Benchmarking Your CCRC

Benchmarking Your CCRC Presented by: Moore Stephens Lovelace, P.A. Objectives Provide information on how ratios can provide insight into financial statements Give information about key ratios and what the data can tell you Discuss some of the Florida CCRC trends from the most recent filed data with the OIR Provide insight into what management should focus on in understanding numbers 1 Theme 2 1

Successful Organizations Are: Being creative Maintaining Growing occupancy through entrance fees or MSF programs (continued reduction in concession programs) Managing operations by exploring opportunities to decrease expenses Considering repositioning and previously shelved projects Looking for new revenue streams Mitigating risk 3 Successful Organizations Are: Cognizant of the increased needs of its residents Understand the importance of strong governance Affiliations (formal and informal) Data, data and more data!! Turning data into useful and manageable information 4 Uses of Financial Analysis Entity Financial Condition Analysis of the entities financial condition and profitability. Financial Ratios 1. Individually 2. Over time 3. In combination 4. In comparison 5 2

Uses of Financial Analysis Analysis of the business risk of the entity. Examples: Volatility in sales Volatility in costs Proximity to break-even point Business risk relates to the risk inherent in the operations of the entity. 6 Uses of Financial Analysis Analysis of the entities funding needs Analytical Tools Used Sources and Uses Statement Statement of Cash Flows Cash Budgets Trend / Seasonal Component How much funding will be required in the future? Is there a seasonal component? 7 Uses of Financial Analysis Determining the financing needs of the entity. Management should consider all three analysis types; funds needs, financial condition and profitability and business risk, when determining the financial needs of an entity. 8 3

Uses of Financial Analysis Proper determination of an entities financing needs. Proper evaluation of financing needs puts the entity in the best position to negotiate with potential capital suppliers 9 Challenges of Benchmarking Not an exclusive tool to be used in isolation Ratios alone do not tell the entire story or provide the answers Large deviations or unexpected swings do not necessarily reflect a problem Certain ratios or statistics can be meaningless or distorted by inconsistent reporting between entities Definitions and calculations may vary 10 Challenges of Benchmarking Various sizes and configurations of communities may distort the data: Contract types Payor mix Budgeting philosophy Capital structure Unit mix Single versus multi-site Operational changes Etc. 11 4

Benchmarking Resources The State of Seniors Housing 12 Benchmarking Resources MSL Annual Florida CCRC Benchmark Report Chapter 651 Makes Florida Providers Unique 13 Understanding the Data Source Data obtained from the annual reports and audited financial statements filed with the OIR Some CCRC s were excluded from certain benchmarks due to: CCRC s in run out Start up CCRC s Significant changes in operations Significant deviation from other providers 14 5

Key Financial Ratios: Profitability/Operating Liquidity Capital Structure 15 Profitability: What Can You Control? Key Indicator of a Strong Income Statement: REVENUE Three Main Types of Revenue Resident Revenue Charitable Contributions Investment Income 16 Resident Revenue: Price Monthly fee increases Entrance fee increases Refundability provisions AL and SNF outside admits Volume Length of time to fill vacated units Unit turnover Waiting list information Actuarial data Staff turnover 17 6

Occupancy Rate Trends Not-For-Profit Medians 94% 92% 90% 88% 86% 84% 82% 2007 2008 2009 2010 2011 2012 2013 2014 IL 93% 89% 87% 87% 87% 88% 89% 92% AL 87% 88% 87% 87% 88% 86% 88% 90% SNF 89% 87% 88% 91% 90% 90% 88% 89% 18 Profitability What Can You Control? Operating Expenses: #1 Largest Expense: Nursing & Healthcare Hours per patient day CCRCs ~4.57 DPC Payor Mix CCRCs: Medicare RUG Days Rates by Payor Class Use of Agency Nursing #2 Largest Expense: Dining & Dietary Raw food cost per day CCRCs ~$12.50 per day Labor cost per meal *Benchmarks on this slide represent average for sub-set of CCRCs participating in Medicaid program 19 Profitability Medicare 20 7

Profitability Medicare 21 Readmission Statistics 22 Readmission Statistics 23 8

Quality Strategies 5 star rating Survey results Length of stay PEPPER reports 24 Cost per Episode Joint Replacement of Lower Extremity MS DRG 469, 470 Episodes 200 Average Cost per Episode $ 15,900 SNF $ 10,500 IRF 100 LTCAH 50 HHA 1,800 DME 200 Physician 1,800 Readmissions 1,000 Outpatient 400 Other 50 25 What Profitability Measure is Important to You? Net Operating Margin Ratio Focusing on core operations Net Operating Margin Ratio Adj. Operating Ratio Operating Margin Total Excess Margin Most inclusive incl. investment activity and contributions 26 9

Operating Ratio: Total Operating Expenses - Depreciation Expense - Amortization Expense Total Operating Revenues - Amortization of Deferred Revenue 27 Operating Ratio: 110% 105% 100% 95% 90% 85% 80% 75% 70% 2009 2010 2011 2012 2013 2014 Median - All 106% 100% 100% 99% 100% 99% Average - All 107% 102% 102% 101% 100% 102% 28 Net Operating Margin Ratio Resident Revenue -Resident Expense Resident Revenue Excludes investment performance and interest expense 29 10

