Skip directly to Accessibility Notice
  • Muni Nation

    CCRCs: A Growing Source of Municipal Bonds

    Jim Colby ,Portfolio Manager
    June 27, 2017
     

    As baby boomers swell the ranks of retirees in the U.S., Continuing Care Retirement Communities (CCRCs) offer one option for senior living. Of interest to investors in municipal bonds is the fact that their construction is often financed by issuing tax-exempt or taxable bonds.

    CCRCs comprise approximately $34 billion worth of municipal debt, according to Municipal Market Advisors. The majority of CCRC debt falls into the high yield/unrated segment (approximately 80% as shown in this chart), and carry higher risks and higher yields than their investment grade counterparts.

    CCRCs Ratings Distribution1
    As of 6/16/2017

    CCRCs Ratings Distribution Chart

    Source: Ziegler Investment Banking. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue.

    We expect this segment of the muni high yield market to continue to grow given the aging population in the U.S. and its increased need for residential healthcare options. In terms of market size, CCRCs are approximately the same size as the tobacco bonds segment within the muni high yield market, as we discussed in The Burning Truth about Tobacco Bonds.

    The U.S. Population is Aging

    The U.S. elderly population is expected to nearly double in the next 25 years, growing by almost 80 percent.2 The population of those over the age of 65 is projected to reach 83.7 million by 2050.3 For many, living out the rest of their days in their own homes will not be an option. The decision, then, will be choosing between the options available. A CCRC is one of those options.

    What are CCRCs?

    Continuing Care Retirement Communities provide one-stop shops for seniors, combining most aspects of senior living solutions in a single location. They may include independent residential units where healthy seniors may live on their own, assisted-living units that provide some care, and nursing beds for seniors requiring constant nursing care.

    Today, there are roughly 2,000 CCRCs in the U.S., housing some 600,000 residents.4 While each CCRC is different, they are typically paid for out-of-pocket. As retirees take stock of their options, CCRCs will often be among the more expensive options they are likely to consider. Incoming residents typically pay an upfront entrance fee. This may be as low as $20,000 for a rental agreement. However, it could range as high as $500,000, and up, for a buy-in at a luxury establishment.5 This cost will often be supplemented with monthly fees ranging from $500 to $3,000, depending on the level of care provided. The greater the residents’ needs, the greater the cost.

    How are CCRCs Structured?

    The vast majority of CCRCs are structured as 501(c)(3) not-for-profit organizations under the Internal Revenue Code. However, in recent years the for-profit CCRC market has also grown. These organizations issue municipal bonds through cooperative local government agencies and are typically issued based on certain projections for move-in rates. CCRCs are rarely overbuilt, thanks to the cost and time spent on up-front pre-marketing, which ordinarily secures at least 60% pre-commitments before construction begins. However, CCRCs that broke ground in and around 2005 and 2006 made headlines a few years ago as they struggled with lower-than-expected move-in rates.6

    To cover the substantial cost of moving into CCRCs, many seniors use the proceeds from selling their homes. This makes some CCRC-related bonds somewhat sensitive to moves in the housing market. The relationship between the strength of the housing market and the health of CCRC-related bonds was made readily apparent during the recent financial crisis of 2008. As home prices dropped, many seniors held off on selling their homes. Some CCRCs suffered as a consequence, with a handful filing for Chapter 11 bankruptcy.

    A Positive Outlook for CCRCs

    For investors, as the U.S. gets older, the size of the market for municipal bonds used to finance the construction of CCRCs looks set both to increase, as more of them are built, and to offer interesting opportunities. The graying of American baby boomers, and the consequent increasing demand for CCRCs, is likely to result in greater issuance of both tax-exempt and taxable bonds in the coming years.7

    An Attractive Yield Component

    Given their risk profile, CCRCs may offer an attractive yield component to high yield portfolios. Many come to market without ratings attached, putting the analysis squarely into the hands of analysts who recommend them for inclusion in portfolios. And since they are "start-ups", additional returns must accompany these issues to bring buyers to the table. Thus, CCRCs do occupy a meaningful part of most municipal high yield bond portfolios. Those that do successfully complete construction, fill their residential units to near capacity, and operate within the expected targets, can generate meaningful returns to investment portfolios such as VanEck Vectors® High-Yield Municipal Index ETF (HYD®) and VanEck Vectors® Short High-Yield Municipal Index ETF (SHYD®) , where they occupy a prominent sector allocation and provide diversification to each.

  • IMPORTANT MUNI NATION®DISCLOSURE  

    This content is published in the United States for residents of specified countries. Investors are subject to securities and tax regulations within their applicable jurisdictions that are not addressed on this content. Nothing in this content should be considered a solicitation to buy or an offer to sell shares of any investment in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction, nor is it intended as investment, tax, financial, or legal advice. Investors should seek such professional advice for their particular situation and jurisdiction.

    VanEck does not provide tax, legal or accounting advice. Investors should discuss their individual circumstances with appropriate professionals before making any decisions. This information should not be construed as sales or marketing material or an offer or solicitation for the purchase or sale of any financial instrument, product or service.

    Please note this represents the views of the author and these views may change at any time and from time to time. MUNI NATION is not intended to be a forecast of future events, a guarantee of future results or investment advice. Current market conditions may not continue. Non-VanEck proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck. MUNI NATION is a trademark of Van Eck Associates Corporation.

    All indices listed are unmanaged indices and do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in a fund. Certain indices may take into account withholding taxes. An index’s performance is not illustrative of a fund’s performance. Indices are not securities in which investments can be made.

    The Bloomberg Barclays Municipal Bond Index is considered representative of the broad market for investment grade, tax-exempt municipal bonds with a maturity of at least one year. The AAA and BBB indices are sub-sets of this broader index.

    Municipal bonds are subject to risks related to litigation, legislation, political change, conditions in underlying sectors or in local business communities and economies, bankruptcy or other changes in the issuer’s financial condition, and/or the discontinuance of taxes supporting the project or assets or the inability to collect revenues for the project or from the assets. Bonds and bond funds will decrease in value as interest rates rise. Additional risks include credit, interest rate, call, reinvestment, tax, market and lease obligation risk. High-yield municipal bonds are subject to greater risk of loss of income and principal than higher-rated securities, and are likely to be more sensitive to adverse economic changes or individual municipal developments than those of higher-rated securities. Municipal bonds may be less liquid than taxable bonds.

    The income generated from some types of municipal bonds may be subject to state and local taxes as well as to federal taxes on capital gains and may also be subject to alternative minimum tax.

    Diversification does not assure a profit or protect against loss.

    Investing involves substantial risk and high volatility, including possible loss of principal. Bonds and bond funds will decrease in value as interest rates rise. An investor should consider the investment objective, risks, charges and expenses of a fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.