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Retirement facilities municipal bonds have historically been the type of bonds with the largest number of defaults, so it is no surprise that the Covid pandemic years have been no exception. From 2020 to date there have been 73 bond issues which have defaulted or had to dip into reserves to make scheduled interest and principal payments. This means some $2.9 billion in bonds have taken significant price hits of from 20% to 50% of their face value. This is nothing new for this industry.

Running a retirement facility is one of the most demanding management challenges in business. You combine the talents needed to operate both a hotel as well as a health care facility. For those with a nursing home on the same premises, the requirements become even more severe. Since many of these facilities are built to accommodate only one or two hundred clients, the demands are more severe since they cannot afford to hire the specialized management talent needed. In addition, there is a high standard of performance demanded by the state in which they operate since poor management usually translates into abuse of the elderly. Finally, this industry has attracted a large number of operators and underwriters who see such facilities as an easy mark for making money by less than honest dealings, both at the expense of the elderly clients and of bondholders. This problem is so pervasive that a large number of defaulted facilities have changed hands more than once only to be milked again by new owners.

The advent of the pandemic and how it was handled in different states raised deep concerns about how well a retirement facility could and did handle the spread of Covid in such a facility. The mishandling of the elderly in New York state was so egregious that it raised the valid fear that the elderly could not be protected in such a facility. Suddenly every facility needed the sterility standards of a hospital since every elderly had a high risk of death. Such standards are terribly hard to enforce with a work force of minimum wage employees with little training. While New York proved to be a particular egregious case, it made the elderly and their offspring hesitate and even decide to permanently keep their parents in their or their own homes. In fact, the population statistics reported by facilities indicates that not only did the new client population drop off, but some elderly either temporarily or permanently left. This change in demand hit particularly hard among the new facilities which did not yet have a full complement of clients.

Time will tell how soon the public perception of retirement facilities will come back from recent events. However, it is very likely that the number of new facilities being constructed will come to a halt. We can also expect to see an increase in the sale of existing facilities and their purchase by multi-state operators who can achieve economies of scale so lacking in small, stand-alone facilities. Since retirement facility defaults were a common event, it is likely that many of those who used Covid as an excuse were fated to fail in any case. Lastly, we need to make sure that government provides not just oversight of the industry, but also adequate support payments for those who cannot pay their own way since inadequate levels of government support in small homes translates directly into poor care.

Source: Forbes

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