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  • 1. A MEMBER OF CARF INTERNATIONAL C C A C CONTINUING CARE ACCREDITATION COMMISSION 2519 Connecticut Avenue, NW Washington, DC 20008-1520 (202) 783-7286 Fax (202) 220-0022 www.ccaconline.org
  • 2. FINANCIAL RATIOS TREND ANALYSIS OF CCAC ACCREDITED ORGANIZATIONS SEPTEMBER 2003 A joint project of CARF-CCAC, KPMG LLP and Ziegler Capital Markets Group
  • 3. Ratio Summary 2002 Median* Ratio Name Single-site Multi-site Margin (Profitability) Ratios Operating Margin Ratio (0.7)% (0.0)% Operating Ratio 101.7% 102.2% Total Excess Margin Ratio 0.5% 0.2% Net Operating Margin Ratio 2.1% (0.8)% Net Operating Margin Ratio – Adjusted 17.3% 17.1% Liquidity Ratios Days in Accounts Receivable Ratio 18.0 20.0 Days Cash on Hand Ratio 261.0 225.0 Cushion Ratio (x) 6.7 6.4 Capital Structure Ratios Debt Service Coverage Ratio (x) 2.0 2.1 Debt Service Coverage Ratio – Revenue Basis (x) 0.6 0.3 Debt Service as a Percentage of Total Operating Revenues and 9.2% 8.8% Net Nonoperating Gains and Losses Ratio Unrestricted Cash and Investments to Long-term Debt Ratio 51.6% 47.2% Long-term Debt as a Percentage of Total Capital Ratio 78.9% 77.0% Long-term Debt as a Percentage of Total Capital Ratio – Adjusted 54.1% 55.1% Long-term Debt to Total Assets Ratio 40.6% 42.4% Average Age of Facility Ratio (Years) 10.2 9.0 * 50th Percentile
  • 4. FINANCIAL RATIOS TREND ANALYSIS OF CCAC ACCREDITED ORGANIZATIONS SEPTEMBER 2003 A joint project of Commission on Accreditation of Rehabilitation Facilities- Continuing Care Accreditation Commission (CARF-CCAC), KPMG LLP and Ziegler Capital Markets Group (a division of B. C. Ziegler and Company).
  • 5. Project Team Commission on Accreditation of Rehabilitation Facilities- Continuing Care Accreditation Commission (CARF-CCAC) Christine MacDonell Managing Director, Washington, DC Debra Roane* Director of Finance, Washington, DC droane@ccaconline.org KPMG LLP Senior Living Services Practice Douglas Berry Partner, Harrisburg, PA Alan Wells Partner, Atlanta, GA Jennifer Schwalm* Director, Harrisburg, PA jsschwalm@kpmg.com KPMG LLP, the U.S. member firm of KPMG International, a Swiss nonoperating association Ziegler Capital Markets Group Daniel Hermann Managing Director & Group Head, Senior Living Finance Group, Chicago, IL Kathryn Brod* Senior Vice President/Director of Research, Washington, DC kbrod@ziegler.com Ziegler Capital Markets Group is a division of B.C. Ziegler and Company *Contact person for each agency. Special acknowledgement: CARF-CCAC thanks Kathryn Brod and Jennifer Schwalm for their continued support and leadership in this publication. ©2003, CARF-CCAC All rights reserved. No part of this publication may be 4891 East Grant Road reproduced, stored in a retrieval system, or Tucson, Arizona 85712 transmitted in any form or by any means electronic, mechanical, photocopied, recorded or otherwise without the prior written permission of the publisher. Brian Boon, Ph.D, President/CEO Printed in the United States of America. CARF-CCAC • KPMG LLP • Ziegler Capital Markets Group
  • 6. Table of Contents Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 A Message from the Financial Advisory Panel Chair . . . . . . . . . . . . . . . . . . . . 4 Chapter 1 – Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 The Uses and Limitations of this Publication Development of the Database What’s New? Chapter 2 – Margin (Profitability) Ratios. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Operating Margin Ratio Operating Ratio Total Excess Margin Ratio Net Operating Margin Ratio Net Operating Margin Ratio – Adjusted Chapter 3 – Liquidity Ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Days in Accounts Receivable Ratio Days Cash on Hand Ratio Cushion Ratio Chapter 4 – Capital Structure Ratios. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 Debt Service Coverage Ratio Debt Service Coverage Ratio – Revenue Basis Debt Service as a Percentage of Total Operating Revenues and Net Nonoperating Gains and Losses Ratio Unrestricted Cash and Investments to Long-term Debt Ratio Long-term Debt as a Percentage of Total Capital Ratio Long-term Debt as a Percentage of Total Capital Ratio – Adjusted Long-term Debt to Total Assets Ratio Average Age of Facility Ratio Chapter 5 – Contract Type Ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Appendix A – Ratio Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Appendix B – Discussion of “Cash”. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Appendix C – Median Ratio Comparisons. . . . . . . . . . . . . . . . . . . . . . . . . . . 58 Financial Ratios & Trend Analysis of the CARF-CCAC Accredited Organizations
  • 7. Overview This year’s 2003 ratio publication presents the financial unrealized losses are not explicitly included in any ratios encompassing 2002 financial results for CCAC’s ratio, they affect the value of cash on the balance accredited continuing care retirement communities. sheet (discussed in more detail below). The database of financial results from which these ratios Communities with relatively high equity exposure are computed is unique within continuing care in their portfolios have their cash balances affected retirement communities; by the sheer size of this simply by the mark-to-market requirement for database it has become one of the definitive measures of financial statement presentation. Those who the financial strength of continuing care providers. enjoyed the bull market effect of the past have now As a result, we look to the 2002 ratio results and the seen their market values decline. Few have been trends that they produce with special interest, for the exempt from the ongoing equities market decline. operating climate for CCRCs continues to challenge • Average debt levels remain higher for multi-site even the most successful of providers. The ratios this providers than for the single-sites. This is a year provide evidence of the operating expense consistent trend, with multi-site providers challenges that continue to plague CCRCs: somewhat apparently leveraging their growth and single-site mitigated, but nonetheless ongoing spikes in liability providers apparently more inclined to use cash insurance premiums; health care benefits’ packages balances to fund growth. increasing at double digit rates; health care workers • Profitability Ratios weakened across nearly all leaving long-term care. Revenues have been challenged quartiles as did Total Excess Margin. In a decided as well. Earnings rates on providers’ cash balances shift from previous years, however, the Net remain at historic lows as do the earnings on their Operating Margin Ratio strengthened. Decreased residents’ retirement funds. The equities market has investment earnings and interest income, brought little in the way of increased market value. increasing nursing costs, liability insurance The Operating Margin Ratio, Operating Ratio and premium increases and increasing costs from Total Excess Margin Ratio results reflect the regulatory changes have pressured both sides of this sector’s vulnerabilities. profitability measure. With these ratio values as a prelude it was especially CCRC providers whose investment portfolios contain encouraging to see the degree to which both single-site significant percentages invested in equities may and multi-site providers produced strengthened Net experience financial weakening through several market Operating Margin Ratios. It is the Net Operating pressures. The first is caused by unrealized gains or losses. Margin Ratio that measures a provider’s ability to cover While unrealized gains/losses have no effect on any ratio the costs of its core service, providing care to residents, that is computed in this publication, they have a huge with the revenues generated from this service provision. effect on investment balances. Investments must be More on that later. marked to market for financial statement presentations, and, as a result, cash balances may swing widely based A brief overview of the year’s 2002 results: on market valuations alone. It’s all a matter of timing, of • In a repeat performance of 2001, Days Cash on course, and should the market continue its recent rally, Hand (DCOH) continues to weaken. While liquidity levels may improve in the near future. 2 CARF-CCAC • KPMG LLP • Ziegler Capital Markets Group
  • 8. FINANCIAL RATIOS As noted earlier, a second market pressure can result through its financial strength, with the ability to withstand when realized investment earnings weaken as a result of the financial pressures such as the liability insurance worsened economic factors. “My ongoing concern for crisis without putting services at risk,” says Hermann. many senior living providers is the degree to which they Investments that are needed to cover operations may are comfortable relying on earnings from investments require a sale when market conditions are at their worst. and realized capital gains, rather than ensuring that their Clearly, in order to be in the strongest financial position, core operations are shored-up,” says Dan Hermann, an organization should not be overly dependent on their Managing Director & Group Head, Ziegler Capital investment earnings. Markets Group, Senior Living Finance Group. The Debra Roane, Director of Finance for CCAC, monitors charts (below) show that in 1999 single-site providers the financial health of continuing care retirement TREND ANALYSIS reported that approximately six percent of their earnings communities through reviews of the annual reports they were in interest/investment income and realized submit to the Commission. “CCRCs, like other health gains. In 2002 this has been reduced to 1.5%. We are care providers, have been struggling with significant encouraged this year to see the degree to which reliance operational issues this past year, but increasingly we are on earnings has dropped and that Net Operating Margin seeing an increased momentum to address strategic Ratio has strengthened. Senior living providers who issues such as how to reposition an aging facility to progress in limiting their reliance on investment compete in a rapidly changing market or how to grow to earnings and contributions are viewed favorably by the maintain or build a stronghold in a market area.” capital markets. Investors see this performance as one of Financial strength is critical to meet these strategic goals. the clear measures of management’s abilities. Jennifer Schwalm, Director, KPMG, commenting on the How does an investment banker respond to the 2002 ratios, "In the past many providers have been community that argues that it is their goal to rely as reluctant to raise resident fees to the degree necessary to little as possible on residents for necessary expense cover expenses. I think we’re all pleased to see that changes? “Our response is favorable when we see that a many providers seem to be stepping up to today’s community has found dependable service revenues that challenges in senior living by committing themselves to produce a margin that offsets the need for fee increases. ensuring that resident revenues are keeping pace with But for the community that relies on philanthropy or expense pressures." investments to cover their ongoing operating expenses, the capital markets participants (credit enhancers, rating The CCAC ratio publication has been of critical agencies and investors) will expect to see an ongoing importance for understanding the trends in CCRCs. financial strengthening projected that isn’t dependent CCRCs that use their past performance to set higher on ongoing non-service revenues. We’ve noted standards of financial performance will be the best repeatedly that a community needs to serve its residents positioned to deal with the unknowns of the future. 2002 Revenue Breakdown 1999 Revenue Breakdown 1% 1% 0% 1% 1% 0% 1% 1% 3% 0% 0% 1% Residential Revenue Residential Revenue 1% 6% Entrance Fee Amount 2% Entrance Fee Amount 4% Skilled Nursing Skilled Nursing 6% 5% Assisted Living Assisted Living Adult Day Adult Day 47% 48% Management Fees Management Fees 25% Interest & Gain 24% Interest & Gain Other Op Other Op Change in FSO Change in FSO 11% 11% Administrative Adjustments Administrative Adjustments Net Assets Rld for Op Net Assets Rld for Op Other Non-Cash Other Non-Cash Source: CARF-CCAC Database; Single Sites Source: CARF-CCAC Database; Single Sites Financial Ratios & Trend Analysis of the CARF-CCAC Accredited Organizations 3
  • 9. A Message from the Financial Advisory Panel Chair In early 2003, the merger of two leading accreditation organizations occurred. This merger between CARF (Commission on Accreditation of Rehabilitation Facilities) and CCAC (The Continuing Care Accreditation Commission) has positioned CARF- CCAC to build upon their mutual accreditation histories of providing standards of excellence within care delivery systems and aging services. Today’s marketplace challenges and demands highlight more than ever the need for standards of excellence and for a commitment to serving consumers in the best way possible. The fragmentation of the senior living marketplace can often confuse the very consumer that the marketplace is intended to serve. CARF-CCAC standards will assist consumers in identifying high-quality providers of care. Many senior living organizations are actively seeking to diversify the services provided within their own continuums. While continuing to have direct benefit to the traditional Continuing Care Retirement Community service structure, the CARF-CCAC merger will dramatically expand accreditation opportunities to organizations serving consumers within the senior living environment. CARF-CCAC will continue the focus on efficient and effective services to residents through sophisticated uses of technology, the streamlining of business process and an ongoing desire to strengthen business practices within senior living. The creation of one industry leader in accreditation will provide consumers with enhanced abilities to navigate what can be at times an intimidating and complicated senior living environment. Eventually, ratios derived from new continuum models will be incorporated into publications such as this one. Traditional CCRCs and other models will be provided opportunities to earn the CARF-CCAC “seal of approval.” CCAC has an exciting and dynamic past but the past is just the beginning. Excellence, efficiency, growth, leadership, service: all point to a CARF-CCAC that will not only provide accreditation opportunities but will seek to enhance the lives of people served within the field of aging. Richard Olson Chairman CARF-CCAC Financial Advisory Panel September 2003 4 CARF-CCAC • KPMG LLP • Ziegler Capital Markets Group
  • 10. CHAPTER 1 C C A C INTRODUCTION The Uses and Limitations of this Publication Background Quartile Rankings The purpose of this publication is to provide, in For each financial ratio, the highest and the lowest ratios summary form, for 1991 through 2002, the financial ratio are presented to provide an overall sense of the range for quartiles of the CARF-CCAC accredited organizations each ratio. Also, quartile divisions have been calculated. (hereafter referred to as CCRCs regardless of individual Each single-site or multi-site provider’s ratio was ranked states’ designations) that were accredited by the CARF- in ascending order (or descending order, depending on Continuing Care Accreditation Commission (the the nature of the ratio), then the list was divided into Commission or CCAC) as of December 2002. This four equal groups. The best ratio in the lowest quarter year’s publication, with over a decade of data, provides defines the 25 percent quartile marker (the point at valuable industry benchmarks allowing readers of this which 25 percent of the providers reporting that ratio publication a unique opportunity to view the financial are at or below), the best ratio in the next quartile trends resulting from a number of factors: provider defines the 50 percent quartile marker (or the median), growth, accounting changes, operating challenges, and and the best ratio in the third quartile defines the regulatory changes, to name a few. 75 percent quartile marker. The group of organizations included in this report consists of 36 multi-site providers (representing 148 The Benefits of Financial Ratios accredited organizations) and 162 single-site providers. Financial ratios are valuable tools of analysis. Ratios are: Four of the organizations included in this publication • A useful tool in analyzing a provider’s financial operate on a for-profit basis. strengths and weaknesses; The intent of this report is: • Valuable in identifying trends; • To assist individual CCRC boards and management • Presented in the form of arithmetic computations teams in understanding and fulfilling their fiduciary which are easy to use for both internal and external responsibilities to residents; comparisons; • To provide an ongoing mechanism for strengthening • Helpful in identifying unusual operating results; the Commission’s financial performance • Useful for illustrating best practices of the standards; and financially strong providers; and • To promote better understanding of CCRCs among • Valuable because they provide comparisons among outside constituencies such as investors, regulators, providers regardless of the actual dollar amounts for and consumers. the underlying data. This report represents the eleventh publication of financial ratios for CCAC-accredited providers. It provides standardized financial information to CCRC boards, management teams, and the broader professional and consumer constituencies. Ratios have been computed using information from the audited financial statements of the accredited organizations. Data have been collected and the ratios calculated and analyzed by representatives from CARF- CCAC, KPMG LLP (KPMG) and Ziegler. The information provided herein is of a general nature and is not intended to address the specific circumstances of any individual or entity. Financial Ratios & Trend Analysis of the CARF-CCAC Accredited Organizations 5
