S&P - Public Finance Criteria (2007). - The Global Clearinghouse

Health Careing procedures (financial and health-oriented) areanalyzed, but this may be most critical to life-careorganizations, which are essentially offering longtermcare insurance to residents.The Type B, or modified, contract typically offersthe same range of service levels and amenities as alife-care contract, except that the contract typicallyprovides only a fixed number of skilled nursingdays at no charge, with any excess utilization subjectto a full or discounted per diem charge. Thetotal number of fixed days can vary depending onthe organizations specific contract details. When aresident moves permanently to a higher level ofcare, he/she pays higher rates for that service level.Typically, entrance fees and monthly maintenancefees are lower for CCRCs offering Type B contracts,reflecting the substantial reduction of thepotential health care liability.The third contract type is the Type C, or fee-forservicecontract. Facilities employing this contracttype charge different rates for each level of care,and may also offer more services and amenities ona fee-for-service basis. Residents are guaranteedaccess to nursing care, but pay full per diem rates.Other features now offered by CCRCs are refundableadvance or entrance fees; with these contracts,the refund amount is negotiated in advance, and usuallytied to length of occupancy and/or resale of theunit. At this time, a 90% refund model is becomingmore common; entry fees under this type of contractare typically significantly higher than non-refundableentry fees, but the organization has limited ability tosignificantly build reserves after initial fill-up as subsequentresident turnover only generates limited cashflow. Refund policies, while fulfilling a marketdemand, add an element of risk. Strong actuariallydetermined reserves help offset these risks. BecauseCCRC providers frequently offer refundable advancefees as an option, more scrutiny is devoted to howmonthly fees are determined and subsequentlyadjusted, as well as the conditions for the entry feerefund (primarily whether it is dependent on unitreoccupancy). Even the refundable contracts that aredependent on reoccupancy usually have languagethat sets a fixed time frame for resale before therefund must be returned, typically up to one year.However, this concern is somewhat mitigated if anorganization has a history of strong demand and typicallyrefills a unit in a much shorter time frame.Financial PerformanceOne of the basic factors that determine financialstability is an organization’s ability to match its revenuesto its cost structure. In the senior livingindustry, one basic factor influencing this is thecontract type, as noted above. Additionally, a historyof monthly and entry fee rate increases as well aspricing philosophy are central to the analysis.Additionally, Standard & Poor’s examines the organization’scontracts and pricing methodology vis-àvisits ability to recoup the cost of providingservices. On the cost side, Standard & Poor’s evaluatestrends, particularly with regard to more recentpressures such as liability and workers compensationinsurance, and nurse staffing and other laborcosts. Finally, Standard & Poor’s will review theCCRC’s overall financial performance and projections.Key financial indicators include operatingand excess margins, revenue and expense growthrates, coverage of pro forma maximum annual debtservice, debt burden, and days’ cash on hand. Thesources and reliability of nonoperating income—including contributions, and endowment earnings—are also evaluated.Balance Sheet And Capital ProgramCash reserves and overall leverage measures play akey role in evaluating a senior living organization’screditworthiness. A solid balance sheet can offsetthe risk of the health care liability of a life-carefacility, for example, or earnings volatility related tocost spikes or occupancy pressures. Key debt ratiosinclude debt service as a percentage of revenues, thedebt-to-capital ratio, debt-service coverage, and thecash-to-debt level. A review of investment policies,asset allocation and endowment spending policiesare also examined. To determine whether the cashflows of the CCRCs are sufficient to meet thefuture health needs of the resident population,Standard & Poor’s will also review the most recentactuary’s report, with related assumptions.As in all revenue-bond analysis, Standard &Poor’s focuses on the structure of a proposed debtissue from an economic and legal standpoint toensure that the proposed structure is feasible inlight of the obligor’s existing financial performance,commitments, and debt capacity. Project-relatedfinancings are generally supported by an independentfeasibility study prepared by a consultant withextensive experience in the CCRC industry. In additionto the project that is the subject of the bondissue being rated, Standard & Poor’s evaluates anorganization’s strategic and financial plans over athree-to-five year period, including annual capitalspending as well as any significant upcoming developmentprojects or future debt plans. Standard &Poor’s incorporates to some degree any expecteddebt or spending that is planned to occur within aone-to-two year time frame, but also seeks tounderstand the longer-term strategic direction andplanned financial goals of the organization.164 Standard & Poor’s Public Finance Criteria 2007