68-C: Financial Ratios for CCRCs: 2015 Update Presenters:

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2 November 2, 2015 І 3:30 5:00 pm 68-C: Financial Ratios for CCRCs: 2015 Update Presenters: Michael Kelly Managing Director Ziegler Karen Christiansen Executive Vice President & CFO ACTS Retirement-Life Communities Michael Flynn Chief Financial Officer Friendship Senior Options Mark Ross Partner, Health Care Baker Tilly Virchow Krause 2

3 Objectives Review current financial trends affecting the CCRC market. Learn to use the financial ratios to inform strategic planning efforts and communicate performance information to stakeholders. Study the findings and future implications of the 2015 Ratio Trends and Analysis report for CCRCs. Discuss ways that CCRC providers can measure and identify areas to improve operating performance. 3

4 Outline Section 1 Section 2 Section 3 Section 4 - Financial Trends Affecting the CCRC Market - The Strategy within Financial Ratios: An ACTS Perspective - Financial Perspective of a Mature Community vs. a Start-Up Community - How to Measure, Identify and Improve Questions & Answers 4

5 Jeffrey Boland Reinsel Kuntz Lesher, LLP Dave Bond CCRC Actuaries, LLC Amy Castleberry Ziegler Karen Christiansen Michael Connell Asbury Communities, Inc. Samuel Derieux** The Hermitage at Cedarfield Michael Flynn* Friendship Senior Options Thomas Gibbons The Huntington National Bank Amy Hayman Cain Brothers & Company Geary Milliken Carroll Lutheran Village Timothy Myers Ingleside Andrew Nesi Herbert J. Sims J. Wickliffe Peterson Senior Resource Group, LLC Mark Ross Baker Tilly Virchow Krause, LLP * FAP Chair ** Person Served This session is presented by members of the CARF Financial Advisory Panel This session is presented by the ACTS Retirement-Life Communities, Inc. CARF-CCAC Financial Advisory Panel

6 Availability of 2015 Financial Ratios & Trend Analysis CARF accredited CCRCs receive complimentary copies by mail automatically as a value-add to their accreditation bookstore.carf.org for online ordering Visit CARF at booth 502 for more information about the ratios or the publication

7 Section 1 Financial Trends Affecting the CCRC Market MICHAEL KELLY Managing Director Ziegler

8 Overview Senior Living Success: Key Drivers Baseline Operations Net Proceeds from Entrance Fees Senior Living Financial Strength Contributions Capital Structure Treasury Management 8

9 2015 marks 23rd publication Three types of ratios: Profitability Liquidity 2015 CARF Publication Financial Ratios & Trend Analysis Capital Structure Single-sites (137) and multi-sites (27) Predominantly non-profit (2 for-profits) CARF, Ziegler, and Baker Tilly are the Publication Partners Source: Financial Ratios & Trend Analysis of CARF-Accredited Continuing Care Retirement Communities,

10 Where Do You Focus? Profitability (Operating) Ratios Net Operating Margin Ratio Core operations: resident revenue resident expense. Excludes non-resident revenues and excludes interest/dividend income, interest expense, depreciation, taxes, amortization, contributions and entry fee amortization. CORE SERVICES Net Operating Margin Ratio-Adjusted Add net entry fees received. Operating Ratio Differs from NOM only in that it includes interest income, interest expense and net assets released for operations. Like NOM --- cash-based. Operating Margin Includes the impact of non-cash operating items such as earned entry fees and depreciation Total Excess Margin Builds on the Operating Margin Ratio but adds impact of realized investment gains or losses, contributions and other non-operating revenues/gains. ALL RESOURCES 10

11 Net Operating Margin Ratio (NOM) NET OPERATING MARGIN In 2014, median increased for multisite providers to 6.15%, but the single-site provider median decreased to 4.72% Decrease in NOM held across all quartiles for single-sites Despite recent flattening/dip, longterm trend remains positive since the early 2000s Source: Financial Ratios & Trend Analysis of CARF-Accredited Continuing Care Retirement Communities,

12 Net Operating Margin-Adj. Ratio (NOM-A) NET OPERATING MARGIN-ADJ NOM-A highlights importance of cash flow from entrance fees, compared to NOM, where net entrance fee receipts are excluded Creditors, regulators, rating agencies, etc. recognize importance of entrance fees in offsetting healthcare risk, operating costs NOM-A continues to improve for the 2014 fiscal year for single-sites; multi-site organizations decreased slightly Both organization types achieved a median NOM-A of just over 22%-- the highest level since publication began in 1996 Source: Financial Ratios & Trend Analysis of CARF-Accredited Continuing Care Retirement Communities,

