Operational and Financial Considerations for Campus ... › ...and-Financial-Considerations-for...Financial and Resource Considerations HJ Sims has provided the Rightfinancing solutions

Operational and Financial Considerations

for Campus RepositioningTuesday, May 7, 2019

10:45 a.m. – 12:15 p.m.

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Photo

Jeffrey E. BolandPartner, Senior Living Group

RKL LLP717.525.7447

[email protected]

Aaron M. RulnickManaging Principal

HJ Sims301.424.9135

[email protected]

Steve FetykoInterim CEO

734.433.1000 ext. [email protected]

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Learning Objectives

• Evaluate key operating and financial considerations that impact the repositioning process

• Review alternative financing structures to maximize the efficiency of the financing during the repositioning process

• Hear case studies about operations and finance lessons learned

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KEY OPERATIONAL PERFORMANCE INDICATORS

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• RKL LLP (RKL) is a leading regional public accounting and consulting firm based in Central PA founded over 60 years ago

• RKL was ranked 61st on Accounting Today’s 2019 “Top 100 Firms” list and has over 450 team members

• RKL’s Senior Living Services Consulting Group provides services to post-acute care providers throughout the US

RKL Background

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Analytical Tools

• Key Performance Indicators• Operational Metrics

Operational Benchmarks

• Margin (Profitability) Ratios• Liquidity Ratios• Capital Structure Ratios

Financial Ratios

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Operational Benchmarks – Key Drivers

Operating Revenues

Operating Expenses

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Benchmarks/Key Performance Indicators

• Demographics• Referral Sources

Resident/Client Data

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• Occupancy:

• Census / Attendance Record

• Lost revenue calculation

• Pricing structure

• All-inclusive rate vs. ala-carte pricing

• Average payment rates by payer class

• Rates by payer class vs. cost to provide services

• Payer mix


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• Conversion ratio

• Charge capture systems

• Other revenue sources

• Contracted services

• In-house vs. outsourcing


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• Staffing:

• Full time equivalents (FTEs) by department or day

• Direct care staff vs. Non-direct care staff

• Employee benefits as a percentage of salary

• Employee turnover

• Overtime


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• Operating expenses per day

• Labor

• Non-labor

• General and administrative expenses

• As a percentage of total operating expenses

• Allocation methodologies

• Home Office/Management Fees as a percentage of revenue

• Bad debt as a percentage of revenue


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• Marketing/advertising costs

• Meal cost/raw food cost per day or per meal

• Key operating expenses

• Housekeeping

• Laundry

• Utilities

• Repairs and maintenance

• Property insurance


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• Allocation of indirect expenses

• Transportation

• Nursing services

• Rehabilitation therapy services

• Information Technology (IT) and use of automation

• Accounting functions / Scheduling

• Benevolent care

• Development/Fundraising


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• Other considerations

• Trend of rate increases

• Dependence on contributions, investment income, or other outside sources

• Capital additions and improvements

• Satisfaction surveys

• Clients

• Staff


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• Other considerations (cont’d)

• Benefit plans

• 401(k)/403(b) plans

• Worker’s Compensation

• Energy/Telecom/Waste costs

• Policies and Procedures• Processes

• Are your processes costing you too much money (efficiency)?


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• Other considerations (cont’d)• Budgeting – Operating vs. Capital• Reporting

• Financial reporting• Actual vs. Budget; Budget Variances

• Operational reporting• Census; attendance

• Financial Projections


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BEYOND THE METRICS:OPERATIONAL STRATEGIES FOR PERFORMANCE AND GROWTH

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• Occupancy

• Medicare Part A • Utilization• Average Length of Stay• Resource Utilization Group (RUG) Distribution

• Medicare Part B• Utilization

• Medicaid Case Mix

• Ancillary Revenue/Charge Capture

• Development/Fund Raising• Revenue-to Expense Multiple• Cost to Raise $1

Revenues

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• Departmental Expenses Per Patient Day (PPD)

• Full Time Equivalents (FTEs) Per Resident

• Nurse Staffing• Hours Per Patient Day (HPPD)

• Laundry• Pounds Per Resident Day• Pounds Per Productive Labor Hour

• Dining Services• Meals Per Productive Labor Hour

• Human Resources (HR)• Ratio of HR Staff to Employees

Expenses

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• Marketing Costs as a Percentage of Operating Expenses

