Fitch Ratings released its 2012 Median Ratios for Not-for-Profit CCRCs, revealing that no communities in its rated portfolio were downgraded and that just one was upgraded. (Click on the link above to see the press release and information on accessing the conference call on September 20).6 of the 65 communities in the rated portfolio have a negative outlook while 5 have a positive outlook. Fitch posits that the industry will continue to be challenged by the weak economy and the slow recovery of the housing market.
While there were no big surprises in the report, debt service coverage for “A” rated borrowers declined from 3.1 to 2.7 and capital expenditures declined relative to depreciation, reflecting caution by managements.
Of particular interest to us, investment income as a percentage of revenue declined from 3.4% to 3.2%. The drop in investment income relative to revenue was particularly acute for A rated communities (4.6% to 3.1%) while BBB credits actually experienced an increase (3% to 3.2%). It is somewhat difficult to analyze these aggregated statistics, but our guess is that A rated credits perhaps have more aggressive investment policies and therefore experience a higher “beta” effect to the stock market’s results. Additionally, BBB credits may have been more aggressive in 2011 in realizing the investment gains of the 2009 and 2010 in an attempt to improve debt service coverage calculations. Regardless, much of the portfolio gain in recent years can be attributed to the surprising, continuing drop in interest rates and consequent increase in bond values. Obviously this cannot continue forever. It will be a challenge for communities to generate portfolio returns and, importantly, investment income without the benefit of the declining interest rate tailwind.