Strategic Pricing Strategies for Senior Housing

1. Strategic Pricing Strategies for Senior Housing Reginald Hislop, III Managing Partner Robert LeClaire Sr. Vice President, Senior Housing

2. The Current Real Estate Economy • Demand for existing home sales – off 25% on average since the first quarter • Demand for new homes – down by 32% since 2009. Lowest sales volume since early 1960s. • Historically low interest rates but tighter lending requirements – reduces available buyers from the market • Continued high unemployment – reduces available buyers from the market • Continued softening of existing home values via declining sale prices and foreclosures

3. Real Estate Economy Dynamics • Understanding the issues that create the current climate • Buyer/Investor Psychology and Consumer Confidence • Regional and Local Economies • Government Policy • Credit/Banking Dynamics • National Economic Trends • Housing Supply

4. Buyer/Investor Psychology and Consumer Confidence • Consumption is a function of demand for a particular good or service that is available in sufficient supply at a price that the consumer is willing and able to pay • Consumer confidence is all about the willingness and the ability (real and perceived) of consumers to purchase goods and services – how one feels about spending one’s resources on (typically) non-essential (food, gas, etc.) items. • Investor psychology is a combination of outlook, economics, risk and the price that is quoted to reflect these items (loan terms)

5. Regional and Local Economies • While national economic news dominates the airwaves, real estate is truly locally and regionally dominated • What is true in some locations is not true universally • In current recessionary period, some regions/locations performed better while others fared miserably (Southwest, Las Vegas, etc.) • Regions and locations that performed better evidence less employment volatility, more government/institutional employment, a broader supply of moderate priced housing, less speculative development/new construction

6. Government Policy • To sustain mortgage liquidity, the federal government and the Federal Reserve have maintained Fannie Mae and Freddie Mac intact – the primary buyers for mortgages • The Federal Reserve has continued to buy Treasury securities as a means of maintaining capital market stability and price stability – key as mortgage rates are tied proportionately to Treasury yields • Tried, and failed, to stimulate residential real estate demand by first time buyer tax credits – bumped the market temporarily • Key issue for future policy: Job creation, tax rates, confidence in continuing favorable lending/borrowing environment (Fed Reserve)

7. Credit and Banking Dynamics • Interest rates are currently favorable • Terms and conditions have tightened due to defaults and federal policy changes – regulations now require more verifications and credit requirements from borrowers • Market for mortgage-backed securities very lackluster - requires more banks to originate and “hold” their mortgages • Fewer overall lenders – less competition, less product • Tighter appraisal requirements and erosion of higher level market comparables – price/value compression • Default risk running at historic highs

8. National Economic Trends • High unemployment and limited wage inflation • Continued investment market volatility and overall wealth reduction (losses from investment fall-out not fully recouped) • New banking and financial sector regulations • Uncertainty regarding tax rates and tax policy • Large and growing amounts of cash “sitting” awaiting a change in investment climate • Global market insecurity and volatility – impacts U.S. in terms of trade, currency, investment

9. Housing Supply • Large and growing in terms of product available – keeps prices low • An increasing percentage of the supply is “troubled” – default or foreclosed • Supply is greater than actual demand – too much supply lengthens the turnover cycle • Supply in highest demand continues to be for moderate to low income housing – four to eight times below the real, current demand • In some markets, supply continues to grow in proportion to population as the population is decreasing (Southwest metro areas)

10. Demand for Senior Housing and Elasticity • Demand for housing in general, is fairly constant. Influencers of demand include; • Location • Price • Type (single, congregate, etc.) • Supply is stable to growing. Today, supply of available units for housing is greater than demand. • Economic Axiom: Supply exceeds demand, prices fall in order to increase consumption. With housing, cycles for absorption (consumption) are longer – can’t efficiently reduce inventory.

11. Principle of Elasticity • Adequate to surplus supply of comparable products at various price points = Elasticity • Stable to limited supply of a product with alternative or replacement products priced higher = Inelasticity • With elasticity, when prices for a given product rise or remain stable compared to prices for comparable products falling, demand for one product shifts to the lower priced/lower cost option. • Demand can be impacted even when prices remain stable if the financial condition of the consumer changes – consumer shifts to lower cost alternatives

12. Elastic Demand

13. Elasticity and Senior Housing • Many alternatives exist at different price points • Remain at home • Smaller home or condo • Rental • Add services to complement remaining at home • Move-in with relatives • Supply of senior “housing” units in most areas is adequate to surplus with the exception of moderate to low income housing. • Supply of senior housing units tends to exist at price points equal to or above the median market cost/price of alternatives.

