The linked article reports what Fitch Ratings regards as encouraging news for healthcare real estate investment trusts: their growing senior housing operating portfolios are helping to stabilize their credit. Instead of simply owning buildings and collecting rent from independent operators, major REITs increasingly are participating more directly in community operations and financial performance. Fitch currently assigns the healthcare REIT sector an overall stable outlook.
Read Article - McKnights
From an investor’s perspective, this may be a positive development. Greater operating control can allow a REIT to replace underperforming managers, combine properties into larger portfolios, increase occupancy, adjust rates, reduce costs and capture more of the resulting growth in net operating income. Senior housing has become particularly attractive because an aging population is expected to create continuing demand while construction of new communities remains limited.
But residents and prospective residents should read this news from a different perspective.
Many continuing care retirement communities—now often called Life Plan Communities—were founded by religious, charitable or civic organizations. Their original purpose was not merely to provide apartments and healthcare services. It was to create secure communities in which older people could live with dignity, companionship and confidence that they would be cared for as their needs changed.
These organizations always needed sound finances. Benevolence without adequate reserves, competent management and disciplined planning cannot fulfill a lifelong promise. A community must produce sufficient revenue to pay its employees, maintain its buildings, replace aging facilities and prepare for the future.
The critical question, however, is whether financial performance serves the mission or the mission becomes a means of producing financial performance.
The language of the investment market is revealing. Communities are described as assets. Groups of communities become portfolios. Their residents generate occupancy, revenue and net operating income. Management systems are evaluated according to their capacity to produce growth, improve margins and strengthen investor credit.
None of these measures is inherently improper. A financially successful community may provide excellent housing, compassionate care and a satisfying resident experience. Investors also can supply capital needed to renovate aging buildings or rescue organizations that have been poorly managed.
Nevertheless, the increasing financial power of REITs and other large investors may shift the balance of influence within senior living. Decisions about staffing, fees, services, maintenance, acquisitions and property sales may be evaluated primarily according to their effect on portfolio performance. Resident satisfaction remains important, but perhaps because it supports occupancy and revenue rather than because resident well-being is the organization’s ultimate purpose.
This distinction is critically important in a Life Plan Community. Residents may have paid hundreds of thousands of dollars in entrance fees and committed much of their retirement income in reliance on a promise of lifelong security. They are not ordinary apartment tenants or short-term customers. They are the community’s principal stakeholders, even when they do not legally own its property.
The article documents a structural change worth watching. Senior communities increasingly are being assembled, operated, and evaluated as investment portfolios. That trend should prompt residents, governing boards, and public officials to ask who benefits from financial success, who bears the consequences of failure, and whose interests prevail when the needs of residents conflict with the expectations of investors.
Financial strength is essential. But in a community promising care for the remainder of a person’s life, financial strength should remain the servant of the mission—not its replacement.
Richmond Shreve
NaCCRA Board Member & VP
Forum Moderator