C C A C

A MEMBER OF CARF INTERNATIONAL

C C A CCONTINUING CARE ACCREDITATION COMMISSION

2519 Connecticut Avenue, NWWashington, DC 20008-1520

(202) 783-7286Fax (202) 220-0022www.ccaconline.org

FINANCIAL RATIOSTREND ANALYSIS

OF CCAC ACCREDITED ORGANIZATIONS

SEPTEMBER 2003

A joint project of CARF-CCAC,

KPMG LLP and Ziegler Capital

Markets Group

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

Ratio Summary

* 50th Percentile

A joint project of Commission on Accreditation of Rehabilitation Facilities-Continuing Care Accreditation Commission (CARF-CCAC), KPMG LLP andZiegler Capital Markets Group (a division of B. C. Ziegler and Company).

SEPTEMBER 2003

FINANCIAL RATIOSTREND ANALYSIS

OF CCAC ACCREDITED ORGANIZATIONS

Commission on Accreditation of Rehabilitation Facilities-Continuing Care Accreditation Commission(CARF-CCAC)

Christine MacDonellManaging Director, Washington, DC

Debra Roane*Director of Finance, Washington, [email protected]

KPMG LLP

Senior Living Services Practice

Douglas BerryPartner, Harrisburg, PA

Alan WellsPartner, Atlanta, GA

Jennifer Schwalm*Director, Harrisburg, [email protected]

KPMG LLP, the U.S. member firm of KPMG International, a Swiss nonoperating association

ZieglerCapital Markets Group

Daniel HermannManaging Director & Group Head, Senior Living Finance Group, Chicago, IL

Kathryn Brod*Senior Vice President/Director of Research, Washington, [email protected]

Ziegler Capital Markets Group is a division of B.C. Ziegler and Company

*Contact person for each agency.

©2003, CARF-CCAC

4891 East Grant Road

Tucson, Arizona 85712

Brian Boon, Ph.D, President/CEO

Special acknowledgement:

CARF-CCAC thanks Kathryn Brod and Jennifer Schwalm for their

continued support and leadership in this publication.

All rights reserved. No part of this publication may be

reproduced, stored in a retrieval system, or

transmitted in any form or by any means electronic,

mechanical, photocopied, recorded or otherwise

without the prior written permission of the publisher.

Printed in the United States of America.

CARF-CCAC • KPMG LLP • Ziegler Capital Markets Group

Project Team

Financial Ratios & Trend Analysis of the CARF-CCAC Accredited Organizations

Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

A Message from the Financial Advisory Panel Chair . . . . . . . . . . . . . . . . . . . . 4

Chapter 1 – Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5The Uses and Limitations of this Publication

Development of the Database

What’s New?

Chapter 2 – Margin (Profitability) Ratios. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15Operating Margin Ratio

Operating Ratio

Total Excess Margin Ratio

Net Operating Margin Ratio

Net Operating Margin Ratio – Adjusted

Chapter 3 – Liquidity Ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26Days in Accounts Receivable Ratio

Days Cash on Hand Ratio

Cushion Ratio

Chapter 4 – Capital Structure Ratios. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32Debt 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

Table of Contents

CARF-CCAC • KPMG LLP • Ziegler Capital Markets Group2

OverviewThis year’s 2003 ratio publication presents the financial

ratios encompassing 2002 financial results for CCAC’s

accredited continuing care retirement communities.

The database of financial results from which these ratios

are computed is unique within continuing care

retirement communities; by the sheer size of this

database it has become one of the definitive measures of

the financial strength of continuing care providers.

As a result, we look to the 2002 ratio results and the

trends that they produce with special interest, for the

operating climate for CCRCs continues to challenge

even the most successful of providers. The ratios this

year provide evidence of the operating expense

challenges that continue to plague CCRCs: somewhat

mitigated, but nonetheless ongoing spikes in liability

insurance premiums; health care benefits’ packages

increasing at double digit rates; health care workers

leaving long-term care. Revenues have been challenged

as well. Earnings rates on providers’ cash balances

remain at historic lows as do the earnings on their

residents’ retirement funds. The equities market has

brought little in the way of increased market value.

The Operating Margin Ratio, Operating Ratio and

Total Excess Margin Ratio results reflect the

sector’s vulnerabilities.

With these ratio values as a prelude it was especially

encouraging to see the degree to which both single-site

and multi-site providers produced strengthened Net

Operating Margin Ratios. It is the Net Operating

Margin Ratio that measures a provider’s ability to cover

the costs of its core service, providing care to residents,

with the revenues generated from this service provision.

More on that later.

A brief overview of the year’s 2002 results:

• In a repeat performance of 2001, Days Cash on

Hand (DCOH) continues to weaken. While

unrealized losses are not explicitly included in any

ratio, they affect the value of cash on the balance

sheet (discussed in more detail below).

Communities with relatively high equity exposure

in their portfolios have their cash balances affected

simply by the mark-to-market requirement for

financial statement presentation. Those who

enjoyed the bull market effect of the past have now

seen their market values decline. Few have been

exempt from the ongoing equities market decline.

• Average debt levels remain higher for multi-site

providers than for the single-sites. This is a

consistent trend, with multi-site providers

apparently leveraging their growth and single-site

providers apparently more inclined to use cash

balances to fund growth.

• Profitability Ratios weakened across nearly all

quartiles as did Total Excess Margin. In a decided

shift from previous years, however, the Net

Operating Margin Ratio strengthened. Decreased

investment earnings and interest income,

increasing nursing costs, liability insurance

premium increases and increasing costs from

regulatory changes have pressured both sides of this

profitability measure.

CCRC providers whose investment portfolios contain

significant percentages invested in equities may

experience financial weakening through several market

pressures. The first is caused by unrealized gains or losses.

While unrealized gains/losses have no effect on any ratio

that is computed in this publication, they have a huge

effect on investment balances. Investments must be

marked to market for financial statement presentations,

and, as a result, cash balances may swing widely based

on market valuations alone. It’s all a matter of timing, of

course, and should the market continue its recent rally,

liquidity levels may improve in the near future.

Financial Ratios & Trend Analysis of the CARF-CCAC Accredited Organizations 3

FINANCIAL RATIOSTR

END

AN

ALYSIS

As noted earlier, a second market pressure can result

when realized investment earnings weaken as a result of

worsened economic factors. “My ongoing concern for

many senior living providers is the degree to which they

are comfortable relying on earnings from investments

and realized capital gains, rather than ensuring that their

core operations are shored-up,” says Dan Hermann,

Managing Director & Group Head, Ziegler Capital

Markets Group, Senior Living Finance Group. The

charts (below) show that in 1999 single-site providers

reported that approximately six percent of their earnings

were in interest/investment income and realized

gains. In 2002 this has been reduced to 1.5%. We are

encouraged this year to see the degree to which reliance

on earnings has dropped and that Net Operating Margin

Ratio has strengthened. Senior living providers who

progress in limiting their reliance on investment

earnings and contributions are viewed favorably by the

capital markets. Investors see this performance as one of

the clear measures of management’s abilities.

How does an investment banker respond to the

community that argues that it is their goal to rely as

little as possible on residents for necessary expense

changes? “Our response is favorable when we see that a

community has found dependable service revenues that

produce a margin that offsets the need for fee increases.

But for the community that relies on philanthropy or

investments to cover their ongoing operating expenses,

the capital markets participants (credit enhancers, rating

agencies and investors) will expect to see an ongoing

financial strengthening projected that isn’t dependent

on ongoing non-service revenues. We’ve noted

repeatedly that a community needs to serve its residents

through its financial strength, with the ability to withstand

the financial pressures such as the liability insurance

crisis without putting services at risk,” says Hermann.

Investments that are needed to cover operations may

require a sale when market conditions are at their worst.

Clearly, in order to be in the strongest financial position,

an organization should not be overly dependent on their

investment earnings.

Debra Roane, Director of Finance for CCAC, monitors

the financial health of continuing care retirement

communities through reviews of the annual reports they

submit to the Commission. “CCRCs, like other health

care providers, have been struggling with significant

operational issues this past year, but increasingly we are

seeing an increased momentum to address strategic

issues such as how to reposition an aging facility to

compete in a rapidly changing market or how to grow to

maintain or build a stronghold in a market area.”

Financial strength is critical to meet these strategic goals.

Jennifer Schwalm, Director, KPMG, commenting on the

2002 ratios, "In the past many providers have been

reluctant to raise resident fees to the degree necessary to

cover expenses. I think we’re all pleased to see that

many providers seem to be stepping up to today’s

challenges in senior living by committing themselves to

ensuring that resident revenues are keeping pace with

expense pressures."

The CCAC ratio publication has been of critical

importance for understanding the trends in CCRCs.

CCRCs that use their past performance to set higher

standards of financial performance will be the best

positioned to deal with the unknowns of the future.

Residential RevenueEntrance Fee AmountSkilled NursingAssisted LivingAdult DayManagement FeesInterest & GainOther OpChange in FSOAdministrative AdjustmentsNet Assets Rld for OpOther Non-Cash

47%

4%

25%

11%

6%

1%

1%3%

1%0%

1%0%

2002 Revenue Breakdown

Source: CARF-CCAC Database; Single Sites

Residential RevenueEntrance Fee AmountSkilled NursingAssisted LivingAdult DayManagement FeesInterest & GainOther OpChange in FSOAdministrative AdjustmentsNet Assets Rld for OpOther Non-Cash

48%

2%

24%

11%

5%

1% 6%

0%0%

1%1%

1%

1999 Revenue Breakdown

Source: CARF-CCAC Database; Single Sites


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


C H A P T E R 1

I N T R O D U C T I O NC C A C

5

BackgroundThe purpose of this publication is to provide, in

summary form, for 1991 through 2002, the financial ratio

quartiles of the CARF-CCAC accredited organizations

(hereafter referred to as CCRCs regardless of individual

states’ designations) that were accredited by the CARF-

Continuing Care Accreditation Commission (the

Commission or CCAC) as of December 2002. This

year’s publication, with over a decade of data, provides

valuable industry benchmarks allowing readers of this

publication a unique opportunity to view the financial

trends resulting from a number of factors: provider

growth, accounting changes, operating challenges, and

regulatory changes, to name a few.

The group of organizations included in this report

consists of 36 multi-site providers (representing 148

accredited organizations) and 162 single-site providers.

Four of the organizations included in this publication

operate on a for-profit basis.

The intent of this report is:

• To assist individual CCRC boards and management

teams in understanding and fulfilling their fiduciary

responsibilities to residents;

• To provide an ongoing mechanism for strengthening

the Commission’s financial performance

standards; and

• To promote better understanding of CCRCs among

outside constituencies such as investors, regulators,

and consumers.

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.

Quartile RankingsFor each financial ratio, the highest and the lowest ratios

are presented to provide an overall sense of the range for

each ratio. Also, quartile divisions have been calculated.

Each single-site or multi-site provider’s ratio was ranked

in ascending order (or descending order, depending on

the nature of the ratio), then the list was divided into

four equal groups. The best ratio in the lowest quarter

defines the 25 percent quartile marker (the point at

which 25 percent of the providers reporting that ratio

are at or below), the best ratio in the next quartile

defines the 50 percent quartile marker (or the median),

and the best ratio in the third quartile defines the

75 percent quartile marker.

The Benefits of Financial RatiosFinancial ratios are valuable tools of analysis. Ratios are:

• A useful tool in analyzing a provider’s financial

strengths and weaknesses;

• Valuable in identifying trends;

• Presented in the form of arithmetic computations

which are easy to use for both internal and external

comparisons;

• Helpful in identifying unusual operating results;

• Useful for illustrating best practices of the

financially strong providers; and

• Valuable because they provide comparisons among

providers regardless of the actual dollar amounts for

the underlying data.

The Uses and Limitations of this Publication


The Limitations of Financial RatiosHowever, financial ratios have limits. Specifically:

• Ratios are not an exclusive tool to be used in

isolation; and

• The interpretation of an individual CCRC’s ratios

may be meaningless or ratios may be distorted due

to variations in reporting treatments.

Ratios are often characterized as having “best” values.

Yet, specific circumstances often require substantial

exceptions to these standard interpretations. Thus, the

reader is cautioned about drawing quick conclusions that

‘Provider A’ is better than ‘Provider B’ because ‘A’ has a

particular financial ratio above the 75 percent quartile

while ‘B’s is below the 25 percent quartile.

In general, no single ratio should be looked at in

isolation. Rather, ratios must be looked at in combination

with other ratios and with nonfinancial information to

interpret the overall financial condition of a provider.

A particular provider’s performance must also be

evaluated based on where it is in its life cycle. For

example, start-up organizations would be expected to

have a relatively unfavorable (high) Long-term Debt to

Total Assets Ratio, whereas a mature community would

be expected to have a relatively favorable (low) Long-

term Debt to Total Assets Ratio. Similarly, a high Long-

term Debt as a Percentage of Total Capital Ratio for a

start-up community should not necessarily be

considered a point of concern. Conversely, unless further

investigation reveals that a substantial renovation and

modernization program has recently been financed, a

comparatively high Long-term Debt as a Percentage of

Total Capital Ratio for a mature community could signal

a significant problem.

Furthermore, the types of contracts that are offered to

residents at CCRCs may affect certain ratios. Generally,

accredited CCRCs offer one or more of five basic

contract types:

• Extensive Contracts (Type A) have an up-front

entry fee and include housing, residential services

amenities and unlimited, specific health-related

services with little or no substantial increase in

monthly charges, except for normal operating costs

and inflation adjustments;

• Modified Contracts (Type B) have an up-front entry

fee and and include housing, residential services

amenities and a specific amount of long-term

nursing care with no substantial increase in

monthly charges (reductions in fees may occur for

a specified period of time (e.g., 30 days per year)

or the resident’s monthly charges may increase as

the level of care increases but at a discount from

the posted fees for the services);

• Fee-For-Service Contracts (Type C) have an up-

front entry fee and and include housing, residential

services amenities for monthly charges that

increase directly with the level of care provided;

• Rental Contracts (Type D) do not require an up-

front entry fee and the resident’s monthly charges

increase directly with the level of care provided.

Typically, residents are guaranteed access to

health care services; and

• Equity Contracts are similar to cooperative housing,

whereby residents have membership in the

corporation and sign a proprietary lease agreement.

Knowledge of this contract experience is helpful when

examining ratio results. When the results of the ratios

appear to have been affected by the types of contracts in

existence, comments have been included in the ratio

discussion. Chapter Five presents each of the ratios by

contract type.


FINANCIAL RATIOSTR

END

AN

ALYSIS

Uses of this ReportGiven the limitations mentioned above, we expect the

Commission’s accredited organizations to use the ratios

published in this report as points of reference for

developing internal targets of financial performance, but

only after considering their own specific marketing,

physical plant, and mission/vision considerations. We

also anticipate that others will use these ratios,

particularly within the capital markets, to learn about

the financial position of organizations that have been

subjected to the screening of the Commission’s

accreditation process. The ratios can also be used as

benchmarks against which to evaluate nonaccredited

organizations and to gain a deeper understanding about

the sector as a whole.

Growth in the financial sophistication of retirement

communities and increased understanding of their credit

strength and operational patterns by rating agencies and

other capital market participants have produced a

favorable environment for many CCRCs. Approximately

132 senior living providers, the majority of which are

continuing care retirement organizations, have their

debt rated. Within CCAC’s accredited population, forty-

six single-sites and 15 multi-site organizations are rated.

Within the 15 multi-site obligated groups are eighty-two

accredited organizations. Therefore, 128, or 37 percent

of CCAC’s 334 accredited organizations are rated as of

December 31, 2002. For a few of the ratios, the rating

agencies utilize calculation methodologies different than

those used in this study. The reference chart in

Appendix A provides a guide for the calculation of each

of the ratios in this publication.

CCAC uses the ratios published in this report

extensively throughout the accreditation process to

assist in measuring compliance with Commission

Standards IA: Current Financial Position and IIB: Long-

Term Financial Resources. In this regard, ratio analysis is

utilized as:

• A Strategic Planning Tool: Once an organization has

been accepted as a candidate, it is required to

develop a three-year strategic plan that is

integrated with a five-year financial plan. As

staff members formulate strategic initiatives and

assess the financial impacts of each, ratio analysis

greatly assists with the selection and prioritizing

of such initiatives.

