs services  Understanding the interconnection of residential real estate, hospitality and health care industries  Legislative issues - depending on type of facility  How does demographics play a role  Economic factors impacting seniors  Understanding of market and social objectives - costs vs services  Understanding the interconnection of residential real estate, hospitality and health care industries  Legislative issues - depending on type of facility  How does demographics play a role  Economic factors impacting seniors

4. Demand Factors

5. How to Estimate Demand? Population Over 75750,000 Estimated population requiring services 60,000 Population receiving services 35,000 Estimated need for senior housing 25,000 % of 75+ population3.3%

6. Supply Factors  Barriers to Entry  Cost of Capital  location and diversifying risk  operational synergies that comes from management expertise  Barriers to Entry  Cost of Capital  location and diversifying risk  operational synergies that comes from management expertise

7. How to Estimate Supply?  Competitive Analysis  Existing ownership and locations  Demographics and geographic targets  number, type, mix and size of units  rental rates and occupancy rates, waiting lists and turnover, resident profiles  Government subsidies  Competitive Analysis  Existing ownership and locations  Demographics and geographic targets  number, type, mix and size of units  rental rates and occupancy rates, waiting lists and turnover, resident profiles  Government subsidies

8. Continuum of Care Independent Living Assisted Living Care Facility

9. How does Aging in Place Affect Senior Housing?  Design of buildings  Appraisers will need to keep this concept in mind when appraising older facilities and assess their functionality  Services offered  Could impact demand and vacancy  Design of buildings  Appraisers will need to keep this concept in mind when appraising older facilities and assess their functionality  Services offered  Could impact demand and vacancy

10. Types of Facilities Two Categories:  Independent Living  Facility Care Two Categories:  Independent Living  Facility Care

11. Example of “Independent Living” facility

12. Example of “Independent and Facility Care” facility

13. Example of a small scale “Facility Care” facility

14. Example of large scale “Facility Care” facility

15. Valuation Issues  Premise of Value  Example of a Going Concern Definition:  “The value created by a proven property operation; considered as a separate entity to be valued with a specific business establishment”.  The Dictionary of Real Estate Appraisal. Third Edition.  Premise of Value  Example of a Going Concern Definition:  “The value created by a proven property operation; considered as a separate entity to be valued with a specific business establishment”.  The Dictionary of Real Estate Appraisal. Third Edition.

16. Valuation Issues Continued  Extraordinary assumptions:  Licensing is in place to operate # of beds  Management of the operation is reasonable and competent  Comments on the FF&E  Extraordinary assumptions:  Licensing is in place to operate # of beds  Management of the operation is reasonable and competent  Comments on the FF&E

17. Valuation Approaches  Cost Approach  Direct Comparison Approach  Income Approach  Cost Approach  Direct Comparison Approach  Income Approach

18. Cost Approach  Can provide a supportive role  Investors do not place much weight on this approach unless new construction  May have validity among lenders, insurers, and assessors  More relevant for new facilities  Can provide a supportive role  Investors do not place much weight on this approach unless new construction  May have validity among lenders, insurers, and assessors  More relevant for new facilities

19. Cost Approach Advantages  Provides value estimates in the absence of other market evidence  Good tool to test financial feasibility on proposed projects  Good tool to test the economic benefits of a major upgrade/renovation  Provides value estimates in the absence of other market evidence  Good tool to test financial feasibility on proposed projects  Good tool to test the economic benefits of a major upgrade/renovation

20. Cost Approach Weaknesses  Depreciation estimating  No recognition of business value  Reflection of full fee simple ownership when property may be leased  May not account for absorption on new construction  Depreciation estimating  No recognition of business value  Reflection of full fee simple ownership when property may be leased  May not account for absorption on new construction

21. Direct Comparison Approach  Usually used to support income approach  Values are based on a per unit or per bed comparison  PCH may be based on per square foot  Comparisons should reflect whether the property is licensed or not  Properties vary significantly due to small number of transactions, and dissimilar properties  Usually used to support income approach  Values are based on a per unit or per bed comparison  PCH may be based on per square foot  Comparisons should reflect whether the property is licensed or not  Properties vary significantly due to small number of transactions, and dissimilar properties

22. Other issues with DCA  Varying components to these facilities - land, building, FF&E, business interests  Motivations of large players - value of individual property plus accretive value to overall portfolio  Variation in age, design, types of services, licensing, funding, staffing, location, size and suite mix.  Limited access to market information and the lack of an efficient market.  Varying components to these facilities - land, building, FF&E, business interests  Motivations of large players - value of individual property plus accretive value to overall portfolio  Variation in age, design, types of services, licensing, funding, staffing, location, size and suite mix.  Limited access to market information and the lack of an efficient market.

