Key Financial Statistics for CCRCs and Projecting Apartment Turnover - - PowerPoint PPT Presentation

Key Financial Statistics for CCRCs and Projecting Apartment Turnover

June 4, 2002

AV Powell & Associates LLC 6055 Barfield Road, NE, Suite 209 Atlanta, GA 30328-4400 phone 404.845.0360 fax 404.845.0366 www.avpowell.com

Key Financial Statistics – 1

OVERVIEW

What are the key financial statistics? How are the statistics determined? How should the statistics be used and

what do they tell financial analysts?

Key Financial Statistics – 2

Key Financial Statistics

Input Assumptions

Actuarial decrement Occupancy Entry age Gender Apartment density

Key Financial Statistics – 3

Process for Projecting Future Population Flows for a CCRC

Select assumptions from inconsistent sources

OR

Analyze data and select appropriate “actuarial

decrement” assumptions

Develop computer model for CCRC Interpret results for planning decisions

Key Financial Statistics – 4

Source of Actuarial Assumptions: before 1976

?

Key Financial Statistics – 5

Source of Actuarial Assumptions: 1979-2004 (Medical Model)

5,000 Life Years of Experience for Credible Data Set Move Out Transfer to ALU Transfer to NUR 12 Sets of Probabilities for a CCRC That Offers Three Levels of Care Die (Not Survive)

Key Financial Statistics – 6

Actuarial Decrement Assumptions

0% 5% 10% 15% 20% Mortality Move-out Morbidity

Key Financial Statistics – 7

Source of Actuarial Assumptions: 2005+ (Disability Model)

4 or more IADL limitations 4 or more ADL limitations Nursing care resident 3 IADL limitations 2 or 3 ADL limitations Assisted living resident 1 or 2 IADL limitations 1 ADL limitation Home care resident 1 or 2 IADL limitations 0 ADL limitations Typical entrant to apartment

Key Financial Statistics – 8

Life Expectancy Comparison with Similar CCRCs

5 10 10 15 15 Female Female Male ale

Age-80 Entrant

AVP AVP 2 25th AVP AVP 5 50th AVP AVP 7 75th th AVP av aver erage age

Key Financial Statistics – 9

Case Study Survivorship Curve for Initial Cohort

285 Residents; Avg Age=77; Females=77%

100 100 200 200 300 300 1 9 7 5 1 9 7 5 1 9 7 7 1 9 7 7 1 9 7 9 1 9 7 9 1 9 8 1 1 9 8 1 1 9 8 3 1 9 8 3 1 9 8 1 9 8 5 5 1 1 9 9 8 8 7 7 1 1 9 9 8 8 9 9 1 1 9 9 9 9 1 1 1 1 9 9 9 9 3 3 1 1 9 9 9 9 5 5 1 1 9 9 9 9 7 7 1 1 9 9 9 9 9 9 IL ILU Assi ssist sted L Livi ving Nurs rsin ing C Care re

Key Financial Statistics – 10

Expected ILU Female Health Care Usage

5 10 15 20 25 65 70 75 80 85 Entry Age Years ILU Assisted Living Nursing Care

Key Financial Statistics – 11

Average ILU Occupancy

Percentages 1999 88.5 95.6 92.2 96.5 2000 91.0 95.0 92.9 97.2 2001* 90.0 95.1 93.0 97.5 25th 50th Average 75th

Key Financial Statistics – 12

Average ALU Occupancy

Percentages 1999 85.0 91.7 87.7 94.8 2000 84.5 92.0 88.2 95.6 2001* 86.0 90.3 90.0 95.4 25th 50th Average 75th

Key Financial Statistics – 13

Average NUR Occupancy

Percentages 1999 88.6 93.9 92.1 95.9 2000 85.9 91.4 88.1 94.2 2001* 85.6 91.8 89.7 94.5 25th 50th Average 75th

Key Financial Statistics – 14

Entry Age Distribution (1995 to 1999)

0.0% 10.0% 20.0% 30.0% 40.0% 5 5 t

• 5

9 6 t

• 6

4 6 5 t

• 6

9 7 t

• 7

4 7 5 t

• 7

9 8 t

• 8

4 8 5 t

• 8

9 9 + Female avg=79.1 yrs Male avg=79.6 yrs

Key Financial Statistics – 15

Apartment Density (1995 to 1999)

0% 20% 40% 60% 80% < 500 Sq Ft 501 to 1,000 1,001 to 1,500 > 1,500 Sq Ft

Key Financial Statistics – 16

Key Financial Statistics

Output assumptions

Turnover Health care usage Debt coverage ratio and cash-to-debt ratio Actuarial funded status ∼ Future service obligation

Key Financial Statistics – 17

Steps in Actuarially-based Population Flow Projection

Identify current census

Number of residents as of Average age Average years in community Percentage female

Apply actuarial decrements to project:

Deaths, move-outs, and transfers Couple density, average health care usage by level

Generate sensitivity projections

Key Financial Statistics – 18

Expected and Potential Variation in Apartment Turnover

0.02 0.04 0.06 0.08 0.1 0.12 0.14 2 2 2 4 2 6 2 8 2 1 2 1 2 2 1 4 2 1 6 2 1 8 2 2 Expected

Key Financial Statistics – 19

Number of Years for 100% Turnover

8 11 14 17 20 B a s e l i n e

• 3

e n t r y a g e + 3 e n t r y a g e A L U i n I L U 1 % S i n g l e s 5 X M

• v

e

• u

t L i f e E x p

Key Financial Statistics – 20

ALU + NUR Projected Needs

20 25 30 35 40 B a s e l i n e

• 3

e n t r y a g e + 3 e n t r y a g e A L U i n I L U 1 % S i n g l e s 5 X M

• v

e

• u

t

Key Financial Statistics – 21

How Does Projected Usage Compare with Similar CCRCs?

