Fitch Ratings published its Healthcare Special Report, "2010 Senior Living Outlook" on March 16, 2010, in which it maintained its negative outlook on the senior living industry. Fitch cites concerns that are mostly external to the industry but significantly affect the industry, such as renewal risk of letters of credit, the uncertainty of the real estate market and higher capital costs as the rationale for maintaining its negative outlook.

Fitch does point out that senior living management has been able to maintain stable occupancy levels by enhancing their communities' marketing efforts, updating finishes on existing units to improve marketability, using incentive programs and concentrating on resident satisfaction. Demand for senior living facilities still remains strong, and despite the recession, many organizations rated by Fitch preserved their wait lists, and their marketing efforts in response to the weak economic climate were largely successful. Fitch believes that "proactive management practices in the areas of labor, food and supply costs, marketing, nursing census, and payor mix will be key credit factors" in 2010 and beyond.

Fitch notes that the stress the senior living industry has been dealing with over the last year to 18 months has caused a sharp differentiation between the well-known and reputable communities and the newer facilities that are not well-established in a local market area. The highly regarded communities and investment grade credits, while having experienced somewhat weaker performance, seem to be weathering the economic climate fairly well, while those newer communities still in fill-up mode are generally struggling.

In evaluating expectations for 2010, Fitch commented on the following fundamentals of the senior living industry and predicted how these essential characteristics would affect the industry going forward:

Credit markets – Short-term volatility and the potential for a "retreat from the current recovery" are concerns, and Fitch expects communities to move to more conservative investment portfolios. For providers with letters of credit, relationships with their banks need to be understood; and if letter of credit term expirations are imminent, plans for extending or refinancing need to be developed, the earlier the better.

Occupancy/Cash Flow – Fitch expects cash flow and occupancy to remain stable and the need for incentive move-in programs to diminish, which will improve cash flow.

Management Practices/Demand – Fitch expects high demand for senior living housing to continue through 2010 and beyond. In addition, management needs to focus on maximizing "opportunities in areas they can control while trying to limit risks in those less within their control, such as the capital and financial markets."

Capital Needs – Fitch expects to see senior living providers return to the capital markets in 2010, financing projects that had been postponed or delayed during the recession. The rating agency projects both the par amount of the financing and the number of deals to increase over 2010. These projects may be smaller than originally anticipated, or phased, due to a higher cost of capital.

Please contact your Sims banker if you would like a copy of Fitch’s "2010 Senior Living Outlook."