Annual Report for Fiscal Year 2018

As a ministry of the Evangelical Covenant Church, Covenant Retirement

Communities celebrates God’s gift of life in Christian community. We

follow the Great Commandment to love and serve God and one another

as taught by Jesus Christ. That compels us to affirm the dignity of each

person and to pursue excellence and financial integrity in all that we do.

As we provide a broad range of resources, services and programs

to enhance individual and community wellness, we collaborate with

residents and families to achieve the best possible results. While seeking

to foster independence, we respond to each individual’s evolving needs

in order to provide the security that assures peace of mind.

Creating joy and peace of mind

Our Mission

2 COVENANT RETIREMENT COMMUNITIES

Contents

Table of Contents 5

2OUR MISSION

Creating Joy & Peace of Mind

8OUR VISION

From the President

12COMMITTED TO MISSION

The Year in Review, Part One

20POSITIONED FOR SUCCESS

Report on Finances

6OUR PASSION

From the Board of Directors

10OUR GOVERNANCE

Leadership and Boards

16INVESTED IN GROWTH

The Year in Review, Part Two

18 ENGAGED IN COMMUNITY

Report on Community Benefit

A s you read this annual report you will see that one of

the themes for the past year at Covenant Retirement

Communities has been investment. Why this theme?

Investment is something we do to express our passion, to embrace

what is most important to us. We invest in education for ourselves

and our children. We invest our time in friendships and causes that

are dear to us. We invest our financial resources in what we most

value. Investment signals passion.

As a longtime board member of Covenant Retirement

Communities, I have seen firsthand that this is an organization

that passionately invests in creating secure, engaging, inspiring,

and compassionate Christian communities. We as organizational

leaders are always asking ourselves how we can create

communities of abundant lives for our residents and staff. As the

pace of change in our society accelerates, so does our need to

adapt to the changing needs of seniors. And that is just what we

are committed to do.

This investment expresses itself in beautiful and safe facilities,

building a culture focused on service where staff and residents

can thrive, and innovating with new programs that enrich the lives

of those we serve. Investment has also meant building a team of

leaders and professionals who are national experts in the field of

senior living.

What motivates us as board members and leaders of Covenant

Retirement Communities? This work is personal for us. Our

communities care for our own family members, close friends,

and people we love. And this is the work we are called to do—to

model the compassion of Christ on a large scale so that each

person we serve experiences love and care in a deeply individual

and personal way.

Although our roots go back over 130 years, we believe the best is

yet to come. We look forward to serving you.

Our Passion

MARK EASTBURGBoard Chair

6 COVENANT RETIREMENT COMMUNITIES

From the Board of Directors 7

Our Vision

8 COVENANT RETIREMENT COMMUNITIES

S enior living may not appear as fast paced as Silicon Valley,

complicated as NASA, exciting as Disney World or as

impactful as Habitat for Humanity. However, this is contrary

to what leaders, employees and residents say about Covenant

Retirement Communities (CRC). Senior living is rapidly changing

as it prepares for the “silver tsunami,” the largest 65-plus cohort

in U.S. history. Our industry is more regulated than nuclear power

plants, and the “customer” experience is vital as our residents live

with us and the work is more impactful as we serve an “extended

family of residents.”

This past year we have continued to focus on executing the right

strategies and action plans to assure CRC remains well positioned

to serve current and future residents through programs, services

and amenities that promote joy, peace of mind and a life of

continued purpose.

We recognize a great resident experience is the result of an even

better employee experience—every single day. Over the past

year we have identified and addressed key factors to improving

our staff’s experience through leadership training, creating a wage

and benefit strategy to improve our competitive advantage and

sustaining our commitment to Inspired to Serve, CRC’s customer

service framework.

Through the work of our Board of Directors, we journeyed through

a brand audit to evaluate consistency of CRC’s brand in relation to

our strategic vision. We are excited for the impact this study will

have on the future of CRC.

CRC’s strategic vision is transformational, exciting and hopeful. I

look forward to continuing to lead and serve Covenant Retirement

Communities as it strives to be the best place to live and work.

Please enjoy this annual report and God bless.

TERRI CUNLIFFEPresident

From the President 9

Our Governance

10 COVENANT RETIREMENT COMMUNITIES

MARK EASTBURG

Chair

MATTHEW MANLOVE

Vice Chair

SARAH BENTLEY

Secretary

JON AAGAARD, M.D.

PAMELA CHRISTENSEN

KARA DAVIS, M.D.