13 Total Excess Margin (TEM) TOTAL EXCESS MARGIN TEM measures bottom line GAAP profitability Includes non-cash items such as amortization of entrance fees, depreciation and non-operating sources of revenues Multi-sites were down from last year (1.59% compared to 2.39%), and single sites down from 3.24% to 2.07% The timing of the adoption of Accounting Standards Update may be the contributing factor for the decreases Source: Financial Ratios & Trend Analysis of CARF-Accredited Continuing Care Retirement Communities,

14 Days Cash on Hand (DCOH) DAYS CASH ON HAND DCOH is the chief measure of organizational liquidity The single-site DCOH median decreased to 317 days; the multi-site median dipped to 272 days The 25 th quartile was lower for both, while the 75 th quartiles improved The DCOH median remains in the +/- 300 day range of the past 10 years for both provider types Source: Financial Ratios & Trend Analysis of CARF-Accredited Continuing Care Retirement Communities,

15 Unrestricted Cash & Investments to Long-Term Debt UNRESTRICTED CASH & INVESTMENTS TO LONG-TERM DEBT Measures an organization s position in cash and marketable securities in relation to its long-term debt Average cash balances decreased roughly 3%-5% for fiscal year 2014; possibly due to expense increases Median Cash to Debt weakened for multi-site and single-site providers, most likely driven by increased debt Source: Financial Ratios & Trend Analysis of CARF-Accredited Continuing Care Retirement Communities,

16 Debt Service Coverage Ratio (DSC) DEBT SERVICE COVERAGE DSC ratio is generally considered to be the most important ratio for evaluating an organization s financial viability Reflects ability to fund debt service with cash flow from net cash revenues and net entrance fees DSC was down from last year for multi-sites (2.74x), while single-sites improved (2.62x) Average net entrance fees increased 12% - 15% Source: Financial Ratios & Trend Analysis of CARF-Accredited Continuing Care Retirement Communities,

17 (Ratio) Debt Service Coverage Ratio Revenue Only DEBT SERVICE COVERAGE-REVENUE 50th PERCENTILE Measures an organization s ability to meet debt service obligations without net entrance fee turnover Results are substantially impacted by pricing policies and contract types Improvement for single- and multisite organizations at all quartiles in FY 2014 Single-Site Multi-Site Top quartile is consistently well above 1.0x for both provider types Source: Financial Ratios & Trend Analysis of CARF-Accredited Continuing Care Retirement Communities,

18 Capital Expenditure as a Percentage of Depreciation CAPITAL EXPENDITURE AS A % OF DEPRECIATION Sixth year of data collection, trend is improving Both Multi-sites and single-sites improved from last year Important for organizations to show commitment to reinvest in physical plant at least to level of annual depreciation Source: Financial Ratios & Trend Analysis of CARF-Accredited Continuing Care Retirement Communities,

19 Average Age of Facility Ratio (AGE) AVERAGE AGE OF FACILITY AGE measures an organization s commitment to maintaining its physical plant AGE suggests the capital investment isn t sufficient to counter the aging of physical plants Many providers have embarked upon master planning, but there s a significant gap between project planning and opening Source: Financial Ratios & Trend Analysis of CARF-Accredited Continuing Care Retirement Communities,

20 Section 2 The Strategy within Financial Ratios An ACTS Perspective KAREN CHRISTIANSEN Executive Vice President & CFO ACTS Retirement-Life Communities

21 NON-PROFIT Multi-Site Senior Living Organization Profile 2015 LZ 150: ACTS Retirement-Life Communities, Inc. LZ 150 #: 3 Headquarters Location: Pennsylvania, West Point Year Founded: 1971 Total Units (as of 12/31/14): 7,993 5,652 ILUs 904 ALUs 1,437 NCBs 1 st Community opened in nd Community opened in rd Community opened in 1977 Classification: Primary: National Secondary: Across States Total # of Communities: 23 # of CCRCs: 23 # of Accredited Organizations: 22 Affordable Housing: N/A Debt Rating: Yes Fitch: A- S&P: BBB+ Practices: While past growth was primarily through new campus development, current growth has been through acquisition and/or expansion. Non-denominational background has led to acquisitions of others without religious ties. Most recent acquisition was in 2010: Peninsula United Methodist Homes and Heron Point of Chestertown. Managed Housing: N/A Source: 2015 LeadingAge Ziegler 150 Publication (data as of 12/31/14) 21