10 10 20 20 30 30 40 40 Be Beds ds NUR NUR R Ratio ALU+NUR +NUR R Ratio AVP AVP 25 25th AVP AVP 50 50th AVP AVP 75 75th AVP AVP av aver erage age

Key Financial Statistics – 22

General Definition of Solvency

Do the assets of your organization equal or

exceed your liabilities?

Key Financial Statistics – 23

Hierarchy of Solvency Criteria

Level One (Residents)

Cash inflows projected to exceed cash outflows No technical defaults of loan covenants

Level Two (Regulators/Financing Institutions)

Projected accumulation of significant reserves DSR and cash-to-debt ratios exceed targets

Level Three (Board and Management)

Meets criteria for satisfactory actuarial balance

Key Financial Statistics – 24

Solvency Measures in Bond Covenants

Minimum debt service coverage requirements Possible cash-to-debt thresholds Concerned only with ability to repay bonds, not

• bligations to residents

Key Financial Statistics – 25

Solvency Measures using Ratio Analysis

Is there a “magic set” (high statistical correlation)

• f ratios that would indicate that a CCRC is

solvent?

If so, how does it vary and what are criteria for:

Mix of contract types Age of facility Unit configuration

Key Financial Statistics – 26

Solvency Measures from Feasibility Study

Five-year financial projection is too short to

uncover long-term pricing problems

Expectation that $0 GAAP future service

• bligation means that all liabilities are fully

funded

Key Financial Statistics – 27

∼ Future Service Obligation (FSO)

GAAP amortization generally recognizes too

much entry fee income too soon

FSO—good name, wrong implementation

Employs actuarial techniques Liquidation liability Excludes certain expenses Focus should be on “net assets” value from GAAP balance sheet

Key Financial Statistics – 28

ASOP No. 3 Conditions for Satisfactory Actuarial Balance

Developed by American Academy of Actuaries

Committee on CCRCs

Adopted by Actuarial Standard Board, July 1994 Defines three criteria to be tested by:

Condition 1—Actuarial balance sheet Condition 2—Cohort pricing analysis Condition 3—Cash flow projection

Key Financial Statistics – 29

Condition 1: Funded Status ≥ 100%

Are the resources available for current residents greater

than or equal to the actuarial present value of the expected costs of meeting all remaining obligations to such residents under their contracts, with appropriate provision for surplus?

Layman’s terms—do the reserves held by the

• rganization, which include liquid assets and PP&E,

cover the shortfall between future costs and fees?

Key Financial Statistics – 30

Empirical Data on Condition 1 Funded Status

Median is fully funded Recommended surplus

depends on age of facility, mix of continuing care contracts and their risks

AVP standards are:

5% to 10% surplus

96.0% 98.0% 100.0% 102.0% 104.0% 1999 2000 2001*

Key Financial Statistics – 31

Condition 2: New Entrant Pricing Surplus ≥ 0%

Does the sum of entry fees paid plus the actuarial

present value of monthly fees equal or exceed the actuarial present value at occupancy of the costs of meeting all obligations for a typical cohort of new entrants, with appropriate provision for surplus?

Layman’s terms—will the combination of future monthly

fees and entry fees cover the expected future costs of care and entry fee refunds for a group a new residents?

Key Financial Statistics – 32

Empirical Data on Condition 2 New Entrant Pricing Surplus

Median is nearly 12% Recommended surplus

depends on size of facility, type of continuing care contract and its risk

AVP standards are:

10% to 15% surplus

0.0% 5.0% 10.0% 15.0% 1999 2000 2001*

Key Financial Statistics – 33

Condition 3: Projected Cash Balances ≥ $0

Are positive cash balances projected with

respect to current and future residents for a period of at least 20 years?

Layman’s terms—is the facility projected to

generate sufficient cash to pay its expenses?

Key Financial Statistics – 34

Empirical Data on Condition 3 Projected Cash Balances

Median is increasing cash

balances

Recommended position is

for reserves to at least match increases in expenses since liabilities will increase the same

AVP standards are:

1.48 to 1.79 (10-year growth)

0.0 0.5 1.0 1.5 2.0 2.5 1st Qtr 1999 2000 2001*

Key Financial Statistics – 35

Summary

Projecting population flows is a key assumption for

financial analysis

FSO and trends do not reflect CCRC economic reality Ratios are useful for measuring ability to repay debt Methods to achieve satisfactory actuarial balance have

become the de facto standard for prudent stewardship