Fitch Improves CCRC Rating Outlook on Creative Marketing, Reinvestment

Creative, aggressive marketing plans and increased capital spending contributed to boosting Fitch’s ratings outlook for not-for-profit continuing care retirement communities (CCRCs) from negative to stable as median ratios for investment grade borrowers were mostly stable in 2012. 

“As in the years since 2008, management teams utilized tight expense controls, creative marketing plans, and better skilled nursing payor mix to maintain financial performance and occupancy in the face of an improving yet still challenging operating environment,” says Fitch in a special report on the sector, published Sept. 23, 2013.

Debt coverage remains solid in the sector, while capital spending increased.

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“Capital expenditures as a percentage of depreciation expense increased in fiscal 2012 reflecting greater confidence among borrowers in the latter part of the year in support of marketing activity and an improving economic outlook,” says Fitch. 

The ratings agency views the uptick in spending positively, as it should alleviate some “pent-up need” for physical plant maintenance following a decline in 2011. In 2012, capital spending as a percentage of depreciation equaled 91.5%, up from 86.7% the previous year. 

Marketing efforts in the nonprofit CCRC sector have supported better occupancy, despite limited economic recovery.

“As many communities struggled with soft occupancy, pressure on Medicare and Medicaid reimbursement, and other industry challenges, Fitch believes that management’s focus on maintaining expense levels and undertaking aggressive marketing strategies were key contributors to steady profitability levels in fiscal 2012,” says the report. 

Greater economic growth with an increase in real wages and reduction in unemployment will be key to return the sector to pre-recesion performance. The capital markets were more accessible in 2012, but new money borrowing remained light for the sector as capita plans were modified, postponed, or funded largely via equity, Fitch notes. 

“This ongoing trend is reflected in several levels of capital expenditures remaining below that of depreciation expense for several years,” the report says. “While the deal in necessary plant reinvestment may pose some concern over the medium term, Fitch notes that many borrowers benefitted from the better lending environment by reducing their exposure to variable-rate debt or other uncommitted capital during fiscal 2012.”  

While downgrades (five) currently outpace upgrades (two) within Fitch’s rated portfolio, 36 ratings were affirmed, and nearly 90% of Fitch’s Rating Outlooks were stable as of August 28, 2013. 

“As occupancy and housing challenges remain paramount, Fitch believes ongoing stable financial performance will depend on a community’s ability to control expenses in light of depressed occupancy and maintain steady cashflow through generation of consistent turnover entrance fees to cover debt service and reinvest in its facilities,” the report concludes. 

Access the full report. 

Written by Alyssa Gerace

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