Post on 15-Jan-2022
Owning the Economics of Your
Master Plan
A Case Study
2
Today
• Your perspectives
• How strategic & economic planning can go wrong
• What pitfalls to avoid
• A case study
• Where you are now
3
4
5
6
7
8
9
15%
85%
10
What do you think?Let’s take a moment to summarize…
11
86% - Planning or have a significant capital project underway
83% - Of these projects had an economic study performed
43% - Of the econ studies performed by outside resource – 6% by developer
86% - Of all meaningful options considered in modeling
14% - Did not consider all meaningful options
Why A) 75% Project had too much momentum
B) 35% Not enough resource to answer the question
15% - Of forecasts were viewed at the quarterly or monthly level – 85% annual
77% - Of CFOs wish they had more of a hand in the planning/forecasting processSome conclusions:
• Modeling is outsourced to a significant extent – Developer involved
• Conflict?
• Options not considered in a meaningful number of cases
• Project “momentum” may compromise analysis and outcomes
• CFOs not involved to the extend they feel is beneficial
• Lack of involvement compromises outcomes?
Lets quickly look at two examples:CCRC current state:
• Faith-based community
• Large, single-site campus
• Many cottages built in the 70’s and 80’s
• 80+ units of IL product built in 2007
• Type B & C contracts with modest AL/SNF discount
• Average entry fee $180K, highest $385K
• Occupancy of IL apartments built in 2007 = 84%
• Large SNF built in 1960’s - occupancy 94%
• Average MedA census of 20 beds (12%) 12
CCRC current state - cont’d:
• Cottage census 92% with some units “offline”
• Little in the way of marketing & brand awareness
• No active use of actuarial services
• Organization had “tucked-in” since 2008
• CEO in place for 12 months (SNF background only)
• CFO – Had been on board for 12 years
• Board not well versed in industry dynamics
• Wanted to grow
• Financial reporting historically inadequate
• Wanted to keep current swapped bank debt and layer 13
CCRC current state - cont’d:
• Range length of stay for short term recovery stays
(“STRC”) = 18-31 days with average of 25
• Annual resident financial support at 8% of revenue
• Very competitive market/PMA
• No strategic plan in place
• Product constructed in 2007 is very nice (IL, Wellness,
dining, library, AL renovation)
14
15
CCRC current state – a look at some key ratios
2.11
2.89
CARF 50th Client
DSCR
319
372
CARF 50th Client
Days Cash
52%
103%
CARF 50th Client
Cash to Debt
8.5%
10.9%
CARF 50th Client
NOM
16
CCRC current state – a look at the key ratios
$4.5
$3.2
CARF 50th Client
Annual Capital
CMS 3 Star Facility
11.6
15.9
CARF 50th Client
Average Age of Community
Hired a CCRC “developer”:
• Facilitated strategic plan
• Very articulate and knowledgeable
• Recommended architect, construction rep, other
• Developer acted as resource:
Marketing consultant
Financial forecast and sensitivity modeling
Coordinator of master planning process
17
Outcomes of Master Planning Process…
• SNF replacement
New
• Stand-alone rehab and wellness facility
• Memory support centers (homes)
• IL hybrid homes with underground parking
• IL apartments
• Activities center & new dining venue
• Main kitchen
• Maintenance center
• Administrative offices & procurement/inventory center18
Implications of Master Plan:
• Reliance upon STRS
• Increase of 3.0x average historical census
• Knowledge of how to accept & manage STRS
• Measurement of care quality
• Understand population flows
• Understanding of demand for SNF & STRS
• Average entry fees for new product $395K with highest $580
• Some “programmatic” change – wellness & dining
• Projects to be phased over 5 years
• $145 to $155 million of capital 19
20
Developer:
• Had a preliminary market study done for IL
• “You have all the market in the world!”
• None for Rehab Center & SNF
• Built a 5 year projection with some sensitivity analysis
• Annual level of detail – End of year 5….
21
Results of Five Year Projection: Developer’s resource
2.11
1.56
Before Developer
DSCR
372
367
Before Developer
Days Cash
103%
48%
Before Developer
Cash to Debt
10.9%
15.2%
Before Developer
NOM
22
Developer:
• Included $1.5 million payday based upon IL occupancy
Overall Board:
• Moving forward but…
FC Chair – “I studied the model for a couple of weeks and
don’t know if we can and should do it.”
