Fitch Rates Lenbrook Square Foundation, Inc.'s (GA) Revenue Bonds 'BBB'; Outlook Stable
--$86.7 million retirement facility refunding revenue bonds, series 2016.
Bond proceeds will refund Lenbrook's series 2006A bonds and advance refund the series 2006B bonds, fund a debt service reserve account and pay costs of issuance. The 2016 bonds are scheduled to sell via negotiated sale the week of October 3rd, 2016.
The Rating Outlook is Stable.
The bonds are secured by a mortgage lien on the facility, a security interest in the gross revenues and a debt service reserve fund.
KEY RATING DRIVERS
SOLID FINANCIAL PERFORMANCE: Lenbrook's increasing occupancy and demand across all levels of care has resulted in continuously improved financial position over the past five years. Lenbrook's operating ratio of 94.6% in 2016 and 95% in 2015 and net operating margin - adjusted of 40.1% in 2016 and 39.6% in 2015 compare favorably to Fitch's 'BBB' category medians.
NICHE MARKET POSITION: Fitch views Lenbrook's market position as its key credit factor. Lenbrook has limited competition as a luxury Type 'B' contract community in the desirable Peachtree corridor in the Buckhead district of Atlanta. It is the only CCRC in Atlanta to receive accreditation from the Commission on Accreditation of Rehabilitation Facilities (CARF) and all of its 60 skilled nursing (SN) beds are Medicare certified.
HIGH OCCUPANCY SUPPORTED BY LOCATION AND SERVICES: Lenbrook's desirable location, reputation and program offerings, coupled with well-developed marketing strategies, have translated into strong occupancy rates following the fill-up period after the new Lenox tower opened in 2008. Occupancy in the Independent Living Units (ILUs) is 96%, 93% for the Personal Care Suites and 93% occupancy for SN beds.
GROWING LIQUIDITY POSITION: With improving occupancy and strong net entrance fee receipts, Lenbrook's cash position has demonstrated remarkable growth over the past five years to 501 days cash on hand (DCOH) as of fiscal year end 2016 from 103 days in 2011. Lenbrook's liquidity is comfortably above Fitch's 'BBB' category medians of 400 days.
HIGH DEBT METRICS: Lenbrook's debt position remains high after the 2006 financing for the most recent construction project. Low cash to debt of 39.4% and pro forma maximum annual debt service (MADS) representing a high 18.0% percent of 2016 revenues are unfavorable compared to category peers. Pro forma MADS coverage is adequate at 2.6x for 2016 and MADS Coverage-Revenue Only is now at 1.1x. With no new debt plans or projects planned in the near future, Fitch expects Lenbrook's debt metrics to continue to moderate in the coming years to levels that are more in line with the 'BBB' rating.
STEADY OPERATING PROFILE: In the short to medium-term, Fitch expects Lenbrook Square Foundation, Inc. (Lenbrook) to maintain its current financial performance supported by its differentiating product offerings and high occupancy. Longer term, absent significant capital needs or expansion projects, Fitch anticipates that Lenbrook's liquidity will continue to increase. Increased liquidity and coverage may provide momentum in the long run for a ratings upgrade.
Lenbrook is a Type-B continuing care retirement community (CCRC) located in Atlanta, GA. The community consists of 353 ILUs, 16 Personal Care Suites and 60 SN beds located in two adjoining residential towers. The 60 SN beds are located in three floors, each with a 20-bed household model of care. One of the three floors is available for cognitive and memory care.
The Lenox tower opened in 2008 and is a 25-story building containing 140 ILUs and all 60 SN units. The Brookhaven tower is a 17-story building containing 213 ILUs and the Personal Care Suites. Lenbrook offers non-refundable, 50% refundable and 90% refundable contract options, with the 90% refundable option representing approximately 69% of the current contracts. Total operating revenue in 2016 was $32.4 million.
FULL CONTINUUM IN KEY LOCATION
Located in the northern section of the City of Atlanta, Lenbrook is located in a desirable area near shopping, dining and other social offerings. There are other senior living providers in the same Peachtree Road corridor, but they have slightly different characteristics. Two facilities (including an adjacent community) are rental for-profit communities that do not offer skilled nursing care. Another facility across the street is a Type-B CCRC with semi-private nursing beds but it offers 15 days of healthcare per annum and is not Medicare certified. All of Lenbrook's SN beds are private rooms and are five-star Medicare certified. Lenbrook offers a 60 day annual health care benefit.
Lenbrook offers residents an appealing facility and amenities, including eight onsite dining options. The average entrance fee at Lenbrook has been relatively consistent over the past five years and averaged $452,000 in 2016. Current residents have an average net worth that is approximately four times the average entrance fee.
OCCUPANCY AND DEMAND TRENDS
Construction on the Lenox tower was financed in 2006 and completed in 2008. Despite Lenbrook's advantageous location and quality offerings, the fill-up period for the 140 units at Lenox coincided with the real-estate crisis and the result was a prolonged period (from 2008 - 2013) of very weak occupancy in the ILUs. The personal care suites and SN units maintained adequate occupancy during this period, sustained by entrants from outside the Lenbrook community. Personal care and SN averaged a healthy 94% and 90%, respectively, during the five year period from 2012 to 2016.