• A Continuous Financial Assessment Tool: After

receiving accreditation, both the accredited

organization and CCAC use this report (in

conjunction with RatioPro) to measure financial

viability, trending and ongoing compliance with the

Commission’s financial standards.

CCAC Financial Advisory PanelCCAC Financial Advisory Panel (FAP) is an advisory

group to the Commission. It includes representatives

from major public accounting firms, chief financial

officers from accredited CCRCs, and representatives

from the development and finance industries. All panel

members have demonstrated expertise in the aging

services field.

The role of the FAP is:

• 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.


Commission on Accreditation of RehabilitationFacilities (CARF)CARF is an independent, not-for-profit organization that

accredits human services providers for their rehabilitation,

employment, child and family, or aging services. Founded

in 1966 as the Commission on Accreditation of

Rehabilitation Facilities, the accrediting body is now

known as CARF. CARF establishes consumer-focused

standards to help providers measure and improve the

quality, value, and outcomes of their services.

At present, CARF has accredited more than 4,000

organizations in the United States, Canada, and Western

Europe in the areas of adult day services, aging services

continuums (including continuing care retirement

communities), assisted living, behavioral health,

employment and community services, medical

rehabilitation, and opioid treatment programs.

The CARF offices are at 4891 East Grant Road, Tucson,

AZ 85712, USA.

CARF Canada, a member of the CARF international

group of organizations, is at 10665 Jasper Avenue, Suite

1400A, Edmonton, AB T5J 3S9, Canada.

CARF merged through an acquisition with the

Continuing Care Accreditation Commission to form

CARF-CCAC.

For more information about the CARF accreditation

process, please visit the CARF web site at www.carf.org;

or e-mail [email protected] (adult day services), [email protected]

(assisted living), [email protected] (behavioral health),

[email protected] (employment and community services),

[email protected] (medical rehabilitation), [email protected]

(opioid treatment programs); or call (520) 325-1044. For

more information about accreditation of continuing care

retirement communities, visit www.ccaconline.org or

write [email protected].

Continuing Care Accreditation CommissionThe Continuing Care Accreditation Commission

(CCAC) is part of CARF’s customer service unit for

Aging Services, including CCRCs. As of September

2003, there are 346 CARF-CCAC accredited continuing

care retirement communities. These organizations are

committed to meeting Standards of Excellence for

Aging Services. The CARF-CCAC accreditation offers to

the public, assurance that there has been an external

third party review of quality.

ZieglerZiegler Capital Markets Group is a specialist in senior

living finance, focused primarily on tax-exempt debt.

Since 1990, Ziegler has senior-managed nearly $9 billion

of tax-exempt bond issues for senior living facilities, far

more than any other investment banking firm. Ziegler is

committed to serving senior living providers whenever

the need arises for a wide range of financial and advisory

needs, not only when a financing transaction is pending.

To this end, Ziegler offers a broad range of financing

services to senior living providers that includes:

• Investment Banking

• FHA Mortgage Banking

• Financial Risk Management

• Investment Management

• Mergers and Acquisitions

• Seed Money & Mezzanine Financing

• Capital and Strategic Planning

• Industry Research and Education

KPMGKPMG is a leading provider of assurance, tax, and risk

advisory services. KPMG’s Senior Living Services

Practice focuses specifically on helping senior living

providers achieve their objectives and succeed in a

changing environment through measuring performance,

managing risks, and leveraging knowledge. KPMG

professionals are knowledgeable about the issues that

affect the senior living environment. The skills,

resources, and insights of KPMG professionals play an

important role in securing critical information that guide

clients in formulating individual and collective decisions

regarding alternative senior living strategies. KPMG’s

Senior Living Services Practice provides a wide

spectrum of senior services, including:

• Accounting and information systems design;

• Assurance and tax services;

• Alliance strategy assistance;

• Clinical advisory services;

• Financial planning and feasibility studies;

• Market analysis and research;

• Mergers and acquisition assistance;

• Operations performance and process improvement;

• Project management and development;

• Regulatory compliance;

• Reimbursement services;

• Revenue cycle management;

• Strategic business planning and board

development; and

• Strategic repositioning.


FINANCIAL RATIOSTR

END

AN

ALYSIS

Development of the DatabaseThe charts and tables in this report present data

collected from the 1991 through 2002 fiscal year audited

financial statements of the multi-site and single-site

providers accredited as of December 2002. For

organizations that were accredited for the first time

during their 2002 fiscal year, the ratio results reported

for 2001 in the 2003 publication remain unchanged. In

the discussion of this year’s ratio results the text will

note whether the inclusion of the financial results of

these newly accredited organizations would have

significantly altered the previously reported 2001

ratio results.

Under the terms of its charter, all of the Commission’s

accredited organizations must include independent

living units and a plan for providing continuing care for

residents as they age, including one or more levels of

healthcare, and an overall program of supportive services

such as meals and activity programs. As of December

2002 most of the Commission’s accredited organizations

used a combination of up-front fees collected at the

time a resident moves into the community (entry fees)

and monthly charges.

Prior to each ratio’s discussion, the definition of the ratio

is displayed. However, this definition is general in

nature. To enhance the accuracy and usefulness of this

publication, a chart has been included (see Appendix A)

to give a more detailed guide to each ratio’s calculation.

The chart was developed by analyzing actual

nomenclature from the audited financial statements of

the accredited providers. Each line from the balance

sheet/statement of financial position and statement of

activities is assigned to the numerator or denominator

(and sometimes, both) of each of this publication’s ratios.

Data Collected from Audited Financial StatementsAudited financial statements are used as data source for

the ratio calculations in order to enhance the integrity of

the database. The classification of certain items in the

audited financial statements, such as investment

earnings and unrestricted contributions, may differ

among providers. Accordingly, certain reclassifications

were made by the preparers of this report for the

purposes of calculating certain ratios to promote

consistency within the ratio category. Such adjustments

were reviewed by professionals from KPMG.

Multi-site and Single-site ProvidersWe have divided the presentation of data between

single-site and multi-site providers. Where the type of

provider appears to have a significant impact on ratio

performance, the impact is noted and discussed.

The decision to include only data derived from audited

financial statements in calculating the ratios means that

each multi-site provider is represented by one set of

ratios, rather than having the ratios of each of its

individual operating entities represented. Multi-site

providers generally have corporate structures that, for

financial statement purposes, consolidate or combine

subsidiaries or unincorporated divisions. Some of these

divisions may include activities and results from other

operations in addition to those of an accredited CCRC.

Most multi-site providers usually do not prepare

separate audited financial statements for each of their

accredited organizations.

Types of Financial RatiosThree groups of financial ratios are presented in this

report: Margin (or Profitability) Ratios, Liquidity 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.


For each ratio, we provide a specific definition and

formula, a graph illustrating the accredited population’s

ratio “curve” for the 2002 data for both single-site and

multi-site providers, a graph showing the trends in each

ratio’s medians over the years, and a table summarizing

the results of the quartile analysis for each of the years

of the study. The quartiles are identified with the

following symbols:

■ 25 th percentile

★ 50 th percentile

● 75 th percentile

In addition, on each graph we note the numeric values

for the medians of the single-site and multi-site provider

populations. We eliminate any significant outliers from

each graph so that the data can be presented clearly in

this format. The number of outliers removed are

identified at either end of each curve (please see

example following). Outliers are not removed for

calculation of the quartiles.

We discuss the significance of each ratio, any limitations

or problems inherent in its use, the findings from the

accredited organizations and an interpretation of results.

Obvious trends are noted.

88%

92%

96%

100%

104%

108%

112% Multi-site

Single-site

200220012000199919981997199619951994199319921991

Perc

enta

ge

Year

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%Multi-site

Single-site

- 0.04% -0.66%

Perc

enta

ge

3

0

2

0

Number of outliers removed fromthe upper end of the spectrum

Number of outliers removed fromthe lower end of the spectrum

Multi-site median value

Single-site median value

Trended Median Ratio

2002 Ratio


FINANCIAL RATIOSTR

END

AN

ALYSIS

What’s New?Other Than Temporary Declines in Fair Value of InvestmentsDue to continuing declines in the fair value of debt and

equity securities during 2002, the ratios may reflect the

recognition of "other than temporary" declines in fair

value of investments in debt and equity securities.

Accounting guidance related to this issue has been in

existence for a number of years; however, market

conditions have resulted in a significant increase in

recognition of other than temporary declines during 2002.

A decline in the fair value of an investment in a debt or

equity security below (amortized) cost or carrying value,

as appropriate, that is "other than temporary" is

accounted for as a realized loss, whereby the cost basis

of the security must be written down to fair value. For

investor-owned healthcare organizations, FASB

Statement No. 115, ”Accounting for Certain

Investments in Debt and Equity Securities,”

(Statement 115) paragraph 16, discusses other than

temporary declines in fair value. For not-for-profit

healthcare organizations, FASB Statement No. 124,

“Accounting for Certain Investments Held by Not-for-

Profit Organizations” does not specifically address other

than temporary declines. However, paragraph 4.07 of the

AICPA Audit and Accounting Guide, Health Care

Organizations, indicates that other than temporary

impairment losses are to be included in the performance

indicator (e.g., excess of revenue over expenses) of not-

for-profit healthcare organizations.

The consideration of "other than temporary" is applied

to each investment, except for those investments that

are carried at fair value and the changes in fair value are

included in the determination of income, such as trading

securities. An "other than temporary" impairment exists

for debt securities if it is probable that the investor will

be unable to collect all amounts due according to the

contractual terms of the security. Statement 115

indicates that the "other than temporary" evaluation

should be performed on an individual-security basis, and

that the unrealized loss of one debt or equity security

should not be offset with the unrealized gains of another

debt or equity security to avoid loss recognition in

income of "other than temporary" declines in fair value

below cost.

Implications to RatiosRealized gains (losses) on investments are included in

the Excess Margin, the Debt Service Coverage Ratio,

the Debt Service Coverage Ratio—Revenue Basis, and

Debt Service as a Percentage of Total Operating

Revenues and Net Nonoperating Gains and Losses

Ratio. If current market trends are to continue, these

ratios may experience continuing declines as a result of

the accounting for additional "other than temporary"

declines in the fair value of investment securities.

Additionally, because this measure is considered in the

performance indicator, it may negatively impact ratios

subject to covenant measurement, if the covenants were

not structured to specifically exclude the investment or

noncash activity.

While treatment of this loss recognition as it relates to

undefined covenant definitions is subject to

interpretation by trustees, underwriters and attorneys,

for this year’s publication "other than temporary"

declines in the fair value of investment securities has

been excluded from the ratios (i.e. not recognized in the

performance indicator). The basis for this decision has

been the general practice of covenant definition to

exclude noncash activity (e.g., "other than temporary"

declines in investment activity). This treatment will be

reevaluated for future years’ publications in an effort to

reflect the consensus of the CCRC boards, management

teams, and professional and consumer constituencies.


Rescission of FASB Statements Nos. 4 and 64, Amendment of FASB Statement No. 13, and Technical CorrectionsFASB Statement No. 145 (Statement 145) rescinded

FASB Statement No. 4, “Reporting Gains and Losses

from Extinguishment of Debt,” (Statement 4) and

FASB Statement No. 64, “Extinguishments of Debt

Made to Satisfy Sinking-Fund Requirements,” which

amended Statement 4. Beginning with fiscal years

beginning after May 15, 2002, the implementation of

this statement affected income statement classification

of gains and losses from extinguishment of debt.

Statement 4 required that gains and losses from

extinguishment of debt be classified as an extraordinary

item, if material. However, over time, the

extinguishment of debt was considered to be a risk

management strategy by the reporting enterprise.

Therefore, the FASB does not believe it should be

considered extraordinary under the criteria in APB

Opinion No. 30, “Reporting the Results of Operations—

Reporting the Effects of Disposal of a Segment of a

Business, and Extraordinary, Unusual and Infrequently

Occurring Events and Transactions” (APB 30), unless

the debt extinguishment meets the unusual in nature

and infrequency of occurrence criteria in APB 30, which

is expected to be rare. As a result, gains or losses

incurred as a result of the extinguishment of debt are

now included in income.

Implications to RatiosGains and losses incurred as a result of the

extinguishment of debt will be generally included as

nonoperating gains and losses for purposes of calculating

the ratios. Ratios that are influenced by this change

include the Operating Margin, Excess Margin, and Debt

Service as a Percentage of Total Operating Revenues and

Net Nonoperating Gains and Losses Ratio (for

nonoperating gains only).

What’s New for Next Year?

SOP 02-2, Accounting for DerivativeInstruments and Hedging Activitiesby Not-For-Profit Health CareOrganizations, and Clarification ofthe Performance IndicatorFinancial Accounting Standards Board (FASB)

Statement of Financial Accounting Standards No. 133

(Statement 133) establishes accounting and reporting

standards for derivative instruments, including certain

derivative instruments embedded in other contracts,

(collectively referred to as derivatives) and for hedging

activities. It was effective for fiscal quarters beginning

after June 15, 1999. A new Statement of Position (SOP)

clarifies the implementation of FAS 133 for not-for-

profit health care organizations, among other things.

Statement of Position (SOP) 02-2, “Accounting for

Derivative Instruments and Hedging Activities by Not-

for-Profit Health Care Organizations, and Clarification of

the Performance Indicator” (SOP 02-2) by the

Accounting Standards Executive Committee, provides

guidance with respect to how nongovernmental not-for-

profit health care organizations should report gains or

losses on hedging and nonhedging derivative instruments

under Statement 133, as amended, and clarifies certain

matters with respect to the performance indicator

(earnings measure) reported by such organizations.

This SOP 02-2 requires that not-for-profit health care

organizations apply the provisions of Statement 133

related to accounting and reporting for derivative

instruments and hedging activities. Statement 133

requires that an entity recognize all derivatives as either

assets or liabilities in the statement of financial position

and measure those instruments at fair value. If certain

conditions are met, a derivative may be specifically

designated as a hedge of the exposure to changes in the

fair value of a recognized asset or liability or an

unrecognized firm commitment or a hedge of the

exposure to variable cash flows of a forecasted transaction.


FINANCIAL RATIOSTR

END

AN

ALYSIS

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

required by Statement 133.

Implications to RatiosAs 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.



C C A C

15

C H A P T E R 2

M A R G I N ( P R O F I T A B I L I T Y ) R A T I O S

Operating Margin Ratio Quartiles

Margin Ratios indicate the excess or deficiency of revenues overexpenses. One of the drivers of success for senior living providersis the organization’s ability to generate annual operating surplusesto provide for future resident care expenses, capital and programneeds and to handle unexpected internal and external events. Fivemargin ratios measure the degree to which providers generatesurpluses:.

• Operating Margin Ratio;• Operating Ratio;• Total Excess Margin Ratio;• Net Operating Margin Ratio; and• Net Operating Margin Ratio—Adjusted.

To maintain consistency among the information presented in prioryears, certain protocols were adopted. Certain items, regardless ofthe financial statement presentation of the individual provider,are reclassified as either operating or nonoperating revenue.Interest earnings are considered operating revenue; realized gainson investments are not. Net assets released from restriction foroperations are also considered operating revenue. While themajority of the total contributions reported by accreditedorganizations were identified as operating revenue on the auditedfinancial statements, we have uniformly classified contributions/donations as nonoperating revenue. This classification methodresults in a variance between the Operating Margin Ratio andTotal Excess Margin Ratio that is useful for determining thedegree to which a provider relies on its contributions/donationsand realized investment gains to cover operating expenses.

Several items on some providers’ audits would benefit fromchanges in the way in which information is presented in thefinancial statements. To ensure accurate ratio calculations,providers are encouraged to separate realized from unrealizedgains for unrestricted net assets on the statement of activities/income statement or, at the very least, to provide detail separatingthe two in the notes of the financial statements. Secondly,

providers are encouraged to classify insurance separately, ifmaterial, from other expense line items on their statements ofactivities/income statement to enable future analysis of the effect ofrising liability insurance costs on CCRCs’ margin ratios.

Operating Margin Ratio

Definition and SignificanceThe Operating Margin Ratio indicates the portion of

total operating revenues remaining after operating

expenses are met. The AICPA’s Audit and Accounting

Guide for Healthcare Organizations defines "total

operating revenues" to include all operating revenues

net of contractual allowances and charity care. Though

included in the definition of Total Operating Revenues

the Operating Margin calculation excludes contributions

and realized investment gains or losses. Non-cash items

such as earned entry fees are included. Revenues from

nonoperating sources that are not ongoing, major or

central to operations, such as gains and losses from the

dispositions of assets, are excluded. This ratio focuses on

operations and is sometimes considered to be the

primary indicator of a provider’s ability to generate

surpluses for future needs and unplanned events.

