In December of 2022, Fitch (credit rating agency) issued their outlook for the non-profit, Life Plan (CCRC) sector within the senior housing industry. Fitch outlooks are a primer for creditors seeking to determine lending scales for the upcoming year (bullish v. bearish).
The Fitch outlook for the sector was “deteriorating”. The basis for this negative outlook is two-part, soft economy/high-inflation and continued labor/staffing challenges. Fitch notes that while demand is decent for the product, rising commodity costs (food, energy, supplies) and staffing shortages pressure providers with staffing shortages, creating in some cases, an inability to improve census in care areas (SNF and Assisted). Fitch further notes that a dour residential housing market due to high prices and weak credit access (high rates, tighter lending) could suppress demand as real estate sales are often the genesis for a Life Plan move (sell the residence, use the proceeds for the entrance fee). Note: I have written multiple pieces on the connection between residential real estate and CCRC/Life Plan unit sales. My most recent article on this subject area was in May and is available here: https://wp.me/ptUlY-zJ
Fitch notes that for the short-term, fee increases have bolstered revenues and buffered losses. The difficulty, however, is to what extent can communities continue to charge fee increases above inflation (CPI) without a dent in resident satisfaction or a drag on marketing. Fee increase histories are often an important consideration point for new residents forecasting their financial means into the future. Most seniors have seen an erosion in their estate value (down 10% to 15%) across the prior eighteen months due to market contraction and interest rate volatility. A quick summary of the Fitch Outlook is available here: https://www.fitchratings.com/research/us-public-finance/fitch-revises-us-life-plan-communities-2023-sector-outlook-to-deteriorating-05-12-2022
The forward occupancy momentum has been steadily improving but the overall senior housing industry remains below pre-pandemic occupancies. According to the National Investment Center (NIC), second quarter occupancies rose slightly in all segment categories (housing, assisted, skilled, overall). Most gains were modest in the 30 to 50 basis point range but, this parallels the trend starting in third quarter 2022. What has aided the improvement, aside from pandemic recovery, is an almost zero growth in new inventory, just a touch above 1% for housing and zero percent for skilled (actually, a touch negative in terms of inventory totals). Demand is not yet robust but as it recovers, the option for housing remains primarily existing product vs. new construction. With capital access problematic in terms of cost and credit tightening, new inventory will remain slow to enter the market (not to mention, construction cost escalation as an additional factor). The NIC second quarter data can be accessed here: 2Q23-NIC-MAP-Market-Fundamentals-PDF
Looking at the remainder of the year, the two largest headwinds for Life Plan Communities (CCRCs) are labor and the residential real estate market. The housing market is worsening and could become nearly illiquid if the Federal Reserve decides additional rate increases are necessary to dampen (further) inflation. As a true home shortage remains, no new inventory is being created in the single-family market to speak of, housing prices will remain high. What does sell will do so at a premium. The problem, however, is that each tick higher in mortgage rates reduces prospective buyers (and further tightens credit). The inability to liquidate a primary residence creates a major impediment to moving to a Life Plan Community.
Labor stresses Life Plan Community fundamentals in two ways. First, in care facilities within the community, a lack of labor reduces bed capacity. For some communities, this is not a problem in the short run as overall capacity may be greater than necessary to care for contracted resident obligations. The knock here is fallow capacity reduces revenue and in turn, coverage on debt and cash coverage for overhead (depreciation funding, etc.). Making do with less-than-optimal capacity can be a short-run strategy but the effects, if continuing, create a compounding problem. Deferring maintenance and capital investment can lead to competitive disadvantages when the market does fully heal, such that sales are now negatively impacted by environmental wear and tear.
To date, Life Plan Communities appear to be able to move prices up a bit more aggressively than perhaps, historic. This is a one-time phenomenon, however, do to pricing lags that occurred during COVID. Most communities went soft on increases or abated increases all together during COVID when community amenity usage was constricted by pandemic policy. As staff costs increase, both to attract and retain, the source of coverage for the added costs has primarily been resident fees. Occupancy gains have been to slow to fully cover, staff cost increases plus additional supply and environmental costs. As Fitch notes, this places the sector in a “deteriorating” state as the drags on profitability, cash flows and coverage, are consistent and in some cases, accelerating (real estate market).
No doubt, the road ahead is bumpy for most. The best capitalized, the most stable from an occupancy perspective, with limited to no deferred maintenance, and smaller debt levels should weather the next six to twelve months of lackluster recovery, just fine. The more vulnerable providers may require other options to survive (affiliation for example).