By Margaret Johnson, Director and Senior Living Sector Lead at Fitch Ratings
I recently had the chance to join Love & Company’s webinar, “Focus on 2021: Insights and Strategies for a Successful Year,” and it was refreshing to hear such optimism and energy from the esteemed panel of thought leaders in our sector. We have reason to believe that 2021 will bring hope to Life Plan Communities after a challenging 2020, and the webinar provided actionable steps that providers can take to maintain their missions.
Along those lines, fellow webinar panelists also put their thoughts on paper and produced a blog series to complement the 90-minute session and share further recommendations. John Franklin of Pearl Creek Advisors penned an insightful piece highlighting three lessons that senior living providers must carry into 2021. Sean Kelly of Kendal wrote why community partnerships and communication will be key to our field’s recovery. And Rob Love of Love & Company shared one simple lesson: never stop marketing.
Now, I would like to provide a financial and credit analysis perspective. Our team at Fitch Ratings recently released the 2021 Outlook: U.S. Not-For-Profit Life Plan Communities, which you can access in full by clicking here. For the purposes of this blog, I will share some high-level, easy-to-digest answers to five questions that pertain to our recently published outlook. For more detail, I encourage you to download the full report.
1. In general, how have Life Plan Communities fared amid COVID-19?
We at Fitch have about 160 not-for-profit Life Plan Communities in our portfolio, and they’ve fared relatively well during the pandemic. A main reason for this is that the communities we rate all have high proportions of independent living units, which has been easier to maintain census for during this time than assisted living or skilled nursing beds.
Other factors we considered included the following:
- Not-for-profit communities typically handle cashflow fairly well and have relatively strong balance sheets to get through periods of volatility with cash cushions.
- Senior living communities aggressively pursued stimulus funding and programs like the Payroll Protection Program (PPP).
- Communities took infection-mitigation procedures as early as January 2020, which informed residents and prospects that they would act with caution and put the best interest of residents first.
Of course, most of our portfolio experienced stress turnover during the spring and summer while it was virtually impossible to move in new residents, but quarter three showed a sharp recovery as communities began to backfill their independent living units.
2. So, what were the ratings actually like this year for Life Plan Communities in the Fitch portfolio?
We took a surgical approach to ratings this year. We did not make any bulk or portfolio-level ratings. Additionally, we weren’t necessarily precluded from making any positive ratings, but COVID-19 definitely raised the bar in terms of what it would take for a community to receive a credit upgrade.
From our portfolio of Life Plan Communities, we downgraded 20 ratings and have not yet made any upgrades in 2020. Only about five of the downgrades we made, however, were directly attributable to the virus and its effects. The other downgrades were mostly scenarios where organizations had borrowed for expansions, therefore raising their leverage position and reducing their credit quality.
3. What about the outlook for senior living as a whole?
Everyone has seen the news lately, and the approval of COVID-19 vaccines by the FDA is one of the reasons that we see the senior living sector as stable for 2021. Before the vaccines even got approved, we published an update on how the priority for senior living providers to receive doses first is a positive for the sector.
The vaccine not only gives us more confidence in the senior living business model, but will also reduce providers’ operating costs of using temporary staff when permanent staff had to quarantine. Many of us know this was necessary because most outbreaks originated from community staff.
A couple of other factors also led us to rate the senior living sector as stable for 2021, not the least of which was the healthy residential real estate market. Again, you can read the detailed explanation of our outlook in the full report.
4. What do senior living providers need to be wary of based on what we learned from 2020?
This year obviously brought a seismic shift to how senior living operates. My fellow webinar panelists John Franklin and Sean Kelly detailed this in their articles in this blog series. From our perspective, in terms of what providers need to be cautious of, we look at a number of sources of uncertainty in the sector.
Staffing was a challenge even before COVID-19, and the pandemic compounded matters. The tight labor market for the field got even tighter this year. However, we see potential hope for this in how displacement from retail and hospitality jobs could bring a higher quality labor pool to senior living.
We also saw a short-term crunch across our portfolio when it came to capital needs. One major hike in operating costs included the IT hardware needed for taking marketing, sales and social programming virtual. This was necessary, but expensive.
In the longer term, the pandemic will likely have an effect on the types of amenities that prospects will expect at modern Life Plan Communities. The changing market will require a heavier degree of capital investment regarding how funds get directed to enhancing or changing a community’s offerings so that it can stay relevant. These changes will affect cash flow and likely also raise operating costs.
5. What trends are you seeing from investors and in other major financial moves like mergers and acquisitions?
In short, investors are still interested in senior living. That bodes well for organizations seeking, perhaps, to grow or expand once the pandemic settles. We gauge investor interest in the sector based on how many requests we get for credit rating issuances, and we’ve certainly seen those this year. Of course, not so much in the spring, but we saw an uptick in investors’ appetite in the senior living sector, especially for tax-exempt bonds.
“When the first Life Plan Community deal after March got done with 20 investors buying in, it was eye-opening,” John Franklin, webinar co-panelist and principal at Pearl Creek Advisors, said. “Since then, we’ve seen really good appetite for tax exempt bonds as interest rates are low. That said, what investors are looking for are organizations with great governance, great leadership and great cash positions. Organizations with official credit ratings, like from Fitch, are also getting looked at more favorably than non-rated ones.”
Finally, as it relates to the cost pressures on capital and operations, we expect to see a heightened level of mergers and acquisitions, both within healthcare systems and between disparate organizations. As I shared in John’s blog, it may be worthwhile to consider a merger or acquisition if that is what it takes to keep your organization’s mission viable for the long term.
For a deeper dive into what 2021 looks like for Life Plan Communities and how they can make the best path for themselves, I encourage you to watch the recording of the webinar. And if you’d like a detailed look at how Fitch Ratings views senior living, remember you can find the full sector outlook report on our website.
For the rest of the articles in this series supporting our newest webinar, “Focus on 2021: Insights and Strategies for a Successful Year,” click here.