Multi-siteProviders Worst Best 25th% 50th% 75th%

1991 -14.83% 10.31% -2.78% -0.68% 0.59%

1992 -24.96% 10.33% -3.25% -0.84% 1.73%

1993 -12.38% 7.77% -5.33% 0.45% 2.82%

1994 -15.41% 10.87% -3.39% -0.43% 3.43%

1995 -17.10% 18.44% -2.17% -0.65% 3.25%

1996 -20.50% 18.40% -2.85% 1.40% 2.42%

1997 -16.35% 29.38% -1.31% 1.74% 5.30%

1998 -14.25% 28.03% -0.75% 2.75% 6.87%

1999 -16.47% 15.14% -1.07% 2.35% 5.06%

2000 -20.50% 17.70% -6.30% -0.16% 7.12%

2001 -18.29% 9.92% -5.84% -1.13% 3.95%

2002 -22.48% 11.80% -2.40% -0.04% 3.77%

Single-siteProviders Worst Best 25th% 50th% 75th%

1991 -29.14% 20.95% -3.24% 0.57% 3.73%

1992 -22.70% 24.59% -4.34% 0.07% 3.34%

1993 -24.70% 24.69% -3.52% 0.45% 3.29%

1994 -38.03% 16.57% -2.87% 1.01% 4.86%

1995 -151.60% 21.36% -0.78% 3.52% 6.64%

1996 -152.23% 18.65% -0.06% 3.63% 6.51%

1997 -32.32% 40.73% 0.57% 4.80% 8.50%

1998 -80.16% 37.91% -2.01% 2.84% 8.75%

1999 -61.98% 39.06% -3.08% 2.68% 6.48%

2000 -56.45% 21.55% -3.48% 0.84% 4.98%

2001 -74.78% 15.74% -5.62% -0.63% 3.17%

2002 -55.74% 14.36% -5.39% -0.66% 2.62%

Income or Loss from Operations– Contributions

Total Operating Revenues


However, many financial experts believe the Total

Excess Margin Ratio to be a better indicator of a

provider’s overall financial performance.

For purposes of calculating the Operating Margin Ratio,

we have excluded the impact of any changes in future

service obligation reflected on the Statement of

Activities. Typically, credit analysts do not consider the

effects of this line item in their analysis of operating

profitability because this actuarial computation is

typically a one-time event that has only long-range

implications. Further, incorporating this item in the

budgeting process when targeting a specific level of

performance in terms of the Operating Margin Ratio

could prove misleading because the change in future

service obligation reflects a year-end adjustment in the

associated deferred liability accounts versus a true

operating revenue or expense. Based on the analysis of

the underlying data, the impact on the ratio would not

be significant if it were included. Other non-cash items

excluded from the computation of the Operating Margin

Ratio are changes in value of hedging instruments such

as swaps, caps, collars, etc. These items are generally

marked to market quarterly or at least annually, but in all

cases will result in a non-cash entry reflecting the mark-

up or mark-down.

In general, a trend of stable or increasing Operating

Margin Ratio values is favorable. A declining trend

and/or negative ratio may signal an inappropriate

monthly service fee pricing structure, poor expense

control, low occupancy, or operating inefficiencies. If a

provider has a low Operating Margin Ratio but a high

Total Excess Margin Ratio, the provider may be relying

significantly on nonoperating gains and/or contributions.

While some providers experience a trend of steady

contributions, others find donation revenue difficult to

control and predict.

CCAC Ratio Database ResultsSenior living has been gripped in the past years by a

number of margin deflating factors that it has yet to

shake: rising nursing costs, increasing liability insurance

costs, reimbursement reductions, and implementation

costs of the regulatory requirements of HIPAA, to name

a few. In addition, the earnings rates on investments

continue at historic lows. The impact of each of these

issues has affected large and small providers, both

single-site and multi-site providers. However, for the

first time in a number of years, the performance of

the multi-site providers exceeded that of the single-

site providers.

As noted above, both provider types are faced with a

number of increasing expense pressures. The most

obvious problem areas were insurance, administration,

and health center costs. Anecdotally, many providers have

noted significant increases in health insurance benefit

costs. Despite these ongoing expense pressures, both

provider types kept their expense increases in check.

The average expense increase for single-site providers

was just over one percent; the average expense increase

for multi-site providers was just under four percent.

Multi-site providers balanced this increase with a nearly

matching revenue increase. The average revenues per

single-site provider edged just beyond their expense

increase. On the revenue side, the detail behind the

performance of the two provider types shows that the

average increase in residential revenues for multi-site

providers increased by over nine percent; for single-site

providers the increase was significantly less, just over

four percent. The Net Operating Margin Ratio

performance of both provider types, despite industry

expense pressures and a weakened national economy,

was favorable and is discussed under the Net Operating

Margin Ratio section.


FINANCIAL RATIOSTR

END

AN

ALYSIS

-2%

0%

2%

4%

6% Multi-site

Single-site

200220012000199919981997199619951994199319921991

Perc

enta

ge

Year

Trended Median Operating Margin Ratio

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%Multi-site

Single-site

- 0.04% -0.66%

Perc

enta

ge

3

0

2

0

2002 Operating Margin Ratio


Definition and SignificanceThe Operating Ratio indicates whether current year cash

operating revenues are sufficient to cover current year

cash operating expenses. This ratio excludes non-cash

revenues (e.g., amortized entry fees). Neither cash from

net entry fees collected nor contributions are included.

Although the exclusion of non-cash revenues is offset by

an exclusion of non-cash expenses (e.g., depreciation

and amortization), typically the Operating Ratio proves

a more stringent test of a provider’s ability to support

annual operating expenses than the Operating Margin

Ratio. Though an Operating Ratio of less than 100

percent is desired, this ratio may push above the 100

percent mark (a value resulting from cash operating

expenses exceeding cash operating revenues) because of

the historical dependence of many CCRCs on cash from

entry fees collected to offset operating expenses,

particularly interest expense.

Many factors must be considered when evaluating the

Operating Ratio. These factors include, but are not

limited to, contract type, price structure (balance

between entry fees and monthly service fees) and

refund provisions. Young CCRCs in particular will often

experience ratios in excess of 100 percent if they have

been structured to rely on initial entry fees to subsidize

operating losses during the early, fill-up years. Financial

analysts sometimes argue that the Operating Ratios of

mature CCRCs should drop below 100 percent. They

argue that revenue sources should shift toward a greater

dependence on operating revenues, such as monthly

resident charges, as entry fee cash flows decline to those

generated by normal resident turnover. In addition the

argument is sometimes made that mature providers

should rely on entry fees only to cover capital expenditures,

but as the results below indicate, entry fees are utilized

by many providers to fund a portion of operations.

CCAC Ratio Database ResultsThe Operating Ratio is a stronger measure of an

organization’s performance, stripping non-cash items

from the computation and focusing on the coverage of

cash expenses provided by cash revenues. Perhaps one of

the most important findings in this year’s study is the

significant improvement (approximately 300 basis points)

of the Operating Ratio for the lowest quartile of multi-

site providers. The lowest quartile of the single-site

providers improved as well, but the improvement was

slight (less than 100 basis points). One of the key

revenue drivers in a senior living organization is its

occupancy rate, and, per the National Investment

Center’s Key Financial Indicators, CCRC occupancy has

strengthened modestly at all levels of care through 2002.

The increase in average cash revenues exceeded the

increase in average cash expenses for single-site providers.

Multi-site providers had double digit percentage increases

in a number of their expense categories, but to what

degree these increases may have been due to growth

isn’t known. Regardless of the reason for the expense

increases, the data show that revenues aren’t keeping

pace for multi-site providers. Though the average

increase in resident revenues for multi-site providers

was over 9 percent, the largest cost center for the multi-

site providers, the nursing area, had average expenses

increase by nearly 14 percent; single-site providers had a

much smaller increase in their average resident services

revenue (4.1 percent), but average nursing costs, also

their largest cost center, increased by just 4.6 percent.

Total Operating Expenses– Depreciation Expense– Amortization Expense

Total Operating Revenues– Amortization of Deferred Revenue

Operating Ratio Quartiles


1991 127.42% 93.68% 112.90% 107.48%100.41%

1992 123.23% 94.33% 109.88% 103.32% 98.46%

1993 123.36% 92.94% 107.98% 100.31% 96.68%

1994 119.46% 87.98% 108.79% 98.62% 94.63%

1995 126.54% 84.19% 110.32% 102.82% 93.27%

1996 132.52% 71.93% 110.14% 99.69% 94.55%

1997 116.35% 61.54% 105.95% 99.21% 92.65%

1998 127.66% 64.79% 103.15% 95.51% 90.73%

1999 118.43% 78.39% 103.13% 98.44% 92.98%

2000 125.96% 77.56% 110.69% 102.76% 97.19%

2001 122.52% 84.23% 111.63% 102.02% 97.41%

2002 121.17% 87.09% 108.47% 102.17% 97.56%


1991 140.52% 60.61% 112.76% 104.88% 95.64%

1992 139.76% 60.55% 111.81% 104.80% 96.53%

1993 133.36% 68.21% 110.78% 103.42% 95.47%

1994 132.06% 75.56% 110.34% 102.66% 96.12%

1995 306.38% 74.32% 105.54% 98.62% 92.63%

1996 330.25% 79.34% 104.38% 98.57% 93.45%

1997 130.22% 64.95% 104.69% 97.84% 91.33%

1998 147.81% 66.96% 105.71% 97.99% 90.91%

1999 163.57% 72.83% 108.00% 101.15% 92.44%

2000 150.07% 73.91% 107.54% 100.57% 95.12%

2001 175.27% 80.38% 108.86% 102.24% 96.34%

2002 144.90% 82.18% 108.29% 101.71% 96.74%

Operating Ratio


FINANCIAL RATIOSTR

END

AN

ALYSIS

88%

92%

96%

100%

104%

108%

112% Multi-site

Single-site

200220012000199919981997199619951994199319921991

Perc

enta

ge

Year

Trended Median Operating Ratio

80%

85%

90%

95%

100%

105%

110%

115%

120%

125%

130%Multi-site

Single-site

102.2% 101.7%

Perc

enta

ge

0

4

0

0

2002 Operating Ratio

The margin pressures described in the Operating

Margin Ratio discussion (decreased interest earnings,

increasing nursing costs, liability insurance premium

increases, decreased reimbursement rates, increased

costs due to implementation of regulatory changes)

create a dilemma for providers who are unable or

unwilling to recover the loss of cash revenues or increase

in cash expenses from other sources. Providers who are

effectively managing these issues are considering a

breadth of margin management solutions, all of which

typically incorporate a high degree of resident education:

rate increases (more frequently than one time annually

in some cases); expense reductions through outsourcing,

creative staffing reductions; reconfiguration of benefits

packages; investment policy review; endowment

reevaluation, etc. A review of this ratio by contract type

shows that Type D providers (those where a

predominant number of signed contracts are Rental

Contracts) are better positioned to recover their cash

expenses with cash revenues than providers with other

contract types. These providers must price their services

to ensure that costs of care are adequately covered from

resident revenues, for they may not have the levels of

liquidity to cover unforeseen costs of care increases

through the use of cash as do communities with

significant cash balances from entry fee receipts. Not

surprisingly, it is the communities with predominantly

Extensive Contracts that have the weakest operating

ratios. Each quartile of the Operating Ratios for single-

site providers that offer Extensive Contracts weakened

between 2001 and 2002. The most favorable comparative

performance between 2002 and 2001 occurred for the

single-site providers with Modified Contracts, where

each quartile improved by over 200 basis points. However,

it is important to note that this category of community

has the smallest number of data points (n=17 in 2002),

and hence is subject to more data variation.


Definition and SignificanceThe Total Excess Margin Ratio includes both operating

and nonoperating sources of revenue and gains. To

promote consistency and comparability, the Total Excess

Margin Ratio has been computed based on total excess

revenues over expenses before any extraordinary items

and changes in accounting principles. Unrestricted

contributions are included in both the numerator and

denominator of the ratio, as are any realized gains/losses

on unrestricted investments or derivatives. Unrealized

gains/losses should be excluded from the computation of

all profitability ratios.

This ratio is most sensitive to the argument put forward

by many nonprofit providers that, since many have

unique and reliable access to charitable donations as an

ongoing source of support, charitable donations should

be included in measuring their ability to generate

surpluses. Some providers classify contributions in

operating revenues if they believe their contributions are

ongoing, major, or central to the operation of the

provider. Others classify contributions as nonoperating

revenue. This latter presentation can be used to

emphasize to potential donors that resident revenue

does not fully cover expenses.

A value greater than zero for the Total Excess Margin

Ratio is essential for a provider to achieve positive net

assets, to maintain a favorable balance sheet/statement

of financial position, and to provide adequate

contingency funds for unforeseen financial needs.

CCAC Ratio Database ResultsThe Total Excess Margin Ratio for both single-site and

multi-site providers presents a stronger picture of

financial performance than the other profitability ratios.

The gap between the Operating Margin Ratio and the

Total Excess Margin Ratio is primarily due to the

inclusion of contributions and realized gains in the

calculation of the latter ratio. Concerns about a

provider’s Operating Margin Ratio may be mitigated

when the Total Excess Margin Ratio is evaluated

depending on the provider’s performance in these areas.

The effect of the prolonged bearish equities market

may have taken a toll on donations to senior living

communities; average contributions decreased for both

types of providers. Unfortunately, as in previous years,

the volatility of the stock market affected the ratio

results for both types of providers as well, with each

having investment portfolios affected by realized losses

this year. In last year’s publication we noted that the

ongoing weak equities market in 2002 could potentially

challenge senior living providers. In fact, the Total

Excess Margin Ratio deteriorated at every quartile for

both types of providers. The 2002 median Total Excess

Margin, nearly zero for both types of providers, hit its

lowest point in this study’s eleven year history.

Total Excess Margin Ratio

Total Excess of Revenues over Expenses

Total Operating Revenues and NetNonoperating Gains and Losses


1991 -12.98% 10.31% -2.22% 1.72% 3.93%

1992 -17.25% 10.33% 0.66% 1.96% 2.86%

1993 -7.35% 8.71% -0.87% 3.39% 5.56%

1994 -10.81% 12.17% 0.41% 3.20% 6.80%

1995 -21.86% 20.98% -0.92% 2.89% 5.50%

1996 -32.37% 24.10% 1.47% 4.31% 9.45%

1997 -0.91% 31.01% 2.10% 6.80% 9.67%

1998 -9.58% 31.55% 2.01% 5.52% 9.51%

1999 -4.44% 19.37% 0.00% 2.50% 10.32%

2000 -8.23% 24.42% -0.05% 3.84% 9.43%

2001 -15.44% 15.32% -0.02% 2.59% 5.62%

2002 -24.10% 10.08% -4.22% 0.22% 4.42%


1991 -14.46% 61.97% 0.04% 4.41% 6.92%

1992 -19.48% 35.86% -0.58% 3.28% 7.96%

1993 -24.36% 32.22% -1.07% 3.54% 7.38%

1994 -38.76% 32.63% 0.10% 4.53% 8.41%

1995 -151.60% 39.24% 2.48% 5.58% 8.84%

1996 -152.23% 27.18% 2.08% 5.47% 8.65%

1997 -32.90% 162.04% 2.96% 6.63% 10.68%

1998 -14.51% 38.29% 1.71% 6.19% 10.97%

1999 -9.72% 39.10% 0.35% 4.32% 8.50%

2000 71.07% 41.32% -0.40% 3.93% 8.32%

2001 -44.18% 29.51% -2.35% 1.09% 5.98%

2002 -55.74% 23.77% -3.84% 0.48% 4.35%

Total Excess Margin Ratio Quartiles


FINANCIAL RATIOSTR

END

AN

ALYSIS

0%

1%

2%

3%

4%

5%

6%

7%

8% Multi-site

Single-site

200220012000199919981997199619951994199319921991

Perc

enta

ge

Year

Trended Median Total Excess Margin Ratio

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%Multi-site

Single-site

0.22%0.48%

Perc

enta

ge

0

11

0

2002 Total Excess Margin Ratio



1996 -250.40% 30.81% -7.68% 3.73% 10.47%

1997 -55.70% 31.97% -7.69% 3.08% 8.99%

1998 -77.50% 32.06% -6.78% 1.93% 8.48%

1999 -65.68% 31.92% -8.82% 0.14% 6.81%

2000 -115.56% 33.60% -8.43% 0.25% 8.51%

2001 -104.36% 33.58% -9.42% 0.04% 6.95%

2002 -132.74% 29.14% -7.29% 2.08% 7.33%


1996 -76.71% 14.87% -9.74% 0.09% 6.45%

1997 -62.04% 23.36% -11.75% 0.53% 9.89%

1998 -111.63% 22.43% -4.67% -0.13% 12.30%

1999 -163.92% 13.56% -6.51% -3.00% 7.36%

2000 -31.92% 20.32% -9.37% -5.60% 6.34%

2001 -19.79% 18.33% -8.37% -1.65% 6.65%

2002 -24.56% 16.40% -6.29% -0.80% 5.81%

For those providers looking for ratios from which to

benchmark operational performance, only this ratio and

the Net Operating Margin-Adjusted look solely at

operations. All of the elements for benchmarking are

contained in the detail behind this ratio.