  • 11. The Limitations of Financial Ratios Furthermore, the types of contracts that are offered to residents at CCRCs may affect certain ratios. Generally, However, financial ratios have limits. Specifically: accredited CCRCs offer one or more of five basic • Ratios are not an exclusive tool to be used in contract types: isolation; and • Extensive Contracts (Type A) have an up-front • The interpretation of an individual CCRC’s ratios entry fee and include housing, residential services may be meaningless or ratios may be distorted due amenities and unlimited, specific health-related to variations in reporting treatments. services with little or no substantial increase in Ratios are often characterized as having “best” values. monthly charges, except for normal operating costs Yet, specific circumstances often require substantial and inflation adjustments; exceptions to these standard interpretations. Thus, the • Modified Contracts (Type B) have an up-front entry reader is cautioned about drawing quick conclusions that fee and and include housing, residential services ‘Provider A’ is better than ‘Provider B’ because ‘A’ has a amenities and a specific amount of long-term particular financial ratio above the 75 percent quartile nursing care with no substantial increase in while ‘B’s is below the 25 percent quartile. monthly charges (reductions in fees may occur for a specified period of time (e.g., 30 days per year) In general, no single ratio should be looked at in or the resident’s monthly charges may increase as isolation. Rather, ratios must be looked at in combination the level of care increases but at a discount from with other ratios and with nonfinancial information to the posted fees for the services); interpret the overall financial condition of a provider. • Fee-For-Service Contracts (Type C) have an up- A particular provider’s performance must also be front entry fee and and include housing, residential evaluated based on where it is in its life cycle. For services amenities for monthly charges that example, start-up organizations would be expected to increase directly with the level of care provided; have a relatively unfavorable (high) Long-term Debt to • Rental Contracts (Type D) do not require an up- Total Assets Ratio, whereas a mature community would front entry fee and the resident’s monthly charges be expected to have a relatively favorable (low) Long- increase directly with the level of care provided. term Debt to Total Assets Ratio. Similarly, a high Long- Typically, residents are guaranteed access to term Debt as a Percentage of Total Capital Ratio for a health care services; and start-up community should not necessarily be • Equity Contracts are similar to cooperative housing, considered a point of concern. Conversely, unless further whereby residents have membership in the investigation reveals that a substantial renovation and corporation and sign a proprietary lease agreement. modernization program has recently been financed, a Knowledge of this contract experience is helpful when comparatively high Long-term Debt as a Percentage of examining ratio results. When the results of the ratios Total Capital Ratio for a mature community could signal appear to have been affected by the types of contracts in a significant problem. existence, comments have been included in the ratio discussion. Chapter Five presents each of the ratios by contract type. 6 CARF-CCAC • KPMG LLP • Ziegler Capital Markets Group
  • 12. FINANCIAL RATIOS Uses of this Report CCAC uses the ratios published in this report extensively throughout the accreditation process to Given the limitations mentioned above, we expect the assist in measuring compliance with Commission Commission’s accredited organizations to use the ratios Standards IA: Current Financial Position and IIB: Long- published in this report as points of reference for Term Financial Resources. In this regard, ratio analysis is developing internal targets of financial performance, but utilized as: only after considering their own specific marketing, physical plant, and mission/vision considerations. We • A Strategic Planning Tool: Once an organization has also anticipate that others will use these ratios, been accepted as a candidate, it is required to particularly within the capital markets, to learn about develop a three-year strategic plan that is the financial position of organizations that have been integrated with a five-year financial plan. As TREND ANALYSIS subjected to the screening of the Commission’s staff members formulate strategic initiatives and accreditation process. The ratios can also be used as assess the financial impacts of each, ratio analysis benchmarks against which to evaluate nonaccredited greatly assists with the selection and prioritizing organizations and to gain a deeper understanding about of such initiatives. the sector as a whole. • A Continuous Financial Assessment Tool: After receiving accreditation, both the accredited Growth in the financial sophistication of retirement organization and CCAC use this report (in communities and increased understanding of their credit conjunction with RatioPro) to measure financial strength and operational patterns by rating agencies and viability, trending and ongoing compliance with the other capital market participants have produced a Commission’s financial standards. favorable environment for many CCRCs. Approximately 132 senior living providers, the majority of which are continuing care retirement organizations, have their CCAC Financial Advisory Panel debt rated. Within CCAC’s accredited population, forty- CCAC Financial Advisory Panel (FAP) is an advisory six single-sites and 15 multi-site organizations are rated. group to the Commission. It includes representatives Within the 15 multi-site obligated groups are eighty-two from major public accounting firms, chief financial accredited organizations. Therefore, 128, or 37 percent officers from accredited CCRCs, and representatives of CCAC’s 334 accredited organizations are rated as of from the development and finance industries. All panel December 31, 2002. For a few of the ratios, the rating members have demonstrated expertise in the aging agencies utilize calculation methodologies different than services field. those used in this study. The reference chart in The role of the FAP is: Appendix A provides a guide for the calculation of each of the ratios in this publication. • To review and recommend revisions in the Commission’s financial standards. • To review and evaluate the financial position of candidate and accredited organizations. • To assist in training the Commission’s finance evaluators. Financial Ratios & Trend Analysis of the CARF-CCAC Accredited Organizations 7
  • 13. Commission on Accreditation of Rehabilitation Ziegler Facilities (CARF) Ziegler Capital Markets Group is a specialist in senior CARF is an independent, not-for-profit organization that living finance, focused primarily on tax-exempt debt. accredits human services providers for their rehabilitation, Since 1990, Ziegler has senior-managed nearly $9 billion employment, child and family, or aging services. Founded of tax-exempt bond issues for senior living facilities, far in 1966 as the Commission on Accreditation of more than any other investment banking firm. Ziegler is Rehabilitation Facilities, the accrediting body is now committed to serving senior living providers whenever known as CARF. CARF establishes consumer-focused the need arises for a wide range of financial and advisory standards to help providers measure and improve the needs, not only when a financing transaction is pending. quality, value, and outcomes of their services. To this end, Ziegler offers a broad range of financing services to senior living providers that includes: At present, CARF has accredited more than 4,000 organizations in the United States, Canada, and Western • Investment Banking Europe in the areas of adult day services, aging services • FHA Mortgage Banking continuums (including continuing care retirement • Financial Risk Management communities), assisted living, behavioral health, • Investment Management employment and community services, medical • Mergers and Acquisitions rehabilitation, and opioid treatment programs. • Seed Money & Mezzanine Financing • Capital and Strategic Planning The CARF offices are at 4891 East Grant Road, Tucson, • Industry Research and Education AZ 85712, USA. CARF Canada, a member of the CARF international KPMG group of organizations, is at 10665 Jasper Avenue, Suite KPMG is a leading provider of assurance, tax, and risk 1400A, Edmonton, AB T5J 3S9, Canada. advisory services. KPMG’s Senior Living Services CARF merged through an acquisition with the Practice focuses specifically on helping senior living Continuing Care Accreditation Commission to form providers achieve their objectives and succeed in a CARF-CCAC. changing environment through measuring performance, For more information about the CARF accreditation managing risks, and leveraging knowledge. KPMG process, please visit the CARF web site at www.carf.org; professionals are knowledgeable about the issues that or e-mail ads@carf.org (adult day services), al@carf.org affect the senior living environment. The skills, (assisted living), bh@carf.org (behavioral health), resources, and insights of KPMG professionals play an ecs@carf.org (employment and community services), important role in securing critical information that guide medical@carf.org (medical rehabilitation), otp@carf.org clients in formulating individual and collective decisions (opioid treatment programs); or call (520) 325-1044. For regarding alternative senior living strategies. KPMG’s Senior Living Services Practice provides a wide more information about accreditation of continuing care spectrum of senior services, including: retirement communities, visit www.ccaconline.org or write info@ccaconline.org. • Accounting and information systems design; • Assurance and tax services; Continuing Care Accreditation Commission • Alliance strategy assistance; • Clinical advisory services; The Continuing Care Accreditation Commission • Financial planning and feasibility studies; (CCAC) is part of CARF’s customer service unit for • Market analysis and research; Aging Services, including CCRCs. As of September • Mergers and acquisition assistance; 2003, there are 346 CARF-CCAC accredited continuing • Operations performance and process improvement; care retirement communities. These organizations are • Project management and development; committed to meeting Standards of Excellence for • Regulatory compliance; Aging Services. The CARF-CCAC accreditation offers to • Reimbursement services; the public, assurance that there has been an external • Revenue cycle management; third party review of quality. • Strategic business planning and board development; and • Strategic repositioning. 8 CARF-CCAC • KPMG LLP • Ziegler Capital Markets Group
  • 14. FINANCIAL RATIOS Data Collected from Development Audited Financial Statements of the Database Audited financial statements are used as data source for the ratio calculations in order to enhance the integrity of The charts and tables in this report present data the database. The classification of certain items in the collected from the 1991 through 2002 fiscal year audited audited financial statements, such as investment financial statements of the multi-site and single-site earnings and unrestricted contributions, may differ providers accredited as of December 2002. For among providers. Accordingly, certain reclassifications organizations that were accredited for the first time were made by the preparers of this report for the during their 2002 fiscal year, the ratio results reported purposes of calculating certain ratios to promote TREND ANALYSIS for 2001 in the 2003 publication remain unchanged. In consistency within the ratio category. Such adjustments the discussion of this year’s ratio results the text will were reviewed by professionals from KPMG. note whether the inclusion of the financial results of these newly accredited organizations would have Multi-site and Single-site Providers significantly altered the previously reported 2001 We have divided the presentation of data between ratio results. single-site and multi-site providers. Where the type of Under the terms of its charter, all of the Commission’s provider appears to have a significant impact on ratio accredited organizations must include independent performance, the impact is noted and discussed. living units and a plan for providing continuing care for The decision to include only data derived from audited residents as they age, including one or more levels of financial statements in calculating the ratios means that healthcare, and an overall program of supportive services each multi-site provider is represented by one set of such as meals and activity programs. As of December ratios, rather than having the ratios of each of its 2002 most of the Commission’s accredited organizations individual operating entities represented. Multi-site used a combination of up-front fees collected at the providers generally have corporate structures that, for time a resident moves into the community (entry fees) financial statement purposes, consolidate or combine and monthly charges. subsidiaries or unincorporated divisions. Some of these Prior to each ratio’s discussion, the definition of the ratio divisions may include activities and results from other is displayed. However, this definition is general in operations in addition to those of an accredited CCRC. nature. To enhance the accuracy and usefulness of this Most multi-site providers usually do not prepare publication, a chart has been included (see Appendix A) separate audited financial statements for each of their to give a more detailed guide to each ratio’s calculation. accredited organizations. The chart was developed by analyzing actual nomenclature from the audited financial statements of Types of Financial Ratios the accredited providers. Each line from the balance sheet/statement of financial position and statement of Three groups of financial ratios are presented in this activities is assigned to the numerator or denominator report: Margin (or Profitability) Ratios, Liquidity Ratios, (and sometimes, both) of each of this publication’s ratios. and Capital Structure Ratios. Each group is covered in one of the following chapters. Each chapter, in turn, is divided into a description and a discussion of certain commonly used ratios in each group. Financial Ratios & Trend Analysis of the CARF-CCAC Accredited Organizations 9
  • 15. For each ratio, we provide a specific definition and In addition, on each graph we note the numeric values formula, a graph illustrating the accredited population’s for the medians of the single-site and multi-site provider ratio “curve” for the 2002 data for both single-site and populations. We eliminate any significant outliers from multi-site providers, a graph showing the trends in each each graph so that the data can be presented clearly in ratio’s medians over the years, and a table summarizing this format. The number of outliers removed are the results of the quartile analysis for each of the years identified at either end of each curve (please see of the study. The quartiles are identified with the example following). Outliers are not removed for following symbols: calculation of the quartiles. s 25 th percentile We discuss the significance of each ratio, any limitations 5 50 th percentile or problems inherent in its use, the findings from the accredited organizations and an interpretation of results. q 75 th percentile Obvious trends are noted. Trended Median Ratio 112% Multi-site 108% Single-site 104% Percentage 100% 96% 92% 88% 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Year 2002 Ratio Multi-site median value Number of outliers removed from the upper end of the spectrum 20% Multi-site 15% 0 Single-site 0 10% 5% Percentage 0% - 0.04% -0.66% -5% -10% -15% 2 3 -20% Number of outliers removed from the lower end of the spectrum Single-site median value 10 CARF-CCAC • KPMG LLP • Ziegler Capital Markets Group
  • 16. FINANCIAL RATIOS be unable to collect all amounts due according to the What’s New? contractual terms of the security. Statement 115 indicates that the "other than temporary" evaluation should be performed on an individual-security basis, and Other Than Temporary Declines that the unrealized loss of one debt or equity security in Fair Value of Investments should not be offset with the unrealized gains of another Due to continuing declines in the fair value of debt and debt or equity security to avoid loss recognition in equity securities during 2002, the ratios may reflect the income of "other than temporary" declines in fair value recognition of "other than temporary" declines in fair below cost. value of investments in debt and equity securities. TREND ANALYSIS Accounting guidance related to this issue has been in Implications to Ratios existence for a number of years; however, market Realized gains (losses) on investments are included in conditions have resulted in a significant increase in the Excess Margin, the Debt Service Coverage Ratio, recognition of other than temporary declines during 2002. the Debt Service Coverage Ratio—Revenue Basis, and A decline in the fair value of an investment in a debt or Debt Service as a Percentage of Total Operating equity security below (amortized) cost or carrying value, Revenues and Net Nonoperating Gains and Losses as appropriate, that is "other than temporary" is Ratio. If current market trends are to continue, these accounted for as a realized loss, whereby the cost basis ratios may experience continuing declines as a result of of the security must be written down to fair value. For the accounting for additional "other than temporary" investor-owned healthcare organizations, FASB declines in the fair value of investment securities. Statement No. 115, ”Accounting for Certain Additionally, because this measure is considered in the Investments in Debt and Equity Securities,” performance indicator, it may negatively impact ratios (Statement 115) paragraph 16, discusses other than subject to covenant measurement, if the covenants were temporary declines in fair value. For not-for-profit not structured to specifically exclude the investment or healthcare organizations, FASB Statement No. 124, noncash activity. “Accounting for Certain Investments Held by Not-for- While treatment of this loss recognition as it relates to Profit Organizations” does not specifically address other undefined covenant definitions is subject to than temporary declines. However, paragraph 4.07 of the interpretation by trustees, underwriters and attorneys, AICPA Audit and Accounting Guide, Health Care for this year’s publication "other than temporary" Organizations, indicates that other than temporary declines in the fair value of investment securities has impairment losses are to be included in the performance been excluded from the ratios (i.e. not recognized in the indicator (e.g., excess of revenue over expenses) of not- performance indicator). The basis for this decision has for-profit healthcare organizations. been the general practice of covenant definition to The consideration of "other than temporary" is applied exclude noncash activity (e.g., "other than temporary" to each investment, except for those investments that declines in investment activity). This treatment will be are carried at fair value and the changes in fair value are reevaluated for future years’ publications in an effort to included in the determination of income, such as trading reflect the consensus of the CCRC boards, management securities. An "other than temporary" impairment exists teams, and professional and consumer constituencies. for debt securities if it is probable that the investor will Financial Ratios & Trend Analysis of the CARF-CCAC Accredited Organizations 11
