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Costs, Weakening Economy Point to ‘Deteriorating’ 2023 Outlook for Life Plan Community Sector

Stubborn labor costs and the potential for more distress in the U.S. economic landscape are leading to a worsening outlook for life plan communities in the year ahead, according to a new Fitch Ratings report.

While the influx of the baby boomer generation is expected to support the sector in the years ahead, other headwinds including decelerating real estate price growth, rising operating costs and labor costs will potentially imperil its growth and success in the short-term.

Among the trends Fitch identified as deteriorating for life plan communities are personal income and affordability; real-estate values; labor cost and availability; non-staffing operating costs; capital input costs and cost of debt.

“Fitch expects that these headwinds may stall the sector’s continued recovery following the coronavirus pandemic,” the report’s authors wrote.

Image courtesy of Fitch Ratings

As occupancy for the sector has improved in 2022, the sector has been able to mostly pass through the weight of those rising expenses based on monthly service and community entry fees. But the report states occupancy and demand could “soften” if rate increases continue above historical norms or if cost-cutting erodes the quality of care and services.

The decelerating growth in real estate prices “may also slow” the strong pace set by IL unit sales and limit life plan communities ability to raise entrance fees in order to meet cost inflation pressures.

“A sector outlook revision to neutral would require sustainable improvement in labor and supply availability, demonstrated efficacy of higher-than-average rate increases to counteract inflationary cost pressures and stabilization of real estate values and interest rates,” the report’s authors wrote.

Despite positive momentum in ratings in 2022 and a more negative sector outlook, Fitch Ratings staff do not expect a “material increase in negative rating actions” for 2023. The high cost of construction projects and increased borrowing costs could result in the postponement of major capital projects in 2023 which could stabilize leverage among Fitch-rated lifeplan communities.

A closer look at ‘pressures’

Higher wages, food prices and construction costs have been driving up expenses for life plan communities this year and the trend is expected to continue in 2023 which could pressure margins.

Job vacancies among health care and social assistance roles remain high in the tight labor market, with those two career areas have returned to all-time highs, according to the report, citing U.S. Bureau of Labor Statistics and Centers for Disease Control and Prevention (CDC) data. Wage compression continues to eat into bottom lines for LPC operators.

Rate increases have ranged between 3% and 5% for communities and some Fitch-rated communities enacted double-digit or off-cycle rate increases aimed at countering expenses.

Life plan communities that went into 2020 with lower occupancy or those with slowed occupancy recovery face greater budget stress and potential rating downgrades without the ability to raise rates in a fully-occupied community. Those with a large skilled nursing component may experience additional pressure given exposure to government payor limits, the report said.

While real estate prices are slowing, Fitch said it did not expect a housing market crash as seen during the Great Recession of 2008 as home prices are “expected to moderate further with elevated mortgage rates,” the report states.Homes currently are 12.2% over-valued, according to Fitch’s 3Q U.S. RMBS Sustainable Home Price Report

“If home prices decline beyond our overvaluation estimates, we believe LPC entrance fee pricing can remain stable, as entrance fee growth still represents just a fraction of home price appreciation even with higher-than average rate increases over the last few years,” the report reads.

Capital to remain ‘robust,’ as M&A to continue

Over time, Fitch believes capital spending in the sector will “remain robust,” with IL expansions to grow revenues and meet growing resident demand. Capital investment for common areas and activity spaces “will be pursued” to enhance and refresh communities focused on “wellness, dining and hospitality” programs.

Fitch also expects to see more operators reposition communities to focus on AL units and skilled nursing beds..

Credit issuers have been actively pursuing mergers and acquisitions) in the sector in recent years, with the pace of M&A activity to increase next year, according to Fitch. Competitive pressures are driving smaller-scale life plan communities to seek affiliation which has resulted in larger ones to diversify their portfolio.

That comes as the sustained pressures seen in 2022 have pushed the market to be more favorable for buyers, with a shorter runway for distressed senior living properties emerging as lenders seek quicker financial results coming out of the pandemic’s disruptive time.

The post Costs, Weakening Economy Point to ‘Deteriorating’ 2023 Outlook for Life Plan Community Sector appeared first on Senior Housing News.

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