Life plan communities (LPCs) could face tougher overall market conditions in the year ahead compared to 2022, despite demand remaining strong for all care types.
Operating cost pressures, driven by staffing shortages at communities, have prompted operators and owners to pass through considerable rate increases due to wage adjustments. That ultimately led to the deterioration of operating margins, particularly LPCs with a large skilled nursing component, according to Fitch Ratings Senior Director of Securities Margaret Rowe.
“The industry trends that we are reading are not quite at where we were pre-pandemic, but definitely moving in the right direction,” Rows said during a webinar on Thursday. “We’re optimistic about it given the demographics and stabilize at roughly pre-pandemic levels for independent living.”
Fitch Ratings last month released new guidance for the year ahead, downgrading the outlook of the LPC sector from “neutral” to “deteriorating.”
But Rowe said LPCs have mostly been able to absorb rising costs and wage growth through hiked rates on the IL and AL side, along with the ability to take beds offline without having to rely on agency staffing.
“Fitch is concerned that these strategies could prove to be unsustainable if these inflationary pressures persist over the longer term,” Rowe said. “Another driver of the deteriorating outlook is decelerating real estate price growth.”
Most residents will sell homes or other assets to enter an LPC. With cooling home prices, residents might delay making the jump to a senior living community longer, something that was made more commonplace since the start of the Covid-19 pandemic.
While most entrance fees have not risen along with previously-rising home prices, Rowe said unit vacancies could lengthen and negatively impact a community’s cash flow.
An overarching concern that also contributed to Fitch’s downgrade is the volatility of the financial market as capital costs rise and that could impact how LPCs prepare for future demand-base growth. High cost of debt and construction materials could balloon costs and lead to missed growth opportunities, Rowe said.
Fitch Ratings is also watching for the potential of a spike in Covid-19 cases, similar to that seen last year during the Omicron wave, along with a resurgence of regulatory requirements, said Director Ratings Analyst Gary Sokolow.
“Both of these potential disruptors are beyond the considerations that went into our deteriorating outlook,” Sokolow said.
As property values fall, Sokolow said deal activity in the sector is expected to continue, with single-site LPCs contemplating a merger or even growth through an acquisition, he added.
While the sector’s outlook is deteriorating, Rowe said it’s unlikely that wholesale ratings downgrades would take place.
“The sector outlook is really a comment on what headwinds and tailwinds the sector could be facing,” Rowe added.
To improve the rating of the sector, Sokolow said labor and inflation pressures would need to ease, along with a calming in the real estate market.
“We want to see a stabilizing of the real estate sector before we want to move it back,” Sokolow said.
In terms of new ratings volumes, Rowe said it was hard to gauge what year ahead has in store.
‘If I had to guess, I would say that I think we are going to see more new issuance than we did last year,” Rowe said. “But that’s a pretty safe bet since we didn’t see much last year.”
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