CFO – Not sure but ok with Developer, CEO & board
driving process…focused on transactions.
Building Committee
• Not certain, but have spent $1.3 million in predevelopment
costs and mounting (14 mos)…Developer $12,000/month.
23
We were contacted by FC Chair
• Are the model/projection and overall approach reasonable?
• Is there enough market for a dedicated a short term recovery unit?
• What are some alternatives to the master plan?
• What are the economic impacts of alternatives?
• Are moving too upmarket.
• What do we look like after we are finished?
• What flexibility will we have going forward?...What are the
risks at that time?
• It feels like we have no “dry powder” left
24
25
26
What we determined by review of existing model:
• Model assumed 100% of entry fees from pre-sales available to
pay down CL three months after project completion
• Potential cost of swap buyout on current debt was not
considered
• Key operational assumptions (e.g. staffing, etc.) used historical
ratios despite product mix change for SNF & programmatic
changes.
• Cost inflation was homogenous across the cost spectrum at
2.75%
• Revenue for short term recovery stays the same as current
• No assumptions upon dining costs for “cook to order” in rehab
center.
27
What we determined: cont’d
• Duration of stay not considered in determining occupancy for new
rehab and wellness center
• Pop flow data not employed
• Once project is complete, remaining product (50% of revenue)
would average 22+ years of age.
• Increased entry and monthly fees for new product targeted a
meaningfully different demographic.
In alignment with mission
PMA had to increase to satisfy demand
• Technology needs not assessed as part of project (e.g. resident,
nurse call, etc.)…New auditorium…
28
What we did:
• Formulated a monthly model for a 7 year period
• Discretely modeled each project component of the master plan in terms
of:
Timing and total construction finished costs
Unit volume & timing of projects
Staffing ratios and mix of RN, LPN and CNAs
Assumptions for support staff increases
Pharmacy utilization & average cost
Dining raw food and staff costs by venue
Programmatic changes (e.g. wellness and memory support programs)
Occupancy
Payor mix
Duration of stay
29
What we did: cont’d
• Discretely modeled each project component of the master plan in
terms of…
Level of “maintenance” capital post expansion/replacement
Obtained estimates for population flows by care level (new & old)
CL costs and perm (Fixed and Bank) financing mix and costs
Loan conversion costs
Technology “plug”
Pricing – RUGS, CMI, monthly and entry fees
Increase in fellowship/resident support
30
What we did: cont’d
• Discretely modeled means:
Incremental P&L, Cash and SFP for each component of the
project
• Performed sensitivity limit analysis – Construction costs, unit scope,
occupancy, pricing, cost of capital (fixed and variable mix), Rehab center duration of stay
relationship to demand required to achieve desired occupancy;
NOM 9% -- DSCR 1.50 -- Days Cash 225 -- Cash/Debt >= 45%
31
What we did: cont’d
• Performed a study of likely demand based upon hospital DRG
codes, adjusted for age and increased utilization of procedures.
• Need to increase market share by 11 – 23% to achieve
targeted/stabilized occupancy.
• Dependent upon length of stay & growth of HH
• Reviewed the model in detail with the CFO so she could “own it”
• Determined two quarter “trip” for DSCR for existing debt
32
Expected values after reviewing input (independent
operational) assumptions and outcomes in detail with the
management team… ( 5 year)
2.11
1.56 1.49
Before Developer Revised
DSCR372 367
287
Before Developer Revised
Days Cash
103%
48% 45%
Before Developer Revised
Cash to Debt
10.9%
15.2%13.4%
Before Developer Revised
NOM
33
Expected values after reviewing input (independent
operational) assumptions and outcomes in detail with the
management team… ( 7 year)
2.11
1.56 1.491.36
Before Developer Revised 7 Year
DSCR
34
Outcomes - cont’d
• Based upon assumed cost of capital and relatively low entry fees
DSCR would decline to 1.32 – 1.36 in year seven unless average
entry fees for existing product were increased by 5-7%.