  • 17. Rescission of FASB Statements Nos. 4 and 64, Amendment of What’s New for Next Year? FASB Statement No. 13, and Technical Corrections SOP 02-2, Accounting for Derivative FASB Statement No. 145 (Statement 145) rescinded Instruments and Hedging Activities FASB Statement No. 4, “Reporting Gains and Losses by Not-For-Profit Health Care from Extinguishment of Debt,” (Statement 4) and Organizations, and Clarification of FASB Statement No. 64, “Extinguishments of Debt the Performance Indicator Made to Satisfy Sinking-Fund Requirements,” which Financial Accounting Standards Board (FASB) amended Statement 4. Beginning with fiscal years Statement of Financial Accounting Standards No. 133 beginning after May 15, 2002, the implementation of (Statement 133) establishes accounting and reporting this statement affected income statement classification standards for derivative instruments, including certain of gains and losses from extinguishment of debt. derivative instruments embedded in other contracts, Statement 4 required that gains and losses from (collectively referred to as derivatives) and for hedging extinguishment of debt be classified as an extraordinary activities. It was effective for fiscal quarters beginning item, if material. However, over time, the after June 15, 1999. A new Statement of Position (SOP) extinguishment of debt was considered to be a risk clarifies the implementation of FAS 133 for not-for- management strategy by the reporting enterprise. profit health care organizations, among other things. Therefore, the FASB does not believe it should be Statement of Position (SOP) 02-2, “Accounting for considered extraordinary under the criteria in APB Derivative Instruments and Hedging Activities by Not- Opinion No. 30, “Reporting the Results of Operations— for-Profit Health Care Organizations, and Clarification of Reporting the Effects of Disposal of a Segment of a the Performance Indicator” (SOP 02-2) by the Business, and Extraordinary, Unusual and Infrequently Accounting Standards Executive Committee, provides Occurring Events and Transactions” (APB 30), unless guidance with respect to how nongovernmental not-for- the debt extinguishment meets the unusual in nature profit health care organizations should report gains or and infrequency of occurrence criteria in APB 30, which losses on hedging and nonhedging derivative instruments is expected to be rare. As a result, gains or losses under Statement 133, as amended, and clarifies certain incurred as a result of the extinguishment of debt are matters with respect to the performance indicator now included in income. (earnings measure) reported by such organizations. This SOP 02-2 requires that not-for-profit health care Implications to Ratios organizations apply the provisions of Statement 133 related to accounting and reporting for derivative Gains and losses incurred as a result of the instruments and hedging activities. Statement 133 extinguishment of debt will be generally included as requires that an entity recognize all derivatives as either nonoperating gains and losses for purposes of calculating assets or liabilities in the statement of financial position the ratios. Ratios that are influenced by this change and measure those instruments at fair value. If certain include the Operating Margin, Excess Margin, and Debt conditions are met, a derivative may be specifically Service as a Percentage of Total Operating Revenues and designated as a hedge of the exposure to changes in the Net Nonoperating Gains and Losses Ratio (for fair value of a recognized asset or liability or an nonoperating gains only). unrecognized firm commitment or a hedge of the exposure to variable cash flows of a forecasted transaction. 12 CARF-CCAC • KPMG LLP • Ziegler Capital Markets Group
  • 18. FINANCIAL RATIOS SOP 02-2 also amends the AICPA Audit and Accounting Guide, Health Care Organizations, to clarify that the performance indicator (earnings measure) reported by not-for-profit health care organizations is analogous to income from continuing operations of a for-profit enterprise. SOP 02-2 is effective for fiscal years beginning after June 15, 2003 and will most likely affect future year’s ratio analysis, as entities will have to conform their current accounting for derivative instruments to that TREND ANALYSIS required by Statement 133. Implications to Ratios As is the case with unrealized gains/losses on investments, unrealized gains/losses on the derivative are not included in the CCAC ratio calculations. However, because an asset or liability balance is required to be maintained, the capital structure ratios will be impacted. Any realized gains/losses from derivative instruments will be included in the total excess margin ratio, as is the case with realized investment gains/losses. Financial Ratios & Trend Analysis of the CARF-CCAC Accredited Organizations 13
  • 19. 14 CARF-CCAC • KPMG LLP • Ziegler Capital Markets Group
  • 20. CHAPTER 2 C C A C M A R G I N ( P R O F I TA B I L I T Y ) RAT I O S Margin Ratios indicate the excess or deficiency of revenues over providers are encouraged to classify insurance separately, if expenses. One of the drivers of success for senior living providers material, from other expense line items on their statements of is the organization’s ability to generate annual operating surpluses activities/income statement to enable future analysis of the effect of to provide for future resident care expenses, capital and program rising liability insurance costs on CCRCs’ margin ratios. needs and to handle unexpected internal and external events. Five margin ratios measure the degree to which providers generate surpluses:. • Operating Margin Ratio; Operating Margin Ratio • Operating Ratio; • Total Excess Margin Ratio; • Net Operating Margin Ratio; and Income or Loss from Operations • Net Operating Margin Ratio—Adjusted. – Contributions To maintain consistency among the information presented in prior Total Operating Revenues years, certain protocols were adopted. Certain items, regardless of the financial statement presentation of the individual provider, are reclassified as either operating or nonoperating revenue. Definition and Significance Interest earnings are considered operating revenue; realized gains The Operating Margin Ratio indicates the portion of on investments are not. Net assets released from restriction for operations are also considered operating revenue. While the total operating revenues remaining after operating majority of the total contributions reported by accredited expenses are met. The AICPA’s Audit and Accounting organizations were identified as operating revenue on the audited Guide for Healthcare Organizations defines "total financial statements, we have uniformly classified contributions/ operating revenues" to include all operating revenues donations as nonoperating revenue. This classification method net of contractual allowances and charity care. Though results in a variance between the Operating Margin Ratio and included in the definition of Total Operating Revenues Total Excess Margin Ratio that is useful for determining the the Operating Margin calculation excludes contributions degree to which a provider relies on its contributions/donations and realized investment gains to cover operating expenses. and realized investment gains or losses. Non-cash items such as earned entry fees are included. Revenues from Several items on some providers’ audits would benefit from changes in the way in which information is presented in the nonoperating sources that are not ongoing, major or financial statements. To ensure accurate ratio calculations, central to operations, such as gains and losses from the providers are encouraged to separate realized from unrealized dispositions of assets, are excluded. This ratio focuses on gains for unrestricted net assets on the statement of activities/ operations and is sometimes considered to be the income statement or, at the very least, to provide detail separating primary indicator of a provider’s ability to generate the two in the notes of the financial statements. Secondly, surpluses for future needs and unplanned events. Operating Margin Ratio Quartiles Single-site Multi-site Providers Worst Best 25th% 50th% 75th% Providers Worst Best 25th% 50th% 75th% 1991 -29.14% 20.95% -3.24% 0.57% 3.73% 1991 -14.83% 10.31% -2.78% -0.68% 0.59% 1992 -22.70% 24.59% -4.34% 0.07% 3.34% 1992 -24.96% 10.33% -3.25% -0.84% 1.73% 1993 -24.70% 24.69% -3.52% 0.45% 3.29% 1993 -12.38% 7.77% -5.33% 0.45% 2.82% 1994 -38.03% 16.57% -2.87% 1.01% 4.86% 1994 -15.41% 10.87% -3.39% -0.43% 3.43% 1995 -151.60% 21.36% -0.78% 3.52% 6.64% 1995 -17.10% 18.44% -2.17% -0.65% 3.25% 1996 -152.23% 18.65% -0.06% 3.63% 6.51% 1996 -20.50% 18.40% -2.85% 1.40% 2.42% 1997 -32.32% 40.73% 0.57% 4.80% 8.50% 1997 -16.35% 29.38% -1.31% 1.74% 5.30% 1998 -80.16% 37.91% -2.01% 2.84% 8.75% 1998 -14.25% 28.03% -0.75% 2.75% 6.87% 1999 -61.98% 39.06% -3.08% 2.68% 6.48% 1999 -16.47% 15.14% -1.07% 2.35% 5.06% 2000 -56.45% 21.55% -3.48% 0.84% 4.98% 2000 -20.50% 17.70% -6.30% -0.16% 7.12% 2001 -74.78% 15.74% -5.62% -0.63% 3.17% 2001 -18.29% 9.92% -5.84% -1.13% 3.95% 2002 -55.74% 14.36% -5.39% -0.66% 2.62% 2002 -22.48% 11.80% -2.40% -0.04% 3.77% Financial Ratios & Trend Analysis of the CARF-CCAC Accredited Organizations 15
  • 21. However, many financial experts believe the Total CCAC Ratio Database Results Excess Margin Ratio to be a better indicator of a Senior living has been gripped in the past years by a provider’s overall financial performance. number of margin deflating factors that it has yet to For purposes of calculating the Operating Margin Ratio, shake: rising nursing costs, increasing liability insurance we have excluded the impact of any changes in future costs, reimbursement reductions, and implementation service obligation reflected on the Statement of costs of the regulatory requirements of HIPAA, to name Activities. Typically, credit analysts do not consider the a few. In addition, the earnings rates on investments effects of this line item in their analysis of operating continue at historic lows. The impact of each of these profitability because this actuarial computation is issues has affected large and small providers, both typically a one-time event that has only long-range single-site and multi-site providers. However, for the implications. Further, incorporating this item in the first time in a number of years, the performance of budgeting process when targeting a specific level of the multi-site providers exceeded that of the single- performance in terms of the Operating Margin Ratio site providers. could prove misleading because the change in future As noted above, both provider types are faced with a service obligation reflects a year-end adjustment in the number of increasing expense pressures. The most associated deferred liability accounts versus a true obvious problem areas were insurance, administration, operating revenue or expense. Based on the analysis of and health center costs. Anecdotally, many providers have the underlying data, the impact on the ratio would not noted significant increases in health insurance benefit be significant if it were included. Other non-cash items costs. Despite these ongoing expense pressures, both excluded from the computation of the Operating Margin provider types kept their expense increases in check. Ratio are changes in value of hedging instruments such The average expense increase for single-site providers as swaps, caps, collars, etc. These items are generally was just over one percent; the average expense increase marked to market quarterly or at least annually, but in all for multi-site providers was just under four percent. cases will result in a non-cash entry reflecting the mark- Multi-site providers balanced this increase with a nearly up or mark-down. matching revenue increase. The average revenues per In general, a trend of stable or increasing Operating single-site provider edged just beyond their expense Margin Ratio values is favorable. A declining trend increase. On the revenue side, the detail behind the and/or negative ratio may signal an inappropriate performance of the two provider types shows that the monthly service fee pricing structure, poor expense average increase in residential revenues for multi-site control, low occupancy, or operating inefficiencies. If a providers increased by over nine percent; for single-site provider has a low Operating Margin Ratio but a high providers the increase was significantly less, just over Total Excess Margin Ratio, the provider may be relying four percent. The Net Operating Margin Ratio significantly on nonoperating gains and/or contributions. performance of both provider types, despite industry While some providers experience a trend of steady expense pressures and a weakened national economy, contributions, others find donation revenue difficult to was favorable and is discussed under the Net Operating control and predict. Margin Ratio section. 16 CARF-CCAC • KPMG LLP • Ziegler Capital Markets Group
  • 22. FINANCIAL RATIOS Trended Median Operating Margin Ratio 6% Multi-site Single-site 4% Percentage 2% TREND ANALYSIS 0% -2% 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Year 2002 Operating Margin Ratio 20% Multi-site 15% 0 Single-site 0 10% 5% Percentage 0% - 0.04% -0.66% -5% -10% -15% 2 3 -20% Financial Ratios & Trend Analysis of the CARF-CCAC Accredited Organizations 17
  • 23. Operating Ratio dependence on operating revenues, such as monthly Total Operating Expenses resident charges, as entry fee cash flows decline to those – Depreciation Expense generated by normal resident turnover. In addition the – Amortization Expense argument is sometimes made that mature providers should rely on entry fees only to cover capital expenditures, Total Operating Revenues but as the results below indicate, entry fees are utilized – Amortization of Deferred Revenue by many providers to fund a portion of operations. Definition and Significance CCAC Ratio Database Results The Operating Ratio is a stronger measure of an The Operating Ratio indicates whether current year cash organization’s performance, stripping non-cash items operating revenues are sufficient to cover current year from the computation and focusing on the coverage of cash operating expenses. This ratio excludes non-cash cash expenses provided by cash revenues. Perhaps one of revenues (e.g., amortized entry fees). Neither cash from the most important findings in this year’s study is the net entry fees collected nor contributions are included. significant improvement (approximately 300 basis points) Although the exclusion of non-cash revenues is offset by of the Operating Ratio for the lowest quartile of multi- an exclusion of non-cash expenses (e.g., depreciation site providers. The lowest quartile of the single-site and amortization), typically the Operating Ratio proves providers improved as well, but the improvement was a more stringent test of a provider’s ability to support slight (less than 100 basis points). One of the key annual operating expenses than the Operating Margin revenue drivers in a senior living organization is its Ratio. Though an Operating Ratio of less than 100 occupancy rate, and, per the National Investment percent is desired, this ratio may push above the 100 Center’s Key Financial Indicators, CCRC occupancy has percent mark (a value resulting from cash operating strengthened modestly at all levels of care through 2002. expenses exceeding cash operating revenues) because of the historical dependence of many CCRCs on cash from The increase in average cash revenues exceeded the entry fees collected to offset operating expenses, increase in average cash expenses for single-site providers. particularly interest expense. Multi-site providers had double digit percentage increases in a number of their expense categories, but to what Many factors must be considered when evaluating the degree these increases may have been due to growth Operating Ratio. These factors include, but are not isn’t known. Regardless of the reason for the expense limited to, contract type, price structure (balance increases, the data show that revenues aren’t keeping between entry fees and monthly service fees) and pace for multi-site providers. Though the average refund provisions. Young CCRCs in particular will often increase in resident revenues for multi-site providers experience ratios in excess of 100 percent if they have was over 9 percent, the largest cost center for the multi- been structured to rely on initial entry fees to subsidize site providers, the nursing area, had average expenses operating losses during the early, fill-up years. Financial increase by nearly 14 percent; single-site providers had a analysts sometimes argue that the Operating Ratios of much smaller increase in their average resident services mature CCRCs should drop below 100 percent. They revenue (4.1 percent), but average nursing costs, also argue that revenue sources should shift toward a greater their largest cost center, increased by just 4.6 percent. Operating Ratio Quartiles Single-site Multi-site Providers Worst Best 25th% 50th% 75th% Providers Worst Best 25th% 50th% 75th% 1991 140.52% 60.61% 112.76% 104.88% 95.64% 1991 127.42% 93.68% 112.90% 107.48%100.41% 1992 139.76% 60.55% 111.81% 104.80% 96.53% 1992 123.23% 94.33% 109.88% 103.32% 98.46% 1993 133.36% 68.21% 110.78% 103.42% 95.47% 1993 123.36% 92.94% 107.98% 100.31% 96.68% 1994 132.06% 75.56% 110.34% 102.66% 96.12% 1994 119.46% 87.98% 108.79% 98.62% 94.63% 1995 306.38% 74.32% 105.54% 98.62% 92.63% 1995 126.54% 84.19% 110.32% 102.82% 93.27% 1996 330.25% 79.34% 104.38% 98.57% 93.45% 1996 132.52% 71.93% 110.14% 99.69% 94.55% 1997 130.22% 64.95% 104.69% 97.84% 91.33% 1997 116.35% 61.54% 105.95% 99.21% 92.65% 1998 147.81% 66.96% 105.71% 97.99% 90.91% 1998 127.66% 64.79% 103.15% 95.51% 90.73% 1999 163.57% 72.83% 108.00% 101.15% 92.44% 1999 118.43% 78.39% 103.13% 98.44% 92.98% 2000 150.07% 73.91% 107.54% 100.57% 95.12% 2000 125.96% 77.56% 110.69% 102.76% 97.19% 2001 175.27% 80.38% 108.86% 102.24% 96.34% 2001 122.52% 84.23% 111.63% 102.02% 97.41% 2002 144.90% 82.18% 108.29% 101.71% 96.74% 2002 121.17% 87.09% 108.47% 102.17% 97.56% 18 CARF-CCAC • KPMG LLP • Ziegler Capital Markets Group