DONALD HODGKINSON

KURT KINCANON

ROBERT MARTIN

MARY PALMER

DALE RINARD

MARLENE STANTE

ANDREW VANOVER

Covenant Retirement Communities Board of Directors (2018-19)

JANET CREANEY

Chair

MARC ESPINOSA

Vice Chair

WALTER SCHILLER

GARTH BOLINDER

DONALD HODGKINSON

Covenant Retirement Services Board of Directors (2018-19)

Our Governance 11

TERRI CUNLIFFEPresident

JODY HOLTSenior Vice President of Finance

SCOTT MOOREExecutive Vice President ofCampus Operations

WILLIAM RABESenior Vice President of Enterprise Operations

DAVID ERICKSONSenior Vice President & General Counsel

JAY HIBBARDSenior Vice President of Sales, Marketing & Communications

ELIZABETH MCLARENVice President of Health Services Strategy, Programming & Health Network Integration

FRAN PALMASenior Vice President of Digital Strategies

MICHELLE KOZLOSKIVice President of Human Resources

Committed to Mission

12 COVENANT RETIREMENT COMMUNITIES

T he past year has been full of exciting interactions,

countless activities, and strengthening relationships

among the 5,000 residents and nearly 3,500 employees at

Covenant Retirement Communities (CRC). This year we continued

to invest in our resident-centered service distinctive. We are

ignited by our mission which calls us to serve older adults, ensuring

they’re leading purposeful lives in a Christian environment. Our

employees are a daily reflection of the commitment to creating joy

and peace of mind for residents and their families by providing a

better way of life.

LifeConnect®

LifeConnect is the whole-person wellness partnership, providing a

framework for staff to partner with each resident on their wellness

journey. LifeConnect was developed by CRC to provide resident-

directed wellness focused opportunities within eight dimensions

of wellness. The need for relevant conversations around health

and wellness is increasing in consideration of societal changes in

health and mortality trends, as well as a continuing shift towards a

proactive lifestyle.

CRC is responding to this shifting industry by refreshing

the LifeConnect philosophy and software to better partner

with residents for their wellness needs and preferences. The

LifeConnect refresh will provide greater opportunities for the

whole person wellness of each community through software

enhancements, expanded training and additional resources at all

levels of care.

Singing in the community choirs, raising funds for employee

scholarships, helping immigrant families and even soaring through

the skies in vintage aircrafts are just a few of the LifeConnect

activities resident have enjoyed this past year. We are excited to

see how LifeConnect will grow and continue to enable residents to

live life to the fullest.

The Year in Review 13

Inspired to Serve

Inspired to Serve is a unique CRC initiative

that serves as our customer service framework

consisting of standards and behaviors related

to how we serve residents and interact

with one another. We regularly recognize

individual employees who have provided

excellent service to our residents or identified

a way to make their work more efficient

or effective. Our commitment to the small

details contributes to a larger shared goal of

making our communities the best place to

work, live and visit.

In 2017, a group of nine CRC employees

from campuses across the country were

honored with the first-ever Inspiration

Awards. The Inspiration Awards will be given

every 18 months and represent the following

categories of service excellence:

� Common Purpose Award—This award

is given to an individual who embodies

our common purpose of “creating joy

and peace of mind for residents and

their families by providing a better

way of life.” This individual inspires by

being an example for others in all four

Service Standards (Safety, Courtesy,

Responsiveness and Image).

� Safety Award—This award is given to

an individual who is inspired to serve

and inspires others by providing an

environment that uses training, reporting,

and analysis to foster a culture where no

one gets hurt.

� Courtesy Award—This award is given

to an individual who is inspired to serve

and inspires others by providing an

environment that is respectful, helpful, and

patient.

� Responsiveness Award—This award is

given to an individual who is inspired to

serve and inspires others by taking timely,

appropriate action with communication

and follow-up support.

� Image Award—This award is given to

an individual who is inspired to serve

and inspires others by providing a clean,

professional, and welcoming environment

for everyone.

2017 Inspiration Award Winners (pictured

above): Front row, from left to right: Ellen

14 COVENANT RETIREMENT COMMUNITIES

The Year in Review 15

Roth, The Holmstad (Image Award); Janel

Wirta, Covenant Village of Florida (Courtesy

Award); Maud Eglaus, Covenant Village of

Florida (Common Purpose Award); Margo

Bule, Mount Miguel Covenant Village

(Common Purpose Award); Back row, from

left to right: Patricia Dooley, Covenant

Village of Cromwell (Responsiveness Award);

James Harris, Covenant Village of Cromwell

(Safety Award); Adrian Ursache, Windsor Park

(Courtesy Award); and Tom Lane, Covenant

Village of the Great Lakes (Common Purpose

Award). Not pictured, Janette Getgen, Mount

Miguel Covenant Village (Safety Award).

