1. 1 Asset Management Eastern Lenders Conference Philadelphia, PA March 13 & 14, 2013

2. 2 Tim Gruenes Tim Coon Regina Casabal John Hartung Eastern Lenders Conference Philadelphia, PA March 13 & 14, 2013

3. 3 Lean Implementation in Asset Management Piloted in 2012 Established Time Grid for standard processing Developing SOPs Monitoring and Measuring Production Identifying Bottlenecks in the Process P ROJECT A CTIONS R ECEIVED IN FY2013

4. 4 Servicers will have more responsibility for Risk Monitoring Lender Analysis of Operator Financial Statements (similar to FNMA system), and Pursuit of Plan of Correction Strengthened Regulatory Agreements Address Problems with REAC Enhanced Relationship with DEC and CMS How We All Can Do Better: Future of 232 Asset Management

5. 5 ORCF – RISK MITIGATION

6. 6 Continually Reducing Claims Risk Mitigation Branch (aka Turnaround Team) Led By Tim Coon Very successful at workouts-always looking for innovative ways to solve problems.

7. 7 Production Levels

8. 8 Default Loan Modification A default loan modification is sometimes a tool that can be used in the event of a default that will lead to a claim. The caveat here is that the default cannot be contrived so as just to break a lock which ORCF and GNMA monitor very closely. The default loan modification offers some flexibility in terms for the Borrowers to further assist in the long term success of the property. HUD will follow all GNMA Guidelines in addition they are working on the development of handbook guidance on the process that will be forthcoming in the near future.

9. 9 Issue: Facility’s Loss of Competitiveness (Obsolescence or Emergence of Newer Product) Possible Response: Recapitalize/Refinance Possible Response: Adjust market niche Issue: State Policy Shifts (Sometimes Implicit) Possible Response: Minimize loss via sale/conversion Issue: Inadequate Market Possible Response: PPC Causes of Defaults/Responses to those Causes

10. 10 Issue: Provider Payment Delays Possible Response: A/R Financing Issue: Provider Payment Reductions Possible Responses: Change patient mix? PPC? Issue: New Deal-Projections Missed Possible Responses: New investment? PPC? Definite Response: Learn for other deals Causes of Defaults/Responses to those Causes

11. 11 Mortgagee Letter 2011-15 along with the PPC Final Rule published in 2012 PPC on Section 232 may be concurrent with change of owner or operator New owner may get larger share of surplus cash than a continuing owner would Close examination of State regulatory/funding matters Census, revenue and expense projections Payables and Receivables PPC as a Response: Some Key Points

12. 12 State Survey Inspection Reports State Survey Inspection Reports Available and FREE to Lenders for current HUD portfolio Available as a Risk Mitigation Tool Training Provided Every Month Report Provides:  Survey Performance history  County and State Ranking  Current and Historical Risk Score  Life Safety, Quality of Care, Survey Types

13. 13 Lender’s Corner New Tool for Lender located on HUD.gov  Tool for lenders to use for the latest training opportunities  Tool for portal access offered by the ORCF for current HUD insured properties http://portal.hud.gov/hudportal/HUD?src=/federal_housing_admin istration/healthcare_facilities/section_232/lean_processing_page/Le nder_Corner

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16. 16 Organization Chart - ORCF 16

17. 17 Organization Chart – ORCF (Production) 17

18. 18 Organization Chart – ORCF (Asset Management) 18

19. 19 Facility Account Executive Assignments 19

20. 20 WHAT’S NEW?

21. 21 NON-PROFIT PROJECTS AND REG. AGREEMENTS

22. 22 Summary of Addressing: 223a7:  If existing Reg. Agreement is for profit, we’ll continue to regulate as for profit.  If existing Reg. Agreement is non-profit, we’ll continue to regulate as for non-profit. All others:  If underwritten at higher than the benchmark LTV for for-profits, we’ll regulate fully as a non-profit (residual receipts)  If underwritten at or below the benchmark LTV for for-profits, we’ll allow surplus cash provided certain provisions are met (see following slide)

23. 23 Language in Reg. Agreement….. Residual Receipts account has 6 months of debt service (with MIP) Positive surplus cash calculation Good standing with licensing agency No unresolved audit findings In compliance with the terms of Reg. Agreements Current on payments, no default under loan docs, no notice of noncompliance or violation from HUD