The Net Operating Margin Ratio looks at the core,

sustainable business of a CCRC, that is, the revenues

and expenses realized solely in the delivery of services to

residents; note that net proceeds from entry fees are

excluded from this ratio (the NOM-Adjusted ratio

incorporates entry fees). The purpose of this ratio is to

provide a benchmark from which providers can determine

the margin generated by cash operating revenues after

payment of cash operating expenses, without interest/

dividend income, interest expense, depreciation and

amortization and without certain other unique elements

familiar to nonprofits (e.g., contributions and entry fee

amortization). Credit analysts view this ratio as an

important means by which to evaluate a facility’s core

operations. The objective of preparing these ratio results

is to determine the benchmarks for the nonprofit senior

living sector.

CCAC Ratio Database ResultsThe Net Operating Margin Ratio generally showed

healthy improvement for both provider types. This

reveals that despite the ongoing nursing and staffing

pressures, liability insurance issues and other operating

pressures noted in the previous ratio discussions, both

provider types have benefited from stabilizing labor and

other operating expense pressures. In fact, 2002 marks

the first year in the presentation of NOM Ratio results

that the median NOM Ratio improved over the prior

year’s performance for the single-site providers. The

median NOM Ratio for multi-site providers also

strengthened.

This performance is consistent with the anecdotal

experience the preparers of this report noted in last year’s

publication, namely, that an increasing number of senior

living providers appear focused on operating efficiencies.

Despite these improvements, a number of organizations

have expressed the conflict they face with residents

when cash balances appear high, apparently contradicting

the need for adequate monthly service fee increases in

residents’ minds. For some this may result in an inability

to raise rates sufficiently to cover the increasing expenses.

Some organizations may be experiencing service creep,

where a growing number of services are provided by staff

in order to meet residents’ expectations without the

documentation or ability to charge appropriately to

recover the costs of the service. In some cases providers

may be adding personnel in order to meet the residents’

requests for enhanced quality of care without determining

the efficiency and effectiveness of the staffing patterns

historically in place. Others may be driven by mission

statements that encourage coverage of resident expenses

with non-resident revenues. Regardless of the

circumstances, a common characteristic of the financially

strong providers is the coverage of core resident services

by resident revenues.

An examination of the NOM results by the contract

types offered at each of the communities yields

interesting insights. Generally, the weakest NOM Ratios

are exhibited by providers with Extensive Contracts (see

definitions in Chapter Five). Not surprisingly these

communities may be relying on reserves that have been

Net Operating Margin Ratio

Resident Revenue*– Resident Expense**

Resident Revenue

Net Operating Margin Ratio Quartiles

* Resident Revenue = Total Operating Revenue less Non-Resident Revenues;

** Resident Expense = Total Operating Expense less Non-Resident Expenses;

Calculation excludes Interest/Dividend Income, Interest Expense,Depreciation, Taxes, Amortization, Contributions and Entry FeeAmortization


FINANCIAL RATIOSTR

END

AN

ALYSIS

-8%

-6%

-4%

-2%

0%

2%

4%

6% Multi-site

Single-site

2002200120001999199819971996

Perc

enta

ge

Year

Trended Median Net Operating Margin Ratio

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%Multi-site

Single-site

-0.80% 2.08%

Perc

enta

ge

2

3

0

0

2002 Net Operating Margin Ratio

funded by entry fees to cover operating shortfalls. This

weaker performance by those communities with

predominantly Extensive Contracts was evident in both

2001 and 2002; furthermore, both the upper quartile

and the median for these communities deteriorated

between 2002 and 2001. For the single-site providers

with predominantly Modified Contracts only the upper

quartile deteriorated. For single-site providers with

predominantly Fee-For-Service Contracts, all quartiles

showed improvement between the two years, while only

the median of the multi-site providers improved. In the

discussion of the NOM-Adjusted Ratio, we’ll see that,

though the communities with predominantly Extensive

Contracts had the strongest NOM-Adjusted Ratios, the

performance between 2002 and 2001 followed generally

the same pattern as described with the NOM ratios,

with weakening ratios at two of the three quartiles for

the Extensive Contract communities.


The Net Operating Margin Ratio is adjusted in this

computation to include net entry fee receipts,

recognizing that most nonprofit CCRCs have entry fees.

While excluded from the Net Operating Margin

calculation, these entry fees are typically employed, in

part, for the provision of healthcare services to their

residents and other operating expenses, a practice that

has become widely accepted within the industry by both

providers and creditors.

By comparing the results of this ratio to the Net

Operating Margin Ratio, the user can determine the

extent to which providers rely on net entry fee receipts

to enhance annual cash flows. Providers are urged to

consider ways by which annual audited financial

statements can segregate entry fee receipts from units

that are being occupied for the first time from those

that represent ongoing annual turnover. First-time entry

fee receipts may distort the results of this ratio, as well

as the Debt Service Coverage Ratio.

CCAC Ratio Database ResultsBoth single-site providers and multi-site providers

benefit from annual entry fee receipts as evidenced by

the significant increase of these ratio values from those

of the Net Operating Margin.

The NOM-Adjusted Ratio improved at nearly every

quartile between 2001 and 2002. In 2002 multi-site

providers had average net entry fee receipts increase by

over 14 percent, in contrast to a decline in net receipts in

2001. Previous years’ ratio results have suggested that

multi-site providers were more actively investing in new

projects. The results of the NOM-Adjusted Ratio in

2002 suggests that these projects are now coming on

line. Average net entry fee receipts declined for single-

site providers. As noted in the previous ratio discussion,

when the NOM-Adjusted Ratio results are analyzed by

contract type, the strongest NOM-Adjusted Ratio

performers are the single-site providers offering

Extensive Contracts and the multi-site providers

offering Modified Contracts. If the providers that

offer Rental Contracts are removed from the analysis,

the NOM-Adjusted Ratio for multi-site providers

increases significantly.

Net Operating Margin Ratio—Adjusted

Resident Revenue*+ Net Proceeds from Entry Fees

– Resident Expense**

Resident Revenue + Net Proceedsfrom Entry Fees


1996 -109.46% 56.98% 11.44% 19.14% 27.29%

1997 -54.87% 65.94% 11.79% 18.65% 25.32%

1998 -77.50% 49.26% 10.13% 17.08% 24.97%

1999 -57.25% 64.42% 8.82% 17.48% 26.57%

2000 -115.56% 48.92% 9.14% 17.34% 25.80%

2001 -104.36% 56.10% 8.22% 16.80% 26.70%

2002 -132.74% 46.85% 11.17% 17.31% 24.03%


1996 -31.08% 34.82% 5.42% 12.39% 21.87%

1997 -29.16% 55.75% 7.41% 16.04% 23.41%

1998 -52.40% 55.96% 11.51% 19.34% 24.76%

1999 -77.82% 70.97% 7.24% 16.89% 21.84%

2000 -8.52% 39.55% 9.84% 16.52% 20.33%

2001 -6.60% 32.04% 9.31% 15.79% 21.10%

2002 -20.32% 41.86% 9.57% 17.10% 22.55%

Net Operating Margin Ratio—Adjusted Quartiles

* Resident Revenue = Total Operating Revenue less Non-Resident Revenues;

** Resident Expense = Total Operating Expense less Non-Resident Expenses;

Calculation excludes Interest/Dividend Income, Interest Expense,Depreciation, Taxes, Amortization, Contributions and Entry FeeAmortization


FINANCIAL RATIOSTR

END

AN

ALYSIS

0%

5%

10%

15%

20%

25% Multi-site

Single-site

2002200120001999199819971996

Perc

enta

ge

Year

Trended Median Net Operating Margin Ratio—Adjusted

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%Multi-site

Single-site

17.31%

Perc

enta

ge

17.10%

6

32

1

2002 Net Operating Margin Ratio—Adjusted


C C A CC H A P T E R 3

L I Q U I D I T Y R A T I O S

Days in Accounts Receivable Ratio Quartiles

Liquidity Ratios are intended to measure a provider’s ability tomeet the short-term (one year or less) cash needs of its ongoingoperations. As is true of any business, a CCRC needs to make sureit has sufficient cash, or investments readily convertible to cash, tomeet its payroll, to pay for goods and services, to fund currentdebt service payments, and to provide for essential maintenanceand repairs.

The Liquidity Ratios described below are the most common means of measuring the ability of most businesses to meet theirliquidity needs.

Often cash and investments have been set aside by board action as“Assets Limited As to Use”. All board-designated funds wereconsidered unrestricted. Donor-restricted funds clearly identifiedfor capital expansion/improvement were considered restricted.When unrestricted funds are used in a liquidity ratio, all suchfunds, whether classified as current or non-current, are includedin the calculation.

Because this is an area that causes confusion, this year’s publicationagain includes an explanatory discussion in Appendix B clarifyingthe determination and use of “cash” in the ratio calculations.

accounts) to average daily operating revenues received

from residents of independent living, personal care and

nursing units. Third-party settlements are excluded

from the numerator of this calculation; net assets

released from restriction for operations are excluded

from the denominator.

The payer mix of a provider, along with the configuration

of healthcare units as a percentage of the provider’s total

units, dramatically affects the value of this ratio.

Generally, a value of 30 days or less is desired, though for

those providers with a low level of government or other

third-party reimbursement, values may be as low as one

to five days, since most CCRCs bill private pay residents

at the beginning of the month and receive payment

before the close of the monthly accounting period.

For those providers with significant reliance on third-

party reimbursement, values may exceed 60 days. The

higher the percentage of the resident population that is

private pay, the lower this value should be. It is

important to note that the timeliness of Medicaid

payments varies from state to state. In addition,

providers (often those with small percentages of third

party payers) may not have kept pace with the billing

requirements that have become more and more

technical as well as precise. Follow-up on problem third

party payments is essential to eliminating third party

accounts receivable. Therefore, a CCRC’s Days in

Accounts Receivable Ratio may vary significantly

depending on the magnitude of third party payments,

regardless of management’s efforts. The reader should

note that an overall favorable Days in Accounts

Receivable Ratio could be masking collection problems

with third-party payers. Since most providers bill and

Net Accounts Receivable

Residential and Healthcare Revenues/365


1991 69 5 27 23 13

1992 63 6 32 23 16

1993 64 8 27 23 14

1994 65 4 27 22 14

1995 37 0 29 20 15

1996 47 0 30 21 13

1997 56 7 34 24 18

1998 116 7 33 24 15

1999 60 4 30 21 19

2000 56 3 32 23 14

2001 66 4 33 24 15

2002 63 3 26 20 13


1991 98 0 35 21 11

1992 111 0 35 19 10

1993 120 0 33 18 9

1994 106 0 34 19 11

1995 83 0 31 20 12

1996 90 0 29 22 11

1997 78 0 34 21 15

1998 98 0 33 23 14

1999 77 1 34 24 13

2000 138 1 32 22 14

2001 79 0 31 21 12

2002 66 0 28 18 11

Days in Accounts Receivable Ratio

Definition and SignificanceThe Days in Accounts Receivable Ratio measures the

average number of days accounts receivable remain

outstanding. The calculation compares the total amount

in accounts receivable (net of allowances for uncollectible

Financial Ratios & Trend Analysis of the CARF-CCAC Accredited Organizations27

FINANCIAL RATIOSTR

END

AN

ALYSIS

receive payment from their private payers at the

beginning of the month, the Days in Accounts

Receivable Ratio for the private pay portion should be

less than seven and could offset and mask an unusually

high ratio for third-party payers.

Those providers with high ratios may be affected by a

combination of a higher percentage of third-party

reimbursement and an above average number of nursing

beds in relation to independent living units.

Management may wish to track the Days in Accounts

Receivable Ratio separately for residential and

healthcare services; the former usually are private

payers, the latter often are third-party payers.

CCAC Ratio Database ResultsThe data shows steady performance from both the

multi-site and single-site providers. This year every

quartile for both provider types showed improvement.

The 75th quartile for multi-site providers hit its lowest

level since 1991. Both the median and the 25th quartile

for single-site providers hit their lowest levels since the

study’s inception. The positive performance of both the

single-site and multi-site providers compared to nursing

home industry benchmarks can be explained through

several initiatives. First, the repositioning efforts

underway by many senior living providers has resulted

in a number of providers decreasing the proportionate

number of nursing beds on their campuses (renovating

semi-private rooms to private rooms; increasing the

number of independent living and assisted living beds;

adding new campuses with a lower proportionate

number of nursing beds than in the past), with the

number of private pay residents increasing as a result.

As noted above, Days in Accounts Receivable should

decline as the proportion of private pay residents

increases. Secondly the improved profitability ratios this

year may reflect a diligence by both types of providers

to increase operating efficiencies. One of the easiest

places to realize operational improvement is to exhibit

diligence in addressing past due accounts and improving

collection efforts.

0

5

10

15

20

25

30 Multi-site

Single-site

200220012000199919981997199619951994199319921991

Day

s

Year

Trended Median Days in Accounts Receivable Ratio

20

0

10

20

30

40

50

60

70Multi-site

Single-site

18

Day

s

0

00

0

2002 Days in Accounts Receivable Ratio


Days Cash on Hand Ratio Quartiles

Definition and SignificanceThe Days Cash on Hand Ratio measures the number of

days of cash operating expenses a provider has covered

by unrestricted cash, cash equivalents, and marketable

securities. The investments may be limited as to use

(e.g., board-designated, temporarily donor-restricted,

or trustee-held). Board-designated assets are included

in the numerator. Trustee-held funds and assets

restricted by donors are excluded from the numerator.

This treatment of these balances is the same whether

the assets are classified as current or non-current or

totaled together.

A benchmark Days Cash on Hand Ratio value for entry

fee providers is 150 days. This standard provides

sufficient funds to cover unexpected expenditures,

provide refunds for unanticipated turnover without

attendant new entry fees, or meet other unbudgeted

expenses. Readers should note, however, that this

benchmark is significantly below the rating agency

medians provided in Appendix C of this publication.

CCAC Ratio Database ResultsWhen FASB Statement No. 124 was implemented in

1995 requiring, in part, the mark-to-market of financial

instruments, the Days Cash on Hand Ratio enjoyed a

period of healthy improvement. Each year the bullish

equities market strengthened the investment market

values for both types of providers. As expected with

the mark-to-market requirement, the equities market’s

downturn coupled with the sluggish economy in 2001 and

2002 brought a decline in providers’ investment market

values. The combination of earnings shortfalls and

investment values declines affected both provider types.

The Days Cash on Hand Ratio continued to weaken

in 2002 across most quartiles. The bearish equities

market caused providers to continue to realign their

investment portfolios; the average gain per facility

realized in 2001 was replaced with an average realized

loss per facility in 2002. However, the average unrealized

loss for each provider type declined significantly

between 2001 and 2002.

Average unrestricted cash balances dropped by 8

percent for single-site providers, despite the headway

they made in operations, with their increase in average

cash revenues exceeding their growth in cash expenses.

As noted in the NOM-Adjusted Ratio discussion, the

average net entry fee receipts for single-site providers

declined by 8 percent. The 14.2 percent increase in net

entry fees for multi-site providers, contributed to

improvement at the upper quartile, at least, of the Days

Cash on Hand for multi-site providers.

