7 Ways to Judge a Retirement Community’s Financial Health

Reprinted in part from: https://www.nytimes.com/2018/03/09/business/retirement-community-financial-health.html

Retiring
By PETER FINCH MARCH 9, 2018

Here are seven key items to focus on when considering a community’s finances.

1.    Occupancy. If 90 percent or more of a home’s rooms are full — and have been that way for the past few years — that suggests it’s doing something right. This is especially important at C.C.R.C.s promising refunds, because you (or your heirs) often don’t get the money back until someone has moved into your old unit.

2.    Rate increases. Lately, most C.C.R.C.s have been increasing their monthly fees by about 3 to 3.5 percent a year, said Justine Vogel, president of RiverWoods, a New Hampshire retirement community. If you see anything above that, ask for an explanation. Similarly, if you find a home where monthly fees have remained unchanged for several years, it may be struggling to maintain its occupancy rate.

3.    Debt rating. Many communities issue bonds to fund expansions or other capital improvements, and Fitch Ratings evaluates them. Ratings of AAA to BBB are considered “investment grade” and should bring a measure of comfort to potential residents.

4.    Profitability. You want a community that usually brings in more cash than it spends. When looking at a retirement home’s financial statements, pay special attention to cash operating expenses as a percentage of cash operating revenue, suggested Amy Castleberry, a director at the investment bank Ziegler and a member of the Financial Advisory Panel of the Commission on Accreditation of Rehabilitation Facilities. A number below 100 means the home is generating enough cash to cover expenses. Communities whose debt gets an investment-grade rating from Fitch have a median score of 96.1 percent.

5.    Capital improvements. Is your community spending enough on its upkeep? One way to gauge this: Find the line for capital spending on its annual financial statement and compare this with the line showing depreciation. Ms. Vogel said she generally liked to see spending equal to at least 50 percent of depreciation, though she conceded that could be way too low if the community hadn’t spent anything in previous years. “You need to combine that info with a visit to the campus,” she said. “How does it look? Does it look like they haven’t replaced the carpet in a while? Is the dining venue outdated?”

6.    Reserves. Find out if the C.C.R.C. performs a regular actuarial valuation, which is a scientific study of its future risks and liabilities. The actuary’s report will give you a sense of whether the community has the reserves, income and cash flow to meet its promise of housing and health care for the rest of your life. You don’t have to read the whole report, said A. V. Powell, an actuary in Atlanta who specializes in retirement communities. “You want to know: Does the study say this community is in satisfactory actuarial balance?” Note that the report’s summary will reveal what kind of fee increases you can expect in the coming years.

7.    Residents’ role. How involved are residents in making major financial decisions? Do they have a couple of seats on the board or at least an active advisory council that works closely with management? “So many residents have extensive backgrounds in finance,” said Brad Breeding, a founder of the MyLifeSite service. “Is it being utilized?”