Operating performance and future demand for continuing care retirement / life plan communities could be significantly affected if inflationary pressures continue beyond this year, according to Fitch Ratings.
After a 2021 comeback from the pandemic showing “across-the-board improvement” in all ratings categories, not-for-profit CCRCs face challenges from inflationary and other macro pressures, according to Fitch Ratings’ Senior Director and US LPC Group Head Margaret Johnson. Those pressures included higher expenses, lower revenues and limited move-ins at the height of the pandemic.
“Pandemic-related pressures have evolved from healthcare and demand risk to risks involving expense inflation and staffing shortages,” Johnson said. “Life plan communities with a significant skilled nursing component, which tend to have lower ratings, are disproportionately exposed to wage and staffing pressures versus those that are predominantly independent living units.”
In its latest median report on 158 life plan communities within its portfolio, Fitch maintains a neutral outlook for the sector. The report noted that communities have been able to pass along higher costs for wage, food and construction through rate and fee increases.
But if inflationary pressures persist beyond 2022, CCRCs may encounter resistance to those rate increases, which could pressure operating performance and future demand.
CCRCs “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, as these issuers may not have the luxury of increasing fees to cover rising expenses,” the report reads.
According to the report, 2021 core operating metrics showed mixed results due to lingering pandemic-related expense escalation. But the sector saw overall recovery in liquidity, operating and capital-related metrics last year.
That improvement was attributed to Paycheck Protection Program loan forgiveness, an accelerated sales pipeline supported by favorable demographic trends, and a significant increase in demand and independent living occupancy.
Fitch also said it is watching potential financial market slowdowns, particularly real estate price growth. But the financial services company noted that although the nationwide annual home price growth peaked at 20.6% in April, CCRCs generally only raise entrance fees by 2% to 4% annually. Doing so allows the communities to maintain some headroom to absorb slowdowns in real estate values and maintain occupancy levels, according to the report.
Fitch’s US Life Plan Communities “2022 Median Ratios” are available on the Fitch Ratings website.