23. Income Approach  Direct Capitalization  Discounted Cash Flow - more appropriate where an appraiser anticipates income fluctuations due to leasing or financing and/or where facility has not achieved full occupancy.  Direct Capitalization  Discounted Cash Flow - more appropriate where an appraiser anticipates income fluctuations due to leasing or financing and/or where facility has not achieved full occupancy.

24. Income  Examine market rates and existing rent schedule  Suite mix/size/design of unit  Licensed (care level)  Operating beds  Examine on a rate per bed, per square foot, per room or per month rate.  Examine government funded beds (if combo facility)  Examine market rates and existing rent schedule  Suite mix/size/design of unit  Licensed (care level)  Operating beds  Examine on a rate per bed, per square foot, per room or per month rate.  Examine government funded beds (if combo facility)

25. Vacancy and Collection Loss Factors  Average age and care level of clients  Management  Proportion of funded beds vs private pay beds  Rental rates  Facility age, design, efficiency, and staffing attitudes/training  Food service  Social and activity programs  Average age and care level of clients  Management  Proportion of funded beds vs private pay beds  Rental rates  Facility age, design, efficiency, and staffing attitudes/training  Food service  Social and activity programs

26. Expenses Typical Expense Ratios: DescriptionIndependent Living Facility Care Overall Range45-65%70-90% Management2-5%3-7% Wages & Ben.25-35%50-65% Food5-10% Utilities3-7% TaxesVary R&M2-4%2-3% Other Exp.5-10%

27. Management  Three alternatives:  Direct management  Contract management  Partnership with service, care or amenity provider  Three alternatives:  Direct management  Contract management  Partnership with service, care or amenity provider

28. Wages and Benefits  Larges expense  Can be up to 75%  Non-union vs union facilities  Can include management  Larges expense  Can be up to 75%  Non-union vs union facilities  Can include management

29. Food and Medical  Include an allowance for dining room linen replacement and cleaning and tablecloth service  Calculate the # of meals and consider if single or double occupant  May also include an allowance for FF&E  Medical Costs  Include an allowance for dining room linen replacement and cleaning and tablecloth service  Calculate the # of meals and consider if single or double occupant  May also include an allowance for FF&E  Medical Costs

30. Other Expenses  Pay attention if there has been a tax grant or exemption - may have to adjust sales when developing an OCR.  Bank charges - exclude mortgage interest; include operation charges  Do not include capital expenditures as part of R&M  Reserve Replacements  Other expenses - billed to client or the care facility?  Pay attention if there has been a tax grant or exemption - may have to adjust sales when developing an OCR.  Bank charges - exclude mortgage interest; include operation charges  Do not include capital expenditures as part of R&M  Reserve Replacements  Other expenses - billed to client or the care facility?

31. Capitalization Rates  Higher than multi-family or commercial properties  REITS and a more competitive market have drawn down cap rates more recently  One REIT makes acquisitions at 9% to 10%  Independent facilities range between 7.5% and 10%  Larger Facility Care facilities range between 8.5% and 11%  Some PCH in the Saskatoon region can range between 12-15%  Higher than multi-family or commercial properties  REITS and a more competitive market have drawn down cap rates more recently  One REIT makes acquisitions at 9% to 10%  Independent facilities range between 7.5% and 10%  Larger Facility Care facilities range between 8.5% and 11%  Some PCH in the Saskatoon region can range between 12-15%

32. Risk Factors for OCR’s  Competitiveness  Demographic trends  Recession stability  Growth strategies of large players striving for market share  Government funding  Depth of market for non-funded units  Competent management and operational competency  Health care regulations  Competitiveness  Demographic trends  Recession stability  Growth strategies of large players striving for market share  Government funding  Depth of market for non-funded units  Competent management and operational competency  Health care regulations

33. CMHC Factors  CMHC may use a different cap rate than market derived cap rates  Usually higher (11% to 12%)  Due to their fiduciary responsibility to avoid mortgage loan default and foreclosure  CMHC may use a different cap rate than market derived cap rates  Usually higher (11% to 12%)  Due to their fiduciary responsibility to avoid mortgage loan default and foreclosure