Balancing Skilled Nursing and Life Plan Communities

Making senior housing work means getting beyond what is considered strictly healthcare, some investors are saying. Part of the mix means looking at the needs of those who need skilled nursing facility (SNF) beds as well as people who are better off with independent living (IL) units.

Finding the proper balance between the two segments is a challenge as skilled nursing beds can have a negative impact on life plan communities (LPCs) operating performance, according to a new report from Fitch Ratings. LPCs with a lower SNF-to-IL ratio performed better. The higher the ratio, the more SNF expenses — understandably significantly higher than IL facilities — spilled over into the independent living business lines.

“SNF-heavy LPCs, considered by Fitch as those LPCs where SNF beds comprise more than 20% of total units, experienced operational stress in Fitch’s rated portfolio in 2023, with labor costs, inflation, tighter reimbursement and heightened government oversight pressuring skilled nursing expenses and revenues,” they wrote.

Fitch downgraded the credit rating of eight LPCs due to operational issues, versus debt, in 2023. Half of the eight were “SNF-heavy LPCs, even though these LPCs make up just over a quarter of Fitch’s rated portfolio.” The percentage of SNF presence in these LPCs ranged from 26% to 61%. Such SNF-heavy LPCs are also half of the 10 LPCs that Fitch has placed on Negative Outlook or Rating Watch Negative status.

A step many Fitch-rated LPCs have taken is to reduce the number of SNF beds. Some take fewer external admits to ensure enough space for current residents as they age. “This active management of SNF beds, along with higher monthly IL rate increases close to or above inflation, helped LPCs absorb SNF-related operating pressures in 2023,” Fitch wrote.

The impact of such decisions have been strong in pricing. IL increases in 2024 were between 4% and 7%. In 2023, they would have been between 6% and 10%, with even higher increases seen in some cases.

However, early data this year show the SNF occupancy percentages rising. Some LPCs are taking some beds that had previously been switched from SNF type and moving them back, while rebuilding skilled nursing staff.

Fitch estimates that LPCs will move toward assisted living or memory care as well as home health care, “all of which are largely private pay.” There will also likely be additional IL expansions, given demand and revenue opportunities.