Net Operating Margin Ratio 14% 12% 10% 8% 6% 4% 2% 0% 2009 2010 2011 2012 2013 2014 Median - All 6% 12% 11% 7% 9% 9% Average - All 6% 12% 10% 8% 10% 9% 30 Other Profitability Ratios Net Operating Margin Ratio Adjusted Operating Margin Ratio Total Excess Margin Ratio 31 The Importance of Liquidity Benchmarks Liquidity Ratios measure a provider s ability to meet the short-term cash needs of the organization Knowing what an organization has allows it to plan and designate funds for strategic purposes Allows the organization to plan proactively instead of reactively 32 11

The Importance of Liquidity Benchmarks Cash needed to operate Cash needed to manage a crisis Cash needed to grow and act strategically 33 Days Cash on Hand: Unrestricted Cash and Investments (Total Operating Expenses - Depreciation Expense - Amortization Expense)/365 34 Days Cash on Hand: 250 200 150 100 50-2009 2010 2011 2012 2013 2014 Median - All 143 140 159 158 114 105 Average - All 175 193 191 191 168 174 35 12

Days Cash on Hand Florida vs. CARF 400 350 300 250 200 150 100 50-2009 2010 2011 2012 2013 2014 Median - All 143 140 159 158 114 105 CARF 304 296 290 306 343 317 36 Other Indicators Affecting or Affected by Days Cash on Hand Average Age of Provider Capital Investment Ratio 37 Average Age of Provider: Accumulated Depreciation Annual Depreciation Expense Increasing Age is an indicator of deferred capital expenses Typically do not like to see anything above 10 years 38 13

Average Age of Provider 12 11 10 9 Average Age of Provider The steadily increasing value in the Average AgeofProvidersisan indication that provider funds are not being used to renovate, upgrade, and update the provider s physical plants and assets. 8 2009 2010 2011 2012 2013 2014 Median - All 9.84 10.37 10.68 11.27 11.19 11.49 Average - All 9.59 10.13 10.13 10.42 10.87 10.74 Continued increases is consistent with CARF data. 39 Capital Investment Ratio: Annual Capital Investment Annual Depreciation Expense Increasing Age is an indicator of deferred capital expenses Typically do not like to see anything above 10 years 40 Capital Investment Ratio 1.8 1.6 1.4 1.2 Capital Investment Providers are increasingly embarking on capital projects 1.0 0.8 0.6 0.4 0.2-2009 2010 2011 2012 2013 2014 Median - All 85.0% 62.0% 74.7% 89.8% 115.6% 109.7% Average - All 137.1% 76.5% 94.9% 127.8% 140.9% 150.4% 41 14

The Importance of Capital Structure Ratios Capital structure ratios better reflect a provider s long term solvency by looking at the relationship between debt and assets. Includes Debt Service Coverage Ratio Cash to Debt Long-Term Debt as a % of Total Capital 42 Debt Service Coverage Ratio: Total Excess of Revenues over Expenses + Interest, Depreciation, and Amortization Expenses - Amortization of Deferred Revenue + Net Proceeds from Entrance Fees Annual Debt Service Reflects a community s ability to fund annual debt with cash flow Lenders generally like a minimum 1.20 Debt Service Coverage Revenue Basis 43 Debt Service Coverage Ratio: Debt Service Coverage Ratio (Revenue Basis) 1.60 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00 2009 2010 2011 2012 2013 2014 Median - All 0.66 0.59 0.66 0.69 0.80 0.81 Average - All 0.79 1.09 1.08 0.81 1.48 1.40 The Debt Service Coverage Ratio Revenue Basis calculates a provider s ability to pay its annual debt service without utilizing entrance fee proceeds; ideally above 1.0. The Debt Service Coverage Ratio calculates a provider s ability to pay its annual debt service, including the use of entrance fee proceeds. Debt Service Coverage Ratio 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 2009 2010 2011 2012 2013 2014 Median - All 2.12 2.36 2.55 2.36 2.91 3.23 44 Average - All 2.49 3.30 3.17 3.20 3.75 4.17 15

Other Capital Structure Ratios Debt Service as a % of Total Operating Revenues and Net Non Operating Gains and Losses Ratio Long-Term Debt as a % of Total Capital Ratio Long-Term Debt as a % of Total Capital Adjusted Ratio Long-Term Debt to Total Assets Ratio 45 Key Performance Indicators: Occupancy Rates by Level of Care Marketing metrics Staffing metrics Departmental cost per resident day 46 End Users Creditors / Bondholders Board Market / Industry Potential buyers / investors Management Residents Partners 47 16

Going Forward Create a dashboard for Executive Management and the Board; include: Profitability/Margin Measure (i.e., Operating Ratio) Liquidity Measure (i.e., Days Cash on Hand) Capital Structure (i.e., Debt Service Coverage Ratio) Occupancy Focus on what will have the greatest impact 48 Going Forward Benchmarking by itself can be an academic exercise Benchmarking should lead to GOAL SETTING with reporting and accountability Report benchmarks regularly to Management and the Board should be done often enough that goals can be modified to accommodate changes 49 But Wait There s More! Medicare Cost Report Information Home Health Care Information Hospital Cost Report Information Detailed Skilled Nursing Database of all Florida providers who participate in the Medicaid program Census Payor Mix Per Patient Day metrics for Departmental Expenses Hours per Patient Day metrics for Direct Patient Care staff Wage rate information for Direct Patient Care staff More 50 17

Presenters Rob T. Matschner, CPA, MSA Shareholder rmatschner@mslcpa.com 1-800-683-5401 Boris Kushnir, MBA Healthcare Senior Manager bkushnir@mslcpa.com 1-800-726-1735 Scot E. Aurelius, CPA, MSA Shareholder Senior Housing Practice Group Leader saurelius@mslcpa.com 1-800-683-5401 www.mslcpa.com 51 Questions or Comments 18