As economic conditions continue to create headwinds for senior living, I thought this post was timely. Bottom-line: I’m seeing lots of single site and even a number of multi-site, small scale organizations struggling. Depending on their markets and their debt load plus cash position, surviving as independents could be a real challenge over the upcoming year or so.
The solid majority of CCRC/Life Plan organizations are non-profit. The industry is primarily comprised of single site organizations and/or small-scale, multi-site organizations (two to three communities, less than 1,000 residents total). While religious affiliated organizations remain plentiful, the overall number are declining. Further, the religious affiliations tend to be covenantal as opposed to direct financial connections or governance involvement.
Post-pandemic, the sector began to experience the negative effects of high inflation, supply chain challenges, rising interest rates, labor scarcity, and capital access issues. For smaller provider organizations without diverse revenue streams (non-occupancy driven) or other sources of support, financial pressures became weighty, pushing already modest margins downward and in some cases, depleting reserves. Rate increases have been hefty just to mitigate cost increases and, in some ways, to catch up with abated or deferred increases during the height of the pandemic.
In December of 2022, Fitch Ratings revised the sector outlook for Life Plan/CCRCs from “stable” to “deteriorating”. In July, Fitch’s second quarter report, confirmed the outlook – deteriorating. The December 2022 Press Release from Fitch 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
Of the 49 rating actions Fitch took in the second quarter, one was an upgrade, two were downgrades. The balance remained unchanged. Overall, 81.6% of CCRCs had stable ratings, 4.9% had positive ratings/outlooks and the balance, 12.9% had negative outlooks/watch ratings.
Occupancy increases have been consistently positive, moving back to (almost) pre-pandemic levels. What is negative for the sector is labor costs and supply costs. For some, sitting with variable debt, interest rate increases have challenged pricing models, forcing organizations to adopt rate increases higher than typical and more frequent than annual.
Per Fitch on second quarter Public Finance: “Conversely, labor challenges are the proverbial thorn in the side for public finance, particularly with regard to Not-For-Profit hospitals (two upgrades and six downgrades in 2Q23) and, to a lesser extent, LPCs (one upgrade against two downgrades in 2Q23). “After the most operationally challenging year on record for many in 2022, we still expect operations to improve slowly, although margins will likely remain below pre-pandemic levels for 2023.”
Principally, it is the uncertainty of economic recovery that is driving mergers and affiliations activity. Capital cost and access is vitally important for CCRCs as their need to continue to modernize and upgrade facilities, staying ahead of deferred maintenance challenges, is imperative to marketing and maintaining/increasing occupancy.
Labor challenges further place pressure on small and single site organizations. Scarcity of labor begets higher wage and benefit costs and, in some cases, reduction in operations and services (not enough staff to offer complete programming).
Organizations that have limited scale and capital to continue to expand, face the greatest risk of obsolescence and thus, deteriorating market share. A revenue model predicated on occupancy and rate creates revenue risk with limited opportunity for offset, save rate increases. While the sector has been fortunate to attain plus-inflation rate increases, the outlook for a continued steep rate increase environment is cloudy.
Factors that bode poorly for single site/small scale operators are as follows.
- Communal living environments often have older resident cohort groups with increasing frailty. Maintaining occupancy is thus a challenge to move the residents further along in the continuum or increase direct services. Both require staff, perhaps additional care staff.
- Offsetting cost increases requires new revenue, typically from rate or occupancy. For organizations that don’t have non-occupancy dependent revenue sources such as home health, hospice, pharmacy, adult day care, and other home and community-based services, additional revenue can only come from donations and increases in service rates.
- Single site and small organizations have difficulties achieving economies of scale. Size provides some additional leverage and opportunity to control overhead costs and/or to lever, overhead across more programs and services.
- The resources necessary to invest in new programs to meet new market demands, principally home care options and lifestyle residences are limited in single site and small system organizations.
- Capital access and affordability challenges limit provider ability to modernize plant, property and equipment and thus, present a deferred maintenance risk going forward. Outdated facilities lose marketability and negate opportunity for additional revenue via rate increases and/or fund development.
A decent article on the trend of consolidation and the driving forces for the ongoing trend of affiliation is available here: https://www.mcknightsseniorliving.com/home/news/business-daily-news/garden-spot-communities-frederick-living-announce-affiliation-noting-end-of-an-era-for-industry/