Post on 25-Jun-2020
transcript
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
jboland@rklcpa.com
Aaron M. RulnickManaging Principal
HJ Sims301.424.9135
arulnick@hjsims.com
Steve FetykoInterim CEO
734.433.1000 ext. 7511sfetyko@umrc.com
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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
Benchmarks/Key Performance Indicators
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• Conversion ratio
• Charge capture systems
• Other revenue sources
• Contracted services
• In-house vs. outsourcing
Benchmarks/Key Performance Indicators
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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
Benchmarks/Key Performance Indicators
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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
Benchmarks/Key Performance Indicators
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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
Benchmarks/Key Performance Indicators
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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
Benchmarks/Key Performance Indicators
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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
Benchmarks/Key Performance Indicators
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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)?
Benchmarks/Key Performance Indicators
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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
Benchmarks/Key Performance Indicators
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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
Representative Campus Repositioning Case Studies
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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
Representative Campus Repositioning Case Studies
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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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CRC Master Plan (2014-2019)
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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CRC Master Plan (2014-2019)
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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CRC Master Plan (2014-2019)
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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CRC Master Plan (2014-2019)
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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Chelsea Retirement Community
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Chelsea Retirement Community
Our Facilities60
Chelsea Retirement Community
Our Facilities61
CRC Master Plan (2014-2019)
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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CRC Master Plan (2014-2019)
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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Chelsea Retirement Community (CRC)Master Plan (2014-2019)
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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Chelsea Retirement Community (CRC)Master Plan (2014-2019)
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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CRC Master Plan (2014-2019)
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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