Healthcare Property Sector - Trends & Values Richard Lunn Director, Head of Healthcare,

1. Healthcare Property Sector - Trends & Values Richard Lunn Director, Head of Healthcare, Christie + Co 5th October 2011

2. Christie + Co - A Snapshot • Dedicated Bank Support and Business Recovery unit • 200 highly experienced business agents, Chartered Surveyors and consultants • Blend of valuation, advisory + transactional services tailored to banks, insolvency practitioners and recovery professionals • Property and operational expertise across our specialist markets • Ability to penetrate local, regional and national markets through network of 14 UK offices • Ability to respond quickly to single asset and portfolio cases across all sectors • 15,000 businesses inspected annually • Access to unparalleled benchmark and transactional databases

3. Sector Overview • Prices have fallen by approximately 26% from their peak • Movement in care business prices was exacerbated by the lack of sales of high-quality, purpose-built stock • Comprehensive Spending Review in October 2010 had severe impact • Fee reductions across the board impacting profitability • Huge number of distressed businesses being managed by banks • Tale of two markets: • Corporate market dominated by Southern Cross • Regional market- dominated by quality issues and distress

4. Southern Cross • 750 homes - only 12 are freehold • Entered dialogue with stakeholders – landlords, banks, Government, CQC, staff and commissioners of care in April • Consensual solvent restructuring underway- first wave of transfers last week • Process should conclude in November • 30 - 40 existing operators taking over the portfolio on renegotiated rent terms • Four Seasons will emerge as the largest operator in the UK • HC-One , taking over a third of the Southern Cross Portfolio

5. Christie + Co’s Sale Of Southern Cross Owned Homes Belhaven, Troon Alexander Park, Newbiggin-by-the-sea Forthview, Methil, Fife Graceland, Oswestry Shropshire Bowen’s Field, Wem, Shropshire

6. Christie + Co Care home transactions - 2010 VS 2011

7. Making Sense of Mixed Messages • Supply • Market still characterised by overpriced stock • No speculative sellers • Underlying stress in many businesses for sale • More stock being forced onto the market • Low base Rate • Still no wholesale fire-sales as in early 1990’s • Demand • Huge demand for distressed assets in all sectors • Very price sensitive • Frustrated operators aspiring to expand • Finance still tight • ‘Future fit’ test vital • Alternative use angles

8. Values - Post Millennium Performance

9. Care Homes For The Elderly – Occupancy Rates

10. Percentage of Care Instructions Marked as Distressed

11. Flight to quality Pre 1990 Original model 1990s 1st generation homes Post 2000s 2nd generation homes • Mainly conversions • Mix of single and twin rooms • Few en-suites • Purpose built • Mostly en-suite WC and WHB • 10m² room sizes • Mainly single • All single with en-suite showers and WC • 12 - 16m² • Improving in quality throughout the decade

12. 45% 40% Only 15% of stock built past 2000 35% 30% 25% 20% 15% 10% 5% 0% Prior to 1980 1980 –1984 1985 – 1989 1990 – 1994 1995 – 1999 2000 – 2004 Post 2005 Capacity Age of stock

13. 93.4% Single rooms as % of all bed spaces Flight to quality 100% 90% 80% 75.8% 70% 60% % of all bed spaces with en-suite WCs 50% 40% 30% 20% 10% 0% 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

14. Today’s Homes Post 2010 New generation homes • 14 - 18m² • En suite wet rooms • Cafes, shop and cinema room • Hairdressing suite

15. Values

16. Buyer Trends and Deal Activity Buyer Profile- Pub Market

17. Buyer Trends and Deal Activity A More Regional Market- Care

18. Case Study – Kaippans Care • Instructed by KPMG in May • Marketing commenced in June • Arranged 58 viewings from 38 operators in three weeks • Generated 22 bids on individual assets and five group bids • All three homes under offer by the end of June, all in excess of guide price Old Vicarage, Swansea Glais, Swansea Brynderwen, Carmarthen

19. Case Study – Torrwood Care Center, Wells • Instructed by Landlord to source alternate tenant • Registered 82 with 24 close care apartments. • Covenant quality and rent level key • 5 operator bids in 2 weeks • Assignment agreed to Methodist Homes • Landlord investment value significantly improved.