22 ORGANIZATIONAL OVERVIEW Total Assets $1.264B Annual Operating Revenue $390.0M Regional Clusters Northeast Mid-Atlantic Mid-South Southeast # of Residents 8,569 # of Employees (ft & pt) 5,856 22

23 Organizational Structure ACTS Retirement Services, Inc. (Parent Company) OBLIGATED GROUP ACTS Management Services, Inc. (Manager) ACTS Signature Community Services, Inc. ACTS Mission Foundation ACTS Retirement-Life Communities, Inc. ACTS Acquisition Company, LLC 21 communities Park Pointe Village Heron Point of Chestertown 23

24 The Strategy within Financial Ratios Select which ratios are most important Combination of ratios that provide a comprehensive overview of financial performance and strategies Select appropriate benchmarks Influence of contract type Variations in calculations Sample size Establish targets / ranges Review and update regularly Vary based on corporate structure Format financial statements Easily calculate ratios 24

25 BEFORE Financial Statement Presentation Unclassified Balance Sheet No separation of current/non-current assets & liabilities More easily identify cash & reserves and debt 25

26 Financial Statement Presentation AFTER Unclassified Balance Sheet No separation of current/non-current assets & liabilities More easily identify cash & reserves and debt 26

27 Financial Statement Presentation Customized Operating Statement Subtotals for cash revenue & expenses Subtotal for Operating Income (company operating indicator) & Net Operating Income (GAAP operating indicator) ACTS Performance Indicator GAAP Performance Indicator 27

28 28 Where Do You Focus? Profitability (Operating) Ratios Net Operating Margin Ratio Core operations: resident revenue resident expense. Excludes non-resident revenues and excludes interest/dividend income, interest expense, depreciation, taxes, amortization, contributions and entry fee amortization. CORE SERVICES Net Operating Margin Ratio-Adjusted Add net entry fees received. Operating Ratio Differs from NOM only in that it includes interest income, interest expense and net assets released for operations. Like NOM --- cash-based. Operating Margin Includes the impact of non-cash operating items such as earned entry fees and depreciation Total Excess Margin Builds on the Operating Margin Ratio but adds impact of realized investment gains or losses, contributions and other non-operating revenues/gains. ALL RESOURCES

29 Net Operating Margin Ratio (NOM) ACTS Obligated Group -0.52% CARF-CCAC Median 6.15% CARF-CCAC Median (Type A Multi-Site Providers) -0.62% Not a Key Financial Indicator Excludes significant part of Resident Revenue Entrance Fee Amortization and/or Proceeds 98.4% of residents on a Type A Lifecare Contract (nonrefundable after 50 month amortization period) 29

30 Use Operating Ratio to measure reliance on Entrance Fees and relationship of cash revenue to cash expenses (in millions) Cash Revenue Cash Expenses Operating Surplus Operating Ratio 112.8% 101.4% 97.1% 97.2% Resident contract revision: 5% of entrance fee is considered a non-refundable processing/administrative fee Recorded as cash revenue with remaining 95% of entrance fee recorded as deferred revenue 30

31 Operating Ratio Key Financial Indicator Long-term objective stated in strategic plan Community specific targets Allows Operations to manage offsets in revenue and expenses Calculation excludes interest expense Entrance fee proceeds used to cover debt service Evaluated with debt service coverage Operating Surplus (Cash revenue cash expenses) + Net resale entrance fees / MADS ACTS Obligated Group 97.2% CARF-CCAC Median 98.1% CARF-CCAC Median (Type A Multi-Site Providers) 104.7% LZ100 (Top 25) 89.6% 31

32 Debt Service Coverage Key Financial Indicator Annual test of covenant compliance Calculation follows definition in debt indentures Based on MADS Effects of Multiple Resident Contract Types: Timing of refunds of refundable entrance fees may cause fluctuations in debt service coverage ratio Consider in negotiating covenant compliance ACTS Obligated Group 2.8x ACTS Obligated Group (Ratio Pro) 2.9x CARF-CCAC Median 2.7x ACTS Affiliate Yr. 1 Yr. 2 Yr. 3 DSC 2.7x 1.4x 2.2x ILU Occup. Gross EFEEs 95% 97% 95% 6.3M 4.5M $6.6 EFEE Refunds 1.6M 2.2M 2.0M 32