The fill-up period was completed in 2014 and the occupancy in the ILUs in 2015 and 2016 was 96% in both years. Similarly, Personal Care suites and SN units had 93% occupancy in 2016. Roughly 38% of the occupants in the Personal Care suites are short-term private pay local residents (fairly consistent for the past five years) but the number of Lenbrook-community residents are beginning to represent a greater number of the SN beds as the community is at full ILU capacity (57%). Although Lenbrook is a Medicare certified facility, Medicare represents a modest 10% of the volume in the SN unit. In general, Lenbrook receives less than $2 million in annual revenue from Medicare and managed care contracts. The rest of Lenbrook's resident service revenue is either entrance fees or private pay for SN or Personal Care, a key contributing factor to the strong operating results.
Although Lenbrook's average age of resident is relatively high at 86.2 years, which is frequently an indication of possible increased turnover at the ILUs and increased transfers to the SN unit, Lenbrook's service offerings combined with residents' economic flexibility, allow many residents to receive personalized care in their own apartments. The turnover in 2016 was slightly higher than in 2015, but the community has been able to keep an adequate number of ILU move-ins from its waiting list. Lenbrook received 47 entrance fees in 2016 as compared to 55 in 2015 and 54 in 2014.
Fitch expects that ILU occupancy will continue to be supported by a solid real estate market in Atlanta and a strong age and income-qualified population in the primary market area. However, Lenbrook's more expensive model has shown vulnerability to the economic and real estate fluctuations in the Atlanta market in the past and may be significantly impacted by future recessions.
SOLID FINANCIAL PROFILE
Mostly as a result of the increased ILU occupancy and receipt of net entrance fees, cash flows have steadily improved over the last five years. Net entrance fees from turnover ILUs were $8.6 million in 2016 and $8.1 million in 2015. As a result, NOM-adjusted was high at 40.1% and 39.6% in 2016 and 2015, respectively. This compares favorably to Fitch's 'BBB' category median of 19.3%. The strong net entrance fee receipts has supported robust debt service coverage, which has averaged 2.6x over the last four years based on pro forma MADS coverage of $5.75 million.
Other financial metrics are also in line with the 'BBB' rating category. The operating ratio has continued to decrease year-over-year and at 94.6% for 2016 is just favorably below Fitch's 'BBB' category median of 96.1%. The NOM has been consistently at 22.1% for the past three years, above the 8.9% median.
CONTINUED LIQUIDITY GROWTH
Lenbrook's liquidity metrics compare well to the 'BBB' category median. In the post construction period, Lenbrook added approximately $31 million in unrestricted cash and investments from fiscal year end 2011 to 2016. As a result, Lenbrook had $37.5 million in unrestricted cash and investments, equal to 501 days cash on hand and yielding a cushion ratio of 6.5x, as of June 30, 2016. Fitch's 'BBB' category medians are 400 days and 7.3x, respectively. Lenbrook's current level of liquidity is adequate for the rating and its Type-B resident contract model.
Liquidity may decrease in the current fiscal year by approximately 70 days cash on hand with the $5.2 million offer to purchase the remaining condominiums in the building adjacent to Lenbrook. The community already owns eight condominiums in the building, seven of which were acquired in early fiscal 2017 for $1.7 million. Lenbrook has offered an additional $3.5 million for the remaining 16 condominiums. Lenbrook is land-locked and both management and Fitch view the purchase of these condos as a key long-term strategic opportunity. There are no immediate or definitive plans to construct or develop the property.
While management continues to re-invest capital into Lenbrook (the physical plant is an important part of its marketing and product offering), capital expenditures have been low compared to depreciation as Lenbrook is a relatively new facility. The average age of plant is 9.8 years and future spending needs are expected to remain modest. With the strong net entrance fee trend, annual savings from the planned 2016 refunding, and light capital spending requirements, Fitch expects Lenbrook to further grow its unrestricted cash and investments in the coming years.
The growth in liquidity should improve the overall balance sheet profile in the long-term as cash-to-debt of 39.4% for 2016 is light and indicative of Lenbrook's leveraged debt position. With the $5.2 million purchase of the condominiums, cash-to-debt would decrease further to 33.9%.
As of June 2016, Lenbrook had $87.3 million in outstanding series 2006A bonds and $7.9 million in 2006B bonds. The 2016 fixed rate financing contemplates a full refunding of the series 2006A bonds when the bonds are callable on or after January 1, 2017 and an advance refunding of Lenbrook's series 2006B bonds (July 1, 2017 call date). Lenbrook is not a party to any swap arrangements nor does it have a pension liability. Lenbrook does not have any current plans to issue additional debt.
Lenbrook covenants to disclose certain financial and operating information, including audited financial statements and occupancy data, within 150 days after the end of each fiscal year. Quarterly financial information is to be disclosed within 45 days after the end of each quarter. Disclosure is provided on the Municipal Securities Rulemaking Board's EMMA website.