outstanding financial and operating results: the defining ... 7th strategy + finance conf.pdf ·...
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FINANCE + STRATEGYChateau Élan Atlanta | 2004 7
Outstanding Financial and Operating Results: The Defining Characteristics
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Section 2
Financial Success or Solvency: How Do You Measure It and What Should You Set As Benchmarks?
AV PowellConsulting ActuaryA.V. Powell & Associates, LLC
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Page 3
Overview
• What is AVP’s perspective?• The prime objective• Defining success and solvency• The CCRC complication• Empirical data• Observations
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AVP’s Perspective
• Student of continuing care financials• Academically trained statistician• Professional actuary• Close ties with accounting profession
– Colleague developed CCRC audit guidelines• Opportunity to evaluate many CCRCs
– More than 100 annually– Nearly 500 unique during past 20 years
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Primary Objective
• Adjust fees to meet predetermined and quantifiable financial goals– Many factors/issues relate/affect the
“success” of a CCRC– This presentation only concerned with
financial factors/issues
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Possible Financial Goals
• Profitability or margin ratios– Net operating income margin– Operating ratio
• Other financial ratios– Debt service– Days cash-on-hand– Audience suggestions
• Satisfactory actuarial balance
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Defining Financial Success
• Able to pay monthly expenses• No defaults of bond covenants• Favorable credit rating• Building an “endowment”• Meeting certain financial ratio targets
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Defining Financial Solvency
• Satisfactory actuarial balance– Fully funded– Positive new entrant fee margin– Projected increasing reserve balances
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Page 9
Perspective for Success or Solvency
Management
Regulators
Bondholders
Residents
Solvency
BOARD
Success
Crisis or Turn-around
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The CCRC Complication: Entry Fees
• If fee-for-service structure, i.e., rental, then financial analysis is straightforward
• But if charge entry fees, which are a prepayment of monthly fees, financial analysis is much more complicated
$0
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
AtEntry
1 2 3 4 5 6 7 8 9 10
No Inf MF 4% Inf MF
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Page 11
Empirical Analysis: Description of Database
• Source of financial statistics– Selected client actuarial studies; most are
predominately Type A contracts– 53 sites in 2003– 58 sites in 2002– 37 same sites in both years– Not necessarily representative of the industry
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Empirical Analysis
• Five financial statistics (subsequent analysis will include all CCAC ratios)
• Solvency measures– Funded status– Funded status adjusted for new entrant surplus
• Success measures– Net operating income margin (adjusted and not)– Debt service ratio– Days cash-on-hand ratio– 10-year reserve projection
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Funded Status Distribution
80%
85%
90%
95%
100%
105%
110%
25th 50th Average 75th
20032002
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Funded Status “Adjusted” Distribution
80%
85%
90%
95%
100%
105%
110%
115%
120%
125%
25th 50th Average 75th
20032002
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Page 15
2003 Success Measure Medians
• All sites (53)– (2.4%) NOI margin– 21.6% NOI margin adjusted– 1.60 debt service ratio– 471 days cash-on-hand– 2.44x ten-year reserve factor
• Solvent sites only (30)– (6.7%) NOI margin– 19.9% NOI margin adjusted– 2.05 debt service ratio– 544 days cash-on-hand– 2.22x ten-year reserve factor
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Experimental Design
• Hypothesis– Is solvency related to certain financial ratios?– Can solvency be reliably predicted?
• Statistical regression analysis– Dependent variable is solvency measures– Independent variables are success measures
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Actuarial Surplus versus NOI Adjusted:Are They Correlated?
-100%
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
Funded Status NOI adjusted
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Correlation to Funded Status “Adjusted”
• Relatively small correlation values
• Only Days Cash-on-Hand has a significant correlation coefficient
-0.3
-0.2
-0.1
0.0
0.1
0.2
0.3
DaysCash
NOI DSR Reserve
R-squaredCorrelation coefficent
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Prediction of Funded Status (Solvency)
• Applied linear regression model with combinations of 5 success measures
• None show a prediction reliability greater than 15%
• Will sophisticated analysis yield better results?
0%
2%
4%
6%
8%
10%
12%
R-Squared
CashonHand + ReserveCashonHand + NOICashonHand + DSRCashonHand + NOI + Reserve
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Observations
• Most of our clients are solvent– 50%+ excluding new entrant fee surplus– 70%+ including new entrant fee surplus
• Difficult to determine whether solvent using traditional financial ratios due to:– Contract mix– Portion of costs covered by entry fees– Amount of debt– Age of facility
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Summary
• An entry fee CCRC will likely be able to pay its expenses indefinitely if:– Can regularly increase fees in an inflationary
environment– Stays relatively full, i.e., 90% or more– Continues to offer same type of contracts
• Achieving solvency is more challenging– Move from “pay-as-you-go” to future outlook– Consider pension plans and social security
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How Do You Get to a Solvent Position?
• 6 keys
– Learn marketplace desires– (Re)Design contracts to meet those desires– Manage and/or reduce operating expenses– Adjust fees with consideration of what market values,
but must be actuarially adequate– Keep occupancy high– Set and meet goals to achieve and maintain a solvent
position (individual facility thresholds)
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A Simple Set of Financial Standards/Goals
• Limited statistical analysis suggests that a simple set may be elusive
• Alternative methods– Set fees to meet target of
satisfactory actuarial balance, OR
– Update long-term financial projections annually,OR
– Other suggestions?
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Questions / Answers
B.C. Ziegler and Company is registered with the National Association of State Boards of Accountancy (NASBA), as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be addressed to the National Registry of CPE Sponsors, 150 Fourth Avenue North, Nashville, TN, 37219-2417. Web site: www.nasba.org.
Attendees are eligible to receive up to 12 credits for attendance at Ziegler’s Seventh Annual Finance + Strategy Conference. Noprerequisites are required for this group-live educational conference. © 2004 B.C. Ziegler and Company