Fitch Ratings Notes Stability in CCRC Sector

The Fitch Ratings report on the fiscal year 2011 median ratios for not-for-profit Continuing Care Retirement Communities (CCRCs) observes that the ratios demonstrate stability.  This stability with prior year performance suggests that senior living management teams “continued to focus on maintaining solid financial performance in the face of a sluggish economic recovery and softened housing market.” Fitch rates a total of 77 CCRCs; 65 of these organizations’ ratios were included in the median ratio study.  Thirty-five percent of the CCRC debt ratings given by FitchRatings are in the “A” category, 53 percent are in the “B” category, and the balance are below investment grade.  Forty-nine of the 65 are stand-alone CCRCs, with the balance CCRC systems.

The very process of obtaining a rating on an organization’s debt precludes young organizations from successfully completing the process, as a threshold of financial strength and operational experience is required. As a result, Fitch notes that the stability they report on their 2012 CCRC portfolio is likely “a reflection of the mature nature of many of the rated investment-grade credits.”  In many cases, the performance of those with “A”-rated debt varied from the performance of those at lower credit ratings; in a number of these situations, the lower rated entities performed better.  “BBB” rated borrowers, for example, generated stronger net operating margin adjusted ratios than the more highly rated “A” category borrowers.  The “A” category borrowers observed a decline in their excess margin ratios in 2011 from 2010. FitchRatings doesn’t offer theories on this disparity in performance.

The capital-related ratios also showed “A” category borrowers performing slightly below their “B” category counterparts for several ratios, but, in general, the ratios for all rated borrowers were very stable between years.  Fitch suggests that this stability in the capital-related ratios stems from a general lack of new money borrowing in the sector in 2011.  For many organizations capital plans were apparently put on the back burner, a theory confirmed by the decline in the ratio that measure capital expenditures as a percentage of depreciation expense.

2011 Selected Medians

Investment-Grade

“A”

“B”

Days Cash on Hand

449.5

494.8

369

Net Operating Margin

8.2

7.6

9.5

Max Annual Debt Svc

2.3

2.7

2.0

Average Age

10.4

10.5

10.4

A key indicator of the stability of the sector reported by FitchRatings is their lack of downgrades in 2012.  Through August 27, 2012, Fitch’s rated portfolio had no downgrades and, in fact, one upgrade.  Despite this stability, Fitch anticipates that the sector will “continue to be pressured until there is a more sustained improvement in the national economy.”

Source:

Fitch Ratings. 2012 Median Ratios for Not-For-Profit Continuing Care Retirement Communities. Special report, September 10, 2012.

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