  • 24. FINANCIAL RATIOS The margin pressures described in the Operating expenses with cash revenues than providers with other Margin Ratio discussion (decreased interest earnings, contract types. These providers must price their services increasing nursing costs, liability insurance premium to ensure that costs of care are adequately covered from increases, decreased reimbursement rates, increased resident revenues, for they may not have the levels of costs due to implementation of regulatory changes) liquidity to cover unforeseen costs of care increases create a dilemma for providers who are unable or through the use of cash as do communities with unwilling to recover the loss of cash revenues or increase significant cash balances from entry fee receipts. Not in cash expenses from other sources. Providers who are surprisingly, it is the communities with predominantly effectively managing these issues are considering a Extensive Contracts that have the weakest operating breadth of margin management solutions, all of which ratios. Each quartile of the Operating Ratios for single- typically incorporate a high degree of resident education: site providers that offer Extensive Contracts weakened TREND ANALYSIS rate increases (more frequently than one time annually between 2001 and 2002. The most favorable comparative in some cases); expense reductions through outsourcing, performance between 2002 and 2001 occurred for the creative staffing reductions; reconfiguration of benefits single-site providers with Modified Contracts, where packages; investment policy review; endowment each quartile improved by over 200 basis points. However, reevaluation, etc. A review of this ratio by contract type it is important to note that this category of community shows that Type D providers (those where a has the smallest number of data points (n=17 in 2002), predominant number of signed contracts are Rental and hence is subject to more data variation. Contracts) are better positioned to recover their cash Trended Median Operating Ratio 112% Multi-site 108% Single-site 104% Percentage 100% 96% 92% 88% 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Year 2002 Operating Ratio 130% 4 Multi-site 125% Single-site 0 120% 115% Percentage 110% 105% 101.7% 102.2% 100% 95% 90% 0 85% 0 80% Financial Ratios & Trend Analysis of the CARF-CCAC Accredited Organizations 19
  • 25. Total Excess Margin Ratio A value greater than zero for the Total Excess Margin Ratio is essential for a provider to achieve positive net Total Excess of Revenues over Expenses assets, to maintain a favorable balance sheet/statement Total Operating Revenues and Net of financial position, and to provide adequate Nonoperating Gains and Losses contingency funds for unforeseen financial needs. Definition and Significance CCAC Ratio Database Results The Total Excess Margin Ratio for both single-site and The Total Excess Margin Ratio includes both operating multi-site providers presents a stronger picture of and nonoperating sources of revenue and gains. To financial performance than the other profitability ratios. promote consistency and comparability, the Total Excess The gap between the Operating Margin Ratio and the Margin Ratio has been computed based on total excess Total Excess Margin Ratio is primarily due to the revenues over expenses before any extraordinary items inclusion of contributions and realized gains in the and changes in accounting principles. Unrestricted calculation of the latter ratio. Concerns about a contributions are included in both the numerator and provider’s Operating Margin Ratio may be mitigated denominator of the ratio, as are any realized gains/losses when the Total Excess Margin Ratio is evaluated on unrestricted investments or derivatives. Unrealized depending on the provider’s performance in these areas. gains/losses should be excluded from the computation of all profitability ratios. The effect of the prolonged bearish equities market may have taken a toll on donations to senior living This ratio is most sensitive to the argument put forward communities; average contributions decreased for both by many nonprofit providers that, since many have types of providers. Unfortunately, as in previous years, unique and reliable access to charitable donations as an the volatility of the stock market affected the ratio ongoing source of support, charitable donations should results for both types of providers as well, with each be included in measuring their ability to generate having investment portfolios affected by realized losses surpluses. Some providers classify contributions in this year. In last year’s publication we noted that the operating revenues if they believe their contributions are ongoing weak equities market in 2002 could potentially ongoing, major, or central to the operation of the challenge senior living providers. In fact, the Total provider. Others classify contributions as nonoperating Excess Margin Ratio deteriorated at every quartile for revenue. This latter presentation can be used to both types of providers. The 2002 median Total Excess emphasize to potential donors that resident revenue Margin, nearly zero for both types of providers, hit its does not fully cover expenses. lowest point in this study’s eleven year history. Total Excess Margin Ratio Quartiles Single-site Multi-site Providers Worst Best 25th% 50th% 75th% Providers Worst Best 25th% 50th% 75th% 1991 -14.46% 61.97% 0.04% 4.41% 6.92% 1991 -12.98% 10.31% -2.22% 1.72% 3.93% 1992 -19.48% 35.86% -0.58% 3.28% 7.96% 1992 -17.25% 10.33% 0.66% 1.96% 2.86% 1993 -24.36% 32.22% -1.07% 3.54% 7.38% 1993 -7.35% 8.71% -0.87% 3.39% 5.56% 1994 -38.76% 32.63% 0.10% 4.53% 8.41% 1994 -10.81% 12.17% 0.41% 3.20% 6.80% 1995 -151.60% 39.24% 2.48% 5.58% 8.84% 1995 -21.86% 20.98% -0.92% 2.89% 5.50% 1996 -152.23% 27.18% 2.08% 5.47% 8.65% 1996 -32.37% 24.10% 1.47% 4.31% 9.45% 1997 -32.90% 162.04% 2.96% 6.63% 10.68% 1997 -0.91% 31.01% 2.10% 6.80% 9.67% 1998 -14.51% 38.29% 1.71% 6.19% 10.97% 1998 -9.58% 31.55% 2.01% 5.52% 9.51% 1999 -9.72% 39.10% 0.35% 4.32% 8.50% 1999 -4.44% 19.37% 0.00% 2.50% 10.32% 2000 71.07% 41.32% -0.40% 3.93% 8.32% 2000 -8.23% 24.42% -0.05% 3.84% 9.43% 2001 -44.18% 29.51% -2.35% 1.09% 5.98% 2001 -15.44% 15.32% -0.02% 2.59% 5.62% 2002 -55.74% 23.77% -3.84% 0.48% 4.35% 2002 -24.10% 10.08% -4.22% 0.22% 4.42% 20 CARF-CCAC • KPMG LLP • Ziegler Capital Markets Group
  • 26. FINANCIAL RATIOS Trended Median Total Excess Margin Ratio 8% Multi-site 7% Single-site 6% Percentage 5% 4% 3% TREND ANALYSIS 2% 1% 0% 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Year 2002 Total Excess Margin Ratio 30% Multi-site 25% 0 Single-site 20% 15% 0 Percentage 10% 5% 0% 0.22% 0.48% -5% -10% -15% 1 -20% 1 Financial Ratios & Trend Analysis of the CARF-CCAC Accredited Organizations 21
  • 27. Net Operating Margin Ratio pressures noted in the previous ratio discussions, both Resident Revenue* provider types have benefited from stabilizing labor and – Resident Expense** other operating expense pressures. In fact, 2002 marks Resident Revenue the first year in the presentation of NOM Ratio results that the median NOM Ratio improved over the prior * Resident Revenue = Total Operating Revenue less Non-Resident Revenues; year’s performance for the single-site providers. The ** Resident Expense = Total Operating Expense less Non-Resident Expenses; median NOM Ratio for multi-site providers also Calculation excludes Interest/Dividend Income, Interest Expense, strengthened. Depreciation, Taxes, Amortization, Contributions and Entry Fee Amortization This performance is consistent with the anecdotal For those providers looking for ratios from which to experience the preparers of this report noted in last year’s benchmark operational performance, only this ratio and publication, namely, that an increasing number of senior the Net Operating Margin-Adjusted look solely at living providers appear focused on operating efficiencies. operations. All of the elements for benchmarking are Despite these improvements, a number of organizations contained in the detail behind this ratio. have expressed the conflict they face with residents when cash balances appear high, apparently contradicting The Net Operating Margin Ratio looks at the core, the need for adequate monthly service fee increases in sustainable business of a CCRC, that is, the revenues residents’ minds. For some this may result in an inability and expenses realized solely in the delivery of services to to raise rates sufficiently to cover the increasing expenses. residents; note that net proceeds from entry fees are Some organizations may be experiencing service creep, excluded from this ratio (the NOM-Adjusted ratio where a growing number of services are provided by staff incorporates entry fees). The purpose of this ratio is to in order to meet residents’ expectations without the provide a benchmark from which providers can determine documentation or ability to charge appropriately to the margin generated by cash operating revenues after recover the costs of the service. In some cases providers payment of cash operating expenses, without interest/ may be adding personnel in order to meet the residents’ dividend income, interest expense, depreciation and requests for enhanced quality of care without determining amortization and without certain other unique elements the efficiency and effectiveness of the staffing patterns familiar to nonprofits (e.g., contributions and entry fee historically in place. Others may be driven by mission amortization). Credit analysts view this ratio as an statements that encourage coverage of resident expenses important means by which to evaluate a facility’s core with non-resident revenues. Regardless of the operations. The objective of preparing these ratio results circumstances, a common characteristic of the financially is to determine the benchmarks for the nonprofit senior strong providers is the coverage of core resident services living sector. by resident revenues. An examination of the NOM results by the contract CCAC Ratio Database Results types offered at each of the communities yields The Net Operating Margin Ratio generally showed interesting insights. Generally, the weakest NOM Ratios healthy improvement for both provider types. This are exhibited by providers with Extensive Contracts (see reveals that despite the ongoing nursing and staffing definitions in Chapter Five). Not surprisingly these pressures, liability insurance issues and other operating communities may be relying on reserves that have been Net Operating Margin Ratio Quartiles Single-site Multi-site Providers Worst Best 25th% 50th% 75th% Providers Worst Best 25th% 50th% 75th% 1996 -250.40% 30.81% -7.68% 3.73% 10.47% 1996 -76.71% 14.87% -9.74% 0.09% 6.45% 1997 -55.70% 31.97% -7.69% 3.08% 8.99% 1997 -62.04% 23.36% -11.75% 0.53% 9.89% 1998 -77.50% 32.06% -6.78% 1.93% 8.48% 1998 -111.63% 22.43% -4.67% -0.13% 12.30% 1999 -65.68% 31.92% -8.82% 0.14% 6.81% 1999 -163.92% 13.56% -6.51% -3.00% 7.36% 2000 -115.56% 33.60% -8.43% 0.25% 8.51% 2000 -31.92% 20.32% -9.37% -5.60% 6.34% 2001 -104.36% 33.58% -9.42% 0.04% 6.95% 2001 -19.79% 18.33% -8.37% -1.65% 6.65% 2002 -132.74% 29.14% -7.29% 2.08% 7.33% 2002 -24.56% 16.40% -6.29% -0.80% 5.81% 22 CARF-CCAC • KPMG LLP • Ziegler Capital Markets Group
  • 28. FINANCIAL RATIOS funded by entry fees to cover operating shortfalls. This showed improvement between the two years, while only weaker performance by those communities with the median of the multi-site providers improved. In the predominantly Extensive Contracts was evident in both discussion of the NOM-Adjusted Ratio, we’ll see that, 2001 and 2002; furthermore, both the upper quartile though the communities with predominantly Extensive and the median for these communities deteriorated Contracts had the strongest NOM-Adjusted Ratios, the between 2002 and 2001. For the single-site providers performance between 2002 and 2001 followed generally with predominantly Modified Contracts only the upper the same pattern as described with the NOM ratios, quartile deteriorated. For single-site providers with with weakening ratios at two of the three quartiles for predominantly Fee-For-Service Contracts, all quartiles the Extensive Contract communities. TREND ANALYSIS Trended Median Net Operating Margin Ratio 6% Multi-site 4% Single-site 2% Percentage 0% -2% -4% -6% -8% 1996 1997 1998 1999 2000 2001 2002 Year 2002 Net Operating Margin Ratio 20% 2 0 Multi-site 15% Single-site 10% 5% -0.80% Percentage 0% 2.08% -5% -10% -15% -20% 0 -25% -30% 3 Financial Ratios & Trend Analysis of the CARF-CCAC Accredited Organizations 23
  • 29. Net Operating Margin Ratio—Adjusted CCAC Ratio Database Results Resident Revenue* + Net Proceeds from Entry Fees Both single-site providers and multi-site providers – Resident Expense** benefit from annual entry fee receipts as evidenced by the significant increase of these ratio values from those Resident Revenue + Net Proceeds of the Net Operating Margin. from Entry Fees The NOM-Adjusted Ratio improved at nearly every * Resident Revenue = Total Operating Revenue less Non-Resident Revenues; quartile between 2001 and 2002. In 2002 multi-site ** Resident Expense = Total Operating Expense less Non-Resident Expenses; providers had average net entry fee receipts increase by Calculation excludes Interest/Dividend Income, Interest Expense, over 14 percent, in contrast to a decline in net receipts in Depreciation, Taxes, Amortization, Contributions and Entry Fee Amortization 2001. Previous years’ ratio results have suggested that multi-site providers were more actively investing in new The Net Operating Margin Ratio is adjusted in this projects. The results of the NOM-Adjusted Ratio in computation to include net entry fee receipts, 2002 suggests that these projects are now coming on recognizing that most nonprofit CCRCs have entry fees. line. Average net entry fee receipts declined for single- While excluded from the Net Operating Margin site providers. As noted in the previous ratio discussion, calculation, these entry fees are typically employed, in when the NOM-Adjusted Ratio results are analyzed by part, for the provision of healthcare services to their contract type, the strongest NOM-Adjusted Ratio residents and other operating expenses, a practice that performers are the single-site providers offering has become widely accepted within the industry by both Extensive Contracts and the multi-site providers providers and creditors. offering Modified Contracts. If the providers that By comparing the results of this ratio to the Net offer Rental Contracts are removed from the analysis, Operating Margin Ratio, the user can determine the the NOM-Adjusted Ratio for multi-site providers extent to which providers rely on net entry fee receipts increases significantly. to enhance annual cash flows. Providers are urged to consider ways by which annual audited financial statements can segregate entry fee receipts from units that are being occupied for the first time from those that represent ongoing annual turnover. First-time entry fee receipts may distort the results of this ratio, as well as the Debt Service Coverage Ratio. Net Operating Margin Ratio—Adjusted Quartiles Single-site Multi-site Providers Worst Best 25th% 50th% 75th% Providers Worst Best 25th% 50th% 75th% 1996 -109.46% 56.98% 11.44% 19.14% 27.29% 1996 -31.08% 34.82% 5.42% 12.39% 21.87% 1997 -54.87% 65.94% 11.79% 18.65% 25.32% 1997 -29.16% 55.75% 7.41% 16.04% 23.41% 1998 -77.50% 49.26% 10.13% 17.08% 24.97% 1998 -52.40% 55.96% 11.51% 19.34% 24.76% 1999 -57.25% 64.42% 8.82% 17.48% 26.57% 1999 -77.82% 70.97% 7.24% 16.89% 21.84% 2000 -115.56% 48.92% 9.14% 17.34% 25.80% 2000 -8.52% 39.55% 9.84% 16.52% 20.33% 2001 -104.36% 56.10% 8.22% 16.80% 26.70% 2001 -6.60% 32.04% 9.31% 15.79% 21.10% 2002 -132.74% 46.85% 11.17% 17.31% 24.03% 2002 -20.32% 41.86% 9.57% 17.10% 22.55% 24 CARF-CCAC • KPMG LLP • Ziegler Capital Markets Group
  • 30. FINANCIAL RATIOS Trended Median Net Operating Margin Ratio—Adjusted 25% Multi-site 20% Single-site Percentage 15% 10% TREND ANALYSIS 5% 0% 1996 1997 1998 1999 2000 2001 2002 Year 2002 Net Operating Margin Ratio—Adjusted 40% 1 6 Multi-site 35% Single-site 30% 25% Percentage 20% 17.10% 17.31% 15% 10% 5% 0% -5% 2 -10% 3 Financial Ratios & Trend Analysis of the CARF-CCAC Accredited Organizations 25
