Fitch Affirms Plymouth Place (IL) Bonds at 'BB+'; Outlook Stable
The Rating Outlook is Stable.
The bonds are secured by an interest in the gross revenues of the obligated group, a security interest in certain mortgaged properties and a debt service reserve fund.
KEY RATING DRIVERS
STRONG OCCUPANCY: Independent living unit (ILU) and assisted living unit (ALU) occupancy have been consistently strong since the community achieved stabilization in fiscal 2013, averaging 96% through fiscal 2015. However ALU occupancy dipped to 89% at June 30, 2016 while skilled nursing (SNF) occupancy has been more volatile and equaled 85% at June 30, 2016.
SOLID PROFITABILITY: Operating profitability compressed slightly in the six-month interim period ending June 30, 2016 (the interim period) with net operating margin (NOM) and net operating margin adjusted (NOMA) decreasing to 11.0% and 21.1%, respectively, but remains solid relative to Fitch's below investment grade (BIG) medians of 6.6% and 14.5%.
HIGH DEBT BURDEN: Plymouth Place needs to sustain solid profitability to support its high debt burden with maximum annual debt service (MADS) equal to 18.3% of fiscal 2015 revenue. MADS coverage has been solid since stabilization was achieved in 2013 and equaled 1.9x in fiscal 2015. MADS coverage decreased to 1.2x in the interim period, but is in line with the prior year's interim period results.
WEAK BUT IMPROVING LIQUIDITY: Despite significant improvement in absolute liquidity since 2011, liquidity metrics remain weak, with 337 days cash on hand, 31.8% cash to debt and 4.3x cushion ratio, but are in line with BIG rated peers.
SOLID COVERAGE: Fitch expects Plymouth Place to generate cash flows sufficiently strong to provide for MADS coverage consistent with the rating category.
FUTURE CAPITAL PROJECTS: Future capital plans include the redevelopment of Plymouth Place's ILU cottages. While Fitch does not expect the redevelopment project to materially impact liquidity or leverage metrics, any material impact would likely result in negative rating pressure.
Plymouth Place operates a Type A continuing care retirement community (CCRC) with 182 ILU apartments, 52 ALUs, 26 memory support units and 86 SNFs. All units are located in an eight-story building on an 18.6-acre campus in La Grange Park, Illinois, approximately 15 miles southwest of downtown Chicago. The community also has 55 ILU cottages; however, the cottages are not actively marketed and the vast majority are not in service. Plymouth Place was incorporated in 1939 and began operations in 1944. Due to aging of the original building, Plymouth Place constructed a replacement facility that opened in 2007.
Plymouth Place is the sole member of the obligated group and accounts for 100% of consolidated total assets and 100% of consolidated operating revenues.
Occupancy rates have remained strong following a slow fill-up and stabilization subsequent to the opening of the new facility. The replacement facility opened in 2007 during the recession, which had a negative impact on fill-up. ILU occupancy increased from 76% in 2011 to 97% in 2013 and has remained strong at 96% through June 30, 2016. ILU cottages are not included in ILU occupancy rates because they are no longer actively marketed and maintained. ALU occupancy has been consistently strong, averaging 96% since 2011 and equal to 97% at fiscal year-end 2015, but declined to 89% at June 30, 2016. SNF occupancy has averaged 86% since 2011 and equaled 85% at June 30, 2016.
Stabilization was achieved in 2013 and operating profitability was consistently solid through fiscal 2015 before compressing in the interim period. Operating ratio decreased from 117.1% in fiscal 2012 to an average of 102.4% in fiscal years 2014 and 2015 as operations were adjusted following the fill-up, before increasing slightly to 103.5% in the interim period. NOM equaled 14.7% in fiscal 2015 before decreasing to 11% in the interim period. The decrease was due to higher dining services expense and increased nursing agency expense, reflecting competitive labor markets. Management has addressed both issues and Fitch expects core operating profitability to stabilize and improve going forward.
Profitability is also exposed to the changing landscape with Medicare short-stays in the SNF. SNF revenue comprised almost 50% of resident service revenue and Medicare accounted for 60% of SNF revenue.
NOMA decreased to 23.8% in fiscal 2015 from 29.1% in fiscal 2014 despite strong ILU sales, due to increased refunds attributable to contract types refunded as opposed to the number of contracts refunded. NOMA decreased further to 21.1% in the interim period reflecting the compressed core operating profitability. However, both NOM and NOMA continue to easily exceed Fitch's BIG category medians of 6.6% and 14.5%, respectively.
HIGH DEBT BURDEN
Plymouth Place needs to maintain its solid profitability to support its heavy debt burden with MADS equal to 18.3% of fiscal 2015 total revenue, exceeding Fitch's BIG category median of 10%. Fitch normalized MADS to smooth out six series 2013 bullet maturities that occur between 2038 and 2043, during which MADS would have equaled $7.2 million. Fitch's normalized MADS assumption is $5.6 million. Actual aggregate debt service is level at approximately $5.2 million through 2037. Plymouth Place's rate covenant is based upon actual annual debt service.
Despite the decreased net entrance fees in fiscal 2015, MADS coverage remained solid at 1.9x, exceeding Fitch's BIG category median of 1.5x. Revenue-only MADS coverage increased to 1.4x in fiscal 2015, exceeding Fitch's BIG category median of 0.8x. MADS coverage and revenue-only MADS coverage decreased to 1.2x and 0.6x, respectively, in the interim period, reflecting Plymouth Place's high debt burden and slightly compressed operating profitability, but remain consistent with the prior year's interim period results. Fitch expects fiscal year-end coverage metrics to remain in line with historical results.
WEAK BUT IMPROVING LIQUIDITY
Unrestricted cash and investments increased 79.3% since fiscal 2011 to $25 million at June 30, 2016. However, unrestricted cash and investments have increased only a modest 1.7% since June 30, 2015 at the time of Fitch's initial rating. The significant increase since fiscal 2011 reflects the stabilization of the community, as initial entrance fees were received and ILU occupancy increased along with solid cash flows. Despite the increase, liquidity metrics remain weak with 337 days cash on hand, 31.8% cash to debt and 4.3x cushion ratio but relatively in line with Fitch's BIG category medians of 226.5 days, 37.3%, and 5.0x.
FUTURE CAPITAL PROJECTS
Capital plans include the incremental replacement of Plymouth Place's ILU dated cottages with new cottages. Fitch does not expect the cottage redevelopment project to materially impact liquidity or leverage metrics. Any related material impact to either unrestricted liquidity or leverage metrics would likely result in negative rating pressure given Plymouth Place's weak liquidity metrics and limited debt capacity at the current rating level. The timing of the cottage redevelopment project is currently uncertain.
Plymouth Place had approximately $78.4 million of total debt outstanding at June 30, 2016. The debt portfolio consists of 100% underlying fixed-rate bonds. Plymouth Place is not counterparty to any interest rate swap agreements. Fitch views the conservative debt profile as appropriate for the rating level.