24. 24 Benchmarks for Maximum LTV’s For-Profits 223f = 80% LTV New construction, Sub. Rehab, 241a, and Blended Rate:  Primarily SNF: 80%  Primarily ALF: 75%

25. 25 NON-PROFITS AND REGULATORY AGREEMENT - LOGISTICS

26. 26 For Firms issued on or after 4/9/13: There is no longer a separate Non-Profit Regulatory Agreement. The Regulatory Agreement (Borrower) has the following language on Page 1: Borrower: Profit-Motivated ___ Non-Profit ___ Is Non-Profit Borrower permitted to take Distributions? Yes___ No___

27. 27 For Firms issued on or after 4/9/13 – 223a7’s: If will be regulated as Non-Profit: Borrower: Profit-Motivated ___ Non-Profit _X__ Is Non-Profit Borrower permitted to take Distributions? Yes___ No_X_ If will be regulated as For-Profit: Borrower: Profit-Motivated _X_ Non-Profit ___ Is Non-Profit Borrower permitted to take Distributions? Yes___ No__

28. 28 For Firms issued on or after 4/9/13 – Non- 223a7’s: If underwritten using for-profit benchmarks: Borrower: Profit-Motivated ___ Non-Profit _X__ Is Non-Profit Borrower permitted to take Distributions? Yes_X__ No__ If underwritten using non-profit benchmarks: Borrower: Profit-Motivated __ Non-Profit _X__ Is Non-Profit Borrower permitted to take Distributions? Yes__ No_X_

29. 29 SUMMARY OF NEW SECTION 232 REGULATIONS (ACCOUNTABILITY RULE)

30. 30 Requirement of Quarterly Financials Applies to all FHA Insured (even existing) We are working on a system/contract  Beta testing manually (without system)  Volunteers? Once we develop process, we’ll post in Federal Register. Will be required for fiscal years commencing on or after 60 days after posting to Federal Register At Operator option, Operator Certified Training will be provided for operators and lenders.

31. 31 Prompt Notification Rule Change, effective 10/9/12, calls for prompt notification of circumstances placing the value of the security at risk. HUD will be establishing a process to deal with this issue, in the meantime…

32. 32 Prompt Notification, Continued 3 reasons to communicate survey results:  Has a tag that is higher than a G, or  Has a G tag that is unresolved from two most recent consecutive prior surveys, or  Has a G tag that is a repeat violation having the same citation number Form of communication:  Operator emails lender describing the conduct cited, the scope and duration of remedies proposed and timelines for corrective actions.  Do not send survey itself, unless requested

33. 33 Apply Only to Projects with Firm Commitment Issued On/After 4/9/13: Operator Working Capital Requirement:  Operator may only take distributions if most recent operator financial statement shows positive working capital.  Working Capital is defined per GAAP as may be further clarified in Program Obligations. Single Asset Mortgagor/Operator Entity Relaxing of Owner Surplus Cash Regulation

34. 34 Apply Only to Projects with Firm Commitment Issued On/After 4/9/13: Long Term Debt Service Reserve (mortgagable):  Different than a mortgagor funded debt service escrow that does not stay for the entire life of the mortgage.  HUD will not apply across the board  Further direction forthcoming – initial intent to use for rare situations as a risk mitigant Change to Election and Assignment Process (covered by Tim Coon)

35. 35 REAC INSPECTIONS AND 232

36. 36 REAC Inspections on Section 232’s Continue except for facilities categorized in system as Skilled Nursing Facilities or Intermediate Care Facilities, however,  SNF/ICF’s where most recent score was below 60 still get inspected; will continue until score 60+  HUD can order inspections on SNF/ICF’s where it determines it is needed

37. 37 REAC Inspections on Section 232’s Posting on HUD.GOV of how we have coded in iREMS:  http://portal.hud.gov/hudportal/HUD?src=/federal_housing_ad ministration/healthcare_facilities/section_232/lean_processing_ page/loan_servicing_guidance_home_page http://portal.hud.gov/hudportal/HUD?src=/federal_housing_ad ministration/healthcare_facilities/section_232/lean_processing_ page/loan_servicing_guidance_home_page  If incorrect classification, contact Account Executive listed.  Projects with more than one facility type are coded as the predominant facility type (based on # of beds)

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40. 40 REAC Inspections, continued Scheduler system: REAC is working on revising system so it doesn’t call for inspections on SNF/ICF’s In meantime, if property scheduled for inspection when shouldn’t be, contact REAC.

41. 41 Questions