20. Future Predictions • Greater concentration by operators on Quality – Location, Management and type of Property • Fee and margin pressure to remain with increasing costs and reduced fees against a backdrop of clients with higher acuity • Values for old style homes unlikely to recover with limited lender appetite • Private Equity and Corporate operators focussing on new build development and specialism's

21. Direct and Indirect Regulation Peter Grose Head of Healthcare

22. Direct Regulation • There are several different forms of regulation affecting the care sector, including : • Care Quality Commission • Health and Safety • Police • Fire Service • Environmental Health

23. Indirect Regulation In addition, there are other forms of “regulation” which are not set out in formal legislation but which can still have a highly detrimental affect on the operation of a business, most notably: • Local Authority or PCT contract monitoring • Safeguarding • Coroner • Media esp. after Winterbourne View and Southern Cross saga

24. Care Quality Commission • The registration and regulation body governing the operation of NHS, independent healthcare and adult social care • From October 2010 – one size fits all legislation • Offence to carry on a regulated activity without being registered with CQC • CQC Guidance on Compliance – Essential Standards of Quality and Safety (“ESQS”).

25. Care Quality Commission - Reviews CQC reviews of compliance Two types of reviews: • Responsive - will be triggered by specific concern and will concentrate on those areas of concern • Planned - will take place at intervals of between 3 months and two years and assess all regulated activities at a particular location to assess compliance Reviews will consider information from: • Quality and Risk Profile • Inspections – a review ‘may’ include an inspection • Provider Compliance Assessment • CQC will make a judgement about compliance with each of the key 16 regulations relating to quality and safety of care; • Each regulation will given a judgement of: compliance/minor concern/moderate concern/major concern.

26. Care Quality Commission - Enforcement Wide range of civil and criminal enforcement powers available to CQC 1. Civil Enforcement Powers • Warning notice • Impose, vary or remove conditions • Suspend registration • Cancel registration

27. Care Quality Commission - Enforcement 2. Criminal Enforcement Powers • Must first serve warning notice before prosecution • Simple caution • Fixed penalty notice – up to £4,000 for a registered provider or £2,000 for a registered manager • Prosecution for an offence – punishable on conviction with a fine up to £50,000

28. Defence against Prosecution • The Health and Social Care Act 2008 (Regulated Activities) Regulations 2010 provides a new defence of due diligence against proceedings by CQC; • The defence may be used where a provider can prove that it took all reasonable steps or exercised all due diligence to ensure that it complied with the regulation.

29. Other Direct Regulation • Health and Safety • Range of enforcement powers • Police • Wide ranging powers, including the ability to apply for a closure order for the temporary closure of premises associated with significant and persistent disorder or persistent serious nuisance to a community • Offence of ill treatment or neglect under Section 44 Mental Capacity Act 2005 • Fire Service • Environmental Health

30. Indirect Regulation 1. - Local Authority (+ PCT) • Contract monitoring • Ensure contractual standards are being achieved • Safeguarding investigations • Following allegations of abuse or neglect • Blocks on admissions, reduction of fees or contractual action against provider • “Benchmarking” eg OLM 2. - Coroner • Potential adverse findings against a care home • Potential adverse media coverage • Power to make a report under Rule 43

31. Indirect Regulation 3. - The Media • “The Winterbourne Effect” • Winterbourne View closed within two weeks of broadcast of Panorama programme • CQC carried out investigation of entire Castlebeck group and found system failings at majority of locations. • CQC now undertaking targeted programme of inspections of services for people with learning disabilities (including supported living) • CQC likely to take tough enforcement action in any areas of concern

32. PETER GROSE Head of Healthcare Lester Aldridge LLP Peter.Grose@LA-law.com 01202 786163

33. PUTTING HEALTHCARE BUSINESSES BACK ON TRACK ROUGH WEATHER – THE FINANCIAL FORECAST Martin Gill PKF (UK) LLP

34. AGENDA • TAXATION AND OTHER ISSUES FACING OPERATORS • INTERPRETING MANAGEMENT INFORMATION

35. CORPORATION TAX RATES

36. CAPITAL ALLOWANCES – COMPANIES Standard Plant & Machinery Rate Post April 2012 18% 1 April 2008 -31 March 2012 20% Pre 31 March 2008 25% First Year Allowances/Annual Investment Allowance 2009/10 FYA 40% Everything 2009/10 AIA 100% First £50k spend 2010/11 AIA 100% First £100k spend 2011/12 AIA 100% First £100k spend 2012/13 AIA 100% First £25k spend Integral Features 10% HMRC Consultative Document • Back Claims • Elections at acquisition

37. INCREASING TAXATION BURDEN - PAYROLL National Minimum Wage 6 Year Increase > 21 years 25% 18 - 20 years 20% Employers National Insurance 2011/12 13.8% 2010/11 12.8%

38. VAT

39. VAT AND TEMPORARY STAFF • Previous concession withdrawn 01/04/2009. • VAT only due on agency commission NOT on salary and NIC costs. • Since 01/04/2009 VAT now due on full charge from the Agency.

