In the wake of the recession, CCRCs reacted quickly to control expenses and conserve cash
By Sue Matthiesen
In any financial planning endeavor, it is critical to understand where your organization is today, where you want to be tomorrow, and how your organization compares with others doing the same thing. Within the senior living field, this is done by monitoring a range of performance indicators such as occupancy levels, payer mix, revenue and cost per day, and days in accounts receivable.
But analyzing these indicators in isolation, or without regard to external factors such as economic conditions and the housing market, will not paint a complete picture of your organization’s financial position. This is especially true when using financial ratios as benchmarks or to conduct long-range business planning.
Aggregate continuing care retirement community (CCRC) financial ratios, compiled and analyzed by CARF International’s Financial Advisory Panel (FAP) from the audited financial statements of participating CARF-accredited CCRCs, contain valuable data points. But they have the danger of being misinterpreted if reviewed individually or without comparisons to the trends of previous years.
One Data Point Not Enough
The recession of a few years ago provides a perfect demonstration of the effect that external pressures can have on individual financial ratios, and offers many lessons on how to interpret the data in context. I touched base with three representatives from CARF’s FAP — Michael Flynn, vice president and chief financial officer, Friendship Senior Options; Jeffrey Boland, partner, Senior Living Services Consulting Group, Reinsel Kuntz Lesher LLP; and Amy Castleberry, senior vice president, Ziegler — to discuss these lessons.
A ratio they made sure to emphasize was the Average Age of Facility (AGE) ratio, which we saw trend in a negative direction for many years during the recession.
Generally, maintaining a healthy level of reinvestment in capital improvements is important for organizations to stay competitive in their product offering. If a potential resident walks onto a 19-year-old campus, for instance, they’re going to know it.
But economic conditions prompted operators to focus on controlling expenses and conserving cash instead. The negative AGE ratio trend over the previous decade must be evaluated alongside other ratios related to profitability and cash, which rebounded in different ways than that AGE ratio. This is valuable information to consider as your organization assesses its own situation and looks forward.
As we come out of the recession and organizations begin to reinvest in their physical plants again, they may see their liquidity ratios remain stagnant or decrease. Liquidity ratios are intended to measure a provider’s ability to meet the short-term (one year or less) cash needs of its ongoing operations (payroll, paying for goods and services, funding current debt service payments, essential maintenance and repairs, etc.). If one were to just look at this ratio alone, an assumption might be made that financial performance is on a downward trend, when in fact, it could be just the opposite.
An organization needs to consider other indicators related to occupancy levels and overall financial performance to accurately evaluate where it’s at with its recovery. Fortunately, the ratios show that many organizations are navigating this environment successfully as single-site providers experienced the first positive change in the median AGE ratio since CARF began evaluating financial ratio trends.
CCRCs Bounced Back
When reviewed in combination with other factors, the ratio trends actually uncover a resiliency within the CCRC field that is terrific to see. Despite occupancy and pricing pressures, we saw providers employ creative ways to continue to support their operations.
One accredited operator received input from its residents about the need for additional spaces, such as a sitting room to greet visitors, a reflection room in the nursing center and a massage therapy area. Unable to allocate money to building out its facilities, this provider instead converted existing office space, and even a bathroom, to meet the needs of residents.
These changes were not huge ticket items, yet addressed the evolving wellness needs of the people that community serves. Success from such strategies should give senior living boards and managers, especially those from the nonprofit sector, real confidence in their ability to weather future challenges.
As we look forward, ratios that providers will want to pay close attention to are those related to debt. Many organizations currently have debt placed directly with banks either on a variable or fixed-rate basis. The Unrestricted Cash and Investments to Long-Term Debt (CD) ratio, which measures a provider’s position in available cash and marketable securities in relation to its long-term debt, weakened for both single- and multi-site providers in the previous year’s analysis.
More Debt Implies More Development
Since we know that unrestricted cash is increasing for both provider types, this weakening in the CD ratio suggests an increase in debt (another indication that a number of system providers have embarked on expansion, renovation or repositioning projects).
However, if your organization is in this situation, you should monitor the situation closely. The cost of capital right now is very low but likely not permanent. It is unrealistic to build operations around a sub-3 percent cost of capital.
Credit analysts and lenders generally rely on the CD ratio, combined with the Debt Service Coverage (DSC) ratio and Days Cash on Hand (DCH) ratio, as a top indicator to evaluate a provider’s short- and long-term financial viability.
A ratio of unrestricted reserves in excess of 20 percent of long-term debt is desired. If your organization has variable rate debt or debt with a commitment period prior to maturity, you will want to perform sensitivity analysis to determine the impact of future rising interest rates on your ability to make debt service payments.
It is important for an organization to assess its financial health in a variety of ways. Financial ratios should not be used by themselves to make financial or operational decisions, but they are an excellent addition to the process.
Looking at trends in financial ratios compiled from other CCRC organizations can help in assessing the direction in which the field is going and evaluating your organization’s past performance. Calculating your own internal ratios can be part of in-house review processes or shared with key stakeholders.
However you choose to use financial ratios, I recommend considering and selecting those most relevant for your organization. That may mean focusing on ratios that are required by bond documents, are most applicable to your contract type or best allow you to compare trends to your budget.
Sue Matthiesen supervises the Commission on Accreditation of Rehabilitation Facilities (CARF) Aging Services accreditation operations and staff, developing standards and improvements in the accreditation processes. This column was written in conjunction with representatives of CARF’s Financial Advisory Panel.