Days Cash on Hand Ratio

Unrestricted Current Cashand Investments

+ Unrestricted Non-current Cashand Investments

(Operating Expenses – Depreciation– Amortization)/365


1991 1 326 90 133 177

1992 -23 275 76 128 207

1993 39 393 78 122 199

1994 48 385 71 134 214

1995 12 1,075 91 157 265

1996 23 1,155 126 207 287

1997 13 2,762 115 188 307

1998 43 1,987 169 288 375

1999 7 2,329 141 307 389

2000 96 1,772 178 282 414

2001 35 1,026 174 242 319

2002 83 942 153 225 332


1991 -3 2,666 105 156 327

1992 12 2,315 99 191 369

1993 -15 2,142 89 164 385

1994 -17 2,170 110 182 319

1995 5 2,001 121 208 360

1996 10 2,105 129 222 378

1997 15 2,229 143 254 414

1998 0 1,856 142 267 430

1999 0 1,672 140 272 469

2000 0 4,882 147 258 478

2001 10 3,453 170 274 438

2002 13 2,659 157 261 394


FINANCIAL RATIOSTR

END

AN

ALYSIS

0

50

100

150

200

250

300

350 Multi-site

Single-site

200220012000199919981997199619951994199319921991

Day

s

Year

Trended Median Days Cash on Hand Ratio

0

100

200

300

400

500

600

700

800Multi-site

Single-site

225 261

Day

s

0

8

0

2

2002 Days Cash on Hand Ratio


Cushion Ratio Quartiles

Definition and SignificanceThe Cushion Ratio measures the provider’s cash

position in relation to its annual debt obligation. While

this ratio is more often computed using maximum

annual debt service in the denominator, for the purposes

of this publication, the ratio has been computed using

current annual debt service. As noted again in our

discussion of the Debt Service Coverage Ratios,

maximum annual debt service is typically not included

in the audited financial statements from which data for

this publication have been derived. Therefore, we use

current interest expense, plus the current principal

payment from the statement of cash flow. Capitalized

interest cost, if disclosed in the audited financial

statements, is included in annual debt service. The

numerator of this ratio includes unrestricted cash and

investments, both current and non-current. All board-

designated funds (including those set aside for capital

improvements, replacements, etc.) are also included in

the numerator.

Since this ratio is computed on the basis of current

annual debt service payments rather than the maximum

annual debt service defined in most financing documents,

the ratios may vary each year as principal payments and

interest payments vary, particularly if a provider has no

scheduled principal sinking fund/redemption payments

in the current year. In the event a provider had no debt

service in one of the years, the provider’s debt service

ratio was excluded from the median computation for the

missing year(s). Providers with widely disparate debt

service amounts between years, typically an indication

of an advance refunding or other restructuring of debt,

were analyzed to determine an approximate annual debt

service payment.

Generally, credit analysts desire a Cushion Ratio greater

than three times. If a provider’s debt service has not

been structured to be level, a low Cushion Ratio may

signal a provider’s inability to meet escalating or balloon

principal payments. However, it is important to view

this ratio in relation to other ratios. Even if the Cushion

Ratio is less than three times, the lower ratio may be

acceptable if it is accompanied by other ratios that have

been strengthening over time.

Typically, mature organizations would be expected to

have greater cash reserves than younger organizations

and, therefore, stronger Cushion Ratios. However, a

provider’s debt structure may also play an important role

in its Cushion Ratio. Tax-exempt financings often have

level debt service over 25 to 30-year periods. Conventional

financings from commercial banks and other lenders are

generally characterized by shorter amortization periods

and higher annual interest and principal repayment rates.

As a result, organizations financed with conventional

debt may have lower Cushion Ratios than organizations

financed with tax-exempt debt.

Younger CCRCs typically produce lower Cushion Ratios.

They may have higher cash levels from fill-up entry fees

but normally have higher annual debt service as well.

More mature CCRCs would be expected to have stronger

Cushion Ratios, both because their annual debt service

would have been reduced over time and because their

cash positions would have been growing through positive

operating results and entry fee turnover. A high Cushion

Ratio may or may not be a sign of strength. As with other

Cushion Ratio



Annual Debt Service


1995 0.16 155.63 2.79 4.78 8.41

1996 0.22 199.41 2.88 5.08 9.63

1997 0.80 36.87 3.01 6.35 10.85

1998 1.26 480.29 5.33 7.53 10.19

1999 0.20 984.10 4.34 7.14 15.44

2000 2.48 55.39 4.42 7.99 13.55

2001 1.03 31.38 3.94 6.34 10.14

2002 1.81 77.29 4.69 6.38 12.40


1995 0.00 987.86 1.44 5.04 10.56

1996 0.00 487.16 1.73 5.35 10.54

1997 0.00 1,916.73 2.58 6.06 12.82

1998 0.00 819.79 2.40 6.11 15.38

1999 0.00 744.91 3.07 6.82 12.96

2000 0.00 555.33 3.07 6.30 11.73

2001 0.15 2,211.50 3.58 6.88 11.62

2002 0.20 166.40 3.54 6.68 10.68


FINANCIAL RATIOSTR

END

AN

ALYSIS

capital structure ratios, this ratio may need to be analyzed

in conjunction with other financial ratios in order to

accurately assess the provider’s financial condition.

CCAC Ratio Database ResultsOnce again, every quartile of the data exceeds the

minimum Cushion Ratio levels desired by credit

analysts. Despite the ongoing bearish equities market

and stagnant economy, the Cushion Ratio for both types

of providers was remarkably strong. For multi-site

providers, their increasing average long-term debt levels

were countered by decreasing interest expense and

steady cash and investments balances. Single-site

providers experienced a decline in their average net

entry fee receipts as well as their average unrestricted

cash balances, so that even though their average long-

term debt increased by just 4 percent in the

denominator, the numerator declined at a faster rate and

caused the Cushion Ratio to deteriorate slightly. As

noted above, the Cushion Ratio is affected by the debt

structures the CCRC employs. It may be that this ratio

weakens over time since many providers are adding

ILUs through the use of additional variable rate debt.

Variable rate debt structures allow for earlier repayment

and, therefore, higher annual debt service than

traditional fixed rate debt.

0

1

2

3

4

5

6

7

8

9 Multi-site

Single-site

20022001200019991998199719961995

Rat

io

Year

Trended Median Cushion Ratio

0

5

10

15

20

25

30

35

40

45

50Multi-site

Single-site

6.386.68

Rat

io

0

41

0

2002 Cushion Ratio

C H A P T E R 4

C A P I T A L S T R U C T U R E R A T I O S


C C A C

Debt Service Coverage Ratio Quartiles

Capital Structure Ratios primarily focus on a provider’s balancesheet strengths and weaknesses. These ratios are useful in assessingthe long-term solvency of a provider. The Capital StructureRatios measure the relative amount of debt a provider hasundertaken. A high percentage of debt relative to assets or equityis an important indication of risk in the CCRC industry becausehigh leverage typically means high debt repayment obligations,and therefore high annual debt service payments. One of theCapital Structure Ratios, the Debt Service Coverage Ratio,incorporates a measure of annual cash flow and, therefore,provides an important quantification of the link between annualoperating performance and a provider’s debt obligations.

As discussed below, the ratios incorporating current annual debtservice as a component of their calculation would be affectedduring years in which interest cost is capitalized. To adjust forsuch occurrences, when capitalized interest for a given year isprovided in the audited financial statements, we have added thatamount to interest expense in the current year.

Definition and SignificanceCredit analysts and lenders generally consider the Debt

Service Coverage Ratio, combined with the Unrestricted

Cash and Investments to Long-term Debt Ratio and

Days Cash on Hand Ratio, to be the most important

ratios for evaluating a provider’s short- and long-term

financial viability. The Debt Service Coverage Ratio

reflects a provider’s ability to fund annual debt service

with cash flow from net cash revenues and net entry

fees. Lenders typically require that this ratio be

calculated using maximum annual debt service in the

denominator. This allows the lender to determine

whether any scheduled increase in debt service can be

covered through cash flow. For the purposes of the

calculations presented in this report, current annual

debt service (current year’s capitalized interest cost

plus interest expense and scheduled principal payments)

was used because maximum annual debt service was

not obtainable from the providers’ audited financial

statements. Many providers do have level debt service

requirements, and therefore, in many cases the

difference between annual and maximum debt services

is insignificant. However, annual debt service

requirements may differ from maximum annual debt

service requirements. Accordingly, the results included

in this report may vary from a lender’s calculation of the

Debt Service Coverage Ratio.

Debt Service Coverage Ratio


1991 0.64 5.01 1.44 1.89 3.31

1992 0.65 8.80 1.50 1.93 2.84

1993 0.79 9.91 1.64 2.32 3.81

1994 0.97 143.87 1.65 2.16 3.88

1995 -6.68 9.97 1.74 1.99 3.00

1996 -22.40 7.29 1.40 2.21 2.82

1997 0.85 7.93 1.95 2.57 4.66

1998 1.29 29.55 2.91 3.28 4.36

1999 -6.28 426.62 1.71 2.65 4.55

2000 0.74 32.15 1.81 3.24 4.77

2001 0.63 17.82 1.78 2.24 3.11

2002 0.11 25.70 1.47 2.10 3.12


1991 0.27 561.28 1.51 2.40 3.67

1992 -0.28 318.10 1.57 2.43 3.31

1993 0.25 98.73 1.59 2.12 3.80

1994 0.10 967.50 1.58 2.32 3.83

1995 -3.14 445.78 1.55 2.40 4.18

1996 -3.22 161.22 1.54 2.46 4.02

1997 -124.95 786.99 1.59 2.65 4.28

1998 -29.85 108.22 1.55 2.75 4.77

1999 -50.41 31.25 1.79 2.66 4.37

2000 -4.15 164.47 1.71 2.63 3.83

2001 -4.10 82.80 1.64 2.37 3.45

2002 -3.61 151.04 1.53 2.00 3.06

Total Excess of Revenues over Expenses + Interest, Depreciation,

and Amortization Expenses– Amortization of Deferred Revenue

+ Net Proceeds from Entry Fees

Annual Debt Service


FINANCIAL RATIOSTR

END

AN

ALYSIS

Most debt obligations require CCRCs to maintain a

Debt Service Coverage Ratio of at least 1.20 times

maximum annual debt service (MADS). Over time,

most financial analysts look for that coverage ratio to

grow to between 1.50 and 2.00 times MADS.

Young CCRCs (with entry fee contracts) that have not

yet completed fill-up will experience extremely high

Debt Service Coverage Ratios. This occurs because the

large amount of entry fees received from initial resident

move-ins swells the numerator of this ratio. In general,

meaningful Debt Service Coverage Ratios for entry fee

communities can only be relied on after occupancy is

stabilized. Furthermore, this ratio can be significantly

impacted by increases in net entry fees that are received

as a result of the initial fill-up of new units being added

through expansion or repositioning growth. In

recognition of this bank and bond financing documents

are increasingly excluding the entry fee receipts received

through fill-up and through expansions.

Since the ratios are computed on the basis of current

annual debt service payments rather than the maximum

annual debt service defined in most financing

documents, the ratios may vary each year as principal

payments and interest payments vary, particularly if a

provider has no scheduled principal sinking

fund/redemption payments in the current year. In the

event a provider had no debt service in one of the years,

the provider’s debt service ratio was excluded from the

median computation for the missing year(s). Providers

with widely disparate debt service amounts between

years, typically an indication of an advance refunding or

other restructuring of debt, were analyzed to determine

an approximate annual debt service payment. Some

argue that making this sort of adjustment in the

denominator should be matched with an adjustment in

the numerator for the entry fees received from a fill-up.

However, the statement of cash flow doesn’t typically

break out entry fee receipts between those received in

the regular course of operations and those related to fill-

up. For single-site providers, the number of data points

are significant, so the ratio aberrations that may result

from inclusion of the entry fees should have little affect

on the value of the median and quartile markers. For the

smaller sample of multi-site providers, the median and

quartile markers are more likely to be affected by

outliers, but entry fees from fill-up would represent a

smaller portion of the multi-providers total cash flow

receipts and, therefore, have less of an impact than the

receipts for a single-site. In either case, more careful

delineation on the statement of cash flow would allow a

more accurate calculation of this and other coverage ratios.

CCAC Ratio Database ResultsFor over a decade nearly all accredited organizations

have exceeded the minimum Debt Service Coverage

Ratio required by typical bond documents. More mature

CCRCs tend to have high coverage ratios for the simple

reason that they have paid down most of their debt. A

high Debt Service Coverage Ratio in this circumstance

may or may not be a sign of financial strength. Providers

may become complacent about a high current Debt

Service Coverage Ratio, not taking into account the need

to build increased cash flows to prepare for new debt

costs needed to undertake a substantial renovation or

expansion project that may not generate incremental

revenue. For this reason, it is often necessary to analyze

the Debt Service Coverage Ratio in combination

with other information to evaluate the adequacy of

annual cash flows for achieving the financial goals of

the organization.

In the past, a fairly high number of providers (especially

single-site providers) had very little debt reflected on

the balance sheet/statement of financial position.

However, this number has decreased over time with

fewer organizations reporting no debt on their balance

sheets/statements of financial position so the computed

median has reflected a greater percentage of the

accredited organizations over time.

Not surprisingly given the weakened 2002 profitability

ratio results, the median Debt Service Coverage Ratio

declined for both types of providers.

The operational challenges described in the discussion

of the Profitability Ratios contributed to the overall

weakening in this ratio for both provider types.

However, the multi-site providers seemed to counter

this challenge through the cash flow benefits of growth

and, perhaps, through potentially more favorable credit

profiles achieved through their market diversity; staff,

management and board sophistication; obligated group

structures; and other factors which allow them to

weather market changes with less volatility than a

single-site provider might. Multi-site providers had their

average annual debt per organization increase by 8.5


0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5 Multi-site

Single-site

200220012000199919981997199619951994199319921991

Rat

io

Year

Trended Median Debt Service Coverage Ratio

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

8Multi-site

Single-site

2.12.0

Rat

io

9

0

0

2

2002 Debt Service Coverage Ratio

percent, but average annual debt service remained nearly

constant. Clearly multi-site providers were taking

advantage of an interest rate environment that provided

refinancing opportunities and the possibility of new

money at lower interest rates. Average annual net entry

fees for multi-site providers increased by 14 percent.

Single-site providers were refinancing as well, though

apparently these financings were seeking lower interest

rates, lengthened terms, or more favorable covenants

rather than new money. Average annual debt service

declined for single-site providers; both interest expense

and principal payments declined from 2001 to 2002.


FINANCIAL RATIOSTR

END

AN

ALYSIS


Definition and SignificanceThe Debt Service Coverage Ratio-Revenue Basis is a

more stringent measure of a CCRC’s ability to meet its

debt obligations through revenues alone. By removing

net proceeds from entry fees from the numerator (they

are included in the numerator for the Debt Service

Coverage Ratio), this ratio indicates a provider’s ability

to cover debt service exclusively from operating

revenues and nonoperating sources. A low Debt Service

Coverage Ratio-Revenue Basis indicates a provider relies

heavily on entry fees to meet ongoing annual operating

expenses. A Debt Service Coverage Ratio-Revenue Basis

value of at least 0.75 is considered desirable by the

credit community.

Some financial analysts argue that heavy reliance on

entry fees may leave a provider vulnerable to a slowdown

in turnover due to natural reasons or unanticipated

competition in the service area. However, this argument

fails to take into account that many entry fee CCRCs

deliberately price their services so that entry fees lower

their capital costs (including annual debt payments

related to capital acquisition) and subsidize a portion of

ongoing healthcare costs. Also, readers should recognize

that most providers need to be sensitive to pricing

structures in their market. If the market is accustomed

to high entry fees and low monthly fees, a provider may

have neither the flexibility nor the desire to adjust its

pricing structure.

This ratio is influenced to a greater degree than the

Debt Service Coverage Ratio by contract type and entry

fee refund plans. A provider that offers fully refundable

entry fees or that has Fee-For-Service Contracts will

generally experience a higher Debt Service Coverage

Ratio-Revenue Basis than a provider with nonrefundable

entry fees. Since the former type of provider is obligated

to refund a substantial portion of the entry fee to

residents, this type of provider should place less reliance

on entry fees for debt service coverage. Fee-For-Service

Contracts typically require less of an entry fee since

future monthly service payments are anticipated to

cover fully the future care needs of the residents (see

Chapter Five).

