Performance should be solid for nonprofit continuing care retirement communities (CCRCs) in 2017, with more pricing power able to offset challenges in areas such as labor, according to a new report from Fitch Ratings.
“I think the sector is in a good spot,” Fitch Analyst Jim LeBuhn, one of the report authors, told Senior Housing News. For the report, LeBuhn and analyst Gary Sokolow focused on the 2017 outlook for the CCRCs that receive credit ratings from Fitch. These CCRCs generally have a well-established track record.
After taking a big hit in the economic downturn, nonprofit CCRCs—also known as life plan communities—now are seeing increased demand, LeBuhn said. This has led more of them to take on capital projects such as expansions and renovations. The next year should bring more of the same, given that a strengthening housing market and overall economic climate should keep demand strong.
“Fitch expects this spending trend to continue in 2017, driven by the strong demand for units, the need for a number of CCRCs to address older health centers or expand into memory care, and a relatively favorable capital market environment,” the report states.
The increased debt load could push some CCRCs into credit downgrade territory, but overall Fitch believes that expansion or repositioning projects help with CCRCs’ long-term viability. And revenues should stay strong, given that CCRCs have increased pricing power with regard to entrance fees and monthly service fees.
Those revenues should help offset “ripples in the water,” LuBuhn said. One such ripple is that lower unemployment and a stronger economy already have created a tighter labor market, putting organizations under wage and benefits pressure.
California is one location in particular to look for these predictions playing out, LeBuhn said
“California is a market that held up well through the recession, and with the improvement in the economy and with real estate prices out there, and the population density, we think some expansion projects just make sense,” he said.
The Trump Factor
The incoming administration of Donald Trump, combined with a Republican-controlled Congress, does put one big question mark over the nonprofit CCRC sector, the report states.
Specifically, the prospect of the Affordable Care Act (ACA) being repealed and replaced now seems likely. CCRCs could be affected in certain areas, such as long-term skilled nursing care and short-term rehabilitation, both of which largely are reimbursed by Medicare and Medicaid.
“While Fitch will monitor developments, the improvement in overall occupancy over the last several years, stronger pricing flexibility, and sound expense management should help mitigate the near term risk of a change within skilled nursing and rehab services, including Medicare reimbursement,” the report states.
The CCRC report came shortly after Fitch provided a similar “stable” 2017 outlook for equity real estate investment trusts (REITs), some of which own CCRCs and other senior housing properties.
Written by Tim Mullaney