S&P: Senior Living Nonprofits Stable, But Proof Will Be in Occupancy

Despite mixed financial results, the not-for-profit senior living sector remains stable as it juggles expense pressures to boost occupancy, a Standard & Poor’s (S&P) report finds.

Median ratios for the sector were mixed in 2013, with weaker operating and excess margins offset by balance sheet improvements, particularly liquidity.

“Organizations’ cash balances are the strongest they’ve been in some time, and cash relative to debt has improved significantly,” said Ziegler Senior Vice President Amy Castleberry. “We like seeing the increase in debt service coverage in the report, undoubtedly boosted by the rebound in occupancy the industry is experiencing.”


The trend of weaker margins is expected to wane over the next several years, as providers continue to leverage improvements in the U.S. economy and housing sector and focus on achieving stronger revenue growth.

“We still feel it’s an overall stable situation, but until the industry can see occupancy levels improve to a much stronger level than they are today — based on some of the ramped up expenses that they’re utilizing — I dont think we’re going to see the operating side improve to a level we’d like to see it improve to going forward,” said Brian Williamson, director of U.S. Public Finance at S&P.

Occupancy Levels Remain a Risk and Opportunity 


Revenue growth will be difficult without occupancy levels in excess of 90%, S&P says. While occupancy levels have improved from post-recession lows, they still need to increase in order to provide “meaningful revenue growth.”

“We continue to view occupancy rates, particularly for independent living units (ILUs), as a continued credit risk for the sector, but also an opportunity for meaningful revenue growth if rates can be sustained between 90% and 95%,” the credit ratings agency writes.

For the senior living sector, rating agencies such as S&P and Fitch analyze organizations based on a number of factors, including occupancy levels, the experience of the management team, the level of cash reserves relative to the amount of long-term debt, the amount of liquidity and the ability to generate cash to pay annual debt costs, according to a 2010 industry report.

Senior housing providers with publicly traded debt may seek and receive a credit rating from an agency, though not all choose to be rated. S&P rates both for-profit and not-for-profit organizations, though this report is based on the findings of 49 reviewed not-for-profit obligors, two of which are no longer rated.

For S&P, the impact of occupancy levels on revenue growth doesn’t come as a surprise.

“It’s something we saw last year and it’s been something that’s been challenging the industry overall,” Williamson said. “Occupancy levels had dipped down after the economic recession. Now, from our findings, what we’re seeing is organizations taking steps to try to draw seniors into their facilities. They’re having to build up the expense base and expectation for occupancy growth, which in turn, over the long term will help the organization out.”

Expense Pressures Challenge Nonprofit Sector

One of the key findings in S&P’s Oct. 6 report details the balancing act for nonprofit providers who are focusing on increasing occupancy levels, but in doing so are boosting expenses in the short term.

“The challenge to be more cost efficient while needing to increase spending in areas such as sales and marketing will continue to hamper the industry,” the report states. “Providers are strategically increasing the operating budget in the hopes that it will help to improve ILU occupancy and in turn, the revenue base.”

Much of the expense pressures comes from increased sales and marketing efforts meant to refurbish and re-market vacated units.

Many organizations have struggled with higher-than-expected turnover of residents, and thus their units have remained vacant longer than usual. This has forced providers to step up their sales efforts and invest capital to remodel the units to make them more marketable to prospective residents.

“The expectation is that organizations can A) enhance their campuses by doing capital spending or sprucing up the amenities that they have and B) as they bring out a much stronger marketing or sales force to draw more people to the organization, they should start to see occupancy levels up, which in turn should grow the revenue base overall,” Williamson said.

As occupancy levels rise within organizations, these expense pressures should drop off slightly, although providers will still have to maintain a strong sales and marketing team, and will need to continue to refurbish vacated units.

“We agree that the need for ongoing capital investment to reposition, renovate or expand communities will be an ongoing challenge for the sector,” Castleberry said. “Organizations must remain attractive and competitive. Fortunately, lenders are active and borrowing costs are near all-time lows for a wide range of financing vehicles.”

Ratings Outlook: Upgrades Outnumber Downgrades

Some S&P-rated communities have seen success recently, receiving an upgrade in their credit rating from S&P.

Greenspring Village Inc. went to “A” from “A-” based on consistently high occupancy for its independent living units as well as favorable financial metrics.

Both Front Porch Communities & Services and Westminster-Canterbury Corp. upgraded to “BBB+” from “BBB”, reflecting their increased operating income and stronger debt service coverage.

These actions, among others, have put upgrades on pace to outnumber downgrades two-to-one for the third straight year.

In addition, Castleberry noted that nearly three-fourths of the S&P debt ratings carry a stable or positive outlook rather than a negative one, which “bodes well for the future.”

“Historically, right after the recession, we saw downgrades outpacing upgrades,” Williamson said. “I think it’s just a testament to organizations being able to navigate in this new world. So operationally they might be doing a little better or they’ve been able to maintain or build up their day’s cash on hand, and that’s where we’re seeing organizations receive upgrades.”

Written by Emily Study

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