CCAC Ratio Database ResultsIn the early years of the study, accredited single-site

providers outperformed the multi-site providers. The

steady strengthening of the multi-site providers’

performance in recent years was stalled in 2001and

weakenedfurther in 2002. The favorable past trend

shown in this ratio may demonstrate that CCRCs are

moving away from offering only non-refundable entry

fees; the higher the refund, the less reliant the CCRC

should be on use of the entry fees to fund annual cash

flow needs. The steady improvement of this ratio across

the years of the study was reversed last year, possibly

Debt Service Coverage Ratio—Revenue Basis

Total Excess of Revenues over Expenses+ Interest, Depreciation and

Amortization Expenses– Amortization of Deferred Revenue

Annual Debt Service

Debt Service Coverage Ratio—Revenue Basis Quartiles


1991 -3.31 1.56 -0.14 0.30 0.85

1992 -1.26 1.57 -0.22 0.39 0.85

1993 -0.85 1.77 -0.12 0.51 1.10

1994 -2.04 35.96 0.34 0.93 1.61

1995 -39.08 2.96 0.09 0.86 1.91

1996 -56.64 4.74 0.21 1.02 1.62

1997 -1.01 4.92 0.64 1.12 1.84

1998 -0.92 18.32 0.92 1.26 2.05

1999 -1.26 18.81 0.60 1.10 1.69

2000 -8.14 4.77 0.15 1.20 1.96

2001 -2.26 3.16 0.06 0.93 1.49

2002 -13.95 19.15 -0.24 0.29 1.21


1991 -112.22 121.75 0.12 0.72 1.55

1992 -4.76 36.82 0.20 0.65 1.17

1993 -35.05 7.08 0.15 0.62 1.27

1994 -4.55 156.73 0.12 0.73 1.25

1995 -54.71 42.10 0.35 0.94 1.91

1996 -7.28 20.46 0.26 0.96 1.80

1997 -124.95 137.79 0.46 1.04 1.93

1998 -23.13 51.05 0.44 1.04 2.18

1999 -102.67 13.13 0.26 0.78 1.69

2000 -15.61 142.85 0.42 1.00 1.64

2001 -47.00 82.80 0.23 0.81 1.38

2002 -6.47 84.08 0.05 0.62 1.20


FINANCIAL RATIOSTR

END

AN

ALYSIS

influenced by the operational challenges highlighted in

the previous discussions on Profitability Ratios. An

increasing number of both types of providers had

negative Debt Service Coverage Ratios—Revenues Basis.

The contract types offered by the different provider

types may offer insight into the disparity between the

providers’ Debt Service Coverage-Revenue Basis Ratios.

The multi-site providers have a nearly even split

between Extensive, Modified, and Fee-For-Service

Contracts (see definitions in Chapter One) offered in

their organizations. Three of the 35 multi-site providers

have Rental Contracts; another multi-site provider offers

a Rental/Type C. Single-site providers have

predominantly Extensive Contracts, with Rental

Contracts comprising a much smaller proportion of their

total contracts. The Debt Service Coverage Ratio—

Revenue Basis by contract type supports that those

providers offering Fee-For-Service or Rental Contracts

will present stronger results than those offering

Extensive Contracts, since a much greater percentage of

the residents are paying market rate through the higher

levels of care. Results by contract type may be affected

in the future as the authors are seeing more and more

communities offering multiple contract types.

0.0

0.2

0.4

0.6

0.8

1.0

1.2

Multi-site

Single-site

200220012000199919981997199619951994199319921991

Rat

io

Year

Trended Median Debt Service Coverage Ratio—Revenue Basis

-2

-1

0

1

2

3

4Multi-site

Single-site

0.290.62

Rat

io

4

6

1

3

2002 Debt Service Coverage Ratio—Revenue Basis


Definition and SignificanceThis ratio indicates the percentage of all operating

revenues and nonoperating gains and losses that are

utilized for annual debt service. This ratio has similar

uses and limitations as the Debt Service Coverage

Ratio-Revenue Basis. CCRCs that are newly developed

or undergoing significant expansion generally have

financed construction with debt. Unoccupied units,

which often result from new construction or expansion,

coupled with additional debt, could cause a temporary

deterioration in this ratio.

For young CCRCs still in start-up and without the

benefit of operating revenues from full occupancy, debt

service may exceed 30 percent of the total operating

revenues plus net nonoperating gains and losses. The

credit capital markets generally prefer to see this ratio

at 20 percent or below for mature organizations.

CCAC Ratio Database ResultsAs with both Debt Service Coverage Ratios, the Debt

Service as a Percentage of Total Operating Revenues and

Net Nonoperating Gains and Losses Ratio will be affected

by: changes in current annual debt service; periods where

no principal payments were due; market conditions that

enable favorable gains, etc. In general, accredited

organizations continue to perform well across all years

of the study. A large number of the single-site providers

had ratio values of less than 20 percent (all but 21);

all but one of the multi-site providers had ratios of less

than 20 percent.

The medians for this ratio are remarkably steady over

the study years; e.g., the median from 2002 for both

provider types has moved relatively little from the

medians in 1991. In addition, the upper quartile marker

and the medians for both types of providers have been

similar, though the performance of the multi-site

providers is typically somewhat weaker. The lowest

quartile marker for the single-site providers continues to

show the weakest performance for both types of

providers. This would suggest that the single-site

providers in this lower quartile may not realize the same

kinds of revenue performance from their leveraged

assets that other providers do.

Annual Debt Service

Total Operating Revenues+ Net Nonoperating Gains and Losses

Debt Service as a Percentage of Total Operating Revenues and Net Nonoperating Gains and Losses Ratio Quartiles


1991 24.36% 2.16% 12.91% 8.55% 6.75%

1992 31.72% 2.03% 12.34% 9.91% 6.79%

1993 34.35% 1.97% 14.09% 9.03% 5.72%

1994 25.65% 0.24% 11.61% 8.45% 5.97%

1995 31.22% 0.00% 12.18% 8.95% 5.83%

1996 56.41% 0.61% 12.79% 9.12% 6.52%

1997 36.51% 1.35% 11.25% 8.66% 5.68%

1998 12.13% 0.86% 10.17% 8.10% 7.04%

1999 16.24% 0.50% 10.79% 9.37% 5.19%

2000 19.75% 0.63% 10.83% 8.89% 5.70%

2001 19.49% 1.75% 11.04% 9.22% 7.19%

2002 29.60% 0.43% 10.93% 8.82% 6.39%


1991 80.39% 0.03% 14.47% 9.87% 5.35%

1992 36.11% 0.00% 17.39% 10.54% 6.03%

1993 52.77% 0.00% 14.64% 9.15% 6.04%

1994 86.21% 0.00% 14.21% 10.07% 5.47%

1995 43.49% 0.00% 15.15% 9.66% 4.87%

1996 36.46% 0.00% 13.47% 9.58% 5.23%

1997 35.02% -2.20% 14.96% 9.96% 5.26%

1998 50.72% -3.12% 12.47% 8.37% 4.54%

1999 49.36% 0.00% 13.82% 9.13% 5.22%

2000 57.94% 0.00% 13.96% 9.13% 5.51%

2001 59.51% 0.02% 14.33% 9.26% 6.80%

2002 38.41% 0.15% 15.34% 9.21% 6.65%

Debt Service as a Percentage of Total OperatingRevenues and Net Nonoperating Gains and Losses Ratio


FINANCIAL RATIOSTR

END

AN

ALYSIS

0%

2%

4%

6%

8%

10%

12% Multi-site

Single-site

200220012000199919981997199619951994199319921991

Perc

enta

ge

Year

Trended Median Debt Service as a Percentage of Total Operating Revenues and Net Nonoperating Gains and Losses Ratio

0%

5%

10%

15%

20%

25%

30%Multi-site

Single-site

8.82% 9.21%

Perc

enta

ge

3

00

0

2002 Debt Service as a Percentage of Total Operating Revenues and Net Nonoperating Gains and Losses Ratio


Definition and SignificanceThe Unrestricted Cash and Investments to Long-term

Debt Ratio measures a provider’s position in available

cash and marketable securities in relation to its long-

term debt, less current portion. This ratio is a measure

of a provider’s ability to withstand annual fluctuations

in cash, either through weakened operating results or

through little or no resident entry fee receipts because

of low turnover or higher refundability of entry fee

contracts. The numerator includes all cash and

investments, excluding trustee-held funds, that are in

any way available to retire debt or to pay operating

expenses. In some cases the audited financial

statements did not provide enough detail to isolate

trustee-held funds held specifically to repay debt (e.g., a

debt service reserve). Board-designated assets and assets

temporarily restricted by donors for operating purposes

are included in the numerator. Trustee-held funds and

assets restricted by donors for purposes other than

operations are excluded. This treatment of asset

balances is the same whether the assets are classified as

current or non-current. The reader is encouraged to

reference Appendix A for detail regarding the accounts

included in this ratio.

Credit analysts place a high degree of reliance on this

ratio as an indicator of a provider’s debt capacity. A ratio

of unrestricted reserves in excess of 20 percent of long-

term debt is desired. While they view annual cash flow

as the primary source of support for long-term debt,

credit analysts also prefer to see adequate discretionary

liquidity to hedge against potentially volatile annual cash

flows. In addition to building cash reserves to support

any existing debt or planned expenditure, providers

should build cash reserves to offset their long-term

healthcare liability.

CCAC Ratio Database Results The average unrestricted cash balances per organization

for multi-site providers remained nearly constant

between 2002 and 2001, in spite of average net entry

fees increasing by approximately 14 percent. The

weakening cash to debt ratio for multi-site providers was

caused, therefore, either due to their increasing long-

term debt per organization or through restrictions in

timing on the release of the entry fees they collected,

e.g., as creditors seek to mitigate their risk exposure by

requiring earlier payoffs of their loans. Note that the

lowest quartile of the multi-site providers improved, so

some were seeing debt increases offset by increasing

cash balances. For single-site providers there was a

weakening at the median and upper quartiles. The

average cash balances per organization dropped by over

7 percent while their long-term debt per facility

increased by over 4 percent.



Long-term Debt, less Current Portion

Unrestricted Cash and Investments to Long-term Debt Ratio Quartiles


1991 0.05% 1,728.36% 24.66% 36.26%100.62%

1992 -2.37% 4,091.18% 23.21% 35.87% 71.62%

1993 10.76% 3,932.30% 15.02% 31.78% 72.89%

1994 9.32% 2,049.42% 18.34% 35.64% 90.96%

1995 1.69% 1,370.38% 28.18% 48.49% 71.10%

1996 3.40% 16,883.80% 24.50% 52.15% 78.13%

1997 7.94% 167.34% 27.77% 50.20% 88.73%

1998 6.19% 563.25% 38.68% 49.56% 72.20%

1999 1.53% 734.44% 20.44% 65.88%113.88%

2000 14.93% 1,350.08% 34.40% 54.86% 75.57%

2001 13.21% 8,799.28% 31.37% 48.53% 76.81%

2002 13.48% 5467.81% 33.87% 47.16% 75.43%


1991 -0.59% 7,858.11% 16.74% 44.38% 118.17%

1992 1.24% 12,201.84% 24.56% 40.48% 97.48%

1993 -2.21% 15,099.12% 21.87% 42.63% 87.12%

1994 1.45% 11,034.14% 23.73% 45.57% 84.57%

1995 0.00% 10,765.19% 15.50% 40.79% 88.28%

1996 0.00% 11,491.50% 20.37% 46.01% 89.60%

1997 1.24% 26,963.92% 24.51% 53.26% 101.69%

1998 0.00% 25,221.02% 28.51% 52.72% 103.26%

1999 0.00% 17,985.20% 27.30% 56.40% 106.70%

2000 0.01% 14,602.70% 23.57% 50.58% 99.12%

2001 1.61% 21,061.90% 27.37% 52.22% 94.83%

2002 2.12% 50,913.64% 27.78% 51.62% 89.42%

Unrestricted Cash and Investments to Long-term Debt Ratio


FINANCIAL RATIOSTR

END

AN

ALYSIS

0%

10%

20%

30%

40%

50%

60%

70% Multi-site

Single-site

200220012000199919981997199619951994199319921991

Perc

enta

ge

Year

Trended Median Unrestricted Cash and Investments to Long-term Debt Ratio

0%

50%

100%

150%

200%

250%Multi-site

Single-site

47.16% 51.62%

Perc

enta

ge

10

0

1

0

2002 Unrestricted Cash and Investments to Long-term Debt Ratio


Definition and SignificanceThe Long-term Debt as a Percentage of Total Capital

Ratio is a traditional measure of the extent to which a

provider has relied on debt versus retained earnings and

invested or donated capital. For CCRCs, values in excess

of 100 percent or negative ratios (caused by net deficits)

are not uncommon because of the reliance on cash from

entry fees, which are treated on the statement of

financial position as a liability rather than equity or an

increase to net assets.

Low net assets or net deficits are particularly common in

younger CCRCs. It is not uncommon to find young

CCRCs with substantial cash and investment reserves

collected from entry fees but with net deficits because

they have not yet earned the deferred revenue balance.

Thus, the value of this ratio is not significant when

considered alone. The ability to repay long-term debt is

better understood when considered in conjunction with

the Long-term Debt as a Percentage of Total Capital

Ratio-Adjusted. Other ratios such as the Unrestricted

Cash and Investments to Long-term Debt Ratio and the

Excess Margin Ratio also help.

CCAC Ratio Database ResultsThis ratio calculation indicates that much of the

financial strength of the accredited CCRCs is due to the

positive relationship between debt and unrestricted net

assets for these providers. Newer organizations may not

be able to reach these levels until a number of years

have passed and they have had the opportunity both to

reduce debt levels and to increase net assets from

improved operational efficiencies and the amortization

of deferred revenue. Organizations, such as those in the

accredited group, that have managed their financial

performance over many years to achieve these positive

ratios, can expect to receive favorable credit

consideration.

Throughout the decade of study there had been a fairly

steady improvement of this ratio for both types of

providers. But, as noted in earlier discussions, the

operating expense pressures, contribution declines and

the prevalence of realized losses (and unrealized losses

to the extent they affect the values of non-restricted

cash investments) have squeezed operating margins.

While average long-term debt has increased in each of

the past two years (for 2002: 4.5 percent for single-site

providers and 8.5 percent for multi-site providers),

average unrestricted net assets per facility have declined

over both of the previous two years for both types of

providers. The average net assets for multi-site providers

declined by nearly 15 percent between 2001 and 2002;

for single-site providers the percentage of decline was

approximately 23 percent.


Long-term Debt, less Current Portion+ Unrestricted Net Assets

Long-term Debt as a Percentage of Total Capital Ratio Quartiles

Long-term Debt as a Percentage of Total Capital Ratio


1991 168.40% 9.64% 90.18% 77.64% 56.42%

1992 156.72% 2.37% 93.56% 79.46% 56.64%

1993 149.59% 2.04% 94.35% 79.65% 57.67%

1994 141.03% 7.98% 92.46% 76.05% 41.58%

1995 134.56% 8.55% 86.53% 73.30% 47.77%

1996 119.45% 0.46% 91.90% 73.64% 40.00%

1997 190.89% 0.00% 91.37% 71.98% 52.11%

1998 161.84% 26.23% 91.36% 76.37% 52.14%

1999 106.50% 20.31% 91.94% 67.12% 48.50%

2000 101.50% -67.82% 82.89% 69.37% 51.60%

2001 115.84% 8.44% 87.71% 74.96% 53.90%

2002 128.39% 4.75% 91.49% 77.01% 54.16%


1991 354.00% 0.00% 103.65% 73.25% 35.16%

1992 913.70% 0.00% 102.11% 76.66% 39.52%

1993 794.88% 0.00% 100.62% 73.74% 38.62%

1994 180.46% 0.00% 98.74% 71.27% 38.60%

1995 9,488.75% 0.00% 99.46% 70.73% 33.88%

1996 3,656.01% 0.00% 96.18% 68.28% 34.16%

1997 6,437.43% 0.00% 97.29% 70.97% 47.53%

1998 61,583.04% 0.00% 97.92% 69.11% 47.37%

1999 361.82% 0.00% 91.33% 67.54% 46.42%

2000 6,440.04% 0.00% 96.01% 70.95% 46.43%

2001 3,628.59% 0.00% 109.05% 76.82% 49.44%

2002 9,056.18% 0.00% 108.78% 78.88% 54.72%


FINANCIAL RATIOSTR

END

AN

ALYSIS

60%62%64%66%68%70%72%74%76%78%80%82% Multi-site

Single-site

200220012000199919981997199619951994199319921991

Perc

enta

ge

Year

Trended Median Long-term Debt as a Percentage of Total Capital Ratio

0%

20%

40%

60%

80%

100%

120%

140%

160%Multi-site

Single-site

77.01%78.88%

Perc

enta

ge

0

19

0

0

2002 Long-term Debt as a Percentage of Total Capital Ratio


Definition and SignificanceThis ratio is similar to the Long-term Debt as a

Percentage of Total Capital Ratio, except that it adds

deferred revenue from entry fees to the denominator.

