OREANDA-NEWS. Fitch Ratings has affirmed the 'BBB-' rating for the following bonds issued by Lancaster County Hospital Authority (PA) on behalf of Landis Homes Retirement Community (Landis or LHRC):

--$49.76 million health center revenue refunding bonds, series 2015A.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a mortgage lien on LHRC's property, a security interest in revenues, entrance fees and accounts receivable, and a debt service reserve fund.

KEY RATING DRIVERS

STRONG OCCUPANCY TRENDS: Given its long operating history, notable reputation for quality services and attractive campus, Landis enjoys strong demand in all levels of care. Independent living unit (ILU), personal care unit/assisted living unit (ALU), and skilled nursing facility (SNF) occupancies averaged, 97.7%, 97.1% and 96.7%, respectively for the nine month period ending March 31, 2016.

ADEQUATE CASH FLOW: Cash flow generation has been solid reflecting satisfactory operating earnings, good investment returns and fundraising, and consistent net entrance fee receipts from turnover ILUs. The net operating margin-adjusted averaged 13.8% from fiscal year 2012-2015. As a result, coverage of actual annual debt service has been solid at 2.5x and 1.6x, respectively, in fiscal years 2014 and 2015. Cash flow softened during fiscal year 2015, but rebounded in the current fiscal year.

SATISFACTORY LIQUIDITY INDICATORS: At March 31, 2016, Landis' $27 million of unrestricted cash and investments amounts to 314 days operating expenses, 5.3x cushion ratio, and 51.9% of long-term debt. While the liquidity metrics are below 'BBB' category medians, LHRC's non-refundable fee-for-service residency contracts temper Fitch's concern.

EXPANSIVE CAPITAL PLANS: Landis is in the early stages of a master facilities plan to upgrade and reconfigure the campus. The three phase plan requires the demolition of several older cottages, renovation and construction of new ILUs, conversion and renovation of SNF beds, and a new learning and wellness center for the entire community. The first two project phases are being funded with a draw-down bank loan that increases debt by $37 million.

INCREASED DEBT POSITION: Including the series 2015A bonds and the full drawdown of the bank loan, long-term debt increases to about $86 million or a moderately high 63.7% of pro forma adjusted capitalization as of March 31, 2016. Of this total, $37 million will be directly placed floating rate bank debt. In addition to counterparty and interest rate risk, the bank loan may be subject to redemption prior to maturity in the event of covenant violations. Pro forma maximum annual debt service (MADS) of $4.9 million is a manageable 13% of expected fiscal 2016 revenues.

RATING SENSITIVITIES

CAPITAL PROJECT MANAGEMENT: Construction and project management risks from Landis Homes Retirement Community's master facilities plan could potentially cause negative rating pressure due to cost overruns, service disruptions, and re-occupancy of demolished and renovated units that lag projections.

OPERATING PROFILE MAINTENANCE: The 'BBB-' rating assumes that Landis Homes Retirement Community's current operating profile, characterized by high occupancy rates across all levels of care, satisfactory cash flow, and solid liquidity balances, remains stable. Should any of these weaken during the construction and re-occupancy period, there could be negative rating pressure.

CREDIT PROFILE

LHRC's parent corporation, Landis Communities operates senior living and care businesses through several affiliates in Lancaster County, PA. In conjunction with the series 2015 bond issue, Landis Communities was removed from the obligated group. In addition to LHRC, the other obligated group member is Landis at Home. LHRC is a retirement community with 448 ILUs, 97 ALUs (including 16 memory care units), and 103 SNF beds (including 26 memory care beds) that is surrounded by farmland and located on 114 acres in Lititz, PA, about eight miles north of the city of Lancaster, PA. Landis at Home operates home and community based services for seniors. The obligated group represents 96.6% of total system operating revenues and 95.5% of total system assets. Other non-obligated affiliates include a small senior living rental community, a personal care facility, and an affordable senior housing apartment complex that is operated through a joint venture. Total operating revenue for the obligated group in fiscal year 2015 was $34.4 million.