  • 31. CHAPTER 3 LIQUIDITY RATIOS C C A C Liquidity Ratios are intended to measure a provider’s ability to accounts) to average daily operating revenues received meet the short-term (one year or less) cash needs of its ongoing from residents of independent living, personal care and operations. As is true of any business, a CCRC needs to make sure nursing units. Third-party settlements are excluded it has sufficient cash, or investments readily convertible to cash, to from the numerator of this calculation; net assets meet its payroll, to pay for goods and services, to fund current debt service payments, and to provide for essential maintenance released from restriction for operations are excluded and repairs. from the denominator. The Liquidity Ratios described below are the most common The payer mix of a provider, along with the configuration means of measuring the ability of most businesses to meet their of healthcare units as a percentage of the provider’s total liquidity needs. units, dramatically affects the value of this ratio. Often cash and investments have been set aside by board action as Generally, a value of 30 days or less is desired, though for “Assets Limited As to Use”. All board-designated funds were those providers with a low level of government or other considered unrestricted. Donor-restricted funds clearly identified third-party reimbursement, values may be as low as one for capital expansion/improvement were considered restricted. to five days, since most CCRCs bill private pay residents When unrestricted funds are used in a liquidity ratio, all such at the beginning of the month and receive payment funds, whether classified as current or non-current, are included before the close of the monthly accounting period. in the calculation. For those providers with significant reliance on third- Because this is an area that causes confusion, this year’s publication party reimbursement, values may exceed 60 days. The again includes an explanatory discussion in Appendix B clarifying the determination and use of “cash” in the ratio calculations. higher the percentage of the resident population that is private pay, the lower this value should be. It is important to note that the timeliness of Medicaid Days in Accounts Receivable Ratio payments varies from state to state. In addition, providers (often those with small percentages of third party payers) may not have kept pace with the billing Net Accounts Receivable requirements that have become more and more Residential and Healthcare technical as well as precise. Follow-up on problem third Revenues/365 party payments is essential to eliminating third party accounts receivable. Therefore, a CCRC’s Days in Accounts Receivable Ratio may vary significantly Definition and Significance depending on the magnitude of third party payments, The Days in Accounts Receivable Ratio measures the regardless of management’s efforts. The reader should average number of days accounts receivable remain note that an overall favorable Days in Accounts outstanding. The calculation compares the total amount Receivable Ratio could be masking collection problems in accounts receivable (net of allowances for uncollectible with third-party payers. Since most providers bill and Days in Accounts Receivable Ratio Quartiles Single-site Multi-site Providers Worst Best 25th% 50th% 75th% Providers Worst Best 25th% 50th% 75th% 1991 98 0 35 21 11 1991 69 5 27 23 13 1992 111 0 35 19 10 1992 63 6 32 23 16 1993 120 0 33 18 9 1993 64 8 27 23 14 1994 106 0 34 19 11 1994 65 4 27 22 14 1995 83 0 31 20 12 1995 37 0 29 20 15 1996 90 0 29 22 11 1996 47 0 30 21 13 1997 78 0 34 21 15 1997 56 7 34 24 18 1998 98 0 33 23 14 1998 116 7 33 24 15 1999 77 1 34 24 13 1999 60 4 30 21 19 2000 138 1 32 22 14 2000 56 3 32 23 14 2001 79 0 31 21 12 2001 66 4 33 24 15 2002 66 0 28 18 11 2002 63 3 26 20 13 26 CARF-CCAC • KPMG LLP • Ziegler Capital Markets Group
  • 32. FINANCIAL RATIOS receive payment from their private payers at the for single-site providers hit their lowest levels since the beginning of the month, the Days in Accounts study’s inception. The positive performance of both the Receivable Ratio for the private pay portion should be single-site and multi-site providers compared to nursing less than seven and could offset and mask an unusually home industry benchmarks can be explained through high ratio for third-party payers. several initiatives. First, the repositioning efforts Those providers with high ratios may be affected by a underway by many senior living providers has resulted combination of a higher percentage of third-party in a number of providers decreasing the proportionate number of nursing beds on their campuses (renovating reimbursement and an above average number of nursing semi-private rooms to private rooms; increasing the beds in relation to independent living units. number of independent living and assisted living beds; Management may wish to track the Days in Accounts adding new campuses with a lower proportionate Receivable Ratio separately for residential and TREND ANALYSIS number of nursing beds than in the past), with the healthcare services; the former usually are private number of private pay residents increasing as a result. payers, the latter often are third-party payers. As noted above, Days in Accounts Receivable should decline as the proportion of private pay residents CCAC Ratio Database Results increases. Secondly the improved profitability ratios this The data shows steady performance from both the year may reflect a diligence by both types of providers multi-site and single-site providers. This year every to increase operating efficiencies. One of the easiest quartile for both provider types showed improvement. places to realize operational improvement is to exhibit The 75th quartile for multi-site providers hit its lowest diligence in addressing past due accounts and improving level since 1991. Both the median and the 25th quartile collection efforts. Trended Median Days in Accounts Receivable Ratio 30 Multi-site 25 Single-site 20 Days 15 10 5 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Year 2002 Days in Accounts Receivable Ratio 70 0 Multi-site 0 60 Single-site 50 40 Days 30 20 20 18 10 0 0 0 27 Financial Ratios & Trend Analysis of the CARF-CCAC Accredited Organizations
  • 33. Days Cash on Hand Ratio CCAC Ratio Database Results Unrestricted Current Cash When FASB Statement No. 124 was implemented in and Investments 1995 requiring, in part, the mark-to-market of financial + Unrestricted Non-current Cash instruments, the Days Cash on Hand Ratio enjoyed a and Investments period of healthy improvement. Each year the bullish (Operating Expenses – Depreciation equities market strengthened the investment market – Amortization)/365 values for both types of providers. As expected with the mark-to-market requirement, the equities market’s downturn coupled with the sluggish economy in 2001 and Definition and Significance 2002 brought a decline in providers’ investment market The Days Cash on Hand Ratio measures the number of values. The combination of earnings shortfalls and days of cash operating expenses a provider has covered investment values declines affected both provider types. by unrestricted cash, cash equivalents, and marketable The Days Cash on Hand Ratio continued to weaken securities. The investments may be limited as to use in 2002 across most quartiles. The bearish equities (e.g., board-designated, temporarily donor-restricted, market caused providers to continue to realign their or trustee-held). Board-designated assets are included investment portfolios; the average gain per facility in the numerator. Trustee-held funds and assets realized in 2001 was replaced with an average realized restricted by donors are excluded from the numerator. loss per facility in 2002. However, the average unrealized This treatment of these balances is the same whether loss for each provider type declined significantly the assets are classified as current or non-current or between 2001 and 2002. totaled together. Average unrestricted cash balances dropped by 8 A benchmark Days Cash on Hand Ratio value for entry percent for single-site providers, despite the headway fee providers is 150 days. This standard provides they made in operations, with their increase in average sufficient funds to cover unexpected expenditures, cash revenues exceeding their growth in cash expenses. provide refunds for unanticipated turnover without As noted in the NOM-Adjusted Ratio discussion, the attendant new entry fees, or meet other unbudgeted average net entry fee receipts for single-site providers expenses. Readers should note, however, that this declined by 8 percent. The 14.2 percent increase in net benchmark is significantly below the rating agency entry fees for multi-site providers, contributed to medians provided in Appendix C of this publication. improvement at the upper quartile, at least, of the Days Cash on Hand for multi-site providers. Days Cash on Hand Ratio Quartiles Single-site Multi-site Providers Worst Best 25th% 50th% 75th% Providers Worst Best 25th% 50th% 75th% 1991 -3 2,666 105 156 327 1991 1 326 90 133 177 1992 12 2,315 99 191 369 1992 -23 275 76 128 207 1993 -15 2,142 89 164 385 1993 39 393 78 122 199 1994 -17 2,170 110 182 319 1994 48 385 71 134 214 1995 5 2,001 121 208 360 1995 12 1,075 91 157 265 1996 10 2,105 129 222 378 1996 23 1,155 126 207 287 1997 15 2,229 143 254 414 1997 13 2,762 115 188 307 1998 0 1,856 142 267 430 1998 43 1,987 169 288 375 1999 0 1,672 140 272 469 1999 7 2,329 141 307 389 2000 0 4,882 147 258 478 2000 96 1,772 178 282 414 2001 10 3,453 170 274 438 2001 35 1,026 174 242 319 2002 13 2,659 157 261 394 2002 83 942 153 225 332 28 CARF-CCAC • KPMG LLP • Ziegler Capital Markets Group
  • 34. FINANCIAL RATIOS Trended Median Days Cash on Hand Ratio 350 Multi-site 300 Single-site 250 200 Days 150 100 TREND ANALYSIS 50 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Year 2002 Days Cash on Hand Ratio 800 2 8 Multi-site 700 Single-site 600 500 Days 400 300 225 261 200 100 0 0 0 Financial Ratios & Trend Analysis of the CARF-CCAC Accredited Organizations 29
  • 35. Cushion Ratio ratio was excluded from the median computation for the Unrestricted Current Cash missing year(s). Providers with widely disparate debt and Investments service amounts between years, typically an indication + Unrestricted Non-current Cash of an advance refunding or other restructuring of debt, and Investments were analyzed to determine an approximate annual debt service payment. Annual Debt Service Generally, credit analysts desire a Cushion Ratio greater than three times. If a provider’s debt service has not Definition and Significance been structured to be level, a low Cushion Ratio may The Cushion Ratio measures the provider’s cash signal a provider’s inability to meet escalating or balloon position in relation to its annual debt obligation. While principal payments. However, it is important to view this ratio is more often computed using maximum this ratio in relation to other ratios. Even if the Cushion annual debt service in the denominator, for the purposes Ratio is less than three times, the lower ratio may be of this publication, the ratio has been computed using acceptable if it is accompanied by other ratios that have current annual debt service. As noted again in our been strengthening over time. discussion of the Debt Service Coverage Ratios, Typically, mature organizations would be expected to maximum annual debt service is typically not included have greater cash reserves than younger organizations in the audited financial statements from which data for and, therefore, stronger Cushion Ratios. However, a this publication have been derived. Therefore, we use provider’s debt structure may also play an important role current interest expense, plus the current principal in its Cushion Ratio. Tax-exempt financings often have payment from the statement of cash flow. Capitalized level debt service over 25 to 30-year periods. Conventional interest cost, if disclosed in the audited financial financings from commercial banks and other lenders are statements, is included in annual debt service. The generally characterized by shorter amortization periods numerator of this ratio includes unrestricted cash and and higher annual interest and principal repayment rates. investments, both current and non-current. All board- As a result, organizations financed with conventional designated funds (including those set aside for capital debt may have lower Cushion Ratios than organizations improvements, replacements, etc.) are also included in financed with tax-exempt debt. the numerator. Younger CCRCs typically produce lower Cushion Ratios. Since this ratio is computed on the basis of current They may have higher cash levels from fill-up entry fees annual debt service payments rather than the maximum but normally have higher annual debt service as well. annual debt service defined in most financing documents, More mature CCRCs would be expected to have stronger the ratios may vary each year as principal payments and Cushion Ratios, both because their annual debt service interest payments vary, particularly if a provider has no would have been reduced over time and because their scheduled principal sinking fund/redemption payments cash positions would have been growing through positive in the current year. In the event a provider had no debt operating results and entry fee turnover. A high Cushion service in one of the years, the provider’s debt service Ratio may or may not be a sign of strength. As with other Cushion Ratio Quartiles Single-site Multi-site Providers Worst Best 25th% 50th% 75th% Providers Worst Best 25th% 50th% 75th% 1995 0.00 987.86 1.44 5.04 10.56 1995 0.16 155.63 2.79 4.78 8.41 1996 0.00 487.16 1.73 5.35 10.54 1996 0.22 199.41 2.88 5.08 9.63 1997 0.00 1,916.73 2.58 6.06 12.82 1997 0.80 36.87 3.01 6.35 10.85 1998 0.00 819.79 2.40 6.11 15.38 1998 1.26 480.29 5.33 7.53 10.19 1999 0.00 744.91 3.07 6.82 12.96 1999 0.20 984.10 4.34 7.14 15.44 2000 0.00 555.33 3.07 6.30 11.73 2000 2.48 55.39 4.42 7.99 13.55 2001 0.15 2,211.50 3.58 6.88 11.62 2001 1.03 31.38 3.94 6.34 10.14 2002 0.20 166.40 3.54 6.68 10.68 2002 1.81 77.29 4.69 6.38 12.40 30 CARF-CCAC • KPMG LLP • Ziegler Capital Markets Group
  • 36. FINANCIAL RATIOS capital structure ratios, this ratio may need to be analyzed providers experienced a decline in their average net in conjunction with other financial ratios in order to entry fee receipts as well as their average unrestricted accurately assess the provider’s financial condition. cash balances, so that even though their average long- term debt increased by just 4 percent in the CCAC Ratio Database Results denominator, the numerator declined at a faster rate and caused the Cushion Ratio to deteriorate slightly. As Once again, every quartile of the data exceeds the noted above, the Cushion Ratio is affected by the debt minimum Cushion Ratio levels desired by credit structures the CCRC employs. It may be that this ratio analysts. Despite the ongoing bearish equities market weakens over time since many providers are adding and stagnant economy, the Cushion Ratio for both types ILUs through the use of additional variable rate debt. of providers was remarkably strong. For multi-site TREND ANALYSIS Variable rate debt structures allow for earlier repayment providers, their increasing average long-term debt levels and, therefore, higher annual debt service than were countered by decreasing interest expense and traditional fixed rate debt. steady cash and investments balances. Single-site Trended Median Cushion Ratio 9 Multi-site 8 Single-site 7 6 Ratio 5 4 3 2 1 0 1995 1996 1997 1998 1999 2000 2001 2002 Year 2002 Cushion Ratio 50 1 4 Multi-site 45 Single-site 40 35 30 Ratio 25 20 15 10 6.38 5 6.68 0 0 0 Financial Ratios & Trend Analysis of the CARF-CCAC Accredited Organizations 31
  • 37. CHAPTER 4 CA P I TA L S T R U C T U R E RAT I O S C C A C Capital Structure Ratios primarily focus on a provider’s balance Definition and Significance sheet strengths and weaknesses. These ratios are useful in assessing the long-term solvency of a provider. The Capital Structure Credit analysts and lenders generally consider the Debt Ratios measure the relative amount of debt a provider has Service Coverage Ratio, combined with the Unrestricted undertaken. A high percentage of debt relative to assets or equity Cash and Investments to Long-term Debt Ratio and is an important indication of risk in the CCRC industry because Days Cash on Hand Ratio, to be the most important high leverage typically means high debt repayment obligations, ratios for evaluating a provider’s short- and long-term and therefore high annual debt service payments. One of the financial viability. The Debt Service Coverage Ratio Capital Structure Ratios, the Debt Service Coverage Ratio, incorporates a measure of annual cash flow and, therefore, reflects a provider’s ability to fund annual debt service provides an important quantification of the link between annual with cash flow from net cash revenues and net entry operating performance and a provider’s debt obligations. fees. Lenders typically require that this ratio be As discussed below, the ratios incorporating current annual debt calculated using maximum annual debt service in the service as a component of their calculation would be affected denominator. This allows the lender to determine during years in which interest cost is capitalized. To adjust for whether any scheduled increase in debt service can be such occurrences, when capitalized interest for a given year is covered through cash flow. For the purposes of the provided in the audited financial statements, we have added that calculations presented in this report, current annual amount to interest expense in the current year. debt service (current year’s capitalized interest cost plus interest expense and scheduled principal payments) was used because maximum annual debt service was Debt Service Coverage Ratio not obtainable from the providers’ audited financial statements. Many providers do have level debt service requirements, and therefore, in many cases the Total Excess of Revenues over Expenses difference between annual and maximum debt services + Interest, Depreciation, is insignificant. However, annual debt service and Amortization Expenses requirements may differ from maximum annual debt – Amortization of Deferred Revenue service requirements. Accordingly, the results included + Net Proceeds from Entry Fees in this report may vary from a lender’s calculation of the Annual Debt Service Debt Service Coverage Ratio. Debt Service Coverage Ratio Quartiles Single-site Multi-site Providers Worst Best 25th% 50th% 75th% Providers Worst Best 25th% 50th% 75th% 1991 0.27 561.28 1.51 2.40 3.67 1991 0.64 5.01 1.44 1.89 3.31 1992 -0.28 318.10 1.57 2.43 3.31 1992 0.65 8.80 1.50 1.93 2.84 1993 0.25 98.73 1.59 2.12 3.80 1993 0.79 9.91 1.64 2.32 3.81 1994 0.10 967.50 1.58 2.32 3.83 1994 0.97 143.87 1.65 2.16 3.88 1995 -3.14 445.78 1.55 2.40 4.18 1995 -6.68 9.97 1.74 1.99 3.00 1996 -3.22 161.22 1.54 2.46 4.02 1996 -22.40 7.29 1.40 2.21 2.82 1997 -124.95 786.99 1.59 2.65 4.28 1997 0.85 7.93 1.95 2.57 4.66 1998 -29.85 108.22 1.55 2.75 4.77 1998 1.29 29.55 2.91 3.28 4.36 1999 -50.41 31.25 1.79 2.66 4.37 1999 -6.28 426.62 1.71 2.65 4.55 2000 -4.15 164.47 1.71 2.63 3.83 2000 0.74 32.15 1.81 3.24 4.77 2001 -4.10 82.80 1.64 2.37 3.45 2001 0.63 17.82 1.78 2.24 3.11 2002 -3.61 151.04 1.53 2.00 3.06 2002 0.11 25.70 1.47 2.10 3.12 32 CARF-CCAC • KPMG LLP • Ziegler Capital Markets Group
