Sensible Perspectives

Is this CCRC worthy of having me as a resident?

Posted by on November 14, 2018

Click here to see my previous articles on CCRCs.

Part 1 – How financially strong is the community?

When our clients consider moving to a Continuing Care Retirement Community, they usually ask the advisor whether they qualify financially. It’s equally important to determine whether the CCRC under consideration is financially qualified to have them as a resident.

You should evaluate the finances of the CCRC you are considering as closely as they evaluate yours, if not more so. Although this rarely happens, the big concern is that a CCRC might become insolvent after you plunk down all your home equity (and then some) on the entrance fee. What would you do then? Even if the CCRC doesn’t go bankrupt, it could run into financial difficulty and dramatically raise its monthly service fees. According to a New York Times article on CCRCs, “This happened with Erickson Retirement Communities, now known as Erickson Living. They filed for bankruptcy protection in 2009, shortly after the Great Recession hit. The company was acquired later that year and continues to function, but not without having given its residents quite a scare.”

There are dozens of questions to ask when evaluating a CCRC’s financial strength. In this article, I will suggest my top ten questions. Also, although there will be plenty to ask the sales and marketing team, I strongly advise directing financial questions to the CCRC’s Director of Finance. (Perhaps make a separate appointment.)

1) What has been the trend in the occupancy ratio of your independent living units?

The occupancy ratio (how filled up the place is) is an indicator of how much consumer demand there is for the community you’re considering. An occupancy ratio of 90% or higher indicates that the community is attracting residents. It’s important to look not only at the current occupancy ratio, but also the direction it has taken over the past few years. If it’s on a downward slope, this could be a sign that, for whatever reason, the CCRC has fallen out of favor.

2) Do you have rated debt? What are the ratings?

Some CCRCs that use public debt to finance their renovations and expansion may have had their bonds rated by a rating agency. Fitch is a common rating agency for CCRCs. At Fitch, a rating of BBB or higher (A, AA, or AAA) indicates financial strength. Other rating agencies have their own rating systems. Your CCRC’s bond ratings should be investment grade rather than junk bond status. The CCRCs that have had their bonds rated usually make a point of mentioning the ratings in their marketing materials, assuming the ratings are strong.

3) Are financial covenants being met?

Communities that use debt financing will be held to strict financial covenants by their lenders. A bond covenant is a legally binding term of agreement between a bond issuer (in this case, the CCRC) and a bond holder (a lender). Negative or restrictive covenants forbid the issuer from undertaking certain activities; positive or affirmative covenants require the issuer to meet specific requirements. There are sometimes minor violations of bond covenants. You want to know if there have been any serious violations of these covenants.

4) Is there positive cash flow from operations?

Cash is king in any business. At CCRCs, cash flow generated by operations results from a combination of residents’ monthly fees and the non-refundable portion of entrance fees. This income must be sufficient to cover the CCRC’s annual operating expenses.

5) Do you have enough assets to pay this year’s debts?

The ratio of current assets to current debts is referred to as the current ratio and is an indication of whether an organization is positioned to pay this year’s liabilities with its assets. The current ratio should show that current assets exceed current liabilities.

6) Has a detailed actuarial analysis been performed on your community by an independent certified actuary? If so, what were the findings?

The analysis should indicate long-term solvency, positive cash flows projected for the foreseeable future, and the ability for the community to fulfill its contractual obligations to current and future residents. If they can give you a copy of the report, that’s even better. (This question is less relevant if you are considering a rental or fee-for-service contract.)

7) Is your community financially regulated by the state?

Not every state regulates CCRCs’ finances, but in some states, communities are required to meet specific financial conditions each year like cash reserve and financial ratio requirements. State regulation does not ensure a community’s financial viability, but it does add another measure of oversight and consumer protection.

8) Is your community accredited?

The CCRC industry has always been somewhat fragmented, and no single central organization rates or ranks CCRCs. The Commission on Accreditation of Rehabilitation Facilities, or CARF, is currently the only accreditation organization for CCRCs. To be accredited means that the CCRC has passed an in-depth review of its services and quality. Part of the accreditation process includes a review of the CCRC’s financials. The accreditation process is ongoing. The CCRC must complete a Quality Improvement Plan after receiving the accreditation report, and it must submit an Annual Conformance to Quality Report each year throughout the accreditation term.

Despite CARF’s strong reputation in the industry, only about 10% of CCRCs are accredited. Accreditation is a voluntary process. Many CCRCs opt out, perhaps because they don’t want to undergo the time and costs involved to attain and maintain accreditation. So, just because a CCRC is not accredited doesn’t mean it is not a quality organization. However, if it is accredited, this speaks very well for the community, as they are adhering to stringent quality standards.

9) Can you provide me with your most recent audited financial statements?

CCRCs will provide their financial statements upon request or include them in their marketing packet. Strongly consider hiring a qualified tax professional experienced in senior living to analyze these statements and the various ratios covering the areas of liquidity, debt, and profitability. These ratios should balance each other out. It is not necessarily disqualifying for one ratio to be weak if it’s balanced by another that’s strong. For example, if a community recently expanded, one would expect that it may have unusually high debt. As a counter-balance, it should have strong operating revenue to adequately service that debt.

Also, keep in mind that the financial statements for a not-for-profit CCRC (the majority are not-for-profit) will be different from those of a for-profit entity. The tax advisor must understand the metrics for each type of community you’re considering.

10) What can you tell me to help me feel confident about your long-term financial viability?

In his October 18, 2014 USA Today article, “Pros, cons: Continuing care retirement community”, columnist Robert Powell suggested that people ask CCRCs this open-ended question and listen carefully to what’s said (and not said). He states, “The prospective resident is looking for real answers here, not just general responses or avoidance. Answers such as [the following] are what you’re looking for:

‘Financial stability is of utmost importance to us. We have been in operation for 20 years and have never had financial difficulties. We have maintained an occupancy ratio over 90% for the past three years. We have extremely low staff and resident turnover, etc. etc. Our management team has 50 years of experience and manages more than 40 CCRCs across the United States. etc. etc.’

Powell goes on to say, “Ultimately, the provider should want to sell the prospect on their strong financial position, not avoid the topic. This can be a strong indicator. Personally, I think sales teams should beg people to ask them about their finances. Unless, of course, they don’t want them to.”

The point being: By all means, ask for the financials and crunch the numbers (or better yet, hire someone to do this), but also listen carefully to how confidently (or not) the CCRC’s financial representative describes the financial strength of the community.

In my next article, I will cover the non-financial questions to ask when evaluating a CCRC.