Continuing care retirement communities (CCRCs) have weathered Covid-19 from a relatively good position over the last couple of years — but looking ahead, there are questions as to whether that trend will continue.
Widespread cost inflation has pushed CCRC and life plan community operators to get creative to maintain margins, continue unit turnover as steadily as possible and identify efficiencies to cut costs. And that has worked thus far to tide them through some of the industry’s darkest days.
Ziegler President and CEO Dan Hermann said that CCRCs “as a whole are strong as they ever have been in history, with the strongest balance sheets with lowest average cost of debt.” But, he added, “those are the positives.”
On the flip side, there are still headwinds imperiling the industry’s future that are out of operators’ control. If, for example, expenses continue to rise and home values precipitously drop, that could affect CCRCs’ ability to bring residents through the door and drive healthy rates needed to maintain and expand margins.
In general, four main metrics can help explain the financial health of the market sector: occupancy, margins, expenses and unit turnover. And regarding each bucket, operators of CCRCs and life plan communities remain optimistic, with that sentiment being shared by organizations including Life Care Services (LCS), Mather, the Riverwoods Group and Three Pillars Senior Living.
“Our balance sheet allowed us to weather the storm of the pandemic,” said Riverwoods Group CFO Kevin Goyette. “The silver lining of all of this has been our ability to find efficiencies, share best practices and work together as a single system rather than a set of independent communities.”
But all this comes with the watchful eyes of the financial sector, with Chicago-based specialty investment bank Ziegler and financial services firm Fitch Ratings keeping close tabs on the financial viability and bond ratings of CCRCs and life plan communities nationwide.
Occupancy brings optimism
It’s no secret occupancy numbers for senior living communities took a massive hit during the Covid-19 pandemic, and operators have worked to rebuild gains lost over the last two-and-a-half years.
In an analysis of 99 NIC MAP primary and secondary markets from 2Q22 data, for-profit CCRC occupancy increased to 86%, which registered higher than the occupancy rate of non-CCRCs at 79.1%. That’s up from a low in the second quarter of 2021 that saw the CCRC sector bottom out at an average 84.2% occupancy.
Nonprofit CCRC occupancy across NIC MAP primary and secondary markets remained higher than for-profit entities with a rate of 87.3% in the second quarter of this year.
As CCRCs build back to its pre-pandemic average occupancy of 91.5%, those occupancy gains are a continuing source of optimism.
Mather has seen strong occupancy growth throughout the pandemic, CEO Mary Leary said, with its property in the Chicago area remaining hovering around 100%. The Illinois-based organization currently operates two life plan communities with a third under development in Tysons, Virginia.
“Our occupancy at our communities did not have a significant decline during the pandemic,” Leary said.
Based in Dousman, Wisconsin, Three Pillars Senior Living operates a single-site CCRC on a nearly 300-acre campus that has steadily grown over the years. CFO Jean Freuck said the community rebounded to nearly 100% occupancy since its pandemic lows.
“People are looking to come back to our facility again whereas during the pandemic they weren’t,” Freuck said. “We’re having strong interest.”
The Riverwoods Group manages three large CCRC sites in New Hampshire and has expanded since 1994. Across its communities, Riverwoods Group last reported occupancy of 97%, Goyette said.
Des Moines, Iowa-based LCS’ portfolio of 95 CCRCs recently returned to March 2020 occupancy levels of 84.9% over the last 18 months, said Senior Vice President and Managing Director of life plan communities, Allison Pendroy.
“I believe the value proposition of life plan communities remains strong and compelling,” Pendroy said. “In fact, the benefits of a life plan community remain consistent and are as strong, if not stronger than ever.”
LCS manages 135 communities and is the third-largest senior living provider in the country, according to Argentum’s latest Top Providers report.
Thin margins a ‘balancing act’
While occupancy is a bright spot for CCRCs in 2022, margins are anything but.
In 2022, cost inflation has driven up the cost of many goods, from food and equipment to labor and building materials.
In 2020 and 2021, many communities saw operating losses and margin contraction. While that was mitigated or softened slightly by pandemic relief federal funds, many communities are trying to tighten bottom lines to stabilize margins and return to a sense of normalcy.
At Three Pillars Senior Living, Freuck said the company relied heavily on PPP federal pandemic aid to offset revenue losses throughout the pandemic. The community most recently reported a $4 million overall operating loss after that aid stopped flowing.
“We’re weathering the storm with our balance sheet because we are just the right size and have strength in our organization,” Freuck said.
The Riverwoods Group, Goyette said, closely monitors cash flows in and out to view the balance sheet from a cash margin perspective. Its largest property is projected to generate about $2 million annually, but that figure has been tamped down due to the pandemic’s effects.
Revenue at its largest site is around $1 million. Goyotte said he hopes and is confident the company could return higher margins in 18 months’ time as companies move further from the pandemic.
“We expect to show continued improvement and within that end of that three year period, we should be back to where we were pre pandemic and then moving forward from there,” Goyette said.
Returning to its previous high watermarks in margins would be difficult without a drastic cut to services and a significant rate hike for residents, both of which aren’t popular with residents as the company strives for a margins “balancing act,” Goyotte said.