• Facilities• Square Feet maintained per Maintenance FTE

• Employee Turnover• Overall• By Department

• Accounts Receivable (AR)• Days in AR• Percentage of AR > 90 days

• Ratio of Nurse Assessment Coordinators (NACs) to Minimum Data Sets (MDSs) Completed in terms of FTEs

Expenses

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FINAL THOUGHTS

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Cash is King

Balance Sheet

Pays the Bills

Pays the Employees

Funds Capital

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• Work Force Issues / Employee Engagement

• Financial Performance / Sustainability

• Reimbursement / Regulatory Changes

• Efficiency

• Agility

• Competition (for-profit)

• Succession Planning

What Keeps Executives Up at Night

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• Organizations focusing on operational areas to improve financial ratios

• Census/Attendance/Marketing

• Vendor contracts

• Staffing realignments/salary freezes or reductions

• Capital expenditure freezes or reductions

• Reduce or eliminate continuing education, travel, supplies, minor equipment, and outside consultant budgeted expenses

• Detailed cost analyses of all departments

• Revenue alternatives and development/fundraising

What We’re Seeing in the Field

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• Profitability only changes (or increases) by increasing revenue or decreasing expenses, or a combination of both

• The “Sacred Cows” of the past need to move out to pasture

• Providing adequate operating margin is just as important for a not-for-profit as it is a for-profit

• No Margin, No Mission / No Mission, No Margin• Utilize benchmarks to monitor your progress, but keep in mind

that the best benchmarks may be your organization’s own financial and operational results

• Focus on key financial and non-financial drivers• Establish goals and determine who will take ownership of the

benchmarking process• What gets measured is what gets improved

Thoughts for You to Consider

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Financial and Resource Considerations

HJ Sims has provided the Right financing solutions since 1935 Provide most innovative and efficient financing structures for

start-up, expansion and repositioning projects Unparalleled distribution of tax-exempt bonds to individual and institutional

investors Ability to syndicate large bank deals

Over $2.1 billion in bank financings since 2013 Ability to secure financing in difficult market conditions Lowest cost of capital

Approximately 160 employees and 20+ investment bankers with over $24 billion in financings nationwide for the following sectors: Senior Living Human Services Other 501(c)(3) Charter Schools

Strong commitment to Board education at national, state and community level Many Sims bankers serve on non-profit Boards

Long history of working with Methodist sponsored provider organizations Approximately $1 billion since 1983

Introduction

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Where to Start? – Key Considerations

Strategic Plan Organizational Structure Financial Profile

Acquisition vs. New Development

Parent/Sub/Affiliate Structure Capital Structure

Bricks & Mortar vs.Programs & Services

Obligated Group vs. SPE Liquidity

Appetite for Risk Stream of Cash Flow Debt Capacity

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EstablishStrategy

Initial Team Selection

Market Assessment

Initial Due Diligence

Remaining Team Selection

Feasibility Assessment

Pre-Construction Construction Project

Operations

“Process” is the operative word

Chronology is key

Should be integrated approach

Managing the Development Process

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Determining Debt Capacity

Important to complete pro-forma analysis to determine additional debt capacity

Capacity is dynamic…impacted by changes over time (Utilization, Operating Income, Financing Conditions/Constraints)

Additional debt without enhanced revenue can negatively impact ability to service existing debt service

Order of phasing can be critical (i.e. independent living expansion concurrent or prior to replacement of health care center)

Various Constraints (Debt Service Coverage, Liquidity, Loan-to-Value, Amortization)

Various Thresholds (Minimum & Optimum Target for Constraints)

How debt is structured can improve cash flow (i.e. extending maturity)

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Debt Capacity

Debt Service Coverage Requirement 1.20 1.25 1.30 1.35 1.40 1.45 1.50

Assu

med

Ave

rage

Inte

rest

Ra

te

4.00% 36,025,069 34,584,067 33,253,910 32,022,284 30,878,631 29,813,851 28,820,056 4.50% 33,935,184 32,577,777 31,324,786 30,164,608 29,087,301 28,084,291 27,148,148 5.00% 32,025,940 30,744,902 29,562,406 28,467,502 27,450,805 26,504,226 25,620,752 5.50% 30,278,636 29,067,490 27,949,510 26,914,343 25,953,116 25,058,181 24,222,909 6.00% 28,676,732 27,529,662 26,470,829 25,490,428 24,580,056 23,732,468 22,941,385 6.50% 27,205,575 26,117,352 25,112,838 24,182,733 23,319,064 22,514,958 21,764,460 7.00% 25,852,169 24,818,082 23,863,541 22,979,706 22,159,002 21,394,899 20,681,735 7.50% 24,604,971 23,620,773 22,712,281 21,871,086 21,089,975 20,362,735 19,683,977 8.00% 23,453,715 22,515,567 21,649,583 20,847,747 20,103,185 19,409,971 18,762,972