14. Current Senior Housing Consumption Realities • Price offered for a unit is negatively impacted by consumer financial situation (suppressed income yields, loss of estate value, decline of current home equity) • Economic outlook, particularly for real estate, is negatively effecting consumer psychology (confidence) • Ability to re-sell existing homestead is limited, especially at a price point psychologically palatable to the senior – won’t “give away” the property • Value proposition is viewed as break-even or loss – paying more and getting the same or lesser value for the price

15. The Value Proposition • All non-essential consumption is psychological and financial • Value is a function of getting (perceived or real) equal or higher utility (benefit) from the product purchased at price that the consumer feels is equal to or less than the utility received. • Pricing then must “maximize” the value proposition for the consumer. There must be some direct, tangible correlation to the utility received and this correlation should be pricing that is equal to or lower than the demonstrated utility (benefit).

16. Senior Housing Value Proposition • Real estate is the least tangible value today – the demand for space is very elastic. Newer, nicer space does not equate to greater utility (benefit) for the customer • While “need” on the part of the senior for different accommodations exists, the need can be met via many alternatives at different prices • Value is both current and future as utility (benefit) may increase (should) over time. The sale may be current and the benefit is extracted over-time.

17. Examples of Utility: Good and Bad • Good • Lower overall housing costs (utilities, taxes, maintenance) • Price stability (costs rise slower) • Convenience • Accessories (activity, health clubs, pools, etc.) at no extra charge or minimal extra charge • Food service • Health care services at a discount or pre-paid level • Safety/security • Accessibility as needs change • Others?

18. Examples, cont’d. • Bad • Unit square footage, furnishings, etc. • Services available on a limited calendar or time • Poor service reputation • Higher prices than comparables in the market • Clearly deferred maintenance • History of price increases greater than general inflation • Poor customer service that is visible • Others?

19. Strategic Pricing: Step One • What is your current value proposition? • Analyze price, services, reputation, price history, and all elements of “good utility”. Be critical and specific • What are the market alternatives? • Start with competitors and work outward. What else is available and at what price and with what features and utility? Important: You must look at as many feasible alternatives as possible including straight rental, remaining at home, condominiums, etc. • Compare: Where does your current value proposition fit within the range of alternatives?

20. Strategic Pricing: Step Two • Analyze the wealth profile of your target market. What is the economic condition of your target market? What is it for your target consumer? What has changed in the past two or so years for this market and consumer? • Analyze the economy in your target market and vicinity. What is employment? What is happening to real estate values? What are rental occupancies like? What are taxes doing? What about utility costs? Dig sufficiently deep! • Qualify the economic conditions of your current customers. No need to be intrusive but how are they doing? How do they feel about your pricing/value proposition and their financial condition?

21. Strategic Pricing: Step Three • Critically analyze the data! • Holding your pricing and value proposition as the constant, how does your product compare? Where is your target consumer, market and vicinity at economically? Do you offer a greater benefit in terms of the market? • Objectify your analysis. Weight the values based on the information received from your current consumer and the options available. For example, the greatest weight today should be given to a senior remaining at home and acquiring needed services “ala carte”. How does your product compare? How do your current customers compare to that scenario?

22. Strategic Pricing: Strategies • Marketing: If after the analysis your options fall in the middle to lower middle range of the universe of all other options, re-tool your marketing and sales approach to communicate the value proposition. Sell the price/utility advantages that you have! • De-Aggregate Your Pricing: If you price is too high, is it possible to reduce the price by removing some features or amenities, providing them on an ala carte or preferred customer basis? • Enhance Value: Add benefits or features within the existing price framework or on an incremental basis where more is perceived as a bargain.

23. Pricing Strategies, cont’d. • Re-Allocate Prices: Subsidize your margin levels by increasing prices on “scarce” or “in-demand” units thereby lower prices or improving value on less sought after units. • Price Options: Consider developing pre-pay or finance options, especially where entry fees are concerned. • Flatten the Increases: Using simple funding equations, it is possible to flatten increases or limit the impact to no more than “X%” per year. • Entry Fee Alignment: Change the allocation of refund provisions, monthly fees and entry level rates to create different “customer” focused entry fees.

24. Pricing Strategies, Cont’d. • Bundle/Unbundle: By bundling or unbundling care services, guarantees of care, other services (meals, etc.), you can create customized packages that target market segments. • Others: We are less enamored with these as they are too gimmicky and less permanent but, they are worth discussing. Free Rent Free Cable Free Trips Free Stuff (televisions, appliances, etc.) Unit Upgrades Free Moving Services Free Decorator Services Custom Unit Finishes • Why?: One time events such as above don’t change the value proposition and often, are viewed as substantiation for higher prices.

25. Conclusion • The demand for senior housing is very elastic • The economy and especially the residential real estate economy has a profound impact on the current and future outlook for senior housing demand • Consumption is a function of creating a solid value proposition for your product – aligned with market economics, price vs. demand against the available supply, and the range of options available to the customer. • Strategic Pricing is about creating the best value proposition for your target market, positioned against the range of alternative products – customers receive more utility than they pay for!