Deferred revenue from entry fees is added in recognition

that this account balance represents cash paid to the

community that is often used for capital improvements

and/or is retained as cash reserves. Thus, it functions as

“quasi-equity.” Providers charging substantial entry fees

that utilize cash from these entry fees to pay down a

portion of their debt, would reduce this ratio. A low

value for this ratio indicates a stronger equity base.

Some believe that the denominator should also include

refundable entry fees, if those refundable fees are paid

only upon reoccupancy of the unit and then, only at

their original entry fee paid or at some lesser price.

Because others in the capital markets include deferred

fees from refundable entry fees in their computation of

this adjusted capital ratio, the ratio’s definition may be

revised in future editions of this publication to include

the deferred revenue from refundable entry fees.

CCAC Ratio Database ResultsThe results of this ratio calculation mirror the findings

of the previous ratio analysis, in that, for the most part,

the accredited organizations appear to reflect a positive

relationship between debt and equity. Twenty single-

site providers had values of over 100 percent (i.e., very

weak performance) for this ratio, while none of the

multi-site providers’ results exceeded 100 percent. Yet,

approximately twenty-five percent of the single-site

providers had values below 35 percent (i.e. very strong

performance) for this ratio, while just over 10 percent of

the multi-site providers had achieved this performance

level. As noted earlier in the publication, when CCRCs

within a multi-site provider are accredited, the financial

statements of the multi-site provider may include some

to even significant non-entry fee producing assets (e.g.,

affordable housing, home health care companies) and

may include non-senior living entities. A single-site

CCRC’s purpose is traditionally focused on senior living.

If this single-site, “single-purpose” CCRC offers

predominantly rental or refundable entry fees, it is less

likely to have other resources to balance this lack of

quasi-equity.


Long-term Debt, less Current Portion+ Unrestricted Net Assets

+ Deferred Revenue from Entry Fees(Nonrefundable Entry Fees Only)

Long-term Debt as a Percentage of Total Capital Ratio-Adjusted Quartiles

Long-term Debt as a Percentage of Total Capital Ratio—Adjusted


1991 82.07% 1.59% 56.34% 50.65% 28.62%

1992 80.44% 0.73% 56.42% 50.25% 36.84%

1993 97.11% 0.80% 66.81% 48.38% 35.59%

1994 97.99% 1.96% 72.04% 50.70% 31.16%

1995 96.54% 2.95% 75.37% 52.10% 28.07%

1996 98.97% 0.40% 77.62% 57.37% 32.20%

1997 96.48% 0.40% 67.38% 53.18% 34.19%

1998 91.86% 9.36% 72.46% 53.21% 41.11%

1999 92.88% 7.69% 64.58% 53.21% 37.48%

2000 99.81% 2.45% 64.90% 51.60% 46.09%

2001 98.09% 1.41% 61.55% 49.91% 37.72%

2002 90.83% 1.60% 71.49% 55.09% 42.54%


1991 112.35% 0.00% 66.40% 43.92% 21.53%

1992 155.26% 0.00% 65.53% 44.96% 24.74%

1993 158.61% 0.00% 63.74% 44.35% 28.37%

1994 128.44% 0.00% 67.23% 45.96% 26.43%

1995 179.95% 0.00% 82.07% 56.06% 26.13%

1996 180.24% 0.00% 76.78% 53.06% 24.42%

1997 188.22% 0.00% 76.15% 54.99% 34.04%

1998 239.03% 0.00% 79.00% 57.27% 36.75%

1999 361.82% 0.00% 79.47% 56.63% 35.56%

2000 317.13% 0.00% 80.56% 56.71% 35.76%

2001 341.39% 0.00% 76.36% 52.24% 33.41%

2002 457.36% 0.00% 81.27% 54.10% 39.25%


FINANCIAL RATIOSTR

END

AN

ALYSIS

0%

10%

20%

30%

40%

50%

60%

70% Multi-site

Single-site

200220012000199919981997199619951994199319921991

Perc

enta

ge

Year

Trended Median Long-term Debt as a Percentage of Total Capital Ratio—Adjusted

0%

20%

40%

60%

80%

100%

120%

140%

160%Multi-site

Single-site

55.09%54.10%Pe

rcen

tag

e

2

5

0

0

2002 Long-term Debt as a Percentage of Total Capital Ratio—Adjusted


Definition and SignificanceLong-term Debt to Total Assets is a ratio that relates a

organization’s indebtedness to total assets. A provider

with a higher percentage for this ratio is considered to

have a weaker capital structure than a provider with a

lower percentage.

Start-up organizations would be expected to have

relatively high Long-term Debt to Total Assets Ratios.

Unless mature organizations have recently undergone

significant expansions and/or renovations, they would be

expected to have relatively lower Long-term Debt to

Total Assets Ratios.

CCAC Ratio Database ResultsThis ratio has the attributes of a liquidity ratio, as its

value is highly sensitive to the market values of

investments. Since average investment balances

declined for both multi-site providers and single-site

providers at the same time their average long-term debt

was increasing, it isn’t surprising that there was little

improvement in the Long-term Debt to Assets Ratio

this year.

In the eight years of data presented for this ratio, the

median and upper quartile marker for both types of

providers have shown that providers in these quartiles

have increasingly been leveraging their assets. Note that

the lowest quartile values have remained relatively static

over the study period.

Long-term Debt to Total Assets Ratio


Total Assets

Long-term Debt to Total Assets Ratio Quartiles


1995 66.75% 2.54% 47.01% 37.50% 24.10%

1996 66.89% 0.30% 51.61% 41.62% 24.04%

1997 64.18% 0.00% 49.70% 45.31% 28.42%

1998 62.12% 7.78% 51.43% 45.60% 36.64%

1999 69.12% 6.53% 48.90% 44.19% 28.44%

2000 69.10% 1.99% 47.13% 42.50% 32.12%

2001 68.71% 0.47% 48.34% 43.08% 31.70%

2002 73.76% 0.57% 48.49% 42.42% 30.13%


1995 94.35% 0.00% 53.63% 36.49% 19.82%

1996 95.07% 0.00% 51.79% 34.29% 19.25%

1997 96.06% 0.00% 50.10% 37.21% 22.76%

1998 105.89% 0.00% 50.63% 39.53% 22.98%

1999 102.46% 0.00% 54.56% 37.19% 24.77%

2000 103.15% 0.00% 56.51% 38.44% 24.55%

2001 106.60% 0.00% 53.78% 40.67% 25.22%

2002 113.09% 0.05% 56.57% 40.57% 25.81%


FINANCIAL RATIOSTR

END

AN

ALYSIS

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50% Multi-site

Single-site

20022001200019991998199719961995

Perc

enta

ge

Year

Trended Median Long-term Debt to Total Assets Ratio

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%Multi-site

Single-site

42.42% 40.57%

Perc

enta

ge

0

1

0

0

2002 Long-term Debt to Total Assets Ratio


Definition and SignificanceAs facilities age, the ongoing marketability of the

community is typically dependent on maintaining the

physical plant. In addition to routine maintenance and

upkeep, most organizations must show evidence of a

commitment to renewal through renovation and/or

replacement of their buildings and grounds. This

commitment is most easily measured through a

calculation called Average Age of Facility. The Average

Age of Facility estimates the number of years of

depreciation that have already been realized for a facility

by dividing accumulated depreciation (from the

statement of financial position) by annual depreciation

expense. A steadily increasing value for the Average Age

of Facility Ratio is an indication that resources are not

being used to significantly renovate a community. It also

may be an indication that significant expenditures may

soon be required in order to keep the community viable.

An important caveat of the calculation is that significant

expansion can drop a community’s age without

renovating existing, aging areas of the community.

Many providers combine depreciation and amortization

when reporting these expenses on the statement of

activities. Calculation of the Average Age of Facility

Ratio should be computed using depreciation expense

only. However, when depreciation and amortization were

combined on the statement of activities, the combined

total was used in the denominator. Organizations are

urged to separate depreciation and amortization

expenses in future reporting periods so that the results

of this calculation are as accurate as possible.

CCAC Ratio Database ResultsThe median age of single-site providers exceeded the

median age for multi-site providers by more than one

year. As noted in previous discussions, multi-site

providers appear more inclined to invest in real estate

and, as a result, their Average Age of Facility Ratio is

slightly stronger than that of the single-site providers.

Over the course of this study multi-site providers have

consistently increased their investment in property,

plant and equipment to a greater degree than single-site

providers. In 2002 this rate of growth declined

significantly for both types of providers (to under 10

percent for both), but the increase in average property,

plant and equipment per organization for multi-site

providers continued to be greater than the increase in

per facility expenditures for single-site providers. As a

result the Average Age of Facility Ratio for multi-site

providers has remained consistently more favorable than

the age of single-site providers.

Average Age of Facility Ratio


1995 14.51 6.34 11.67 9.14 7.94

1996 15.94 6.53 11.25 9.57 8.11

1997 16.74 3.76 10.40 9.00 7.96

1998 21.85 1.81 10.47 9.02 7.29

1999 18.65 0.01 10.65 8.92 7.47

2000 17.13 5.32 10.40 8.80 7.92

2001 16.70 5.89 10.68 8.84 8.18

2002 16.29 6.09 10.53 9.04 7.94

Average Age of Facility Ratio Quartiles


1995 15.95 0.00 10.79 8.47 6.20

1996 24.73 0.00 10.94 9.25 6.54

1997 21.93 0.00 11.09 9.30 7.23

1998 17.81 4.53 11.45 9.45 7.64

1999 22.40 2.80 11.80 9.70 7.90

2000 20.12 0.34 11.37 9.62 7.57

2001 21.62 0.64 11.75 9.70 7.96

2002 19.98 1.75 12.11 10.17 7.98

Accumulated Depreciation

Annual Depreciation Expense


FINANCIAL RATIOSTR

END

AN

ALYSIS

7.8

8.3

8.8

9.3

9.8

10.3 Multi-site

Single-site

20022001200019991998199719961995Year

Ag

e in

Yea

rs

Trended Median Average Age of Facility Ratio

0

5

10

15

20

25Multi-site

Single-site

9.04 10.17

Ag

e in

Yea

rs

0

0

0

0

2002 Average Age of Facility Ratio



C H A P T E R 5

C O N T R A C T T Y P E R A T I O SC C A C

51

Many CCAC accredited organizations offer more than

one contract type. For purposes of producing this report,

organizations have been assigned to a contract type

based on the predominant contract type signed by

residents of their community. A number of communities

offer rental or equity contracts, but these contracts were

the predominant contract type for less than five

communities. As a result, ratios for rental or equity

contract types are not included in the listing.

Organizations with no predominant contract type have

been excluded from this analysis.

The types of contracts that are offered to residents at

the CCRCs may affect certain ratios. Generally,

accredited CCRCs offer one or more of five basic

contract types:

• Extensive Contracts (Type A) have an up-front

entry fee and include housing, residential services

amenities and unlimited, specific health-related

services with little or no substantial increase in

monthly charges, except for normal operating costs

and inflation adjustments;

• Modified Contracts (Type B) have an up-front entry

fee and and include housing, residential services

amenities and a specific amount of long-term

nursing care with no substantial increase in

monthly charges(reductions in fees may occur for

a specified period of time (e.g., 30 days per year)

or the resident’s monthly charges may increase as

the level of care increases but at a discount from

the posted fees for the services);

• Fee-For-Service Contracts (Type C) have an up-

front entry fee and and include housing, residential

services amenities for monthly charges that increase

directly with the level of care provided;

• Rental Contracts (Type D) do not require an up-

front entry fee and the resident’s monthly charges

increase directly with the level of care provided.

Typically, residents are guaranteed access to

health care services; and

• Equity Contracts are similar to cooperative housing,

whereby residents have membership in the

corporation and sign a proprietary lease agreement.

Organizations are grouped by contract types based on

information they provided to CCAC.

Ratios by Contract Type


2002 Financial Ratios By Contract Type—Single-site Providers*

Type A Type B Type C

25% 50% 75% 25% 50% 75% 25% 50% 75%


Operating Margin Ratio (%) (6.3) (0.7) 2.5 (2.4) 2.3 6.2 (5.1) (1.2) 1.8

Operating Ratio (%) 114.5 106.4 101.0 106.2 98.6 94.3 103.2 100.3 94.7

Total Excess Margin Ratio (%) (6.2) (2.5) 2.7 (0.1) 2.1 6.9 (3.5) 0.4 3.9

Net Operating Margin Ratio (%) (12.8) (1.4) 5.8 (2.9) 4.1 7.0 (2.6) 3.2 6.9

Net Operating Margin Ratio—Adjusted (%) 14.9 21.0 27.6 12.7 18.4 25.1 8.4 14.2 20.3

Liquidity Ratios

Days in Accounts Receivable Ratio 22 14 9 24 16 9 33 20 17

Days Cash on Hand Ratio 199 323 448 149 236 329 151 240 307

Cushion Ratio (x) 3.0 6.2 10.9 4.4 6.6 11.3 4.7 8.0 10.6


Debt Service Coverage Ratio (x) 1.4 1.7 2.8 1.8 2.8 4.3 1.8 2.1 3.0

Debt Service Coverage Ratio—Revenue Basis (x) (0.6) 0.1 0.7 0.4 0.7 1.3 0.4 0.7 1.4

Debt Service as a Percentage of Total Operating Revenues and Net NonoperatingGains and Losses Ratio (%) 19.6 12.9 8.1 13.1 8.2 6.6 10.0 8.1 5.2

Unrestricted Cash and Investments to Long-term Debt Ratio (%) 30.4 53.2 95.9 37.9 65.3 85.4 32.1 55.7 90.0

Long-term Debt as a Percentageof Total Capital Ratio (%) 174.9 100.2 63.6 95.2 61.4 47.9 80.1 60.6 43.0

Long-term Debt as a Percentageof Total Capital Ratio—Adjusted (%) 96.4 61.1 41.3 64.2 41.5 34.9 64.3 47.2 30.7

Long-term Debt to Total Assets Ratio (%) 66.7 44.3 26.2 45.4 33.2 25.8 48.1 35.7 22.7

Average Age of Facility Ratio (Years) 11.6 9.3 7.8 12.5 10.6 8.4 12.6 10.3 7.8

*Providers identified themselves by contract type by indicating which contract represented the predominant type of contract in effect in their community.


