Operational and financial health for life plan communities is projected to remain “relatively stable” in 2022 despite ongoing challenges — but certain economic conditions could derail that stability down the road.
That’s according to ratings agency Fitch Ratings, which on Monday released its quarterly Public Finance Rating Actions Report and Sector Updates. Of the 62 life plan communities Fitch rated during the quarter, the agency upgraded four and downgraded one; with 87.9% of the communities rated as “stable,” 7.9% rated as “negative” and 3.6% rated as positive.
On the whole, life plan communities have not seen average occupancy plummet quite as far as the rest of the industry amid the pandemic. But those communities are also adding census at a slower rate than the rest of the industry, according to a recent analysis from Ziegler.
For the remainder of the year, life plan communities are expected to see a stable operating and financial market as they boost occupancy and revenue. Limited Covid outbreaks have helped buoy occupancy growth, and at the same time, a healthy residential real estate market has translated to “consistent demand for retirement living,” the report’s author noted.
Fitch said it had resolved three negative rating outlooks in the second quarter.
Like the wider senior living industry, life plan communities are grappling with cost inflation in a variety of goods and services. Staffing pressures have also exacerbated these costs as communities have looked to fill gaps in their workforces by leaning on overtime and agency usage.
Communities have offset those costs by raising resident rates, and most of the life plan communities that Fitch rates have implemented increases well above the typical 3% yearly increase. Even so, “persistent wage and supply inflation may begin to have a negative impact on budgets,” the report noted.
Life plan communities are also uniquely exposed to home prices, given that residents often use their home equity to pay their entry fees and rates. Now that the housing market is cooling off, operators should take note of these trends, as they could dampen their ability to raise rates in the future if residents have less money to spend.
“Impacts will be especially severe if home prices slow or decline, which could extend the period of resales of vacated independent living units and have negative implications for occupancy,” the report reads.
Looking ahead, Fitch expects life plan communities will resume expansion projects put on pause during the pandemic. Although the agency expects such projects to create negative rating pressure, many of those projects will improve these communities’ competitive positions in the long-term, according to the report’s author.
“Lower rated credits, particularly those undergoing expansions are likely to face the most rating pressure, especially if there is a material escalation in construction costs that necessitates additional borrowing,” the report reads.
The agency also expects mergers and acquisition (M&A) activity to continue as cost pressures and competition fuel dealmaking over the next few years, with some in senior living signaling a recent shift towards buyers of distressed properties.
The potential shift in deal activity comes as signs of distress within senior living start to emerge, as evidenced by the Chap. 11 bankruptcy saga of nonprofit Christian Care Communities. The Dallas-based senior living provider will soon have a new owner by the end of the month after North Texas Benevolent Holdings, a venture owned by the McFarlin Group of Dallas, weighed in with a stalking horse bid of $45 million.
Senior living communities represented the largest portion of delinquencies reported by municipal bond issuers in the first quarter of 2022, showing it is “was the most poorly positioned sector to withstand the pandemic,” according to an April 15 report by Moody’s Investors Service.