David B. Ferguson

Since I last wrote about ABHOW’s response to the recession, the economy has continued to falter. Our residents and employees feel the impact of the downturn. Naturally, all of us are concerned. So I want to share the latest information on how we are doing as a company.

Thankfully, we are weathering the storm. While our investments have suffered with the market, ABHOW is still in a strong position. We are not over-leveraged. Our debt coverage is above loan covenant requirements, even with planned increases in interest expense as campus expansions open at Judson Park in Des Moines, Wash., and San Joaquin Gardens in Fresno, Calif. We have positive working capital. Additionally, we do not depend on investment income to support operations or to provide positive cash flow. Our operations generate the revenue necessary to sustain our mission, and we forecast this to continue. Furthermore, our corporate reserves were $55 million at the end of February – our first line of defense in tough times.

Nevertheless, we are monitoring operating expenses and looking for efficiencies that reduce unnecessary cost. The executive directors of our CCRCs, which generate the greater part of the company’s revenue, understand the importance of good financial oversight. They manage to their operating and capital budgets and provide frequent financial reporting on actual performance to budgets. They closely monitor occupancy, one of the most important barometers of financial health in the senior living business, and they take corrective actions when occupancy dips below the budgeted goal. Occupancy affects not only operating revenue but also entrance fee flows, the primary funding for capital expenditures.

When the real estate market climbed in recent years, we were conservative in forecasting revenue. Most of our CCRCs did not inflate entrance fees to match the rise in home prices, as did some of our competitors. So our pricing is not out of balance with the market now that home prices have dropped precipitously. We have been able to keep resident monthly rate increases at or below five percent while making significant capital and program improvements at our communities. 

We recognize that many residents have seen sizable reductions in the value of their assets. Yet in spite of the challenging investment market, we continue to attract residents because our communities offer a unique lifestyle that meets physical, social, intellectual and spiritual needs. We expect to continue to attract new residents in the months ahead, but we understand that the decision-making process to move into our communities may require longer timeframes.

To guard ABHOW’s positive financial position, we are doing extra contingency planning as we develop our budget for 2010. We are identifying a range of potential changes – in our business operations and the larger economic and legislative arenas – that could negatively impact our strong financial position. Based on the likelihood that one or more of these negative conditions occur simultaneously, we are planning measured responses for these scenarios. For instance, cutbacks in federal funding or significant declines in occupancy would require an offsetting corrective response. We are identifying non-labor areas for cost-savings and discussing new ideas for stimulating increases in occupancy. Scenario planning helps us think through our options. We are striving for continued strong performance by taking moderate action now. And we are planning for the worst-case scenarios.

I will continue to keep all of our stakeholders apprised of the company’s financial strength and cost-saving measures. For now, I want our employees to know that our strong position is due to their diligent efforts and their good stewardship of our resources. And I want our residents to know that our primary objective is to deliver the highest quality services and care. This goal will continue to guide our work as we face this challenging economic environment.

David B. Ferguson
President and CEO