Persistent inflation may weaken US Life Plan Communities’ Margins
Fitch-rated life plan communities (LPCs) are able to absorb labor costs and other inflationary pressures in the near term, but persistent inflation that extends beyond 2022 would pressure margins, Fitch Ratings says.
Higher wages, food prices and construction costs are ratcheting up expenses, but LPCs have been able to pass on higher costs through rate and fee increases. Most of our rated LPCs implemented independent living (IL) rate increases well above the typical 3% yearly increase; a few were double-digit or enacted mid-year (off-cycle).
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.
Demand remained strong during the pandemic, reflecting favorable underlying demographic trends. Pandemic-related challenges, namely sales and marketing disruptions, state-mandated closures and curtailment of elective surgeries that affected short-term rehabilitation referrals temporarily reduced IL occupancy, but overall occupancy continues to improve.
A new coronavirus variant may cause new occupancy disruptions, but this is considered a downside risk beyond our base case expectations, given strong uptake of vaccines at LPCs and improved ability to manage surges.
Those LPCs that began the pandemic with lower occupancy or those that have seen a sluggish occupancy recovery face greater budget stress and potential rating pressure, as these issuers may be unable to increase fees to cover rising expenses.
LPCs 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. Additionally, wage and staffing pressures have been greater in skilled nursing given overall nursing and certified nurse assistant shortages.
Healthcare and social assistance job vacancies remain high against a backdrop of a tight labor market. According to the Bureau of Labor Statistics’ May 2022 employment report, nursing and residential care facilities payrolls were down by 390,100 from February 2020. LPCs have more flexibility relative to hospitals in responding to labor pressures as they are able to take skilled nursing beds offline in response to staff shortages or cost concerns, or to limit the use of agency nurses.
The nominal wage growth for LPCs markedly exceeded nominal wage growth in the broader economy over the last year. Average earnings for the sector surpassed $22/hour this year, above the five-year average of $17.72/hour for the period 2015-2019. Labor costs are expected to remain high over the near term.
LPCs also have a significant hospitality component. Food inflation and food-service staffing constraints have contributed to higher fees and driven dining service modifications to improve efficiency. The job openings rate in the accommodation and food-services sector has averaged 10% over the last 12 months, compared with an average rate of 5.8% in 2019.
Rising capital costs are forcing LPCs to balance efforts to meet pent-up demand while refurbishing turned-over IL units. Repairs and upgrades are taking longer due to construction material shortages caused by supply chain disruptions.
Increased costs and delays hamper the ability of LPCs to meet demand, suppressing occupancy. Although higher interest rates are driving up borrowing costs, most of our rated LPCs have the ability to postpone or delay expansion projects, if needed, to contain expenses.
LPCs have benefited from surging home prices because residents generally use proceeds from home sales to cover entrance fees. Fitch expects the housing market to soften in the wake of recent interest rate increases, which could weaken demand, reducing LPC’s flexibility to raise rates.