FINANCIAL RATIOSTR

END

AN

ALYSIS

2002 Financial Ratios By Contract Type—Multi-site Providers*

Type A Type B Type C

25% 50% 75% 25% 50% 75% 25% 50% 75%


Operating Margin Ratio (%) (3.9) 0.8 5.0 0.7 2.4 4.1 (16.5) (1.2) (0.5)

Operating Ratio (%) 118.5 112.3 104.1 102.9 100.5 98.8 114.4 107.7 100.9

Total Excess Margin Ratio (%) (5.0) (1.5) 5.0 (2.7) 0.3 2.5 (7.2) (1.2) 0.5

Net Operating Margin Ratio (%) (13.8) (12.6) (4.2) (0.3) 1.3 7.0 (8.5) (2.4) 2.7

Net Operating Margin Ratio—Adjusted (%) 15.6 21.4 22.7 20.5 25.5 26.9 7.8 16.9 17.8

Liquidity Ratios

Days in Accounts Receivable Ratio 21 18 12 20 20 14 29 25 19

Days Cash on Hand Ratio 195 266 435 236 317 411 101 183 216

Cushion Ratio (x) 4.4 6.2 14.8 7.4 8.3 11.1 3.1 4.7 5.4


Debt Service Coverage Ratio (x) 1.5 2.2 3.1 2.4 3.1 3.8 1.0 1.5 2.0

Debt Service Coverage Ratio—Revenue Basis (x) (1.3) (0.6) 0.3 0.1 0.3 1.1 (0.1) 0.2 1.1

Debt Service as a Percentage of Total Operating Revenues and Net NonoperatingGains and Losses Ratio (%) 15.9 9.7 7.6 10.4 9.4 6.8 10.9 9.2 8.2

Unrestricted Cash and Investments to Long-term Debt Ratio (%) 48.0 53.7 64.5 55.0 62.0 70.4 28.1 35.0 40.5

Long-term Debt as a Percentageof Total Capital Ratio (%) 101.6 81.2 71.7 75.2 69.3 55.5 101.8 84.7 75.8

Long-term Debt as a Percentageof Total Capital Ratio—Adjusted (%) 68.9 56.9 47.7 55.9 48.0 46.6 79.7 66.3 49.8

Long-term Debt to Total Assets Ratio (%) 42.3 36.9 32.2 44.4 41.9 34.1 54.5 48.0 30.8

Average Age of Facility Ratio (Years) 11.1 8.1 7.9 11.1 8.8 7.7 9.8 9.2 8.2

*Providers identified themselves by contract type by indicating which contract represented the predominant type of contract in effect in their community.


Ratio Definitions LegendN Designates codes included in the

numerator of the ratio calculation

D Designates codes included in the

denominator of the ratio calculation

- Before an “N” or “D” indicates the

value should be multiplied by -1

N/D Designates codes included in both

the numerator and the denominator

of the ratio calculation

OM Operating Margin Ratio

OR Operating Ratio

EM Total Excess Margin Ratio

NOM Net Operating Margin Ratio

NOM-A Net Operating Margin Ratio –Adjusted

DAR Days in Accounts Receivable Ratio

DCH Days Cash on Hand Ratio

DSC Debt Service Coverage Ratio

DSC-R Debt Service Coverage Ratio—

Revenue Basis

DS-TR Debt Service as a Percentage of

Total Operating Revenues and Net

Nonoperating Gains and Losses Ratio

CD Unrestricted Cash and Investments

to Long-term Debt Ratio

LTDC Long-term Debt as a Percentage

of Total Capital Ratio

LTDC-A Long-term Debt as a Percentage

of Total Capital Ratio—Adjusted

CUSH Cushion Ratio

AGE Average Age of Facility Ratio

LTD-TA Long-term Debt to Total Assets Ratio

Days in Accounts Receivable RatioSum of codes designated by “N”

DIVIDED BY

(Sum of codes designated by “D” divided by 365)

Days Cash on Hand RatioSum of codes designated by “N”

DIVIDED BY

(Sum of codes designated by “D” divided by 365)

A P P E N D I X A


FINANCIAL RATIOSTR

END

AN

ALYSIS

A P P E N D I X A

Description OM OR EM NOM NOM-A DAR DCH DSC DSC-R DS-TR CD LTDC LTDC-A CUSH AGE LTD-TA

Residential Revenues N/D D N/D N/D N/D D N N DEntry Fee Amortization N/D N/D DSkilled Nursing Revenue N/D D N/D N/D N/D D N N DAssisted Living Revenue N/D D N/D N/D N/D D N N DAdult Day/Home Health Revenue N/D D N/D N/D N/D D N N DManagement Fees N/D D N/D N/D N/D N N DInterest/Dividends/Investment Earnings Revenue N/D D N/D N N DOther Operating Revenue N/D D N/D N/D N/D N N DAdministrative Adjustments to Operating Revenue N/D D N/D N N DNet Assets Released from Restriction for Operations N/D D N/D N N DOther Non-Cash Revenues N/D N/D DNursing/Health Center -N N -N -N -N D -N -NDietary/Food Services -N N -N -N -N D -N -NSocial and Community Services/Chaplaincy -N N -N -N -N D -N -NRecreation, Activities, and Transportation -N N -N -N -N D -N -NAssisted Living and Personal Services -N N -N -N -N D -N -NHousekeeping -N N -N -N -N D -N -NPlant and Maintenance -N N -N -N -N D -N -NAdministration/General -N N -N -N -N D -N -NMarketing -N N -N -N -N D -N -NAdult Day Care/Home Health -N N -N -N -N D -N -NOther Departments -N N -N -N -N D -N -NHousing/Independent Living -N N -N -N -N D -N -NManagement Fees -N N -N -N -N D -N -NInterest -N N -N D D D N DDepreciation/Amortization -N -N DBad Debt Expenses -N -NOther Non-cash Expenses -N -NSalaries and Benefits -N N -N -N -N D -N -NSupplies -N N -N -N -N D -N -NContract Services -N N -N -N -N D -N -NFacility Costs -N N -N -N -N D -N -NAncillary Health Services -N N -N -N -N D -N -NInsurance -N N -N -N -N D -N -NOther Expenses -N N -N -N -N D -N -NContributions N/D N N DGain (Loss) on Sale of Investments N/D N N DGain (Loss) on Sale of Derivatives N/D N N DUnrealized Gain/(Loss) on InvestmentsUnrealized Gain/(Loss) on DerivativesOther Nonoperating Revenue N/D N N DNonoperating Expenses -N/D N N DNet Assets Released from Restriction for PP&E N/D N N DCurrent Cash and Investments - Unrestricted N N N DCurrent Cash and Investments - Restricted DPatient/Resident Accounts Receivable N DOther Accounts Receivable DResident Deposits DOther Current Assets DNon-current Cash and Investments - Unrestricted N N N DNon-current Cash and Investments - Restricted DProperty Plant and Equipment, net DOther Non-Current Assets/Derivatives DLong Term Debt, Less Current Portion/Capital Leases D N/D N/D NDeferred Revenues DNet Assets - Unrestricted D DPrincipal Payments D D N DCapitalized Interest N/D N/D DEntry Fees Received N/D NEntry Fees Refunded N/D NAccumulated Depreciation N

Ratio Definitions


The debt capital market is made up of many constituents:

buyers of bonds (institutional buyers as well as retail

buyers); investment banking firms; financial advisors;

rating agencies; auditors; and others. Not all of these

constituents fully agree on what to count in the total

of what traditionally has been called “unrestricted cash

and investments.” Part of the problem stems from the

sheer quantity of distinct descriptions of cash and

investments appearing on audited financial statements.

These descriptions number in the hundreds and

later we provide examples. Furthermore, using the

descriptive term “unrestricted” creates labeling issues

when viewed in the context of generally accepted

accounting principals. The lack of authoritative guidance

about what to include in unrestricted cash and

investments complicates universal understanding and

diminishes the value of financial ratio comparisons.

This annual publication serves as an ideal vehicle to

foster consensus in the treatment and characterization

of certain line items in the financial statements of

AAHSA members. The CCAC’s accredited organizations

make up a formidable cohort of like-minded

organizations. The leadership role these organizations

play is vital to the growth of the industry. Thus with this

expanded annual publication, the authors provide

guidance in counting cash and investments used in

financial ratio calculations.

With the issuance of the Financial Accounting Standards

Board’s Statement of Financial Accounting Standard No.

117, the statement of financial position (which despite

the pronouncement is still more commonly referred to

as the “balance sheet” in generic discussions) now must

list three types of net assets. The three categories are

unrestricted, temporarily restricted, and permanently

restricted. These accounting labels are useful in

determining an organization’s “equity” position, but do

little to stratify the various restrictions placed on cash

and investments. The labeling does not tell the user

what cash and investments are available at the discretion

of the Board and Management. Unfortunately, the net

assets section of the balance sheet is the only place any

restriction is distinguished in terms of accounting

presentation. Individual line items in the assets section

of the balance sheet must be analyzed to determine

what to include in the unrestricted cash and

investments figure used in ratios. Cash and investments

can have both internal and external restrictions imposed

on them as to their spending. These restricted funds

nonetheless, may be considered “unrestricted” for

accounting purposes. Management may possess little

discretion over the use of these assets. These non-

discretionary funds usually are presented in the portion

of the balance sheet labeled as “assets whose use is

limited” or, alternatively labeled, “assets limited as to

use”. An example of a non-discretionary “unrestricted”

asset is a bond trustee-held debt service reserve fund.

The preparers of this report think that for financial ratio

purposes, the term “unrestricted” should connote the

ease of access and availability of the cash and

investments. This “availability” notion is separate from

how liquid the investment is. By “unrestricted” we

mean that management, with Board approval if

necessary, could spend the cash (or the converted

investment) with relatively little outside-the-organization

approval. The accounting concept of “assets limited as

to use” has more to do with who imposes the limit, not

with how easily the limit can be relaxed or the length

of time it might take to get the relaxation of the

restriction. Is it the Board imposing the restriction? If

so, the Board can remove the restriction. It is, therefore,

for ratio calculation purposes considered “unrestricted”

even if currently it is “restricted” by the Board. Is it

restricted by bond documents that would require

outside action by a trustee only after getting bondholder

approval? For ratio purposes these funds are considered

“restricted”. Do regulatory bodies require approval from

state authorities before funds can be utilized by the

community? If so, for ratio purposes, these funds are

considered “restricted”. More detailed explanations of

the logic behind these conclusions follow.

Some access-to-funds-limitations are easily overcome;

others, such as limitations imposed by regulatory bodies,

are somewhat harder to overcome but not impossible,

especially if the funds are there for operating purposes.

In a fiscal emergency, getting timely bondholder

approval to access certain funds is near impossible. For

that matter, even allowing for a longer time frame,

access would most likely be denied. Thus, the capital

markets do not count Trustee-held funds as

unrestricted. Other funds, such as reserves for self-

insurance, require simple Board approval to spend, but

most capital market participants do not think of these

funds as discretionary. If getting access to “external-

approval-needed” funds involves either a very lengthy

process or the restriction can not be easily overcome, or

both, the funds should not be counted as unrestricted

for ratio purposes.

Discussion of “Cash”

A P P E N D I X B


FINANCIAL RATIOSTR

END

AN

ALYSIS

While practically all capital market participants exclude

permanently restricted assets when calculating cash-

related ratios, there is still considerable argument

about what line items to count when calculating cash-

related ratios that use temporarily restricted cash

and investments.

Categorizing dubiously labeled line items on a provider’s

audited financial statements, without benefit of

discussions with management, fosters arbitrary decisions

about what to count as unrestricted cash. Users of

financial statements who perform ratio analysis will

make categorization decisions regardless of the provider’s

intent in the presentation. It behooves providers to be as

clear as possible in their financial statement presentations

as to the amount of discretion the board and management

exercise over their cash and investments.

Placement of the line item on the balance sheet in

terms of “current” or “non-current” does not affect the

discretionary attributes of the cash and investments.

The accounting line item placement should have more

to do with the investment’s liquidity and corresponding

current liability than with the ease of removing the

limitations on accessing. The accounting presentation

does not address the ease of ability to spend the cash

and investments. Thus, for purposes of ratio analysis,

current and non-current cash and investments are

combined. However, treatment of the current asset line

item “assets limited as to use-current portion” is usually

reserved for trustee held funds associated with

imminent debt service. Such funds would not be

counted in unrestricted cash and investments.

Several of the most frequently questioned line items are

discussed below:

Non-current Board Restricted Construction Reserve

Items (e.g., funded depreciation) that are restricted by

the Board can be unrestricted through board action,

therefore, this item is considered unrestricted for ratio

calculation purposes. As noted above, the designation of

non-current does not preclude the use of a cash balance

in ratio calculations.

State Operating Reserves

Through either law or regulation, various states have

imposed operating reserve requirements. These reserves

sometime help to maintain licensure requirements. The

funding dollar amount varies, as well as how to calculate

the required amount. Some argue that management can

not easily tap these funds and, therefore, they should

not be counted as unrestricted. However the consensus

among the authors is generally to count these funds as

unrestricted. If the state, for example Maryland, does

not require the provider to set the funds aside in a

separately maintained account nor does the state require

the provider to seek authorization from the state prior to

using the funds, these funds are considered

unrestricted. If the state, for example Florida, requires

the provider to set the funds aside, the preparers of this

report do further analysis of the provider’s Statement of

Financial Position. If the provider has no debt

outstanding, the reserves are considered restricted.

If the provider has long-term debt outstanding and is

required to maintain a Debt Service Reserve Fund

and/or Operating Reserve by the terms of the bond

documents, the preparers of this report consider the

state-required reserves to be unrestricted.

A P P E N D I X B


Median Ratios Comparison—Single-site Providers*

Fitch1 CCACIG ‘A’ ‘BBB’ 2002 Median**


Operating Margin Ratio (%) N/C N/C N/C (0.7)

Operating Ratio (%) 99.3 98.8 100.3 101.7

Total Excess Margin Ratio (%) 0.6 2.6 0.5 0.5

Net Operating Margin Ratio (%) N/C N/C N/C 2.1

Net Operating Margin Ratio—Adjusted (%) N/C N/C N/C 17.3

Liquidity Ratios

Days in Accounts Receivable Ratio N/C N/C N/C 18.0

Days Cash on Hand Ratio 346.0 502.0 301.0 261.0

Cushion Ratio (x) 8.1 11.6 7.0 6.7


Debt Service Coverage Ratio (x) 1.8 2.3 1.6 2.0

Debt Service Coverage Ratio—Revenue Basis (x) 0.5 0.5 0.4 0.6

Debt Service as a Percentage of Total Operating Revenues and Net NonoperatingGains and Losses Ratio (%) 10.7 10.1 10.8 9.2

Unrestricted Cash and Investments to Long-term Debt Ratio (%) 68.0 127.0 58.0 51.6

Long-term Debt as a Percentageof Total Capital Ratio (%) 65.4 63.4 79.8 78.9

Long-term Debt as a Percentageof Total Capital Ratio—Adjusted (%) 50.5 36.0 55.5 54.1

Long-term Debt to Total Assets Ratio (%) N/C N/C N/C 40.6

Average Age of Facility Ratio (Years) 10.3 9.9 10.4 10.2

1 Fitch 2002 Median Ratios for Continuing Care Retirement Communities. Standard and Poor’s 2002 Median Ratios were not available at time of publication.

* Rating Agency computation of ratios may differ as well as their definition of single-site provider.** 50th PercentileN/C Not Computed

A P P E N D I X C


FINANCIAL RATIOSTR

END

AN

ALYSIS

Median Ratios Comparison—Multi-site Providers*

Fitch1 CCACIG ‘A’ ‘BBB’ 2002 Median**


Operating Margin Ratio (%) N/C N/C N/C 0.0

Operating Ratio (%) 99.3 98.8 100.3 102.2

Total Excess Margin Ratio (%) 0.6 2.6 0.5 0.2

Net Operating Margin Ratio (%) N/C N/C N/C (0.8)

Net Operating Margin Ratio—Adjusted (%) N/C N/C N/C 17.1

Liquidity Ratios

Days in Accounts Receivable Ratio N/C N/C N/C 20.0

Days Cash on Hand Ratio 346.0 502.0 301.0 225.0

Cushion Ratio (x) 8.1 11.6 7.0 6.4


Debt Service Coverage Ratio (x) 1.8 2.3 1.6 2.1

Debt Service Coverage Ratio—Revenue Basis (x) 0.5 0.5 0.4 0.3

Debt Service as a Percentage of Total Operating Revenues and Net NonoperatingGains and Losses Ratio (%) 10.7 10.1 10.8 8.8

Unrestricted Cash and Investments to Long-term Debt Ratio (%) 68.0 127.0 58.0 47.2

Long-term Debt as a Percentageof Total Capital Ratio (%) 65.4 63.4 79.8 77.0

Long-term Debt as a Percentageof Total Capital Ratio—Adjusted (%) 50.5 36.0 55.5 55.1

Long-term Debt to Total Assets Ratio (%) N/C N/C N/C 42.4

Average Age of Facility Ratio (Years) 10.3 9.9 10.4 9.0

1 Fitch 2002 Median Ratios for Continuing Care Retirement Communities. Standard and Poor’s 2002 Median Ratios were not available at time of publication.

* Rating Agency computation of ratios may differ as well as their definition of multi-site provider.** 50th PercentileN/C Not Computed

A P P E N D I X C

C C A C

Documents

proprietary lease agreement

25th 50th 75th

total capital ratioadjusted

dnet assets released

theaudited nancial statements

senior living environment

accounts receivable ratio

entry fees received