Continuing care retirement communities (CCRCs) face a challenging market. They are susceptible to economic fluctuations that can tank their occupancy levels, and they cater to an aging population that's living longer and increasingly wants to age in place at home.
But there's one thing that does work in their favor: a good credit rating - though not many join the ranks of "A"-listers who reap the benefits of greater access to capital at the lowest possible cost.
Two nonprofit CCRCs are beating the odds, having earned and maintained their high ratings since before the recession.
Royal Oaks, a single-site CCRC owned and operated by People of Faith, Inc., has an A Fitch rating. ACTS Retirement-Life Communities, the largest not-for-profit owner, operator and developer of CCRCs, is rated A- by Fitch and BBB+ by Standard & Poor's.
These ratings, the communities say, afford them business opportunities and financing attractiveness that their non-rated or lower-rated counterparts don't enjoy. Business opportunities, along with reassurance to current and prospective residents that the community is financially strong, are the top reasons both Royal Oaks and ACTS seek to be rated.
"By definition it implies there is a certain level of balance sheet and operational strength," says Aaron Rulnick, principal at HJ Sims, which arranges financing for startup CCRCs. "If [a community] is investment grade-rated, it implies that they have a certain level of liquidity and operational strength when compared to their peers."
Any CCRC with publicly traded debt may seek and receive a credit rating from an agency, though not all choose to be rated. For the senior living sector, rating agencies base their determination on a number of factors, including occupancy levels, the experience of the management team, the level of cash reserves relative to the amount of long-term debt, the amount of liquidity and the ability to generate cash to pay annual debt costs, according to a 2010 industry report.
But how to earn these ratings and, more importantly, how to maintain them, plays into the CCRCs' overall strength and ability to thrive in a potentially volatile market.
Earlier this year, Fitch assigned an A rating to Sun City, Arizona-based Royal Oaks' implied general revenue obligations. Fitch also affirmed the A underlying rating on the more than $14.6 million variable rate demand bonds (VRDBs), series 2002, issued by Arizona Health Facilities Authority on behalf of the CCRC.
A few key drivers play into this high rating. Among them are an "excellent" financial profile, a 100% occupancy level and a developing memory care building as well as other capital projects.
"Royal Oaks' overall financial profile is characterized by excellent liquidity, cash flow, and debt metrics," Fitch states in its May report. "Solid financial profile is supported by high demand for services, reflected by strong sales results and sound occupancy across the campus."
The biggest benefit of the A rating is a lower cost of debt. It allows the community to go out into the market and acquire debt at a lower fee structure than if it didn't have the rating. So there's easier access to capital and debt when they need it, which is often the top reason a community requests to be rated.
But the CCRC's secret to maintaining its high ratings, which have been consistent since the early 2000s, come from specific attention to detail in the budget.
"Operationally, as we go into our budgets each year, we strive to meet certain criteria, ratios, thresholds that we have set so we know that we're going to weather unforeseeable storms and maintain our rating in the future," says Royal Oaks COO Gretchen Cobb. "You have to be positioned well to continue on to get through those challenges."
Keeping a strict eye on budgetary expenses plays an important role in maintaining such high marks, especially as labor and food costs steadily rise, Cobb says.
"They both are always at the forefront of our watch list, especially when our residents aren't seeing those increases in their Social Security pay," Cobb says. "It's a challenge for us, but that just prompts us as management and our board to put our strategic thinking caps on and look for alternative sources of revenue, because our residents may not be able to make up that difference in monthly service fee increases alone."
Half of the community's expenses are wages, so watching overtime, staffing and turnover are all items of concern, she adds.
"Our capital expenditures are a huge part of the budget process, not only from a financial standpoint but also in making sure we invest those dollars wisely in our community to make sure we are appeasing existing residents but also attracting new residents and preparing for the future."
ACTS Retirement-Life Communities
In June, Fitch affirmed the A- rating on $413 million of revenue bonds issued by various issuers on behalf of West Point, Pennsylvania-based ACTS, which has 23 CCRCs along the East Coast. ACTS also has outstanding an additional $85.2 million in long-term debt, which Fitch does not rate.
Its scale and geographic diversity, recent affiliations and strong management practices are among the key drivers contributing to the CCRC's strength.
ACTS also maintains a BBB+ S&P rating, earned by solid financial performance, a strong revenue base and effective management practices.
"One of the most important reasons we keep a rating, outside of the capital structure, is for residents and prospective residents," says Karen Christiansen, ACTS executive vice president and CFO. "Over the past five-plus years, we feel residents moving into retirement communities are looking closer and closer at the financial strength and structure of a CCRC. So we use [the high ratings] as a marketing tool in addition to using them as a tool to get us access to capital."
Like Royal Oaks, ACTS has kept its high ratings since the early 2000s, adjusting expenses to respond to the recession's challenges.
"We definitely have had to be very strategic in making sure that decisions we were making were in support of maintaining the ratings," Christiansen says. "Financial performance became a real focus because with the economic challenges, you had revenue coming down through occupancy levels that were less than what the industry was experiencing traditionally, and you also had investment returns that were less than what historical rates were."
In responding to challenges to maintain its ratings, ACTS focused on controlling expenses and adjusting the capital plan, even as occupancy levels dipped.
And with high marks from both Fitch and S&P, the CCRC has a broader appeal to investors, allowing it to take advantage of lower borrowing rates, reduced interest expense and a lower cost of capital.
"To us, the benefit of having both is that if there are any investors that look specifically at Fitch or S&P we know we're covered," Christiansen says. "It opens up our organization to the largest pool of investors. It also tells the public - investors, residents, prospective residents - that we take this very seriously and that we invite not just one but two ratings agencies to look at our organization."