Why Non-Profit CCRCs Should Expect a Sunny 2018

Not-for-profit continuing care retirement communities (CCRCs) are expected to perform well in 2018, despite the possible loss of a tax-exempt financing mechanism that they often utilize.

That’s according to a recently published report from Fitch Ratings, which details the credit rating agency’s 2018 outlook for not-for-profit CCRCs.

Capital spending among not-for-profit CCRCs rated by Fitch rose for a third consecutive year in 2017, the report notes, as multiple properties continued to pursue expansion, repositioning or renovation projects.

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Capital spending should remain strong in 2018, Fitch predicts, fueled by high demand for units, the need to update dated health centers, or expansion into or reconfiguration of memory care and assisted living programs.

It’s possible, however, that tax-free Private Activity Bonds (PABs) will soon be eliminated as part of the Republican tax reform bill. The elimination would raise borrowing costs and lower access to capital. Any downgrades are anticipated to reflect increased leverage, as debt is usually utilized to fund projects and construction, and fill-up risk would rise, Fitch notes.

Overall, though, the 2018 outlook for nonprofit CCRCs is stable.

“Most of the factors that supported the stable outlooks over the past several years—healthy independent living unit occupancy, solid operating profitability and favorable real estate markets—have remained largely unchanged and are expected to be sustained through 2018, supporting the stable outlooks,” the report says.

On the occupancy front, meanwhile, not-for-profit continuing care retirement communities (CCRCs) are currently faring better than their for-profit counterparts, according to a data analysis from the National Investment Center for Seniors Housing & Care (NIC).

Not-for-profit occupancy is presently at 92.3%, while for-profit occupancy stands at 87.4%. The 4.9 percentage points separating the two CCRC types is only half a percentage point lower than the biggest-ever gap NIC has recorded between the occupancy of not-for-profits and for-profits.

For its analysis, published Wednesday, NIC looked at the current third-quarter 2017 data for not-for-profit and for-profit CCRCs in the primary and secondary metropolitan markets tracked by the NIC MAP data service.

Overall CCRC occupancy has, for the most part, trended upward since the second quarter of 2013, when it hit a cyclical low of 89.5%, NIC says. Still, at present, overall CCRC occupancy is 20 basis points lower than its most recent high of 91.2%, which was achieved in the second quarter of 2017.

This specific drop in occupancy may be due to third-quarter 2017 inventory growth of 1,559 CCRC units, exceeding that quarter’s net absorption of 614 CCRC units, according to NIC.

Entrance-fee CCRCs, meanwhile, are enjoying higher occupancy than rental CCRCs, the data show. In fact, the occupancy gap between these two CCRC types is close to the biggest occupancy gap ever recorded.

As of the third quarter of 2017, entrance-fee CCRC occupancy totaled 92% and rental CCRC occupancy totaled 89.2%.

Though rental CCRC occupancy started trending downward during the second quarter of 2015, entrance-fee CCRC occupancy has hovered around 92% for the last eight quarters, NIC notes.

Written by Mary Kate Nelson

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