SAIDO Learning®

SAIDO Learning, implemented within CRC

communities in 2013, is an opportunity for

residents with memory impairment to meet

with trained staff for structured sessions

focusing on simple arithmetic, writing and

reading aloud using materials developed by

the Kumon Institute of Education in Japan.

CRC staff or “supporters” engage with

residents three to five times a week in this

program in one-on-two settings for 30-minute

sessions. Some residents have increased in

engagement through this program.

C ovenant Retirement Communities

is committed to continued

investment in our strategic plan

which includes the pillars of service, growth

and optimization. The optimization pillar

implements ways in which we can operate our

business more efficiently and cost effectively

in areas that might enhance infrastructure or

service offerings to our campuses.

Over the past year, we have seen changes

in some key leadership positions. Jody

Holt joined CRC as our new Chief Financial

Officer. Prior to assuming the role of CFO,

Jody served as a member of the CRC Board

of Directors. During her initial months as

CFO, Jody visited every CRC campus and

invested a significant amount of time learning

about campus culture, the financial reporting

practices and current organizational structure.

An optimization strategy arising from those

visits was the implementation of financial

shared services across all CRC campuses.

Financial shared services optimization works

to eliminate the duplication of efforts,

integrate additional financial controls and

create efficiencies on how we track and report

on all of our financial business.

Providing the best resident and staff

experience is critical for organizational

sustainability in consideration of the

competitive and changing senior living

market. It is imperative to create a leadership

structure that supports campus operations in

Invested in Growth

16 COVENANT RETIREMENT COMMUNITIES

The Year in Review 17

the most effective manner possible while also

advancing CRC’s strategic and operational

initiatives. As part of this structure change,

Scott Moore recently joined CRC as Executive

Vice President Campus Operations. In this

role he will focus on key campus operations

such as dining, facilities management and

healthcare, as well as other areas related to

campus operations.

CRC has been evaluating our relationships

with consultants and vendors as an area

for optimization. We determined there is a

considerable savings to the organization by

internalizing some key initiatives that will

be of great benefit to CRC as we continue

our growth. To this effort, we’ve internalized

some key components related to marketing

and communications. CRC hired a creative

services director to manage the design and

layout of the many communication pieces

distributed to CRC stakeholders. This position

also coordinates the video team who are

charged with producing videos to help in

conveying messages to residents, staff and

the general public.

Communicating internally and externally

about CRC and its campuses is vitally

important in keeping people informed

about the organization, its initiatives, and

happenings across the country. These efforts

have been centralized with an internal public

relations and communications director to

work in collaboration with leadership across

the system. We’ve implemented consistent

monthly newsletters for employees and

embarked on public relations campaigns for

each campus and within the field of senior

living.

Marketing on a digital level is equally

important in promoting CRC campuses

and aiding in specific sales and marketing

endeavors. Through our in-house digital

team, digital tactics like retargeting,

geofencing, behavior targeting, search

and intelligent display, we are more certain

the right message is reaching prospective

residents and their families in the right place

and at the right time.

In the ever-changing, complex world of senior

living we know these types of investments are

already benefiting CRC residents, staff and

the financial viability of the organization.

O ur mission at Covenant Retirement Communities

extends well beyond providing services and care for

our residents on our campuses across the country.

Each campus is a valuable asset in the communities where they

are located, and we recognize that giving back to the greater

community is equally important. From our residents and staff

providing tens of thousands of hours of volunteer services in

schools, churches, charities and hospitals to making monetary

donations to local nonprofits and providing meeting space for local

organizations— it all adds up to significant community benefits.

Engaged in Community

18 COVENANT RETIREMENT COMMUNITIES

72,000Volunteer HoursOur residents and staff regularly donate their time and talents to support causes in our communities.

$ 150,000DonationsWe help support causes in our communities through sponsorships and other monetary contributions.

$ 2.53MSpace UsageMeetings rooms and auditoriums are available to community organizations for board meeting and gatherings.

$ 2.34MVolunteer ServicesOur residents and staff also contribute financially to support of a variety of charitable causes.

$ 7.07MCommunity EventsOur communities frequently host car shows, concerts, and educational events that are open to the public.

