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
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 – 1
Key Financial Statistics � Input Assumptions � Actuarial decrement � Occupancy � Entry age � Gender � Apartment density Key Financial Statistics – 2
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 – 3
Source of Actuarial Assumptions: before 1976 ? Key Financial Statistics – 4
Source of Actuarial Assumptions: 1979-2004 (Medical Model) 5,000 Life Years of Move Out Experience for Credible Data Set Transfer to ALU Transfer to NUR 12 Sets of Probabilities for a CCRC That Offers Die (Not Survive) Three Levels of Care Key Financial Statistics – 5
Actuarial Decrement Assumptions 20% 15% 10% 5% 0% Mortality Move-out Morbidity Key Financial Statistics – 6
Source of Actuarial Assumptions: 2005+ (Disability Model) Typical entrant to 0 ADL limitations 1 or 2 IADL apartment limitations Home care 1 ADL limitation 1 or 2 IADL resident limitations Assisted living 2 or 3 ADL 3 IADL limitations resident limitations Nursing care 4 or more ADL 4 or more IADL resident limitations limitations Key Financial Statistics – 7
Life Expectancy Comparison with Similar CCRCs Age-80 Entrant 15 15 10 10 5 0 Female Female Male ale AVP 2 AVP 25th AVP AVP 5 50th AVP AVP 7 75th th AVP av aver erage age Key Financial Statistics – 8
Case Study Survivorship Curve for Initial Cohort 285 Residents; Avg Age=77; Females=77% 300 300 200 200 100 100 0 5 5 7 7 9 9 1 1 3 3 5 5 7 7 9 9 1 1 3 3 5 5 7 7 9 9 7 7 7 7 7 7 8 8 8 8 8 8 8 8 8 8 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 IL ILU Assi ssist sted L Livi ving Nurs rsin ing C Care re Key Financial Statistics – 9
Expected ILU Female Health Care Usage 25 20 ILU 15 Years Assisted Living 10 Nursing Care 5 0 65 70 75 80 85 Entry Age Key Financial Statistics – 10
Average ILU Occupancy 25th 50th Average 75th 88.5 95.6 92.2 96.5 1999 91.0 95.0 92.9 97.2 2000 2001* 90.0 95.1 93.0 97.5 Percentages Key Financial Statistics – 11
Average ALU Occupancy 25th 50th Average 75th 85.0 91.7 87.7 94.8 1999 2000 84.5 92.0 88.2 95.6 2001* 86.0 90.3 90.0 95.4 Percentages Key Financial Statistics – 12
Average NUR Occupancy 25th 50th Average 75th 88.6 93.9 92.1 95.9 1999 2000 85.9 91.4 88.1 94.2 2001* 85.6 91.8 89.7 94.5 Percentages Key Financial Statistics – 13
Entry Age Distribution (1995 to 1999) 40.0% 30.0% 20.0% 10.0% 0.0% 9 4 9 4 9 4 9 + 5 6 6 7 7 8 8 0 9 o o o o o o o t t t t t t t 5 0 5 0 5 0 5 5 6 6 7 7 8 8 Female avg=79.1 yrs Male avg=79.6 yrs Key Financial Statistics – 14
Apartment Density (1995 to 1999) 80% 60% 40% 20% 0% < 500 Sq Ft 501 to 1,000 1,001 to 1,500 > 1,500 Sq Ft Key Financial Statistics – 15
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 – 16
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 – 17
Expected and Potential Variation in Apartment Turnover 0.14 0.12 0.1 0.08 0.06 0.04 0.02 0 2 4 6 8 0 2 4 6 8 0 0 0 0 0 1 1 1 1 1 2 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 2 2 2 2 2 Expected Key Financial Statistics – 18
Number of Years for 100% Turnover 20 17 14 11 8 e U p e e s t u n x g g e L i o E a a l l I g - e n e e y y n s i v f r r i a t S i t U o L B n n L M e e % A 3 3 0 X - + 0 5 1 Key Financial Statistics – 19
ALU + NUR Projected Needs 40 35 30 25 20 U t e e e s u n g g e L o i a a l I l g - e n e n y y s v i r r i a t S o t U n n B M L e e % A 0 X 3 3 0 - + 5 1 Key Financial Statistics – 20
How Does Projected Usage Compare with Similar CCRCs? 40 40 30 30 Beds ds 20 20 Be 10 10 0 NUR R NUR 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 – 21
General Definition of Solvency � Do the assets of your organization equal or exceed your liabilities? Key Financial Statistics – 22
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 – 23
Solvency Measures in Bond Covenants � Minimum debt service coverage requirements � Possible cash-to-debt thresholds � Concerned only with ability to repay bonds, not obligations to residents Key Financial Statistics – 24
Solvency Measures using Ratio Analysis � Is there a “magic set” (high statistical correlation) of 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 – 25
Solvency Measures from Feasibility Study � Five-year financial projection is too short to uncover long-term pricing problems � Expectation that $0 GAAP future service obligation means that all liabilities are fully funded Key Financial Statistics – 26
∼ 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 – 27
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 – 28
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 organization, which include liquid assets and PP&E, cover the shortfall between future costs and fees? Key Financial Statistics – 29
Empirical Data on Condition 1 Funded Status � Median is fully funded � Recommended surplus 104.0% depends on age of 102.0% facility, mix of continuing 100.0% care contracts and their risks 98.0% � AVP standards are: 96.0% 5% to 10% surplus 1999 2000 2001* Key Financial Statistics – 30
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 – 31
Empirical Data on Condition 2 New Entrant Pricing Surplus � Median is nearly 12% � Recommended surplus 15.0% depends on size of 10.0% facility, type of continuing care contract and its risk 5.0% � AVP standards are: 10% to 15% surplus 0.0% 1999 2000 2001* Key Financial Statistics – 32
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 – 33
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