  • 38. FINANCIAL RATIOS Most debt obligations require CCRCs to maintain a receipts and, therefore, have less of an impact than the Debt Service Coverage Ratio of at least 1.20 times receipts for a single-site. In either case, more careful maximum annual debt service (MADS). Over time, delineation on the statement of cash flow would allow a most financial analysts look for that coverage ratio to more accurate calculation of this and other coverage ratios. grow to between 1.50 and 2.00 times MADS. Young CCRCs (with entry fee contracts) that have not CCAC Ratio Database Results yet completed fill-up will experience extremely high For over a decade nearly all accredited organizations Debt Service Coverage Ratios. This occurs because the have exceeded the minimum Debt Service Coverage large amount of entry fees received from initial resident Ratio required by typical bond documents. More mature move-ins swells the numerator of this ratio. In general, CCRCs tend to have high coverage ratios for the simple TREND ANALYSIS meaningful Debt Service Coverage Ratios for entry fee reason that they have paid down most of their debt. A communities can only be relied on after occupancy is high Debt Service Coverage Ratio in this circumstance stabilized. Furthermore, this ratio can be significantly may or may not be a sign of financial strength. Providers impacted by increases in net entry fees that are received may become complacent about a high current Debt as a result of the initial fill-up of new units being added Service Coverage Ratio, not taking into account the need through expansion or repositioning growth. In to build increased cash flows to prepare for new debt recognition of this bank and bond financing documents costs needed to undertake a substantial renovation or are increasingly excluding the entry fee receipts received expansion project that may not generate incremental through fill-up and through expansions. revenue. For this reason, it is often necessary to analyze Since the ratios are computed on the basis of current the Debt Service Coverage Ratio in combination annual debt service payments rather than the maximum with other information to evaluate the adequacy of annual debt service defined in most financing annual cash flows for achieving the financial goals of documents, the ratios may vary each year as principal the organization. payments and interest payments vary, particularly if a In the past, a fairly high number of providers (especially provider has no scheduled principal sinking single-site providers) had very little debt reflected on fund/redemption payments in the current year. In the the balance sheet/statement of financial position. event a provider had no debt service in one of the years, However, this number has decreased over time with the provider’s debt service ratio was excluded from the fewer organizations reporting no debt on their balance median computation for the missing year(s). Providers sheets/statements of financial position so the computed with widely disparate debt service amounts between median has reflected a greater percentage of the years, typically an indication of an advance refunding or accredited organizations over time. other restructuring of debt, were analyzed to determine Not surprisingly given the weakened 2002 profitability an approximate annual debt service payment. Some ratio results, the median Debt Service Coverage Ratio argue that making this sort of adjustment in the declined for both types of providers. denominator should be matched with an adjustment in the numerator for the entry fees received from a fill-up. The operational challenges described in the discussion However, the statement of cash flow doesn’t typically of the Profitability Ratios contributed to the overall break out entry fee receipts between those received in weakening in this ratio for both provider types. the regular course of operations and those related to fill- However, the multi-site providers seemed to counter up. For single-site providers, the number of data points this challenge through the cash flow benefits of growth are significant, so the ratio aberrations that may result and, perhaps, through potentially more favorable credit from inclusion of the entry fees should have little affect profiles achieved through their market diversity; staff, on the value of the median and quartile markers. For the management and board sophistication; obligated group smaller sample of multi-site providers, the median and structures; and other factors which allow them to quartile markers are more likely to be affected by weather market changes with less volatility than a outliers, but entry fees from fill-up would represent a single-site provider might. Multi-site providers had their smaller portion of the multi-providers total cash flow average annual debt per organization increase by 8.5 Financial Ratios & Trend Analysis of the CARF-CCAC Accredited Organizations 33
  • 39. percent, but average annual debt service remained nearly Single-site providers were refinancing as well, though constant. Clearly multi-site providers were taking apparently these financings were seeking lower interest advantage of an interest rate environment that provided rates, lengthened terms, or more favorable covenants refinancing opportunities and the possibility of new rather than new money. Average annual debt service money at lower interest rates. Average annual net entry declined for single-site providers; both interest expense fees for multi-site providers increased by 14 percent. and principal payments declined from 2001 to 2002. Trended Median Debt Service Coverage Ratio 3.5 Multi-site 3.0 Single-site 2.5 2.0 Ratio 1.5 1.0 0.5 0.0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Year 2002 Debt Service Coverage Ratio 8 2 9 Multi-site 7 6 Single-site 5 4 3 2.1 Ratio 2 0 2.0 1 0 -1 -2 -3 0 -4 -5 34 CARF-CCAC • KPMG LLP • Ziegler Capital Markets Group
  • 40. FINANCIAL RATIOS TREND ANALYSIS Financial Ratios & Trend Analysis of the CARF-CCAC Accredited Organizations 35
  • 41. Debt Service Coverage Ratio—Revenue Basis that most providers need to be sensitive to pricing structures in their market. If the market is accustomed Total Excess of Revenues over Expenses to high entry fees and low monthly fees, a provider may + Interest, Depreciation and have neither the flexibility nor the desire to adjust its Amortization Expenses pricing structure. – Amortization of Deferred Revenue This ratio is influenced to a greater degree than the Annual Debt Service Debt Service Coverage Ratio by contract type and entry fee refund plans. A provider that offers fully refundable entry fees or that has Fee-For-Service Contracts will Definition and Significance generally experience a higher Debt Service Coverage The Debt Service Coverage Ratio-Revenue Basis is a Ratio-Revenue Basis than a provider with nonrefundable more stringent measure of a CCRC’s ability to meet its entry fees. Since the former type of provider is obligated debt obligations through revenues alone. By removing to refund a substantial portion of the entry fee to net proceeds from entry fees from the numerator (they residents, this type of provider should place less reliance are included in the numerator for the Debt Service on entry fees for debt service coverage. Fee-For-Service Coverage Ratio), this ratio indicates a provider’s ability Contracts typically require less of an entry fee since to cover debt service exclusively from operating future monthly service payments are anticipated to revenues and nonoperating sources. A low Debt Service cover fully the future care needs of the residents (see Coverage Ratio-Revenue Basis indicates a provider relies Chapter Five). heavily on entry fees to meet ongoing annual operating expenses. A Debt Service Coverage Ratio-Revenue Basis CCAC Ratio Database Results value of at least 0.75 is considered desirable by the In the early years of the study, accredited single-site credit community. providers outperformed the multi-site providers. The Some financial analysts argue that heavy reliance on steady strengthening of the multi-site providers’ entry fees may leave a provider vulnerable to a slowdown performance in recent years was stalled in 2001and in turnover due to natural reasons or unanticipated weakenedfurther in 2002. The favorable past trend competition in the service area. However, this argument shown in this ratio may demonstrate that CCRCs are fails to take into account that many entry fee CCRCs moving away from offering only non-refundable entry deliberately price their services so that entry fees lower fees; the higher the refund, the less reliant the CCRC their capital costs (including annual debt payments should be on use of the entry fees to fund annual cash related to capital acquisition) and subsidize a portion of flow needs. The steady improvement of this ratio across ongoing healthcare costs. Also, readers should recognize the years of the study was reversed last year, possibly Debt Service Coverage Ratio—Revenue Basis Quartiles Single-site Multi-site Providers Worst Best 25th% 50th% 75th% Providers Worst Best 25th% 50th% 75th% 1991 -112.22 121.75 0.12 0.72 1.55 1991 -3.31 1.56 -0.14 0.30 0.85 1992 -4.76 36.82 0.20 0.65 1.17 1992 -1.26 1.57 -0.22 0.39 0.85 1993 -35.05 7.08 0.15 0.62 1.27 1993 -0.85 1.77 -0.12 0.51 1.10 1994 -4.55 156.73 0.12 0.73 1.25 1994 -2.04 35.96 0.34 0.93 1.61 1995 -54.71 42.10 0.35 0.94 1.91 1995 -39.08 2.96 0.09 0.86 1.91 1996 -7.28 20.46 0.26 0.96 1.80 1996 -56.64 4.74 0.21 1.02 1.62 1997 -124.95 137.79 0.46 1.04 1.93 1997 -1.01 4.92 0.64 1.12 1.84 1998 -23.13 51.05 0.44 1.04 2.18 1998 -0.92 18.32 0.92 1.26 2.05 1999 -102.67 13.13 0.26 0.78 1.69 1999 -1.26 18.81 0.60 1.10 1.69 2000 -15.61 142.85 0.42 1.00 1.64 2000 -8.14 4.77 0.15 1.20 1.96 2001 -47.00 82.80 0.23 0.81 1.38 2001 -2.26 3.16 0.06 0.93 1.49 2002 -6.47 84.08 0.05 0.62 1.20 2002 -13.95 19.15 -0.24 0.29 1.21 36 CARF-CCAC • KPMG LLP • Ziegler Capital Markets Group
  • 42. FINANCIAL RATIOS influenced by the operational challenges highlighted in a Rental/Type C. Single-site providers have the previous discussions on Profitability Ratios. An predominantly Extensive Contracts, with Rental increasing number of both types of providers had Contracts comprising a much smaller proportion of their negative Debt Service Coverage Ratios—Revenues Basis. total contracts. The Debt Service Coverage Ratio— The contract types offered by the different provider Revenue Basis by contract type supports that those types may offer insight into the disparity between the providers offering Fee-For-Service or Rental Contracts providers’ Debt Service Coverage-Revenue Basis Ratios. will present stronger results than those offering The multi-site providers have a nearly even split Extensive Contracts, since a much greater percentage of between Extensive, Modified, and Fee-For-Service the residents are paying market rate through the higher Contracts (see definitions in Chapter One) offered in levels of care. Results by contract type may be affected TREND ANALYSIS their organizations. Three of the 35 multi-site providers in the future as the authors are seeing more and more have Rental Contracts; another multi-site provider offers communities offering multiple contract types. Trended Median Debt Service Coverage Ratio—Revenue Basis Multi-site 1.2 Single-site 1.0 0.8 Ratio 0.6 0.4 0.2 0.0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Year 2002 Debt Service Coverage Ratio—Revenue Basis 4 1 4 Multi-site Single-site 3 2 Ratio 1 0.29 0.62 0 -1 3 -2 6 Financial Ratios & Trend Analysis of the CARF-CCAC Accredited Organizations 37
  • 43. Debt Service as a Percentage of Total Operating Revenues and Net Nonoperating Gains and Losses Ratio Definition and Significance This ratio indicates the percentage of all operating Annual Debt Service revenues and nonoperating gains and losses that are Total Operating Revenues utilized for annual debt service. This ratio has similar + Net Nonoperating Gains and Losses uses and limitations as the Debt Service Coverage Ratio-Revenue Basis. CCRCs that are newly developed or undergoing significant expansion generally have organizations continue to perform well across all years financed construction with debt. Unoccupied units, of the study. A large number of the single-site providers which often result from new construction or expansion, had ratio values of less than 20 percent (all but 21); coupled with additional debt, could cause a temporary all but one of the multi-site providers had ratios of less deterioration in this ratio. than 20 percent. For young CCRCs still in start-up and without the The medians for this ratio are remarkably steady over benefit of operating revenues from full occupancy, debt the study years; e.g., the median from 2002 for both service may exceed 30 percent of the total operating provider types has moved relatively little from the revenues plus net nonoperating gains and losses. The medians in 1991. In addition, the upper quartile marker credit capital markets generally prefer to see this ratio and the medians for both types of providers have been at 20 percent or below for mature organizations. similar, though the performance of the multi-site providers is typically somewhat weaker. The lowest CCAC Ratio Database Results quartile marker for the single-site providers continues to As with both Debt Service Coverage Ratios, the Debt show the weakest performance for both types of Service as a Percentage of Total Operating Revenues and providers. This would suggest that the single-site Net Nonoperating Gains and Losses Ratio will be affected providers in this lower quartile may not realize the same by: changes in current annual debt service; periods where kinds of revenue performance from their leveraged no principal payments were due; market conditions that assets that other providers do. enable favorable gains, etc. In general, accredited Debt Service as a Percentage of Total Operating Revenues and Net Nonoperating Gains and Losses Ratio Quartiles Single-site Multi-site Providers Worst Best 25th% 50th% 75th% Providers Worst Best 25th% 50th% 75th% 1991 80.39% 0.03% 14.47% 9.87% 5.35% 1991 24.36% 2.16% 12.91% 8.55% 6.75% 1992 36.11% 0.00% 17.39% 10.54% 6.03% 1992 31.72% 2.03% 12.34% 9.91% 6.79% 1993 52.77% 0.00% 14.64% 9.15% 6.04% 1993 34.35% 1.97% 14.09% 9.03% 5.72% 1994 86.21% 0.00% 14.21% 10.07% 5.47% 1994 25.65% 0.24% 11.61% 8.45% 5.97% 1995 43.49% 0.00% 15.15% 9.66% 4.87% 1995 31.22% 0.00% 12.18% 8.95% 5.83% 1996 36.46% 0.00% 13.47% 9.58% 5.23% 1996 56.41% 0.61% 12.79% 9.12% 6.52% 1997 35.02% -2.20% 14.96% 9.96% 5.26% 1997 36.51% 1.35% 11.25% 8.66% 5.68% 1998 50.72% -3.12% 12.47% 8.37% 4.54% 1998 12.13% 0.86% 10.17% 8.10% 7.04% 1999 49.36% 0.00% 13.82% 9.13% 5.22% 1999 16.24% 0.50% 10.79% 9.37% 5.19% 2000 57.94% 0.00% 13.96% 9.13% 5.51% 2000 19.75% 0.63% 10.83% 8.89% 5.70% 2001 59.51% 0.02% 14.33% 9.26% 6.80% 2001 19.49% 1.75% 11.04% 9.22% 7.19% 2002 38.41% 0.15% 15.34% 9.21% 6.65% 2002 29.60% 0.43% 10.93% 8.82% 6.39% 38 CARF-CCAC • KPMG LLP • Ziegler Capital Markets Group
  • 44. FINANCIAL RATIOS Trended Median Debt Service as a Percentage of Total Operating Revenues and Net Nonoperating Gains and Losses Ratio 12% Multi-site 10% Single-site 8% Percentage 6% TREND ANALYSIS 4% 2% 0% 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Year 2002 Debt Service as a Percentage of Total Operating Revenues and Net Nonoperating Gains and Losses Ratio 30% 3 0 Multi-site Single-site 25% 20% Percentage 15% 10% 8.82% 9.21% 5% 0 0 0% Financial Ratios & Trend Analysis of the CARF-CCAC Accredited Organizations 39
  • 45. Unrestricted Cash and Investments to Long-term Debt Ratio Credit analysts place a high degree of reliance on this Unrestricted Current Cash ratio as an indicator of a provider’s debt capacity. A ratio and Investments of unrestricted reserves in excess of 20 percent of long- + Unrestricted Non-current Cash term debt is desired. While they view annual cash flow and Investments as the primary source of support for long-term debt, credit analysts also prefer to see adequate discretionary Long-term Debt, less Current Portion liquidity to hedge against potentially volatile annual cash flows. In addition to building cash reserves to support Definition and Significance any existing debt or planned expenditure, providers should build cash reserves to offset their long-term The Unrestricted Cash and Investments to Long-term healthcare liability. Debt Ratio measures a provider’s position in available cash and marketable securities in relation to its long- term debt, less current portion. This ratio is a measure CCAC Ratio Database Results of a provider’s ability to withstand annual fluctuations The average unrestricted cash balances per organization in cash, either through weakened operating results or for multi-site providers remained nearly constant through little or no resident entry fee receipts because between 2002 and 2001, in spite of average net entry of low turnover or higher refundability of entry fee fees increasing by approximately 14 percent. The contracts. The numerator includes all cash and weakening cash to debt ratio for multi-site providers was investments, excluding trustee-held funds, that are in caused, therefore, either due to their increasing long- any way available to retire debt or to pay operating term debt per organization or through restrictions in expenses. In some cases the audited financial timing on the release of the entry fees they collected, statements did not provide enough detail to isolate e.g., as creditors seek to mitigate their risk exposure by trustee-held funds held specifically to repay debt (e.g., a requiring earlier payoffs of their loans. Note that the debt service reserve). Board-designated assets and assets lowest quartile of the multi-site providers improved, so temporarily restricted by donors for operating purposes some were seeing debt increases offset by increasing are included in the numerator. Trustee-held funds and cash balances. For single-site providers there was a assets restricted by donors for purposes other than weakening at the median and upper quartiles. The operations are excluded. This treatment of asset average cash balances per organization dropped by over balances is the same whether the assets are classified as 7 percent while their long-term debt per facility current or non-current. The reader is encouraged to increased by over 4 percent. reference Appendix A for detail regarding the accounts included in this ratio. Unrestricted Cash and Investments to Long-term Debt Ratio Quartiles Single-site Multi-site Providers Worst Best 25th% 50th% 75th% Providers Worst Best 25th% 50th% 75th% 1991 -0.59% 7,858.11% 16.74% 44.38% 118.17% 1991 0.05% 1,728.36% 24.66% 36.26%100.62% 1992 1.24% 12,201.84% 24.56% 40.48% 97.48% 1992 -2.37% 4,091.18% 23.21% 35.87% 71.62% 1993 -2.21% 15,099.12% 21.87% 42.63% 87.12% 1993 10.76% 3,932.30% 15.02% 31.78% 72.89% 1994 1.45% 11,034.14% 23.73% 45.57% 84.57% 1994 9.32% 2,049.42% 18.34% 35.64% 90.96% 1995 0.00% 10,765.19% 15.50% 40.79% 88.28% 1995 1.69% 1,370.38% 28.18% 48.49% 71.10% 1996 0.00% 11,491.50% 20.37% 46.01% 89.60% 1996 3.40% 16,883.80% 24.50% 52.15% 78.13% 1997 1.24% 26,963.92% 24.51% 53.26% 101.69% 1997 7.94% 167.34% 27.77% 50.20% 88.73% 1998 0.00% 25,221.02% 28.51% 52.72% 103.26% 1998 6.19% 563.25% 38.68% 49.56% 72.20% 1999 0.00% 17,985.20% 27.30% 56.40% 106.70% 1999 1.53% 734.44% 20.44% 65.88%113.88% 2000 0.01% 14,602.70% 23.57% 50.58% 99.12% 2000 14.93% 1,350.08% 34.40% 54.86% 75.57% 2001 1.61% 21,061.90% 27.37% 52.22% 94.83% 2001 13.21% 8,799.28% 31.37% 48.53% 76.81% 2002 2.12% 50,913.64% 27.78% 51.62% 89.42% 2002 13.48% 5467.81% 33.87% 47.16% 75.43% 40 CARF-CCAC • KPMG LLP • Ziegler Capital Markets Group