$ 5.70MBenevolent CareWe provide help to those residents who through no fault of their own no longer have adequate resources.

Report on Community Benefits 19

20 COVENANT RETIREMENT COMMUNITIES

O verall, total operating revenues

increased 4% primarily due to a

2% increase in routine resident

care and a 6% increase in ancillary revenue.

Operating expenses increased 4% largely due

to routine nursing expenses, administrative

and general expense and depreciation

expense. CRC’s Net Operating Margin (NOM)

of 5.89% is slightly less than the amount

reported in 2017 fiscal year of 5.95%.

Entrance fee income remains steady. There

were 366 reoccupancies in fiscal 2018

compared to 394 in fiscal year 2017. Net

reoccupancy proceeds totaled $60.6 million

compared to $61.8 million in the prior year.

Residential occupancy remains strong at

92.7%. Occupancy in assisted living is at 86%,

consistent with the prior year end and skilled

nursing occupancy has decreased from 88%

at the prior year end to 87%; however, payor

mix is trending better than the prior year.

Days cash on hand was 413 and significantly

better than the prior year (351 days at the

prior year end). This higher variance is largely

due to investment returns.

Fitch Ratings affirmed CRC’s rating at BBB+

with a positive outlook in January 2018.

Positioned for Success

366Projected: 379

372Projected: 350

Move-Ins■ Actual ■ Budget

Attrition■ Actual ■ Budget

CRC’s Obligated Group

Report on Finances 21

Residential Living Assisted Living Skilled Nursing

50

75

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92.8

0 %

86.0

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92.7

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100

Occupancy

22 COVENANT RETIREMENT COMMUNITIES

■ Nursing Services, 35%■ Administrative and General, 23%■ Dining Services, 16%■ Maintenance and Utilities, 12%■ Resident Benefits and Services, 10%■ Other, 4%

Total Revenues

5.89%FY2017: 5.95%

Operating Margin

■ CRC, 91%■ CovenantCare at Home, 6% ■ Sr Living Rental Communities, 2.5%■ Other, 0.5%

Cost of Resident Care

■ FY 2017 ■ FY 2018

Report on Finances 23

Fiscal Year Ended January 31, 2017 2018

ASSETS

Cash and cash equivalents $ 24,130 $ 18,182

Notes and accounts receivable, net 29,602 24,127

Board designated investments:

Benevolent care 56,625 68,356

Capital reserve 68,838 90,183

Other 83,027 99,622

Total board designated investments 208,490 258,161

Investments restricted under debt agreements 41,650 42,818

Property and equipment, net 579,981 552,226

Other assets 48,606 50,205

TOTAL ASSETS $ 932,459 $ 945,719

LIABILITIES AND NET ASSETS

Accounts payable and accrued expenses $ 27,604 $ 25,029

Long-term debt 371,093 359,626

Other liabilities 88,592 66,915

Refundable contract liabilities 83,276 92,457

Deferred revenue from entrance fees 295,722 302,169

TOTAL LIABILITIES 866,287 846,196

Net assets:

Unrestricted 53,437 83,391

Restricted 12,735 16,132

Total net assets 66,172 99,523

TOTAL LIABILITIES AND NET ASSETS $ 932,459 $ 945,719

OPERATING REVENUES

Operating revenues $ 261,659 $ 271,615

Amortization of deferred entrance fees 39,843 42,047

Total operating revenues 301,502 313,662

OPERATING EXPENSES

Cost of resident care 233,044 242,447

Interest expense 16,386 16,815

Sales and marketing 11,950 11,606

Depreciation and amortization 45,249 47,306

Total operating expenses 306,629 318,174

LOSS FROM OPERATIONS (5,127) (4,512)

NONOPERATING REVENUE (EXPENSE), NET

Investment income 22,340 32,413

Unrealized gains on derivative instrument 5,201 3,706

Contributions, net 124 1,450

Other nonoperating (expense) income (1,051) 71

Derivative instruments termination loss and interest expense (3,801) (3,291)

Loss on extinguishment of debt 0 (471)

INCOME (LOSS) 17,686 29,366

OTHER CHANGES IN UNRESTRICTED NET ASSETS

Net assets released from restriction for capital purposes 199 588

Net asset transfer to related organization (500) —

Total other changes in unrestricted net assets (301) 588

INCREASE (DECREASE) IN UNRESTRICTED NET ASSETS $ 17,385 $ 29,954

Covenant Retirement Communities is a ministry of the Evangelical Covenant Church. All faiths and beliefs are welcome. www.covenantretirement.org