But many communities have had no choice other than to pass on higher expenses to residents in the form of monthly service fee increases or through rental rate increases, while some life plan operators, such as Mather, do not always take that approach.
“We typically budget to be at break-even after fees,” Leary said, noting that total costs of operating communities are covered fully by residents. That led to margins at Mather to remain “relatively the same.”
Expenses dampen expectations
Looking ahead, certain conditions could continue to imperil healthy margins in CCRCs. While the non-profit side of the sector has recovered since the start of the Covid-19 pandemic, higher expenses and lingering uncertainty have given Fitch Ratings pause about what lies ahead.
The ratings agency gave the non-profit life plan community sector a neutral rating for the remainder of 2022. Should higher wages, food prices and construction costs continue into 2023, life plan communities “may encounter resistance from residents to the substantial rate increases that may be required to offset the added cost pressure.”
“This, in turn, could pressure operating performance and negatively impact future demand from prospective residents,” reads an August report from Fitch Ratings. “Life plan communities that entered the pandemic with lower occupancy or those that have experienced a sluggish recovery in demand face the greatest budget stress and potential rating pressure,”
The median rating for 158 life plan communities monitored by Fitch Ratings is “BBB,” and it is also the largest rating category representing about 51% of the rated communities. A little less than a quarter of the organizations earned an “A” rating.
Slowing growth of home prices is also something for the sector to monitor, as many residents sell their homes to fund their initial entrance fees. Life plan communities have historically raised entrance fees between 2% and 4% annually, which will provide a cushion in the event of falling home prices, the Fitch report’s authors noted.
At LCS, Pendroy said community-specific inflation was “trending very closely” to the current consumer price index (CPI) inflation rate of between 9% and 10%, and in-turn outpacing the rate of revenue growth, she added.
“While we continue to seek and implement cost saving measures where possible, we do believe a significant portion of today’s elevated expenses are permanent resets and here to stay,” Pendroy said.
Operators that spoke with Senior Housing News all said labor and staff benefit costs made up over half of their operating budgets. And those higher staffing costs are expected to be the new normal as operators including Mather and the Riverwoods Group raised minimum wage at their communities to $15 an hour. While that helps to attract and retain new employees, the expense pressure only continues to threaten bottom lines.
“We are looking to have probably our highest increase and monthly service fees in the past 20 years,” Leary said. “But we’re continuing to look at how we can operate differently and more efficiently, as we did during the pandemic, to minimize increase in expenses.”
Goyette said after the Riverwoods Group adjusted its pay scale, it saw an approximate $2 million annualized increase in staffing.
Some ways Mather is getting creative is through implementing time-saving tech, such as automated cleaning robots that vacuum communities or robots that deliver meals in restaurants. Leary said it allowed Mather to strategically place staff in the areas of greatest need and have fewer staff in certain departments, including dining services.
Providers also are still seeing sustained, elevated food prices, with Three Pillars Senior Living reporting a 20% increase in food costs, Freuck said. That forced the single-site operator to plan menus more closely related to pricing and availability of certain items while purchasing in-bulk where possible.
“It’s one of our highest concerns when it comes to expenses,” Freuck added.
Unit turnover remains steady, demand high
With occupancy rates high among life plan communities, operators are also seeing a steady rate of unit turnover as waitlists for communities become longer and signal significant demand for the CCRC sector.
Goyette said the Riverwoods Group’s unit turnover is relatively “normal,”, with its independent living units seeing about 40 units turned over in a year.
“Pre-pandemic it would typically take us 60 days to turn a unit from one individual to the next,” Goyette said.
While demand is high, that is sometimes hamstrung by the appliances or building materials needed to turn units around, such as cabinets or countertops.
“We’ve started to see times that were double, sometimes five or six months, due to the product of short supply and supply chain disruptions for materials,” Goyette said.
In turn, Goyette has prepared ahead for unit turnovers, evidenced by the company purchasing things like countertops, cabinets and windows in bulk for storage rather than waiting on materials that might encounter supply chain delays.
“It’s really a challenge to be able to work through all these pieces,” Goyette said.
Leary said Mather’s apartment home turnover remained “consistent.” Mather has also taken the approach of stockpiling appliances and assorted home improvement supplies to combat supply chain disruptions over the last two-and-a-half-years.
Turnover for Mather units ranges between 10 and 12 days for re-carpeting and painting as part of what Leary called “partial turns” while replacing appliances, cabinets and other hardware as part of a “full turn” took approximately 30 days.
For LCS communities, new unit turnover ranges between five and eight weeks on average, Pendroy said.
“Our scale and strong relationships with contractors and suppliers have helped ensure availability and consistency of labor and access to materials,” Pendroy said.
High occupancy combined with extensive wait lists at all three sites, Goyette is optimistic about the future ahead.
“There’s significant demand for our product in the marketplace,” Goyette added. “We still have a ways to go there and I think that is still going to take some time coming out of the pandemic.”
Leary also highlighted Mather’s growing 200-person waiting list for its communities, but stressed the next 12 months to three-to-five years could be a period of uncertainty for life plan communities going forward due to inflation and potential slowdown in the housing market.
“The wind has certainly been at our backs, really for the past decade with unprecedented low interest rates and a strong stock market and strong real estate market,” Leary said. “Mather typically sees concerns about the economy initially popping up in the Southwest.”
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