33 Days Cash on Hand (DCOH) Key Financial Indicator Calculation includes state MLRs Maintain target in combination with other key financial indicators Debt service coverage Debt to assets Average age of facility Respond to changing environment & expectations Target increased from 250 to 275 (will continue to increase) ACTS Obligated Group 267 CARF-CCAC Median 272 Resident education on the importance of funding UC&R Two financial town halls held at each community on an annual basis 33

34 Average Age of Facility Ratio (AGE) Tier II Financial Indicator Annual ordinary capital investment matches or exceeds 100% of depreciation Making up for reductions during recession Major renovations and expansions are not included in ordinary capital Ratio influenced by: New development projects Asset disposals ACTS Obligated Group 11.2 CARF-CCAC Median 12.9 Capital Expenditures as a % of Depreciation 157% Recent year focus on infrastructure, repositioning, privacy and amenities True average age is 31.5 years 34

35 Financial Structure and Governing Objectives Operating ratio of less than 100% Conservative leverage to approximate 40% of assets and provide for debt service coverage of 3.0x Maintain DCOH to average Invest in ordinary capital expenditures at a level equal to annual depreciation Expand and reposition existing communities Continue growth objectives Maintain investment grade ratings Operating Ratio ACTS Obligated Group Multi-site Benchmark 97.2% 98.1% LTD/TA 41% 43% DSC 2.8x 2.7x DCOH Avg. Age of Facility

36 Section 3 Financial Perspective of a Mature Community vs. a Start-Up Community MICHAEL FLYNN Chief Financial Officer Friendship Senior Options

37 Friendship Senior Options History Opened Friendship Village of Schaumburg in 1977 First in Illinois to be accredited by CCAC in 1987 Expand nursing home from 190 to 250 beds in 1997 Add 28 garden homes in 2002 Restructured organization in 2005 Expand commons areas and add 170 independent living units Open second community, GreenFields of Geneva in 2012 GreenFields receives CARF-CCAC Accreditation in

38 Pace of Growth 38

39 Organizational Structure Friendship Senior Options Friendship Village of Schaumburg GreenFields of Geneva Friendship Senior Service Foundation Friendship Village Neighborhood Services 39

40 Friendship Village GreenFields 40

41 Sources of Revenue 41

42 Census Friendship Village GreenFields Total Organization Capacity Occupied % Occupied Capacity Occupied % Occupied Capacity Occupied % Occupied Independent Living % % % Assisted Living % % % Healthcare % % % Total % % % 42

43 Operating Expenses By Community Actual Results Through 8/31/2015 FVS GF Expense Source % of Total Expense Source % of Total Salaries and benefits 39.28% Interest 28.06% Depreciation and amortization 14.59% Salaries and benefits 27.47% Supplies and other 12.77% Depreciation and amortization 15.33% Interest 10.93% Supplies and other 11.19% Professional fees 7.31% Professional fees 7.56% Dietary 5.71% Dietary 3.96% Utilities and telephone 3.71% Utilities and telephone 2.39% Repairs and maintenance 2.84% Repairs and maintenance 1.68% Insurance 1.38% Real estate taxes 1.39% Real estate taxes 0.90% Insurance 0.97% Provision for bad debts 0.57% Provision for bad debts Total Expenses % Total Expenses % 43

44 FVS Operating Performance % % 80.00% 60.00% 40.00% Operating Margin Ratio Operating Ratio Total Excess Margin Ratio Net Operating Margin Net Operating Margin - Adjusted 20.00% 0.00% % 3/31/2013 3/31/2014 3/31/2015 3/31/2016 3/31/2017 3/31/2018 Operating Margin Ratio % % -6.02% -7.64% -5.99% -4.37% Operating Ratio % % 99.14% % 98.95% 97.41% Total Excess Margin Ratio -8.72% % -6.82% -7.82% -6.16% -4.54% Net Operating Margin 11.17% 8.02% 10.61% 11.69% 12.72% 13.74% Net Operating Margin - Adjusted 19.94% 21.75% 23.49% 21.48% 22.34% 23.17% 44

45 FVS Days Cash On Hand Days Cash on Hand Ratio CARF 50th percentile CARF 25th percentile

46 FVS Debt Service Coverage Ratio Debt Service Coverage Ratio CARF 50th percentile CARF 25th percentile

47 FVS Average Age of Facility Average Age of Facility CARF 50th percentile CARF 25th percentile

48 Observations Use CARF benchmarks as a tool to compare your community to others Focus on trending in a positive direction Target specific ratios that have the greatest impact For new communities, operating performance may provide greater value than ratios 48