40. REED CASE • Recent Tribunal case decided that VAT due on the commission element only. • HMRC state that this only applies to pre 2009 supplies and NOT to post 2009. • We understand that Reed will be appealing to the Upper Tribunal.

41. TEMPORARY STAFF • What now? • Businesses should be contacting their suppliers advising them to make protective claims to HMRC for overpaid VAT with a view to refunding their customers. • This will run for a while (4 year capping).

42. UTILITY SUPPLIES • Care Homes are classed as Relevant Residential for VAT. • Therefore any utility bills should be charged at 5% and Not 20%. • This should mean that there should be no CCL charges on the bills. • If energy is green energy then there is an automatic CCL exemption.

43. PENSIONS – AUTO ENROLMENT Starting from 1 October 2012, everyone employed in Great Britain will be enrolled automatically into a pension, provided they: • are aged at least 22 years old • have not yet reached State Pension age • earn more than £7,475 a year • are not already in a suitable pension scheme All earnings figures are in 2011/12 terms Other people will be able to opt into a pension. These includes: • employees ages between 16 and 22 who are earning more than £7,475 will be able to opt in and will get employer contributions if they do • employees aged between State Pension age and 75 who are earning more than £7,475 will be able to opt in and will get employer contributions if they do • people earning below £7,475 a year may opt in – their employer will not be required to make a contribution, but may choose to do so.

44. PENSIONS - continued • The enrolment process will be simple and individuals may choose to opt out of the pension, if you wish. As long as you stay in, your employer will make a minimum contribution to the scheme. • In most cases, individuals will also need to contribute but the employer may pay the contribution for them. They will get tax relief from the government on contributions. • Current plans are to introduce these changes gradually, starting from 2012 with large employers, followed by medium-sized and then small employers. • To help employers and employees adjust gradually, the plan is to phase in the minimum contribution levels over a period.

45. PENSIONS - continued • The official start date is October 1, 2012 and subsequent deadlines roll out over the succeeding 21 months. All employers with at least 50 staff will be required to comply by July 2014. • The minimum employer contribution will remain at 1% of “qualifying earnings” until October 1, 2016 when it rises to 2%. It will then rise to 3% as of October 1, 2017. • Employees can opt out if they choose. • Employers can have a three month waiting period for new recruits but if they ask to be included during that time, they have to be included.

46. PENSIONS - continued Employers can join NEST or set up a qualifying alternative arrangement that satisfies one of the following criteria: • A total minimum contribution of 9% of pensionable pay (including a minimum of 4% from the employer), where pensionable pay is basic salary only. • A total minimum contribution of 8% of pensionable pay (including a minimum of 3% from the employer) where pensionable pay is at least equal to 85% of total pay. • A total minimum contribution of 7% of pensionable pay (including a minimum of 3% from the employer) where pensionable pay is 100% of total pay. The minimum contributions shown above must be proven on an individual employee basis, whereas the ratio of pensionable pay to total pay is the average across the scheme.

47. PENSIONS - continued • Employees must be given re-enrolment opportunity every 3 years if they initially opt out. • Employers cannot provide employees with opt out form. • Admin implications are primarily for HR and payroll departments with them requiring to make deductions and remit to provider or NEST as appropriate. Also to keep a record of triennial re-enrolment dates for opt out cases. • Department of Work and Pensions estimate that between 70% and 90% of employees will choose to be auto enrolled. I believe that this will be a lot lower for the lower paid individuals. • Contracts of employment will have to be altered after consultation with unions. • Very penal on-going daily penalties for non-compliance. • This will definitely have a very negative impact on cash flow. • Could also result in legal claims from employees if rules are not adhered to.

48. BANK OF ENGLAND BASE RATE

49. FUNDING CHANGES • LTV 85% → 70% • Margin 100 basis points → 250/300 • LIBOR more prevelant • 20/25 years term → 5 years • Serviceability and Management vs LTV

50. EXAMPLE – 50 BED HOME • Capital cost £3m • Debt service • Rental cost