CCRC Margins Decline, Long-Term Outlook Remains Stable

Liquidity metrics and net operating margins at U.S. continuing care retirement communities dipped in 2018, driven by an increase in capital spending and a volatile equity market, according to a new report from Fitch Ratings.

Median core operating performance decreased to 5.9% in 2018, compared to 7.2% the previous year. Net operating margins, meanwhile, dropped from 5.1% to 3.9%, year-over-year. Fitch rated a total of 151 CCRCs through Aug. 31, and 142 of these were included in the calculations.

Despite the numbers, Fitch remained optimistic about the sector and offered a stable outlook moving forward. The New York City-based credit rating agency upgraded ratings for four communities, affirmed ratings on 44 more and noted that balance sheets remained stable as the drop in performance and margins were countered by solid occupancy numbers and overall operating profitability, Ryan Pami, director of U.S. finance for Fitch, told Senior Housing News.


Fitch’s majority of rating actions and outlooks — 79% — were affirmations.

Key liquidity metrics such as days cash on hand (DCOH), cushion ratio and cash-to-debt ratios all declined, year-over-year, across the ‘A’ and ‘BBB’ investment grades.

DCOH in ‘A’ rated CCRCs dropped to 638.3 days in 2018 from 852.8 days in 2017. The ‘BBB’ rating category median DCOH only fell to 464.8 days in 2018 from 478.7 days the prior year.


The decline in DCOH last year may be the result of larger CCRCs executing on expansion plans — particularly on the independent living component — and taking equity contributions to fund those expansions.

Courtesy of Fitch Ratings
Operating ratios at investment grade CCRCs across the U.S.

Pami sees this as a bump in the road. Demand for independent living continues to grow, which should bode well for occupancy and rates in the future.

“The expansion projects, over time, should actually prove accretive to [CCRC] overall financial and operating profiles,” Pami said.

The ‘A’ rated CCRCs were also susceptible to financial market returns given their larger, institutional-grade portfolios.

Median cushion and cash-to-debt ratios for the ‘A’ rating category decreased to 15x and 122%, respectively, from the previous year’s 17.2x and 146.7%. The median cash to debt within the ‘BBB’ rating category declined to 63.6% in 2018 from 72% in 2017.

Type A contract providers account for 36% of Fitch’s portfolio, followed by Type C contract providers with 28% and Type B contract providers with 21%. The median data by contract type also exclude the providers that offer rental or month-to-month residency agreements.

CCRCs received an overall favorable outlook in a separate report issued Wednesday by Marcus & Millichap.

Stabilized occupancy for CCRCs climbed to 91.4% in Q2 2019, representing a 40 basis point year-over-year increase, the Marcus & Millichap report noted. That is the strongest occupancy among all senior housing product types, and supported average monthly rent growth of 4%.

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