Assumptions: $2.5 million NOI 1.35x as base case coverage 6.0% as base case interest rate

Debt Capacity Methodology – Key AssumptionsDebt Capacity Constraint: Debt Service Coverage

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Assumptions: $2.5 million NOI Increments of $100,000 reductions/increases in NOI 6.0% as base case interest rate

Debt Capacity

Cash Flow Available for Debt Service$2,200,000 $2,300,000 $2,400,000 $2,500,000 $2,600,000 $2,700,000 $2,800,000

Assu

med

Ave

rage

Inte

rest

Ra

te

4.00% 28,179,610 29,460,501 30,741,393 32,022,284 33,303,175 34,584,067 35,864,958 4.50% 26,544,855 27,751,440 28,958,024 30,164,608 31,371,193 32,577,777 33,784,361 5.00% 25,051,402 26,190,102 27,328,802 28,467,502 29,606,202 30,744,902 31,883,602 5.50% 23,684,622 24,761,195 25,837,769 26,914,343 27,990,917 29,067,490 30,144,064 6.00% 22,431,577 23,451,194 24,470,811 25,490,428 26,510,045 27,529,662 28,549,279 6.50% 21,280,805 22,248,115 23,215,424 24,182,733 25,150,042 26,117,352 27,084,661 7.00% 20,222,141 21,141,329 22,060,518 22,979,706 23,898,894 24,818,082 25,737,271 7.50% 19,246,555 20,121,399 20,996,242 21,871,086 22,745,929 23,620,773 24,495,616 8.00% 18,346,017 19,179,927 20,013,837 20,847,747 21,681,657 22,515,567 23,349,477

Debt Capacity Methodology – Key AssumptionsDebt Capacity Constraint: Net Operating Income

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Reinvestment in Existing Facilities Expansion of Existing Facilities & Addition of New Facilities Sale of Assets that are not so Strategic Acquisition/Affiliation with Existing Providers Development of New Campuses Addition of New Programs/Services (Non-Facilities-based) Forms of Investment Building, Buying, Leasing, Affiliation, Partnering

Leveraging and Prioritizing Financing Capacity

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Criteria for Evaluation Trends in Utilization (Occupancy & Payer Mix) Market Demand vs. Competitive Landscape Financial Impact (Required Investment & ROI) Long-Term Trends (Population, Industry, Political & Regulatory)

Criteria for Prioritization Quantitative (Accretion/Dilution to Financial Performance, ROI,

Time-to- Market) Qualitative (Mission, Tactical, Strategic) Risk/Reward Dynamic Retaining Debt Capacity for Future

(Known/Unknown) Opportunities

Leveraging and Prioritizing Financing Capacity

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Managing Deferred Maintenance

Must balance preservation of cash vs. reinvestment back into existing physical plant

Tired physical plant likely to have adverse impact on marketing/ occupancy

Risk = need to access capital markets to fund improvements to community when weaker financially due to decline in operating revenue/occupancy

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Capital Sources and Debt Structure

Sources of Capital Cash Flow from Operations Cash & Investments Varied application (Direct Equity, Subordinate Loan, Support

for Guaranty, Investment Income to Supplement Cash Flow from Operations)

Consider ROI and Opportunity Cost of Funds, if otherwise invested

Philanthropy/Development Annual Giving & Capital Campaigns for Designated Purposes

Debt Financing New Capital & Refinancing

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Capital Sources and Debt Structure

Cash/Donations (i.e. Equity) Bank Financing (i.e. Construction and

Direct Placement) Draw-Down Bonds (Banks and RIAs) Fixed Rate Bonds Private/Direct Placement HUD / FHA Programs HUD Allocations of HOME, NSP, CDBG,

and Other Soft Loans Fannie Mae/ Freddie Mac USDA - Farmers Home Loan LIHTC, Historical TC, etc. Bond Insurance EB-5 Subordinate debt/mezzanine

loans/equity

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Municipal Bond Fund Flows(Excludes Some State Specific Funds)

