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  1. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 19. 14 CARF-CCAC • KPMG LLP • Ziegler Capital Markets Group
  20. 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. 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. 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. 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. 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. 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. 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

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