Low interest rates for new tax-exempt continuing care retirement community (CCRC) financings are coinciding with some rating agencies’ concerns regarding the senior living industry’s increasing average community age.
In the not-for-profit sector, interest rates for new campus financings are at their lowest levels since early 2008, according to Ziegler’s Senior Living 2013 Sector and Market Outlook.
Interest rates for other categories of senior living borrowers remain low as well, up just slightly from lows reached in November 2012 for rated and stable no rated borrowers.
“In our experience, the pool of institutional buyers participating in new campus financings and major repositioning and expansion projects has expanded over the past twelve months, and we expect that pool to remain active as investors seek higher yields,” writes Angela Larson, Ziegler’s vice president of senior living finance research and development. “Still, we expect these buyers to remain keenly focused on project credit characteristics, sponsorship, and deal structure.”
The not-for-profit CCRC stock is aging, with an average plant age of about 11-12 years, according to Ziegler. Providers need to maintain their older communities through capital expenditures and make sure they stay modern, ratings agencies agree.
“A provider’s reinvestment in plant is a key credit factor to maintain its vitality and competitiveness and keep its campuses marketable,” said a December FitchRatings Outlook Report on the nonprofit CCRC sector, for which it revised its ratings outlook from “Negative” to “Stable.”
As the average age of stock in this sector increases, there is a “need for greater capital spending levels over the next three to five years to maintain a marketable product,” says a Standard and Poor’s report cited by Larson.
In the past couple of years, provider focus has transitioned from carrying out small- and mid-size repositioning and expansion projects for all levels of cares and types of service in 2011, says Ziegler, to refinancing in 2012, which is likely to continue into 2013 as rates stay favorable, but at a slower pace.
“For 2013, we expect boards and managers to turn back toward project planning and execution to stay ahead of consumer expectations,” says the Ziegler Outlook. “We believe not-for-profit providers will turn more attention toward the growing competition from the for-profit provider side, which has been very active in 2011 and 2012 not only in strengthening and consolidating, but in developing new communities as well.”
Written by Alyssa Gerace