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

-3500

-2500

-1500

-500

500

1500

2500

3500

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Tax-Exempt Rates vs. LIBOR

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

2016 Election Fed Rate Hikes 10yr MMD 30yr MMD 30 Day LIBOR

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Tax-Exempt Rates as of April 30, 2019

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Representative Campus Repositioning Case Studies

Moderate expansion and repositioning

Multi-phased project includes “main street” concept with new common areas and amenities

Major expansion and repositioning

Multi-phased project (30 months) New wellness center and dining venues 43

Small Repositioning to Moderate/Affordable Replacement of existing HUD apartments with new 80-unit

LIHTC building Addition of moderate income EF product:

14 cottages and 33 apartments Remaining 25 IL units offered as rental Future phases to include additional moderate income cottages and

repositioning of assisted living and skilled nursing facilities

Small Repositioning to Add New Product Type 297-unit rental CCRC adding 44 entrance fee units

Also remodeling a portion of the common areas and amenity spaces in existing IL living building

Two-phased project


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Replacement Facilities on New Site Financed relocation of three existing programs from current main

campus in Haddonfield, NJ to new campus in Mt. Laurel, NJ – new campus to include: New school with appropriate amenities for students with autism and

intellectual and development disabilities Residential facilities for students with intensive behavioral health

needs Expanded capacity in both The Bancroft School and Lindens

Neuro-Behavioral Stabilization Unit

Replacement Facility on Existing Site Tore down 125+ year-old building and replaced with new building

including 22 memory care units and 52 traditional assisted living units in a “neighborhood model”

Located adjacent to 40-unit assisted living facility added in 1935

Moderately priced relative to the market


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Chelsea Retirement CommunityCampus Repositioning

Steve FetykoInterim CEO

Agenda

• Who We Are• Strategic Plan Context• Campus Repositioning (aka CRC Master Plan)

CRC current state Why Reposition Partners in Plan Development Elements of the Master Plan Plan Evaluation/Prioritization Plan Execution

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UMRC and Porter Hills History

UMRC - Founded in 1906 through donations to the United Methodist Church as a faith-based organization providing housing and services to retired United Methodist Ministers and theirwives.

Porter Hills – Founded in 1961 through donations by a group of friends who set out to provide gracious living primarily for women of moderate means.

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• 1,300 team members• 6,700 older adults served• 24 locations/service lines

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Porter Hills Village Cook Valley EstatesMeadowlark Retirement Community

HUD Independent LivingBailey’s Grove Harvest WayOak Ridge River GroveStation Creek Walker Meadow

Porter Hills Home CareAvenues by Porter Hills

Overall Strategic Plan

We utilize a 5-year rolling Strategic Plan for the entire organization. The Strategic Plan is intended to enhance our mission through diverse senior living and senior support service offerings across all socio-economic strata in a financially sustainable way. Overall plan Components for 2014-2019 included

Potential new locations for market rate IL/AL Potential new locations for mid market IL/AL Potential new locations for low income IL/AL PACE – expansion and new markets Other HCBS Existing campus growth/repositioning – CRC repositioning

falls under this aspect of our strategic plan

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Chelsea Retirement Community (CRC)Master Plan (2014-2019)

Current State of CRC (as of 2013)

Independent Living – 122 units 100 IL Apartments (built 1991 – reno 2013) 4 Garden Cottages (built 2008) 18 Garden Homes (built 1969)

Assisted Living – 138 units 46 Traditional AL (built 1965) 92 Memory Care AL (built 2000)

Skilled Nursing – 85 units (built 1986) Primarily semi-private rooms

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CRC Master Plan (2014-2019)

Why Reposition

Aging facilities have deferred maintenance Increase in maintenance cost Less aesthetically pleasing

Outdated facilities can lead to lower resident/patient satisfaction and reduced census

Areas with market growth potential can result in a stronger margin

Areas without market growth potential can preserve market share

Bottom Line: Repositioning allows us to deliver on our mission for the next 113 years

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Partners in Plan Development

Selecting the right partners allows us to develop a robust repositioning plan with the highest likelihood of success. Key partners include:

