Happy Hump Day! Yesterday, I wrote a post regarding the economy and elements that correlate to CCRC performance. In that post, I referenced Fitch Ratings and their “deteriorating” outlook for the sector. Interesting enough, on the same day, Fitch issued a comment that reinforces a deteriorating outlook for CCRCs. The quick comment from Fitch is here: Fitch Ratings 2024 Mid-Year Outlook: U.S. Public Finance Compendium
Fitch’s mid-year outlooks for the US public finance sector remain consistent. Continuing Care Retirement Communities (CCRCs) and higher education sectors have the highest proportions of negative rating outlooks, at 10% and 8% respectively, among the eight sectors monitored by the ratings agency. This year marked the second year in a row that Fitch has issued a negative or deteriorating rating outlook to the CCRC industry. Their January video summary of the original outlook is available below:
The issues mid-year remain the same, with slight worsening in some risk elements such as a recession possibility. “While Fitch expects demographic trends to continue to support healthy demand, decelerating real estate price growth and cost inflation are significant headwinds that will continue to stall the sector’s recovery. An increase in labor productivity and operating income along with positive equity and housing market performance could cause improvement in the outlook for the ‘deteriorating’ sectors,” per Fitch.
Fitch Ratings has observed that demographic headwinds may enhance the overall operating environment for CCRCs. Nonetheless, analysts anticipate that the sector will continue to face challenges throughout the remainder of the year. Other crucial determinants of core credit quality, such as slowing growth in real estate prices and the pressure of inflationary operating expenses, have not shown improvement from one year to the next.
The bearish residential real estate market adds complexity to the outlook, especially for entrance fee CCRCs. The demand for these environments is highly price elastic. The primary source of proceeds for entry fees remains net proceeds from the sale of the senior’s residence. While prices have held or increased on residential homes, buyers have gone scarce, creating longer time on market conditions. Liquidity of homes is being compromised which can create a trap for senior or alternatively, a force to lower selling price. Recognize, market conditions are very localized and not surprisingly, certain urban and suburban markets are exhibiting the slowest sale trends.
For interested readers, I have attached Fitch’s non-profit Life Plan (CCRC) rating criteria. It is a bit “finance” geeky but interesting if one has never seen how rating criteria is factored into final credit scores. Senior housing and care providers that offer assisted living and/or memory support services, along with skilled nursing care, will be rated under these criteria. The document is available here: RPT_2024-03_10260169