Fitch Affirms United Methodist Communities at 'BBB-'; Outlook Stable
--$19.8 million revenue bonds, series 2014A;
--$35.7 million revenue bonds, series 2013.
The Rating Outlook is Stable.
The bonds are supported by a pledge of gross receipts of the obligated group (OG), a debt service reserve fund, and a mortgage lien on obligated group property.
KEY RATING DRIVERS
STEADY OPERATING PERFORMANCE: The 'BBB-' rating affirmation reflects steady and solid operating performance, despite limited benefit of entrance fee or investment income. UMC produced an 87.2% operating ratio and 15.9% net operating margin through the nine-month interim period ended March 31, 2016, both favorable to Fitch's 'BBB' medians of 96.1% and 8.9%, respectively.
MANAGEABLE DEBT BURDEN: UMC's debt burden remains moderate, and no additional debt is currently planned. Through the nine-month interim period, UMC generated 1.6x coverage of maximum annual debt service (MADS) and had 6.8x debt to net available, against Fitch's 'BBB' medians of 2.0x and 5.9x, respectively. Of note, UMC's revenue-only coverage is very healthy at 1.7x.
MODEST LIQUIDITY: Unrestricted liquidity was hampered by year-over-year market losses in fiscal 2016, with a cumulative $4 million in unrealized losses in fiscal 2015 and 2016. Unrestricted cash fell to 46 million at March 31, 2016, equal to 302 days of cash on hand (DCOH) and 60.2% cash to debt, from 344 DCOH and 64.2% cash to debt at fiscal 2015. Still, termination of its pension plan and moderate capital outlays over the next two to three years should allow for balance sheet preservation at a minimum.
LAGGING OCCUPANCY: While demand for skilled nursing and memory care units remains healthy (with 93% average occupancy through March 31, 2016), assisted living (AL) and independent living (IL) occupancy remain softer than expected. Through the nine-month period ended March 31, 2016, UMC averaged 86% occupancy within its AL, and 80.7% occupancy within its IL units.
HIGH GOVERNMENT PAYOR MIX: Fitch believes that UMC has a heightened sensitivity to reimbursement changes from government payors as 64% of SNF net revenues are derived from Medicare and Medicaid. Emerging bundled payment initiatives could have meaningful impact given UMC's high percentage of Medicare residents. However, Fitch does note that UMC is positioned well as a low cost provider with low readmission rates.
CONSISTENT PROFITABLITY AND COVERAGE: The rating reflects expectation that United Methodist Communities (UMC) will continue producing consistent operating performance and debt service coverage, which should result in balance sheet preservation and a moderation in leverage going forward. Upward rating movement is possible with further moderation of debt metrics, coupled with demonstrable ability to increase liquidity metrics to levels at or above Fitch's 'BBB' median. Longer term capital needs could limit upward rating potential, particularly if scope/scale necessitates additional debt issuance.
UMC operates 10 senior housing, comprehensive assisted living, memory support and skilled nursing facilities across the state of New Jersey. Total reported revenues were $76.1 million in fiscal 2015 (year ended June 30), of which $61.1 million was derived from the OG. Non-OG entities include one assisted living and skilled nursing facility, and five HUD section 202 housing facilities.
The rating is based on the OG financial results and operations. The OG consists of four owned and/or operated facilities with a total of 779 units. They are: Francis Asbury Manor, located in Ocean Grove; Collingswood Manor, located in Collingswood; Bristol Glen, located in Newton and Fredon;
And The Shores at Wesley Manor, located in Ocean City.
PROFITABILITY MAINTAINED DESPITE CENSUS PRESSURE
Through the unaudited nine-months ended March 31, 2016, operating income was maintained against prior fiscal year results, though excess income fell well short of prior year and census in AL and IL remained pressured. UMC generated an 87.2% operating ratio through the March 31 interim period, against 88.6% generated for the same prior year period. However, Excess margin fell to 7.2% versus 8.4% for the same periods.
Still, sufficient coverage for the rating remains, and UMC is expecting to maintain or improve its profitability for fiscal 2017. Management is projecting to produce $4.4 million in net income and 1.7x coverage for fiscal 2016, and a conservative view of flat occupancy is projected to produce cash flow sufficient for steady coverage in fiscal 2017.
CONSERVATIVE CAPITAL STRUCTURE
As expected, UMC terminated its defined benefit pension plan in fiscal 2016, which will eliminate the $1 million annual contribution requirement going forward. Despite a $2 million final contribution to fully fund it prior to termination, going forward, UMC will have more capacity for liquidity growth absent this expense. In addition, capital needs near $4.5 million annually over the near term are manageable, and no additional debt is planned.
The obligated group had approximately $76.5 million in debt outstanding at March 31, 2016, which is all fixed rate. This includes approximately $23 million in two privately placed term loans, which mature in 2019 and 2025. The term loans are parity to the long-term debt, with no additional covenants. An additional $1.5 million in total long-term system debt is non-obligated, governed under HUD regulation, and secured by FHA mortgages on related properties.
UMH provides audited financials within 120 days and quarterly financials within 45 days to the EMMA system, which includes OG financial statements, covenant performance, and occupancy.