  • 46. FINANCIAL RATIOS Trended Median Unrestricted Cash and Investments to Long-term Debt Ratio 70% Multi-site 60% Single-site 50% Percentage 40% 30% 20% TREND ANALYSIS 10% 0% 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Year 2002 Unrestricted Cash and Investments to Long-term Debt Ratio 250% 1 10 Multi-site Single-site 200% Percentage 150% 100% 50% 47.16% 51.62% 0 0% 0 Financial Ratios & Trend Analysis of the CARF-CCAC Accredited Organizations 41
  • 47. Long-term Debt as a Percentage of Total Capital Ratio CCAC Ratio Database Results Long-term Debt, less Current Portion This ratio calculation indicates that much of the Long-term Debt, less Current Portion financial strength of the accredited CCRCs is due to the + Unrestricted Net Assets positive relationship between debt and unrestricted net assets for these providers. Newer organizations may not be able to reach these levels until a number of years Definition and Significance have passed and they have had the opportunity both to The Long-term Debt as a Percentage of Total Capital reduce debt levels and to increase net assets from Ratio is a traditional measure of the extent to which a improved operational efficiencies and the amortization provider has relied on debt versus retained earnings and of deferred revenue. Organizations, such as those in the invested or donated capital. For CCRCs, values in excess accredited group, that have managed their financial of 100 percent or negative ratios (caused by net deficits) performance over many years to achieve these positive are not uncommon because of the reliance on cash from ratios, can expect to receive favorable credit entry fees, which are treated on the statement of consideration. financial position as a liability rather than equity or an Throughout the decade of study there had been a fairly increase to net assets. steady improvement of this ratio for both types of Low net assets or net deficits are particularly common in providers. But, as noted in earlier discussions, the younger CCRCs. It is not uncommon to find young operating expense pressures, contribution declines and CCRCs with substantial cash and investment reserves the prevalence of realized losses (and unrealized losses collected from entry fees but with net deficits because to the extent they affect the values of non-restricted they have not yet earned the deferred revenue balance. cash investments) have squeezed operating margins. Thus, the value of this ratio is not significant when While average long-term debt has increased in each of considered alone. The ability to repay long-term debt is the past two years (for 2002: 4.5 percent for single-site better understood when considered in conjunction with providers and 8.5 percent for multi-site providers), the Long-term Debt as a Percentage of Total Capital average unrestricted net assets per facility have declined Ratio-Adjusted. Other ratios such as the Unrestricted over both of the previous two years for both types of Cash and Investments to Long-term Debt Ratio and the providers. The average net assets for multi-site providers Excess Margin Ratio also help. declined by nearly 15 percent between 2001 and 2002; for single-site providers the percentage of decline was approximately 23 percent. Long-term Debt as a Percentage of Total Capital Ratio Quartiles Single-site Multi-site Providers Worst Best 25th% 50th% 75th% Providers Worst Best 25th% 50th% 75th% 1991 354.00% 0.00% 103.65% 73.25% 35.16% 1991 168.40% 9.64% 90.18% 77.64% 56.42% 1992 913.70% 0.00% 102.11% 76.66% 39.52% 1992 156.72% 2.37% 93.56% 79.46% 56.64% 1993 794.88% 0.00% 100.62% 73.74% 38.62% 1993 149.59% 2.04% 94.35% 79.65% 57.67% 1994 180.46% 0.00% 98.74% 71.27% 38.60% 1994 141.03% 7.98% 92.46% 76.05% 41.58% 1995 9,488.75% 0.00% 99.46% 70.73% 33.88% 1995 134.56% 8.55% 86.53% 73.30% 47.77% 1996 3,656.01% 0.00% 96.18% 68.28% 34.16% 1996 119.45% 0.46% 91.90% 73.64% 40.00% 1997 6,437.43% 0.00% 97.29% 70.97% 47.53% 1997 190.89% 0.00% 91.37% 71.98% 52.11% 1998 61,583.04% 0.00% 97.92% 69.11% 47.37% 1998 161.84% 26.23% 91.36% 76.37% 52.14% 1999 361.82% 0.00% 91.33% 67.54% 46.42% 1999 106.50% 20.31% 91.94% 67.12% 48.50% 2000 6,440.04% 0.00% 96.01% 70.95% 46.43% 2000 101.50% -67.82% 82.89% 69.37% 51.60% 2001 3,628.59% 0.00% 109.05% 76.82% 49.44% 2001 115.84% 8.44% 87.71% 74.96% 53.90% 2002 9,056.18% 0.00% 108.78% 78.88% 54.72% 2002 128.39% 4.75% 91.49% 77.01% 54.16% 42 CARF-CCAC • KPMG LLP • Ziegler Capital Markets Group
  • 48. FINANCIAL RATIOS Trended Median Long-term Debt as a Percentage of Total Capital Ratio 82% Multi-site 80% 78% Single-site 76% Percentage 74% 72% 70% 68% TREND ANALYSIS 66% 64% 62% 60% 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Year 2002 Long-term Debt as a Percentage of Total Capital Ratio 160% 19 Multi-site 140% Single-site 0 120% 100% Percentage 78.88% 80% 77.01% 60% 40% 20% 0 0 0% Financial Ratios & Trend Analysis of the CARF-CCAC Accredited Organizations 43
  • 49. Long-term Debt as a Percentage of Total Capital Ratio—Adjusted this adjusted capital ratio, the ratio’s definition may be revised in future editions of this publication to include Long-term Debt, less Current Portion the deferred revenue from refundable entry fees. Long-term Debt, less Current Portion + Unrestricted Net Assets CCAC Ratio Database Results + Deferred Revenue from Entry Fees (Nonrefundable Entry Fees Only) The results of this ratio calculation mirror the findings of the previous ratio analysis, in that, for the most part, the accredited organizations appear to reflect a positive Definition and Significance relationship between debt and equity. Twenty single- site providers had values of over 100 percent (i.e., very This ratio is similar to the Long-term Debt as a weak performance) for this ratio, while none of the Percentage of Total Capital Ratio, except that it adds multi-site providers’ results exceeded 100 percent. Yet, deferred revenue from entry fees to the denominator. approximately twenty-five percent of the single-site Deferred revenue from entry fees is added in recognition providers had values below 35 percent (i.e. very strong that this account balance represents cash paid to the performance) for this ratio, while just over 10 percent of community that is often used for capital improvements the multi-site providers had achieved this performance and/or is retained as cash reserves. Thus, it functions as level. As noted earlier in the publication, when CCRCs “quasi-equity.” Providers charging substantial entry fees within a multi-site provider are accredited, the financial that utilize cash from these entry fees to pay down a statements of the multi-site provider may include some portion of their debt, would reduce this ratio. A low to even significant non-entry fee producing assets (e.g., value for this ratio indicates a stronger equity base. affordable housing, home health care companies) and Some believe that the denominator should also include may include non-senior living entities. A single-site refundable entry fees, if those refundable fees are paid CCRC’s purpose is traditionally focused on senior living. only upon reoccupancy of the unit and then, only at If this single-site, “single-purpose” CCRC offers their original entry fee paid or at some lesser price. predominantly rental or refundable entry fees, it is less Because others in the capital markets include deferred likely to have other resources to balance this lack of fees from refundable entry fees in their computation of quasi-equity. Long-term Debt as a Percentage of Total Capital Ratio-Adjusted Quartiles Single-site Multi-site Providers Worst Best 25th% 50th% 75th% Providers Worst Best 25th% 50th% 75th% 1991 112.35% 0.00% 66.40% 43.92% 21.53% 1991 82.07% 1.59% 56.34% 50.65% 28.62% 1992 155.26% 0.00% 65.53% 44.96% 24.74% 1992 80.44% 0.73% 56.42% 50.25% 36.84% 1993 158.61% 0.00% 63.74% 44.35% 28.37% 1993 97.11% 0.80% 66.81% 48.38% 35.59% 1994 128.44% 0.00% 67.23% 45.96% 26.43% 1994 97.99% 1.96% 72.04% 50.70% 31.16% 1995 179.95% 0.00% 82.07% 56.06% 26.13% 1995 96.54% 2.95% 75.37% 52.10% 28.07% 1996 180.24% 0.00% 76.78% 53.06% 24.42% 1996 98.97% 0.40% 77.62% 57.37% 32.20% 1997 188.22% 0.00% 76.15% 54.99% 34.04% 1997 96.48% 0.40% 67.38% 53.18% 34.19% 1998 239.03% 0.00% 79.00% 57.27% 36.75% 1998 91.86% 9.36% 72.46% 53.21% 41.11% 1999 361.82% 0.00% 79.47% 56.63% 35.56% 1999 92.88% 7.69% 64.58% 53.21% 37.48% 2000 317.13% 0.00% 80.56% 56.71% 35.76% 2000 99.81% 2.45% 64.90% 51.60% 46.09% 2001 341.39% 0.00% 76.36% 52.24% 33.41% 2001 98.09% 1.41% 61.55% 49.91% 37.72% 2002 457.36% 0.00% 81.27% 54.10% 39.25% 2002 90.83% 1.60% 71.49% 55.09% 42.54% 44 CARF-CCAC • KPMG LLP • Ziegler Capital Markets Group
  • 50. FINANCIAL RATIOS Trended Median Long-term Debt as a Percentage of Total Capital Ratio—Adjusted 70% Multi-site 60% Single-site 50% Percentage 40% 30% 20% TREND ANALYSIS 10% 0% 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Year 2002 Long-term Debt as a Percentage of Total Capital Ratio—Adjusted 160% 5 Multi-site 140% Single-site 120% 100% Percentage 0 80% 60% 54.10% 55.09% 40% 20% 2 0 0% Financial Ratios & Trend Analysis of the CARF-CCAC Accredited Organizations 45
  • 51. Long-term Debt to Total Assets Ratio CCAC Ratio Database Results Long-term Debt, less Current Portion This ratio has the attributes of a liquidity ratio, as its Total Assets value is highly sensitive to the market values of investments. Since average investment balances declined for both multi-site providers and single-site Definition and Significance providers at the same time their average long-term debt was increasing, it isn’t surprising that there was little Long-term Debt to Total Assets is a ratio that relates a improvement in the Long-term Debt to Assets Ratio organization’s indebtedness to total assets. A provider this year. with a higher percentage for this ratio is considered to have a weaker capital structure than a provider with a In the eight years of data presented for this ratio, the lower percentage. median and upper quartile marker for both types of providers have shown that providers in these quartiles Start-up organizations would be expected to have have increasingly been leveraging their assets. Note that relatively high Long-term Debt to Total Assets Ratios. the lowest quartile values have remained relatively static Unless mature organizations have recently undergone over the study period. significant expansions and/or renovations, they would be expected to have relatively lower Long-term Debt to Total Assets Ratios. Long-term Debt to Total Assets Ratio Quartiles Single-site Multi-site Providers Worst Best 25th% 50th% 75th% Providers Worst Best 25th% 50th% 75th% 1995 94.35% 0.00% 53.63% 36.49% 19.82% 1995 66.75% 2.54% 47.01% 37.50% 24.10% 1996 95.07% 0.00% 51.79% 34.29% 19.25% 1996 66.89% 0.30% 51.61% 41.62% 24.04% 1997 96.06% 0.00% 50.10% 37.21% 22.76% 1997 64.18% 0.00% 49.70% 45.31% 28.42% 1998 105.89% 0.00% 50.63% 39.53% 22.98% 1998 62.12% 7.78% 51.43% 45.60% 36.64% 1999 102.46% 0.00% 54.56% 37.19% 24.77% 1999 69.12% 6.53% 48.90% 44.19% 28.44% 2000 103.15% 0.00% 56.51% 38.44% 24.55% 2000 69.10% 1.99% 47.13% 42.50% 32.12% 2001 106.60% 0.00% 53.78% 40.67% 25.22% 2001 68.71% 0.47% 48.34% 43.08% 31.70% 2002 113.09% 0.05% 56.57% 40.57% 25.81% 2002 73.76% 0.57% 48.49% 42.42% 30.13% 46 CARF-CCAC • KPMG LLP • Ziegler Capital Markets Group
  • 52. FINANCIAL RATIOS Trended Median Long-term Debt to Total Assets Ratio 50% Multi-site 45% 40% Single-site 35% Percentage 30% 25% 20% 15% TREND ANALYSIS 10% 5% 0% 1995 1996 1997 1998 1999 2000 2001 2002 Year 2002 Long-term Debt to Total Assets Ratio 100% 1 Multi-site 90% Single-site 80% 70% 0 Percentage 60% 50% 42.42% 40.57% 40% 30% 20% 10% 0 0 0% Financial Ratios & Trend Analysis of the CARF-CCAC Accredited Organizations 47
  • 53. Average Age of Facility Ratio activities. Calculation of the Average Age of Facility Accumulated Depreciation Ratio should be computed using depreciation expense only. However, when depreciation and amortization were Annual Depreciation Expense combined on the statement of activities, the combined total was used in the denominator. Organizations are Definition and Significance urged to separate depreciation and amortization expenses in future reporting periods so that the results As facilities age, the ongoing marketability of the of this calculation are as accurate as possible. community is typically dependent on maintaining the physical plant. In addition to routine maintenance and upkeep, most organizations must show evidence of a CCAC Ratio Database Results commitment to renewal through renovation and/or The median age of single-site providers exceeded the replacement of their buildings and grounds. This median age for multi-site providers by more than one commitment is most easily measured through a year. As noted in previous discussions, multi-site calculation called Average Age of Facility. The Average providers appear more inclined to invest in real estate Age of Facility estimates the number of years of and, as a result, their Average Age of Facility Ratio is depreciation that have already been realized for a facility slightly stronger than that of the single-site providers. by dividing accumulated depreciation (from the Over the course of this study multi-site providers have statement of financial position) by annual depreciation consistently increased their investment in property, expense. A steadily increasing value for the Average Age plant and equipment to a greater degree than single-site of Facility Ratio is an indication that resources are not providers. In 2002 this rate of growth declined being used to significantly renovate a community. It also significantly for both types of providers (to under 10 may be an indication that significant expenditures may percent for both), but the increase in average property, soon be required in order to keep the community viable. plant and equipment per organization for multi-site An important caveat of the calculation is that significant providers continued to be greater than the increase in expansion can drop a community’s age without per facility expenditures for single-site providers. As a renovating existing, aging areas of the community. result the Average Age of Facility Ratio for multi-site Many providers combine depreciation and amortization providers has remained consistently more favorable than when reporting these expenses on the statement of the age of single-site providers. Average Age of Facility Ratio Quartiles Single-site Multi-site Providers Worst Best 25th% 50th% 75th% Providers Worst Best 25th% 50th% 75th% 1995 15.95 0.00 10.79 8.47 6.20 1995 14.51 6.34 11.67 9.14 7.94 1996 24.73 0.00 10.94 9.25 6.54 1996 15.94 6.53 11.25 9.57 8.11 1997 21.93 0.00 11.09 9.30 7.23 1997 16.74 3.76 10.40 9.00 7.96 1998 17.81 4.53 11.45 9.45 7.64 1998 21.85 1.81 10.47 9.02 7.29 1999 22.40 2.80 11.80 9.70 7.90 1999 18.65 0.01 10.65 8.92 7.47 2000 20.12 0.34 11.37 9.62 7.57 2000 17.13 5.32 10.40 8.80 7.92 2001 21.62 0.64 11.75 9.70 7.96 2001 16.70 5.89 10.68 8.84 8.18 2002 19.98 1.75 12.11 10.17 7.98 2002 16.29 6.09 10.53 9.04 7.94 48 CARF-CCAC • KPMG LLP • Ziegler Capital Markets Group
  • 54. FINANCIAL RATIOS Trended Median Average Age of Facility Ratio 10.3 Multi-site 9.8 Single-site Age in Years 9.3 8.8 TREND ANALYSIS 8.3 7.8 1995 1996 1997 1998 1999 2000 2001 2002 Year 2002 Average Age of Facility Ratio 25 Multi-site Single-site 0 20 0 Age in Years 15 9.04 10.17 10 0 5 0 0 Financial Ratios & Trend Analysis of the CARF-CCAC Accredited Organizations 49
  • 55. 50 CARF-CCAC • KPMG LLP • Ziegler Capital Markets Group
  • 56. CHAPTER 5 C C A C CONTRACT TYPE RATIOS Ratios by Contract Type Many CCAC accredited organizations offer more than • Modified Contracts (Type B) have an up-front entry one contract type. For purposes of producing this report, fee and and include housing, residential services organizations have been assigned to a contract type amenities and a specific amount of long-term based on the predominant contract type signed by nursing care with no substantial increase in residents of their community. A number of communities monthly charges(reductions in fees may occur for offer rental or equity contracts, but these contracts were a specified period of time (e.g., 30 days per year) the predominant contract type for less than five or the resident’s monthly charges may increase as communities. As a result, ratios for rental or equity the level of care increases but at a discount from contract types are not included in the listing. the posted fees for the services); Organizations with no predominant contract type have • Fee-For-Service Contracts (Type C) have an up- been excluded from this analysis. front entry fee and and include housing, residential The types of contracts that are offered to residents at services amenities for monthly charges that increase the CCRCs may affect certain ratios. Generally, directly with the level of care provided; accredited CCRCs offer one or more of five basic • Rental Contracts (Type D) do not require an up- contract types: front entry fee and the resident’s monthly charges increase directly with the level of care provided. • Extensive Contracts (Type A) have an up-front Typically, residents are guaranteed access to entry fee and include housing, residential services health care services; and amenities and unlimited, specific health-related • Equity Contracts are similar to cooperative housing, services with little or no substantial increase in whereby residents have membership in the monthly charges, except for normal operating costs corporation and sign a proprietary lease agreement. and inflation adjustments; Organizations are grouped by contract types based on information they provided to CCAC. Financial Ratios & Trend Analysis of the CARF-CCAC Accredited Organizations 51
