Life plan communities can weather the challenges brought about by inflation for now, but long-term inflation stretching into next year would pressure margins, according to Fitch Ratings.
On the whole, life plan communities, also known as continuing care retirement communities, or CCRCs, have been able to stay afloat by passing increased costs related to wages, food and construction along to residents through rates and fees increases, Fitch noted in a press release. Most of the credit rating company’s rated CCRCs have raised independent living rates by “well above” 3% in the past year, which is the typical annual increase, and some have implemented double-digit rate increases. To offset inflation, some life plan communities have enacted mid-year (off-cycle) rate increases.
“Residents seem to accept higher fees for now, but IL occupancy and demand could soften if rate increases continue above historical norms, or if cost-cutting erodes service quality,” the company noted. “However, that can’t go on forever.”
CCRC occupancy for the most part held steady during the pandemic, with some fluctuations here and there, Fitch said. Those that saw steady occupancy are better poised to handle long-term inflation pressures, whereas those communities that had less-than-optimal occupancy before March 2020, or those struggling to recover now, will have a more difficult time offsetting costs by increasing rates, according to the company.
“[Life plan communities] with a significant skilled nursing component, which tend to be lower rated, might also feel pressure given their exposure to government payors limits their ability to raise rates relative to IL, which is all private pay,” Fitch said. “Additionally, wage and staffing pressures have been greater in skilled nursing given overall nursing and certified nurse assistant shortages.”
Wages necessarily have increased in CCRCs as most sectors experience labor shortages, the company said, noting that average earnings for CCRC staff members have increased up to $22 an hour this year. That compares with the average of $17.72 from 2015 to 2019, Fitch said, which maintains that high labor costs are expected to continue for the foreseeable future.
The recent rate hike from the Federal Reserve could negatively affect CCRCs’ bottom lines, Fitch said. For a while, according to the company, high home prices have been a boom for the sector, because residents generally use proceeds from home sales to cover the cost of their entrance fees. The increased interest rate, however, could soften the housing market, which could weaken demand and reduce life plan communities’ flexibility to raise rates, the company said.