• Not enough EF turnover for debt level
• Capital spending for annual maintenance would need to increase
to $4.0-4.2 million irrespective of new/renovated product based
upon age of remaining product
35
Risks Identified:
• Regulatory framework for STRS
• Reimbursement increases well below historical internal
inflation
• Quality improvement requirements – vs now
• Demand (internal and external)
• Growth of home health
• Duration of stay
• “Bunching” of patient turnover
• Prospective product/market needs and preferences
• Building a “lifestyle center” but programmatic changes not
discussed
36
Risks Identified:
• Marketing capabilities
• Reactionary approach – Little outreach
• Brand awareness
• Thought of as a nursing home
• Old product
• Vacated units not refurbished until contract in place
• Blunt pricing
• Clinical “specialties” not discussed
• Process and competencies
• Clinical
• Wellness
• Resident life & transition management
37
Risks Identified:
• Replacement of old product
• Capital requirements
• Targeted product
• Home health providers on campus
38
What we recommended:
• Formulate rebranding and related marketing effort
• Identify presenting conditions of specialty
• Target key decision makers for rehab (orthopedic and cardio)
• Focus on why existing IL product not selling
• Develop disincentive for residents to move from old to new IL
• Reduce size of IL expansion
• Eliminate underground parking
• Modestly reduce entry fees for new
• Expand array of contract types
• Reduce non revenue related capital $ (maint & admin offices)
39
What we recommended: Cont’d
• Consider reduction of rehab center bed size
Train staff on MedA documentation and coding
Review processes, (Co-morbidities, initial assessment,
pharmacy, MDS, Social Worker, etc.) within the context of 11
- 14 day stay.
• Consider home health services
• Demolish “old” cottage product and build duplex
neighborhoods with garages in sets of 26-28 unit
neighborhoods
High occupancy and demand for this product
Entry fees expected to pay 80% of construction
40
What we recommended: Cont’d
• Refurbish vacated units to a standard
Then have resident pay for desired changes
• Formulate care quality scorecard and target desired
improvements
Unique to targeted specialties
Implement/reinvigorate QAPI program
• Utilize actuarial resource
New entry pricing, funded status, pop flows and new rev rec
• Upgrade talent in the finance function
CFO
Controller
41
What we recommended: Cont’d
• Upgrade capabilities in Marketing
Personnel & Org design
Formulate marketing/advertising campaign
Know your market & how to reach them
Ability to “close”
Disaggregate pricing
42
So what were the expected value outcomes based upon
revised project scope?...
1.49
2.56
Revised New Scope
DSCR
287
335
Revised New Scope
Days Cash
Note: end of year 5
43
So what were the outcomes based upon revised project
scope?...
13.4%
12.1%
Revised New Scope
NOM
45%
55%
Revised New Scope
Cash to Debt
44
45
What are the key “learnings” from this example?...
• Where is the CFO/CEO?
• Strategy
• Momentum
• A SME Developer
• Other? – Begin with the end in mind
46
What is missing?...
• Needed competencies/internal GAPS
• Process implications
• Product and brand extension
• Little discussion of product vision
• Low capital ways to leverage and extend services
• No alliances---a stand alone strategy
• Modeling of next steps
47
Example Two: The Context
• Faith based single site CCRC, type A contracts
• Master Plan has been cast
• New larger SNF with increased reliance upon
• Direct admits and short term recovery stays
• No market study for SNF & understanding of impact of reg
changes
• Hybrid homes for IL = expansion
• Memory Support expansion
• New wellness and activity center
• New dining venues
• Many IL cottages and tower with an average age of 27 years
48
Example Two: The Context – cont’d
• Post projects – capital constrained
• Strat plan done fairly quickly
• CEO and Developer had a strong bond (very articulate)
• Developer modeled all scenarios – SNF “go big or go home”
• Worked with board/CEO on all incremental decision making
• Green, Yellow, Red
• CFO – multiple requests for “the Model” but
• 2 years into projects receives model
• CFO & Consultant review model and find material errors and
omissions….Now what?
49
15%96%
4%
Questions?
50
Thank You
www.walkerhealthcarecpas.com
rfisher@walkerhealthcarecpas.com (540) 772-2709
C: (804) 937-3138
51