THERE ARE FIVE COMPELLING REASONS TO INVEST IN SENIOR HOUSING TODAY:

1. High Cash-on-Cash Returns
with High Internal Rates of Return
Due to the varying combinations of real estate, service programming and facility designs, the senior housing market currently provides cash-on-cash returns ranging from 8% to 11% free and clear. Internal rates of return have ranged from 10% to 20%.

2. Demand Drivers are Positive
and More Certain than Other Property Types
The significant growth in the senior population has begun as the aging baby boomers are entering their retirement years. The demographic growth of seniors is forecasted to affect over 25% of the population in the United States during the next decade, evidencing strong support for the demand for senior housing.

The demand for senior housing is not only secular, that is driven by demographics, but it is also (with the exception of active adult communities) need-influenced or need-driven, that is, not discretionary and required by the chronic care issues of aging. It is hard to make the same objective case for growing demand for office, retail and industrial properties.

Demand for senior housing is also much less impacted by "technology risk". This very real risk will impact retail, commercial, and industrial property types to a much greater extent over the foreseeable future, and cause the investment analysis to be much less certain with regard to understanding and measuring demand.

3. The Business Cycle is Independent
Like all property types, senior housing has its own business cycle. Demand for senior housing is much less affected by the rise and fall in employment and the expansion and contraction of GNP. Today's seniors are better equipped financially to live out their senior years with the support of retirement plans, stock portfolios, insurance benefits and 401K programs. Seniors that move to these properties are not employed.

While demand is moderately impacted by severe inflation and an inability to sell residential real estate, social security payments received by seniors and the need-driven element of the product are two substantial cushions to the traditional economic dislocations that affect yearly demand for other property types. The business cycle for senior housing is almost exclusively dependent upon the supply and demand of capital and for the various product types. For the seniors' apartment, independent, CCRC, and dementia units, demand exceeds supply in most markets nationwide.

Even in markets that have reached temporary saturation for assisted living, many of the national operators have maintained 88% occupancy rates or better. There is considerable evidence that the more sophisticated companies with newer properties are taking market share from the smaller, older properties. There is a strong argument that adding independent living properties to a multi-family portfolio will decrease risk for a given level of return or increases return for a given level of risk, since these assets are not highly correlated.

4. Industry Cost Structure Creates
Excess Returns for Additions and Expansions
The industry's high fixed-cost structure, which can create problems where there is a large drop in occupancy, also provides significant, value-added opportunities. Small additions to a property can create significant increases to net operating income and produce leveraged internal rates of return well over 30% with little additional risk to the property. For example, an existing 100-unit independent living property that adds a 30-unit assisted living wing has very little fixed or variable operating expense other than incremental nurse's aide wages, utilities and food. Due to the extremely high revenue per unit (unlike apartments), there is a significant increase to net operating income.

In this specific example, NOI can increase by $500,000 per year on an additional equity investment of $2,500,000 above the equity investment in the property, producing a doubling in the value of the additional equity investment at an 11% capitalization rate.

5. The Current Market is Inefficient which Provides Opportunities To Make Above-Market Returns Through Sophisticated Research
Unlike the other property types which have several national information reporting and data tracking services at both the national and local market levels, senior housing has been slow to develop these efforts. There are few, if any, companies or consultants other than NIC seeking to understand the true interrelationships of the key drivers of supply and demand and their impact on investment performance.

KMF sees a very real opportunity to outperform the returns experienced in the industry by capitalizing on this information inefficiency.