MASTER FACILITIES PLAN

Landis' master facilities plan is being driven by the need and desire to update and modernize its older facilities and upgrade amenities with new and renovated common and activity space. The plan requires the demolition of several older cottages, the renovation of existing and construction of new ILUs, and a new learning and wellness center that includes a new main entrance for the entire community. Phase I of the plan includes seven new cottage homes, renovations and updates to the health care center (25 beds), removal of older residential units, and the combination and renovation of existing ILU apartments into larger and updated units with a total cost of $8.2 million. Construction on phase I started during December 2015 and all seven cottages are reserved with 10% deposits. The seven new cottages are anticipated to be complete by October 2016 and $1.64 million of initial entrance fees are expected to be collected. All other phase I projects are likely to be completed by spring 2017.

Phase II entails the construction and equipping of a community and wellness center which includes 22 new ILUs that replace 19 outdated units. A guaranteed maximum price (GMP) contract is expected by the end of August 2016 and total costs are projected at $27.1 million. Construction on phase II will begin in September 2016 and is projected be completed in late 2017 or early 2018. LHRC has received 46 deposits of $2,000 from new prospective residents for the 22 new ILUs as of May 31, 2016. Once the GMP is signed, Landis will start accepting reservations that require 10% deposits. The overall effect on the ILU mix is expected to improve the desirability by creating additional larger two bedroom units through consolidating smaller units and slightly increasing the number of ILUs by 13.

DEMAND FOR SERVICES AND OCCUPANCY

LHRC's primary market area is defined as a region 10 miles surrounding its main campus in Lititz, PA and includes most of Lancaster County. About 85% of residents come from Lancaster County, which has remained constant over recent years. Demand is supported by favorable demographics with a steadily growing number of age and income qualified households.

Given its long operating history, notable reputation for quality services, and attractive campus and product offerings, Landis enjoys strong demand in all levels of care. Another driver of LHRC's demand is its church-related founding and historical ties to the related support organizations. ILU, ALU, and SNF occupancies averaged, 91%, 97% and 98%, respectively, from fiscal year 2012 through fiscal year 2015. For the nine month period ending March 31, 2016, ILU (97.7%), ALU (97.1%) and SNF (96.7%) remain healthy. Additionally during this period, Landis successfully filled over 125 new ILUs.

GOOD HISTORICAL FINANCIAL PERFORMANCE AND POSITION

Fiscal 2012 operations were negatively impacted by higher than expected Medicaid census in the health center, lower occupancy in the residential suites due to facility limitations and slower than anticipated fill-up of the new south campus ILUs. Fiscal 2013 and 2014 operations rebounded due to healthier occupancies, quicker new ILU fill-ups, effective expenditure controls primarily from lower employee medical benefit costs, and reduced ancillary expenses in the health care center. As a result, the operating ratios were strong and favorably below Fitch's 'BBB' category medians in fiscal 2013 and 2014 at 93.8% and 94.1%, respectively. Operating performance for fiscal 2015 and the early part of fiscal 2016 was negatively affected by higher ancillary service use in the health center, large unfavorable budget variance for employee medical benefit costs, and some monthly service fee revenue loss due to vacated units. Regardless, the operating ratio remained solid at 97.3% for both fiscal year 2015 the nine 2016 month unaudited period ending March 31, 2016.

Cash flow generation has been solid due to adequate operating earnings, good investment returns and fundraising, and consistent net entrance fee receipts. The net operating margin-adjusted averaged 13.8% from fiscal year 2012-2015. As a result, coverage of actual annual debt service has been solid 2.5x and 1.6x, respectively, in fiscal years 2014 and 2015. Cash flow softened during fiscal year 2015 due to rising employee medical benefit expenses, rate increases below historical levels, and lower net entrance fee receipts from planned ILU vacancies. For the nine month interim period of fiscal 2016, the net operating margin-adjusted and actual annual debt service coverage rebounded to 12.1% and 2.0x, respectively.

LHRC's liquidity position is satisfactory. As of March 31, 2016, $27 million of unrestricted cash and investments amounts to 314 days operating expenses, 5.5x cushion ratio and 51.9% of long-term debt. Liquidity grew nicely since the end of fiscal year 2012 due to healthy cash flow, initial entrance fee receipts from new ILUs, and debt financed capital spending. While the liquidity metrics are below 'BBB' category medians, LHRC's non-refundable fee-for-service residency contracts temper Fitch's concern.

DISCLOSURE

LHRC covenants to disclose audited financial statements within 180 days, and quarterly financial statements within 45 days, to the Municipal Securities Rulemaking Board's EMMA system.