Stabilized financial performance and independent living occupancy have contributed to a brighter ratings outlook for continuing care retirement communities in 2013, but communities will have to make some capital investments in order to maintain that, says a new FitchRatings Outlook Report.
Fitch revised its ratings outlook for the nonprofit CCRC sector from “Negative” to “Stable” for next year to reflect continued stability in financial performance, and slight improvement in the “external forces weighing on the sector.”
Those external forces relate to the housing market, which is showing positive signs in many metropolitan statistical areas (MSAs), although some are still struggling with a backlog of distressed inventory and long liquidation timelines.
The improved housing market contributes to another factor that positively impacts CCRCs: Independent living occupancy that stabilized for the first time since 2008.
“Fitch expects IL occupancy to further improve in 2013 due to management’s marketing initiatives and increased demand from potential residents,” says the Outlook Report.
In 2008, following the economic downturn, many providers revamped their marketing strategies and implemented or increased their use of various initiatives, says Fitch, including promissory notes, price discounting, unit upgrades, or home staging assistance services to help sell units.
While many providers have scaled back their capital expenditures in the last three years to preserve liquidity, they may need to shell out and invest in their communities in upcoming years to remain viable.
“A provider’s reinvestment in plant is a key credit factor to maintain its vitality and competitiveness and keep its campuses marketable,” says the report. “Those providers that can consistently invest in their units upon turnover are viewed positively, which is generally not that costly as it usually includes painting and recarpeting.” A delay in capital reinvestment for modernization can negatively impact a CCRC’s market position, the ratings agency notes.
The CCRC sector has also benefitted from a “significant improvement” in access to capital after the lending environment for CCRC borrowers improved throughout the year, allowing many organizations to take advantage of low interest rates to refinance or borrow.
Other strategies providers have implemented to regain and maintain sector stability mesh well with healthcare reform.
“Providers have focused on expense control as well as revenue growth strategies, such as increasing short-term Medicare rehabilitation stays, and many have partnered with local acute care hospitals to accept transfers to skilled nursing units,” says the report. “Fitch believes this remains an area of opportunity for CCRCs as acute care hospitals continue to pursue partners in long-term care as they focus on a more coordinated approach to care for patients.”
Mature communities that are “well located” and have developed strong ties to and reputations in their service areas have helped move the sector toward stability in financial performance.
However, the sector’s performance is weighted heavily on the economy and housing market, leaving Fitch “cautious about the stability in the sector.” Outside pressures—including the effects of a sluggish economy, global financial issues, and housing market recovery—make nonprofit CCRCs vulnerable.
Written by Alyssa Gerace