Recently, owners of continuing care retirement communities (CCRCs) have been spending more money than usual to expand and keep their existing communities looking fresh.
In fact, capital spending for CCRCs in the United States has reached its highest level since the Great Recession, according to a new report from Fitch Ratings.
Median capital spending for CCRCs rose in 2015 for the second year in a row, hitting the highest level of spending since 2008, Fitch Ratings’ 2016 Median Ratios for Nonprofit Continuing Care Retirement Communities report says. Specifically, the investment grade median was 109.4% in 2015, rising from 106.6% in 2014. Those figures represent the level of capital spending as a percentage of depreciation expense.
“The bump in capital expenditure is reflective of higher demand and occupancy across the sector, sustained core profitability, an attractive interest rate environment, and greater confidence of management,” Emily Wadhwani, director at Fitch Ratings, said in a press release.
More expansions, renovations
There has been a noteworthy increase in CCRCs pursuing or considering major expansion or renovation projects in 2016, and Fitch anticipates that trend to continue in 2017, the report says. In general, capital plans are being undertaken to address unit mix, plant age or service offerings, due to an increasingly competitive landscape.
Investment markets were volatile in 2015, but investment-grade CCRCs still managed to post healthy numbers in terms of their core operating performance. The median net operating margin for these CCRCs fell only slightly, from 8.4% in 2014 to 7.7% last year.
Cash-to-debt numbers were impacted as investment-grade CCRCs financed their capital projects, though, with cash-to-debt declining from 75.9% in 2014 to 67.9% in 2015.
The steady recovery of the housing market—in the form of home prices rising, home sales increasing and mortgage delinquency rates declining—has been a major contributor to improved CCRC performance since the recession, the report adds.
CCRCs were hit hard during the recession, when many people had trouble selling their homes to finance their moves. Though this led to a rash of CCRC bankruptcies nationwide, CCRCs have been on the rebound in recent years.
As of Oct. 15, 2016, Fitch rated a total of 118 CCRC providers, 115 of which were included in the report’s median ratio calculations. Type A contract CCRCs currently make up 45% of Fitch’s median portfolio; 35% of Fitch’s median portfolio is made up of Type C contract providers; and 20% of Fitch’s median portfolio is made up of Type B contract providers.
Looking ahead
Fitch’s rating outlook for CCRCs is stable for the fourth consecutive year, the company notes in the report.
Despite weaker investment performance in 2015, Fitch’s rated borrowers have managed to achieve generally stable financial results. This can be attributed to healthy demand, as well as an ongoing focus on sales and marketing strategies that were perfected during the recession and housing downturn, the report says.
Additionally, many CCRCs have returned to stabilized occupancy levels as the housing markets and economy have improved.
The up-and-down markets this year and increased borrowing to fund renovations aren’t the only potential threats to balance sheet health—so are pressures around labor, skilled nursing census, and government reimbursements. However, CCRCs have been able to maintain stability by being more aggressive in their monthly service fees and relying gone demand for other services, the report says.
“Rating pressure will likely result from increasing leverage and project risk over the near term, and operating challenges, including reimbursement stress and labor expense growth over the longer term,” Wadhwani said.
Written by Mary Kate Nelson
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