Owning the Economics of Your

Master Plan

A Case Study

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Today

• Your perspectives

• How strategic & economic planning can go wrong

• What pitfalls to avoid

• A case study

• Where you are now

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15%

85%

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What do you think?Let’s take a moment to summarize…

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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)

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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

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CCRC current state – a look at the key ratios

$4.5

$3.2

CARF 50th Client

Annual Capital

CMS 3 Star Facility

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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

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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

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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….

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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

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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.

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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

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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.

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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…

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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

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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

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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%

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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

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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

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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

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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

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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

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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

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Risks Identified:

• Replacement of old product

• Capital requirements

• Targeted product

• Home health providers on campus

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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)

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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

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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

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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

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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

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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

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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

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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

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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

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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?

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15%96%

4%

Questions?

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Thank You

www.walkerhealthcarecpas.com

rfisher@walkerhealthcarecpas.com (540) 772-2709

C: (804) 937-3138

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