Life Plan Community Outlook Improving Ahead Of 2025 As Some Pressures Ease

The outlook for non-profit life plan communities is improving going into 2025, according to a new analysis from Fitch Ratings.

Headwinds including cost inflation of certain goods and services, real estate price growth and higher interest rates have “leveled off,” while demand is rising as the baby boomers age, according to a new Dec. 2 report from the agency. That led the organization to change its outlook for the non-profit life plan community sector to “neutral,” from a “deteriorating” outlook earlier this year.

“Given expectations for a surge in demand, with the baby boomer generation reaching age and income eligibility for LPCs, and a lower interest rate environment, we expect debt-funded capital investment to accelerate over the coming year,” wrote Margaret Johnson, senior director at Fitch Ratings and the report’s author.

Life plan communities have worked to reduce their exposure to skilled nursing beds in recent years in light of staffing minimums, reimbursement challenges and other pressures. Those pressures will remain for communities that still have significant exposure to skilled nursing.

“LPCs with significant SNF exposure also have less flexibility to remove portions of their SNF beds from service compared to traditional LPCs, owing to reliance on external admissions for core operations,” Johnson wrote. “This hampers these communities’ ability to manage costs, particularly as it relates to their reliance on agency nurses.”

Johnson noted inflationary expense pressures “are largely in the rearview mirror,” with labor costs stabilizing. The continued stabilization of operating costs “bodes favorably” for operations looking ahead.

One specific bright spot is that average hourly earnings growth is stabilizing compared to peak levels a couple of years ago. Average life plan community hourly wages grew nearly 5.3% in July, a marked decrease from January, 2022, when hourly wages grew almost 12.5% for the sector.

Similarly, assisted living community average hourly earnings growth registered at almost 4.5% in July, down from a little more than 11.4% in January 2022; and skilled nursing facility wage growth was 3.63% in that period, down from a 11.58% growth rate in March, 2022.

“Favorably, job openings and quit rates in the healthcare and social assistance sector have also been on steady downward trends,” Johnson added.

An increasing number of baby boomers entering into the sector have pushed occupancy higher in recent quarters, and Fitch expects that to continue into 2025 as demand remains high. Occupancy at Fitch-rated communities have “stabilized at high levels over the past several years,” and Johnson wrote that “stable to improved median occupancy across all service lines led to overall improvement in revenues and net entrance fees in 2023.”

Senior living nonprofits have joined forces in recent years to help combat market pressures, and Fitch indicated that trend will likely continue as M&A remains a “key theme” for the sector.

“Inflationary impacts and economic volatility are driving smaller providers to seek the benefits of economies of scale by partnering with a larger system,” Johnson wrote. “Acquisitions have mostly been occurring outside an LPC system’s obligated group. Often,the “first step” goal stabilizes and financially improves a newly acquired campus before its integration into the system’s [obligated group].”

Most life plan community residents pay for their move into senior living after a home sale, and healthy home prices will continue to support move-ins down the road. Further improvement to these trends likely hinges on interest rates.

“Higher mortgage rates could lead to a decline in housing prices and/or an increase in the number of days a home is on the market for sale,” Johnson wrote.

Life plan operators have laid out capital expenditure (CapEx) plans to improve and expand their communities in recent years. That will likely continue in the new year as operators look to attract a new group of customers with independent living expansions and renovated common areas and activity spaces, Johnson wrote.

“Fitch’s expectation for the level of near-term capital investment is positive, given the lower interest rate environment in the U.S. and expectations for growth in the 65 years and over age cohort,” Johnson noted. “As capital projects in the not-for-profit LPC sector are very often funded with additional debt, an acceleration of CapEx could heighten debt burdens across the sector in the short term, until the projects mature and the LPC is able to reap the revenue and cash flow benefits these projects tend to provide.”

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