  • 57. 2002 Financial Ratios By Contract Type—Single-site Providers* Type A Type B Type C 25% 50% 75% 25% 50% 75% 25% 50% 75% Margin (Profitability) Ratios Operating Margin Ratio (%) (6.3) (0.7) 2.5 (2.4) 2.3 6.2 (5.1) (1.2) 1.8 Operating Ratio (%) 114.5 106.4 101.0 106.2 98.6 94.3 103.2 100.3 94.7 Total Excess Margin Ratio (%) (6.2) (2.5) 2.7 (0.1) 2.1 6.9 (3.5) 0.4 3.9 Net Operating Margin Ratio (%) (12.8) (1.4) 5.8 (2.9) 4.1 7.0 (2.6) 3.2 6.9 Net Operating Margin Ratio—Adjusted (%) 14.9 21.0 27.6 12.7 18.4 25.1 8.4 14.2 20.3 Liquidity Ratios Days in Accounts Receivable Ratio 22 14 9 24 16 9 33 20 17 Days Cash on Hand Ratio 199 323 448 149 236 329 151 240 307 Cushion Ratio (x) 3.0 6.2 10.9 4.4 6.6 11.3 4.7 8.0 10.6 Capital Structure Ratios Debt Service Coverage Ratio (x) 1.4 1.7 2.8 1.8 2.8 4.3 1.8 2.1 3.0 Debt Service Coverage Ratio—Revenue Basis (x) (0.6) 0.1 0.7 0.4 0.7 1.3 0.4 0.7 1.4 Debt Service as a Percentage of Total Operating Revenues and Net Nonoperating Gains and Losses Ratio (%) 19.6 12.9 8.1 13.1 8.2 6.6 10.0 8.1 5.2 Unrestricted Cash and Investments to Long-term Debt Ratio (%) 30.4 53.2 95.9 37.9 65.3 85.4 32.1 55.7 90.0 Long-term Debt as a Percentage of Total Capital Ratio (%) 174.9 100.2 63.6 95.2 61.4 47.9 80.1 60.6 43.0 Long-term Debt as a Percentage of Total Capital Ratio—Adjusted (%) 96.4 61.1 41.3 64.2 41.5 34.9 64.3 47.2 30.7 Long-term Debt to Total Assets Ratio (%) 66.7 44.3 26.2 45.4 33.2 25.8 48.1 35.7 22.7 Average Age of Facility Ratio (Years) 11.6 9.3 7.8 12.5 10.6 8.4 12.6 10.3 7.8 *Providers identified themselves by contract type by indicating which contract represented the predominant type of contract in effect in their community. 52 CARF-CCAC • KPMG LLP • Ziegler Capital Markets Group
  • 58. FINANCIAL RATIOS 2002 Financial Ratios By Contract Type—Multi-site Providers* Type A Type B Type C 25% 50% 75% 25% 50% 75% 25% 50% 75% Margin (Profitability) Ratios Operating Margin Ratio (%) (3.9) 0.8 5.0 0.7 2.4 4.1 (16.5) (1.2) (0.5) Operating Ratio (%) 118.5 112.3 104.1 102.9 100.5 98.8 114.4 107.7 100.9 Total Excess Margin Ratio (%) (5.0) (1.5) 5.0 (2.7) 0.3 2.5 (7.2) (1.2) 0.5 TREND ANALYSIS Net Operating Margin Ratio (%) (13.8) (12.6) (4.2) (0.3) 1.3 7.0 (8.5) (2.4) 2.7 Net Operating Margin Ratio—Adjusted (%) 15.6 21.4 22.7 20.5 25.5 26.9 7.8 16.9 17.8 Liquidity Ratios Days in Accounts Receivable Ratio 21 18 12 20 20 14 29 25 19 Days Cash on Hand Ratio 195 266 435 236 317 411 101 183 216 Cushion Ratio (x) 4.4 6.2 14.8 7.4 8.3 11.1 3.1 4.7 5.4 Capital Structure Ratios Debt Service Coverage Ratio (x) 1.5 2.2 3.1 2.4 3.1 3.8 1.0 1.5 2.0 Debt Service Coverage Ratio—Revenue Basis (x) (1.3) (0.6) 0.3 0.1 0.3 1.1 (0.1) 0.2 1.1 Debt Service as a Percentage of Total Operating Revenues and Net Nonoperating Gains and Losses Ratio (%) 15.9 9.7 7.6 10.4 9.4 6.8 10.9 9.2 8.2 Unrestricted Cash and Investments to Long-term Debt Ratio (%) 48.0 53.7 64.5 55.0 62.0 70.4 28.1 35.0 40.5 Long-term Debt as a Percentage of Total Capital Ratio (%) 101.6 81.2 71.7 75.2 69.3 55.5 101.8 84.7 75.8 Long-term Debt as a Percentage of Total Capital Ratio—Adjusted (%) 68.9 56.9 47.7 55.9 48.0 46.6 79.7 66.3 49.8 Long-term Debt to Total Assets Ratio (%) 42.3 36.9 32.2 44.4 41.9 34.1 54.5 48.0 30.8 Average Age of Facility Ratio (Years) 11.1 8.1 7.9 11.1 8.8 7.7 9.8 9.2 8.2 *Providers identified themselves by contract type by indicating which contract represented the predominant type of contract in effect in their community. Financial Ratios & Trend Analysis of the CARF-CCAC Accredited Organizations 53
  • 59. APPENDIX A Ratio Definitions Legend N Designates codes included in the Days in Accounts Receivable Ratio numerator of the ratio calculation Sum of codes designated by “N” DIVIDED BY D Designates codes included in the (Sum of codes designated by “D” divided by 365) denominator of the ratio calculation - Before an “N” or “D” indicates the Days Cash on Hand Ratio value should be multiplied by -1 Sum of codes designated by “N” DIVIDED BY N/D Designates codes included in both (Sum of codes designated by “D” divided by 365) the numerator and the denominator of the ratio calculation OM Operating Margin Ratio OR Operating Ratio EM Total Excess Margin Ratio NOM Net Operating Margin Ratio NOM-A Net Operating Margin Ratio –Adjusted DAR Days in Accounts Receivable Ratio DCH Days Cash on Hand Ratio DSC Debt Service Coverage Ratio DSC-R Debt Service Coverage Ratio— Revenue Basis DS-TR Debt Service as a Percentage of Total Operating Revenues and Net Nonoperating Gains and Losses Ratio CD Unrestricted Cash and Investments to Long-term Debt Ratio LTDC Long-term Debt as a Percentage of Total Capital Ratio LTDC-A Long-term Debt as a Percentage of Total Capital Ratio—Adjusted CUSH Cushion Ratio AGE Average Age of Facility Ratio LTD-TA Long-term Debt to Total Assets Ratio 54 CARF-CCAC • KPMG LLP • Ziegler Capital Markets Group
  • 60. FINANCIAL RATIOS APPENDIX A Ratio Definitions Description OM OR EM NOM NOM-A DAR DCH DSC DSC-R DS-TR CD LTDC LTDC-A CUSH AGE LTD-TA Residential Revenues N/D D N/D N/D N/D D N N D Entry Fee Amortization N/D N/D D Skilled Nursing Revenue N/D D N/D N/D N/D D N N D Assisted Living Revenue N/D D N/D N/D N/D D N N D Adult Day/Home Health Revenue N/D D N/D N/D N/D D N N D Management Fees N/D D N/D N/D N/D N N D Interest/Dividends/Investment Earnings Revenue N/D D N/D N N D Other Operating Revenue N/D D N/D N/D N/D N N D Administrative Adjustments to Operating Revenue N/D D N/D N N D Net Assets Released from Restriction for Operations N/D D N/D N N D Other Non-Cash Revenues N/D N/D D TREND ANALYSIS Nursing/Health Center -N N -N -N -N D -N -N Dietary/Food Services -N N -N -N -N D -N -N Social and Community Services/Chaplaincy -N N -N -N -N D -N -N Recreation, Activities, and Transportation -N N -N -N -N D -N -N Assisted Living and Personal Services -N N -N -N -N D -N -N Housekeeping -N N -N -N -N D -N -N Plant and Maintenance -N N -N -N -N D -N -N Administration/General -N N -N -N -N D -N -N Marketing -N N -N -N -N D -N -N Adult Day Care/Home Health -N N -N -N -N D -N -N Other Departments -N N -N -N -N D -N -N Housing/Independent Living -N N -N -N -N D -N -N Management Fees -N N -N -N -N D -N -N Interest -N N -N D D D N D Depreciation/Amortization -N -N D Bad Debt Expenses -N -N Other Non-cash Expenses -N -N Salaries and Benefits -N N -N -N -N D -N -N Supplies -N N -N -N -N D -N -N Contract Services -N N -N -N -N D -N -N Facility Costs -N N -N -N -N D -N -N Ancillary Health Services -N N -N -N -N D -N -N Insurance -N N -N -N -N D -N -N Other Expenses -N N -N -N -N D -N -N Contributions N/D N N D Gain (Loss) on Sale of Investments N/D N N D Gain (Loss) on Sale of Derivatives N/D N N D Unrealized Gain/(Loss) on Investments Unrealized Gain/(Loss) on Derivatives Other Nonoperating Revenue N/D N N D Nonoperating Expenses -N/D N N D Net Assets Released from Restriction for PP&E N/D N N D Current Cash and Investments - Unrestricted N N N D Current Cash and Investments - Restricted D Patient/Resident Accounts Receivable N D Other Accounts Receivable D Resident Deposits D Other Current Assets D Non-current Cash and Investments - Unrestricted N N N D Non-current Cash and Investments - Restricted D Property Plant and Equipment, net D Other Non-Current Assets/Derivatives D Long Term Debt, Less Current Portion/Capital Leases D N/D N/D N Deferred Revenues D Net Assets - Unrestricted D D Principal Payments D D N D Capitalized Interest N/D N/D D Entry Fees Received N/D N Entry Fees Refunded N/D N Accumulated Depreciation N Financial Ratios & Trend Analysis of the CARF-CCAC Accredited Organizations 55
  • 61. APPENDIX B Discussion of “Cash” The debt capital market is made up of many constituents: accounting purposes. Management may possess little buyers of bonds (institutional buyers as well as retail discretion over the use of these assets. These non- buyers); investment banking firms; financial advisors; discretionary funds usually are presented in the portion rating agencies; auditors; and others. Not all of these of the balance sheet labeled as “assets whose use is constituents fully agree on what to count in the total limited” or, alternatively labeled, “assets limited as to of what traditionally has been called “unrestricted cash use”. An example of a non-discretionary “unrestricted” and investments.” Part of the problem stems from the asset is a bond trustee-held debt service reserve fund. sheer quantity of distinct descriptions of cash and investments appearing on audited financial statements. The preparers of this report think that for financial ratio These descriptions number in the hundreds and purposes, the term “unrestricted” should connote the later we provide examples. Furthermore, using the ease of access and availability of the cash and descriptive term “unrestricted” creates labeling issues investments. This “availability” notion is separate from when viewed in the context of generally accepted how liquid the investment is. By “unrestricted” we accounting principals. The lack of authoritative guidance mean that management, with Board approval if about what to include in unrestricted cash and necessary, could spend the cash (or the converted investments complicates universal understanding and investment) with relatively little outside-the-organization diminishes the value of financial ratio comparisons. approval. The accounting concept of “assets limited as to use” has more to do with who imposes the limit, not This annual publication serves as an ideal vehicle to with how easily the limit can be relaxed or the length foster consensus in the treatment and characterization of time it might take to get the relaxation of the of certain line items in the financial statements of restriction. Is it the Board imposing the restriction? If AAHSA members. The CCAC’s accredited organizations so, the Board can remove the restriction. It is, therefore, make up a formidable cohort of like-minded for ratio calculation purposes considered “unrestricted” organizations. The leadership role these organizations even if currently it is “restricted” by the Board. Is it play is vital to the growth of the industry. Thus with this restricted by bond documents that would require expanded annual publication, the authors provide outside action by a trustee only after getting bondholder guidance in counting cash and investments used in approval? For ratio purposes these funds are considered financial ratio calculations. “restricted”. Do regulatory bodies require approval from state authorities before funds can be utilized by the With the issuance of the Financial Accounting Standards community? If so, for ratio purposes, these funds are Board’s Statement of Financial Accounting Standard No. considered “restricted”. More detailed explanations of 117, the statement of financial position (which despite the logic behind these conclusions follow. the pronouncement is still more commonly referred to as the “balance sheet” in generic discussions) now must Some access-to-funds-limitations are easily overcome; list three types of net assets. The three categories are others, such as limitations imposed by regulatory bodies, unrestricted, temporarily restricted, and permanently are somewhat harder to overcome but not impossible, restricted. These accounting labels are useful in especially if the funds are there for operating purposes. determining an organization’s “equity” position, but do In a fiscal emergency, getting timely bondholder little to stratify the various restrictions placed on cash approval to access certain funds is near impossible. For and investments. The labeling does not tell the user that matter, even allowing for a longer time frame, what cash and investments are available at the discretion access would most likely be denied. Thus, the capital of the Board and Management. Unfortunately, the net markets do not count Trustee-held funds as assets section of the balance sheet is the only place any unrestricted. Other funds, such as reserves for self- restriction is distinguished in terms of accounting insurance, require simple Board approval to spend, but presentation. Individual line items in the assets section most capital market participants do not think of these of the balance sheet must be analyzed to determine funds as discretionary. If getting access to “external- what to include in the unrestricted cash and approval-needed” funds involves either a very lengthy investments figure used in ratios. Cash and investments process or the restriction can not be easily overcome, or can have both internal and external restrictions imposed both, the funds should not be counted as unrestricted on them as to their spending. These restricted funds for ratio purposes. nonetheless, may be considered “unrestricted” for 56 CARF-CCAC • KPMG LLP • Ziegler Capital Markets Group
  • 62. FINANCIAL RATIOS APPENDIX B While practically all capital market participants exclude not easily tap these funds and, therefore, they should permanently restricted assets when calculating cash- not be counted as unrestricted. However the consensus related ratios, there is still considerable argument among the authors is generally to count these funds as about what line items to count when calculating cash- unrestricted. If the state, for example Maryland, does related ratios that use temporarily restricted cash not require the provider to set the funds aside in a and investments. separately maintained account nor does the state require the provider to seek authorization from the state prior to Categorizing dubiously labeled line items on a provider’s using the funds, these funds are considered audited financial statements, without benefit of unrestricted. If the state, for example Florida, requires discussions with management, fosters arbitrary decisions the provider to set the funds aside, the preparers of this TREND ANALYSIS about what to count as unrestricted cash. Users of report do further analysis of the provider’s Statement of financial statements who perform ratio analysis will Financial Position. If the provider has no debt make categorization decisions regardless of the provider’s outstanding, the reserves are considered restricted. intent in the presentation. It behooves providers to be as If the provider has long-term debt outstanding and is clear as possible in their financial statement presentations required to maintain a Debt Service Reserve Fund as to the amount of discretion the board and management and/or Operating Reserve by the terms of the bond exercise over their cash and investments. documents, the preparers of this report consider the state-required reserves to be unrestricted. Placement of the line item on the balance sheet in terms of “current” or “non-current” does not affect the discretionary attributes of the cash and investments. The accounting line item placement should have more to do with the investment’s liquidity and corresponding current liability than with the ease of removing the limitations on accessing. The accounting presentation does not address the ease of ability to spend the cash and investments. Thus, for purposes of ratio analysis, current and non-current cash and investments are combined. However, treatment of the current asset line item “assets limited as to use-current portion” is usually reserved for trustee held funds associated with imminent debt service. Such funds would not be counted in unrestricted cash and investments. Several of the most frequently questioned line items are discussed below: Non-current Board Restricted Construction Reserve Items (e.g., funded depreciation) that are restricted by the Board can be unrestricted through board action, therefore, this item is considered unrestricted for ratio calculation purposes. As noted above, the designation of non-current does not preclude the use of a cash balance in ratio calculations. State Operating Reserves Through either law or regulation, various states have imposed operating reserve requirements. These reserves sometime help to maintain licensure requirements. The funding dollar amount varies, as well as how to calculate the required amount. Some argue that management can Financial Ratios & Trend Analysis of the CARF-CCAC Accredited Organizations 57
  • 63. APPENDIX C Median Ratios Comparison—Single-site Providers* Fitch1 CCAC IG ‘A’ ‘BBB’ 2002 Median** Margin (Profitability) Ratios Operating Margin Ratio (%) N/C N/C N/C (0.7) Operating Ratio (%) 99.3 98.8 100.3 101.7 Total Excess Margin Ratio (%) 0.6 2.6 0.5 0.5 Net Operating Margin Ratio (%) N/C N/C N/C 2.1 Net Operating Margin Ratio — Adjusted (%) N/C N/C N/C 17.3 Liquidity Ratios Days in Accounts Receivable Ratio N/C N/C N/C 18.0 Days Cash on Hand Ratio 346.0 502.0 301.0 261.0 Cushion Ratio (x) 8.1 11.6 7.0 6.7 Capital Structure Ratios Debt Service Coverage Ratio (x) 1.8 2.3 1.6 2.0 Debt Service Coverage Ratio—Revenue Basis (x) 0.5 0.5 0.4 0.6 Debt Service as a Percentage of Total Operating Revenues and Net Nonoperating Gains and Losses Ratio (%) 10.7 10.1 10.8 9.2 Unrestricted Cash and Investments to Long-term Debt Ratio (%) 68.0 127.0 58.0 51.6 Long-term Debt as a Percentage of Total Capital Ratio (%) 65.4 63.4 79.8 78.9 Long-term Debt as a Percentage of Total Capital Ratio — Adjusted (%) 50.5 36.0 55.5 54.1 Long-term Debt to Total Assets Ratio (%) N/C N/C N/C 40.6 Average Age of Facility Ratio (Years) 10.3 9.9 10.4 10.2 1 Fitch 2002 Median Ratios for Continuing Care Retirement Communities. Standard and Poor’s 2002 Median Ratios were not available at time of publication. * Rating Agency computation of ratios may differ as well as their definition of single-site provider. ** 50th Percentile N/C Not Computed 58 CARF-CCAC • KPMG LLP • Ziegler Capital Markets Group
  • 64. FINANCIAL RATIOS APPENDIX C Median Ratios Comparison—Multi-site Providers* Fitch1 CCAC IG ‘A’ ‘BBB’ 2002 Median** Margin (Profitability) Ratios Operating Margin Ratio (%) N/C N/C N/C 0.0 Operating Ratio (%) 99.3 98.8 100.3 102.2 Total Excess Margin Ratio (%) 0.6 2.6 0.5 0.2 TREND ANALYSIS Net Operating Margin Ratio (%) N/C N/C N/C (0.8) Net Operating Margin Ratio — Adjusted (%) N/C N/C N/C 17.1 Liquidity Ratios Days in Accounts Receivable Ratio N/C N/C N/C 20.0 Days Cash on Hand Ratio 346.0 502.0 301.0 225.0 Cushion Ratio (x) 8.1 11.6 7.0 6.4 Capital Structure Ratios Debt Service Coverage Ratio (x) 1.8 2.3 1.6 2.1 Debt Service Coverage Ratio—Revenue Basis (x) 0.5 0.5 0.4 0.3 Debt Service as a Percentage of Total Operating Revenues and Net Nonoperating Gains and Losses Ratio (%) 10.7 10.1 10.8 8.8 Unrestricted Cash and Investments to Long-term Debt Ratio (%) 68.0 127.0 58.0 47.2 Long-term Debt as a Percentage of Total Capital Ratio (%) 65.4 63.4 79.8 77.0 Long-term Debt as a Percentage of Total Capital Ratio — Adjusted (%) 50.5 36.0 55.5 55.1 Long-term Debt to Total Assets Ratio (%) N/C N/C N/C 42.4 Average Age of Facility Ratio (Years) 10.3 9.9 10.4 9.0 1 Fitch 2002 Median Ratios for Continuing Care Retirement Communities. Standard and Poor’s 2002 Median Ratios were not available at time of publication. * Rating Agency computation of ratios may differ as well as their definition of multi-site provider. ** 50th Percentile N/C Not Computed Financial Ratios & Trend Analysis of the CARF-CCAC Accredited Organizations 59