• Architect• Engineer• Contractor • Consultant for market studies• Investment Banker• Strategic Planning Advisor• Internal operational and project leadership• Foundation/Fundraising team

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Elements of the Plan

AL Traditional relocation/expansion – 20 inc. unitsIL Market Rate Cottages – 82 unitsIL Mid-Market apartments – 84 unitsIL Affordable apartments – 44 unitsSkilled nursing reno and expansion – 25 unitsWellness Center

Bottom line cost - $75-90M and requires securing additional land and incremental licensed SNF beds

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Plan Evaluation and Prioritization (2013-16)

Worked with partners to developed refined scope/pro formas• IL Garden Homes in good shape - $500K of renovations to

extend life• IL market cottages – market/space for 41 units with phase 2

possible (positive ROI)• Skilled nursing – no growth possible – focus on renovation to all

private rooms/baths (current market expectation) and opportunity to move to household model

• Wellness Center – enhanced resident patient experience, also aligns with focus on individual health

Integrated individual pro forma’s into overall 10 year financial forecast. Results were less than ideal

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Plan Evaluation and Prioritization (2015-16)

Worked to identify additional ways to support repositioning

• Significant value engineering work to ensure right scope of construction

• Conducted external operations assessment and implemented recommendations to enhance bottom line in advance of construction

• Conducted external fundraising assessment to assist in identifying target for philanthropic support

• Identified cash flows and borrowing needs• Revise pro forma and overall financial forecast to ensure short-term

and long-term financial impacts (across a range of ratios) meet targets

Pro forma and overall financial forecasts met internal thresholds. Preliminary plans approved by the Board

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Chelsea Retirement Community

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Our Facilities60


Our Facilities61


Plan Execution (2014-19)• AL relocation and expansion• IL Garden Home work and IL cottage expansion move forward• Secured borrowing (combination of public bonds and revolving loans)

Wrench in the works – Changes to construction environment. Prelim bids show much higher construction costs for Skilled Nursing and Wellness Center. • Regroup with partners and work to value engineer to within budget

requirements• Revise individual project pro forma and overall financial forecast to

ensure continued financial viability• Represent to board

Approved to continue to move forward contingent on achieving philanthropy targets ($13M in capital)

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Plan Execution (2017-19)• IL Garden Home work completed• IL cottage expansion completed (41 units) with phase 2

approved and completed (13 more units)• Secured GMP contracts for all construction ensure within

budget and move to construction phase• Secured philanthropic gifts ($15M actual)• Continue work on operational efficiency to support

repositioning• Evaluate innovative staffing models to support new environments• Continue expense evaluations for potential savings• Manage change fatigue with staff and residents• Continue to evaluate capital structure to ensure optimization

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Current State of CRC (as of 2019)

Independent Living – 176 units (54 unit increase) 100 IL Apartments (built 1991 – reno 2013 and ongoing) 4 Garden Cottages (built 2008) 18 Garden Homes (built 1969 – updates 2017) 54 Prairie Cottages (built 2018) Wellness center (pool, walking track, exercise areas, etc)

Assisted Living – 158 units (20 unit increase) 66 Traditional AL (built 2014) 92 Memory Care AL (built 2000)

Skilled Nursing – 85 units (expansion 2018, renovation- 2019) Will be all private rooms

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CRC Master Plan Total cost (2014-2019) - $58M

Funding Sources• Public Bonds (tax-exempt) - $12M• Revolving 5 year loan (taxable) - $15M• Entrance Fee proceeds (pay down revolver) - $15M• Philanthropy - $15M• Operating Cash Flow/improved margin - $16M ($3M/year)

After release of entrance fee proceeds total debt related to project will be $12M

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Key Lessons Learned• Select partners who are in for the long haul and can react to

unexpected developments• Keep strong connections between project teams and

operational teams • Clearly define roles and responsibilities• Keep your eye on existing operations (we had to react to

significant changes in SNF and AL census mid plan)• Expect things to go wrong at some point – be good at

regrouping and overcoming as a team• Don’t be afraid to slow down before you speed up• Listen to and learn from experts as you develop the plan

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United Methodist Retirement Communities

Questions?

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United Methodist Retirement Communities

Thank you!

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Operational and Financial Considerations for Campus ... › ...and-Financial-Considerations-for...Financial and Resource Considerations HJ Sims has provided the Rightfinancing solutions

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