Fitch Ratings has completed updates to its ratings criteria for not-for-profit continuing care retirement/life plan communities (CCRCs), enhancing the reflection of the risk profile for these rated entities. These changes come after a period of commentary on a draft released earlier this spring. The criteria modifications aim to more accurately represent the distinct risks associated with CCRCs. The updated ratings guidance is available here: RPT_2024-08_10280075
The final report indicates modifications in the rating methodology, including a more detailed approach to evaluating the revenue defensibility of a CCRC, as stated in a press release from Fitch. This method entails a more focused approach to rating CCRCs with a higher number of skilled nursing facility beds compared to independent living units. The industry trend (upcoming post) has been to move toward fewer SNF beds or in some cases, to eliminate SNF beds (I don’t recommend).
The rating factors that are used to produce the final Issuer Default Rating (IDR) are summarized below.
Revenue Defensibility: This involves evaluating a CCRC’s vulnerability to demand fluctuations and its ability to manage changes in occupancy and cost pressures via pricing adaptability. Fitch reviews the characteristics of the market area where the community is situated, taking into account the degree of direct and indirect competition, economic and demographic elements, residential housing market conditions and tendencies, the community’s record of occupancy and waitlists, as well as pricing features, to assess the stability of revenue.
Operating Risk: The evaluation includes an analysis of a CCRC’s flexibility in operating costs, encompassing the predictability and volatility of expenses, along with current and future capital expenditures, and the capacity to manage costs over time. Fitch reviews the CCRC’s type of residency contract(s), focusing on entrance fee refund provisions, to determine its ability to control or recoup costs from residents for specific services, and to gauge the level of expenses tied to its business model.
Financial Profile: Metrics serve to assess the leverage and liquidity profiles of CCRCs within the framework of the borrower’s comprehensive revenue and operational risk profile. These metrics are appraised historically and prospectively; the forward-looking evaluation accounts for a CCRC’s total financial adaptability to endure a stress situation across a five-year period.
Asymmetric Additional Risk Considerations: When assigning a rating, risk factors like debt structure, management and governance, as well as legal and regulatory risks are taken into account. These risk factors are not quantified; rather, it is the weaker characteristics that influence the rating.
Below is an example of a Key Rating Indicator for Fitch, Revenue Defensibility, and how it breaks out. (NOTE: this is not the full indicator breakdown as presented in the Fitch report, attached in paragraph one)
When Fitch initially proposed the ratings changes, it estimated 10% of the country’s not-for-profit continuing care retirement / life plan communities could be affected by the changes. The final analysis suggests that 12% of the country’s not-for-profit CCRC could find themselves ‘under criteria observation’ within five business days of criteria publication (per Fitch).
For the past two years, Fitch has issued the caution (outlook) that CCRC economic and operating conditions should be classified as “deteriorating”. In 2022, Fitch’s outlook for the industry was “neutral”. My post on the 2024 Fitch outlook is available here https://rhislop3.com/2024/01/11/fitch-2024-oulook-life-plan-ccrc-communities-non-profit-hospitals-deteriorating/
A good companion piece is available from McKnight’s – Fitch offers bleak outlook for life plan communities for 2024 (mcknightsseniorliving.com)
TGIF! Enjoy the weekend!
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