49 Section 4 How to Measure, Identify, and Improve MARK ROSS Partner and National Firm Leader Healthcare Practice Baker Tilly Virchow Krause, LLP

50 Positioning Your Senior Living Organization Financial Stability Operational Efficiency Quality 50

51 Benchmarking

52 Create a culture of continuous quality improvement Tell a story Benefits of Using Benchmarks Identify strengths / weaknesses; outliers, or low hanging fruit Provide high level direction for Management; identify small problems before they become big ones Dashboard reports; trend analysis over multiple periods 52

53 Challenges of Using Benchmarks Comparisons among organizations may be distorted by unique attributes of each organization Contract type (A, B, C, etc.) Unit complement Payer mix Number of operating locations Capital structure Significant operational changes (e.g., expansions, divestitures, etc.) Financial reporting treatment 53

54 Challenges of Using Benchmarks Access to quality published information Variances may be explained away too easily There is a story behind every number Viewed as purely economic initiative 54

55 Similar operations within one s organization (for multi-site providers) Historical information for your organization CARF Financial Ratios & Trend Analysis Rating agencies Benchmarks Where are they? State of Senior Housing 55

56 Medicare / Medicaid cost reports, MedPAC data, etc. LeadingAge State Associations Peer group surveys Benchmarks Where are they? Proprietary benchmarks (accountants, actuaries, investment bankers, etc.) 56

57 Occupancy and rates in all levels of care; payer mix Benevolent care OPERATING BENCHMARKS Medicare Part A margin and average length of stay Medicare Part B revenue per non-skilled day Provision for bad debts as a % of net resident service revenue (excluding amortization of entrance fees) 57

58 OPERATING BENCHMARKS Nursing / Assisted living hours per resident day and by position (RN, LPN, CNA) Therapy productivity / profitability Dietary costs per meal and resident day Housekeeping and maintenance costs per square foot, average occupied unit, and resident day Administrative costs per average occupied unit and resident day 58

59 OPERATING BENCHMARKS Departmental labor costs per hour (and/or FTE) General and administrative expenses as a % of total operating expenses Taxes and benefits as a % of salaries and wages Fund development expenses as a % of contributions received 59

60 Operations Assessment Process

61 Operations Assessment Process Every assessment is unique and is tailored to the specific needs and objectives of the organization; can be done internally or externally First step in the process is to gain an understanding of. Purpose of the assessment Areas of concern / potential focus Objectives / Expected outcomes 61

62 Operations Assessment Process Utilize this understanding to customize an approach that will achieve the organization s objectives and expected outcomes Assemble a specific team of professionals that possess the experience required for each component of the assessment 62

63 Operations Assessment Process Review general corporate information Articles of incorporation, by-laws, etc. Corporate structure Organization chart Strategic plan Resident agreements Internal control related documentation, accounting processes, etc. 63

64 Operations Assessment Process Review prior years audited financial statements and current year budget Calculate relevant financial ratios; benchmark against CARF and rating agencies Calculate EBIDA margins by level of care and compare to benchmarks 64

65 Operations Assessment Process Obtain in-depth understanding of operations through analyzing, in detail, revenues and expenses for 2-3 year period Analyze census, payer mix, and rates Calculate cost per resident day, average occupied unit, square foot, etc.; benchmark against various data points 65

66 Operations Assessment Process Summarize payroll taxes and benefits Therapy profitability analysis Account analysis on certain revenue and expense related accounts 66

67 Operations Assessment Process Interview personnel in various departments across organization.generally results in multiple qualitative observations Review staffing patterns in all departments; calculate nursing hours per resident day in SNF and AL Reconcile staffing patterns (and related hours) to actual hours paid per payroll reports 67

68 Operations Assessment Process Analyze overtime costs across all departments Analyze non-productive labor costs Evaluate and assess non-personnel related expenses Evaluate and assess all outsourced services 68

69 GOAL. Operations Assessment Process To identify quantitative and qualitative opportunities for improvement 69

70 Summary

71 Achieving sufficient operating margin is applicable to all types of organizations No margin, no mission Focus on your organization s own financial and operational results; use benchmarking as a tool, but remember benchmarking has its limitations Focus on key financial (quantitative) and non-financial qualitative) drivers and metrics 71

72 If you are going to invest in an operations assessment, your entire team needs to be open to challenging the current state. buy in to the process and committed to properly addressing recommendations Set goals that are appropriate for your organization What gets measured is what gets improved 72

73 Questions & Answers