CHICAGO — The continuing-care retirement community sector is starting to show signs of stabilization after suffering through two years of hardship, according to credit analysts.
Fitch Ratings, which released its 2010 median report on the sector this week, said CCRCs’ renewed ability to borrow after virtually being shut out of debt markets last year is among the strongest recovery indicators. The sector has taken a hit since 2008 due to declines in the investment market — one of its main revenue sources — and the national housing market collapse.
The senior-living sector is especially vulnerable to housing market fluctuations because it depends on the ability of seniors to sell their homes and move into the facilities.
“What we’re seeing in general terms is a stabilizing of the sector,” said Standard & Poor’s analyst Karl Propst.
The agency is set to release its own 2010 median report on the sector within the next two weeks.
“So many senior-living providers have historically relied on non-operating income, and with the downturn in the investment market, they had to shift their thinking and refocus on operations,” Propst said. “As a result, operating income has stabilized.”
Fitch said the sector’s performance will continue to wobble with the housing market, but occupancy rates are expected to rise slightly in 2010 and lift profitability.
“There seems to be greater acceptance among potential residents of current home values,” Fitch said in its report. “Many facilities have developed marketing programs to help residents stage their home for sale, [thereby] reducing the time to move in.”
Propst noted that a CCRC’s performance depends heavily on its location and some regional housing markets are performing better than others.
One of the strongest signs of recovery the last year has been the renewed ability of investment-grade credits to access the debt market since 2009, Fitch said.
CCRC issuers borrowed $1.6 billion of debt in 2009, down from $1.9 billion in 2008 and $6.1 billion in 2007, according to Fitch. The market has loosened up for the sector the last several months, allowing investment-grade issuers to refinance variable-rate debt into fixed-rate mode.
Like other health care borrowers, many CCRC credits issued variable-rate debt backed by various forms of liquidity. Eliminating variable-rate risk by refinancing into a long-term fixed-rate mode will benefit the industry overall, Fitch said, although it could translate into higher interest costs.
The sector continues to hold onto a lot of liquidity-backed debt, and faces renewal and term-out risks over the near term amid a tightened liquidity environment, according to analysts.
“Negative rating actions could be precipitated by short termination periods and short term-out periods,” Fitch warned.
Analysts said capital spending changed the most among the medians it measures. For investment-grade credits in 2009, median capital spending as a percentage of depreciation expense fell to 90.9% from 128.5% in 2008 and 106.3% in 2007.
“The drop in the level of capital spending was not unexpected as operators adjusted to slackened demand for services and highly restrictive capital markets,” the report said. “While Fitch continues to believe that capital reinvestment is critical to ensuring long-term viability, CCRCs have a greater flexibility to defer capital spending from year to year in response to changing market conditions.”
However, a weak housing market and weak economic recovery will continue to pressure the industry, analysts said. Fitch predicted that downgrades will exceed upgrades over the next 12 months, though most rating actions will be affirmations.
The majority of CCRC rated credits hover in the triple-B range, and much of the sector remains unrated. Moody’s Investors Service does not maintain an outlook for the sector.
