Fitch Affirms Saint Anne's Retirement Community (PA) at 'BB+'; Outlook Revised to Stable
--$18.4 million series 2012.
The Rating Outlook has been revised to Stable from Negative.
The bonds are secured by a gross revenue pledge, mortgage lien, and debt service reserve fund.
KEY RATING DRIVERS
STRENGTHENED PROFITABILITY: The Outlook revision to Stable is supported by stronger operating performance in fiscal 2016. Following several years of declining or flat revenue, SARC's service revenue grew 9% in fiscal 2016. Growth is due in large part to a successful memory support expansion, coupled with improved census across units. As a result, SARC produced a solid 10.6% net operating margin (NOM), and 2.0x coverage of maximum annual debt service (MADS) coverage by revenue only. Additionally, reliance on entrance fees and investment income is minimal.
IMPROVED OCCUPANCY: Following mixed occupancy in 2015, census improved in 2016, averaging above 92% across all units at fiscal year-end. The opening and fill-up of its new memory support unit in fiscal 2016 was successful; the unit was 94.5% occupied at fiscal year-end.
MODERATE LIQUIDITY: At fiscal year ended June 30, 2015, SARC had $8.8 million in unrestricted cash and investments, equating to 209 days cash on hand (DCOH), 48.1% cash to debt and a 5.4x cushion ratio in line with Fitch's respective 'BIG' medians of 227 DCOH, 37.3% and 5x. This level of liquidity is solid for a Type C fee-for-service facility at a 'BB+' rating level.
ILU EXPANSION PLANS: SARC is moving forward on its planned ILU expansion, which is expected to progress in phases, with initial financing now anticipated within the next nine months. The project's final scope and financing remains in flux, but is expected to be funded in part with debt and with entrance fee proceeds.
SUSTAINED CASH FLOW: SARC is expected to maintain solid operating profitability in line with the 'BB+' rating going forward. However, rating pressure is possible should SARC not maintain healthy cash flow in light of planned its capital outlays and likely increase in debt.
EXPECTED DEBT ISSUANCE: Near-term capital plans will likely include additional debt, which could pressure SARC's financial profile and rating. Though delayed, SARC has continued moving forward on its ILU expansion plan, and Fitch anticipates final determination of size, phasing, and financing to now occur in early-to-mid 2017.
Saint Anne's Retirement Community (SARC, a type C continuing care retirement community (CCRC), is located outside Columbia, PA in the township of West Hempfield, approximately 35 miles southwest of Harrisburg and 10 miles west of Lancaster. SARC is sponsored by the Religious Congregation of Sisters of the Adorers of the Blood of Christ, United States Region (ASC), and operates a 61-unit skilled nursing facility (SNF), a 51-bed memory support unit (MSU), 51-personal care assisted living units (ALUs), and 71-rental and entrance fee independent living units (ILUs). Total reported revenues in fiscal 2016 (year-end June 30) were $16.7 million.
SARC exceeded its budgeted expectations in fiscal 2016, generating 2.2x MADS coverage and a healthy 10.6% NOM. Both compare favorably to Fitch's 'BIG' medians of 1.5x coverage and 6.6% NOM. Healthy occupancy coupled with a conservative staffing and expense approach were key factors. Further, SARC's fiscal 2017 budget remains conservative with regard to expenses, as occupancy targets are conservative compared to fiscal 2016 actual levels. SARC finished fiscal 2016 with 94.9% ILU, 93.5% ALU, 94.5% MSU, and 89.2% SNF occupancy.
As expected, SARC is moving forward with its campus expansion plans, which may add up to 106 ILUs (both apartments and cottages) when fully complete, likely to be accomplished in several phases over the next several years. Overall, the project is expected to be accretive; expanding SARC's revenue base and addressing its somewhat high 17.7 year average age of plant. It is likely that SARC will pursue additional debt financing within the next nine to 12 months as a source of funding for this project. While SARC has some capacity at the current rating for additional debt, rating pressure is possible depending on the final scope and cost of the project and analysis of SARC's pro forma credit profile.
At fiscal 2016 SARC had $18.4 million in total long term debt, all of which is fixed rate. Debt service is level, with MADS measured at $1.6 million. SARC has no derivative instruments, and no defined benefit pension obligation.
SARC's current debt burden is currently manageable, evidenced by MADS equal to 9.2% of total revenue and 5.1x debt to net available. Of note, SARC's revenue-only coverage was a healthy 2x in fiscal 2016 and consistently well above Fitch's below-investment-grade (BIG) median of 0.8x.
SARC generated 1.9x debt service coverage per its fiscal 2016 covenant calculation, ahead of its 1.2x requirement.
SARC provides ongoing disclosure within 120 days of fiscal year and within 60 days of each fiscal quarter end via the Municipal Bondholders Rulemaking Board's EMMA system. Disclosure includes balance sheet, income statement, occupancy, budget, and covenant compliance.