Fitch Rates Lifespace Communities, Inc.'s (IA) Series 2015 Bonds 'A'; Outlook Stable
--\$34,595,000 Illinois Finance Authority revenue bonds, series 2015A
--\$4,795,000 Illinois Finance Authority taxable revenue bonds, series 2015B
--\$43,045,000 Palm Beach County Health Facilities Authority revenue refunding bonds, series 2015C
Fitch has also affirmed the 'A' rating on approximately \$79 million of revenue bonds issued through various authorities on behalf of Lifespace). A complete list of the bonds is provided at the end of this release.
The series 2015 bonds are expected to be issued as fixed rate bonds. Bond proceeds will be used to refinance certain outstanding bonds; finance or reimburse for various capital projects including the addition of a fitness center, auditorium, additional dining venue and additional common areas at Lifespace's Beacon Hill campus in Lombard, IL; and pay costs of issuance. The series 2015A/B bonds are expected to price the week of March 2 through negotiation and the series 2015C bonds are expected to price the week of March 9 through negotiation.
The Rating Outlook is Stable.
The bonds are secured by a pledge of unrestricted receivables and a mortgage interest in certain property of the obligated group (OG).
KEY RATING DRIVERS
DIVERSE OPERATING PLATFORM: The OG's operations are well diversified across 10 communities located in six states with no individual community accounting for more than 15% of gross revenue in fiscal 2014 (Dec. 31 year-end).
CONSISTENTLY SOLID PROFITABILITY: The diverse revenue base, consistently strong and stable occupancy and effective cost management practices have combined to produce consistently solid operating profitability. Net operating margin and net operating margin adjusted averaged 6.8% and 24.4%, respectively, between fiscal years 2010 and 2014, exceeding Fitch's 'A' category medians of 6.2% and 23.4%.
STRONG COVERAGE: A moderate pro forma debt burden and consistent entrance fee generation have resulted in strong pro forma maximum annual debt service (MADS) coverage of 4.2x in fiscals 2014 and 2013, relative to Fitch's 'A' category median of 3.7x.
STABLE OCCUPANCY: Occupancy has remained consistently solid across all levels of care with independent living units (ILUs), assisted living units (ALUs) and skilled nursing beds (SNF) occupancy equal to 92.5%, 89.5% and 90.1%, respectively, at Dec. 31, 2014.
STRONG INVESTMENT IN FACILITIES: Capital reinvestment has been strong, with capital expenditures averaging 147.9% of depreciation expense since fiscal 2011, resulting in well-maintained facilities, thereby enhancing the communities' marketability and competitive positions.
MAINTAINED CREDIT PROFILE: Fitch expects that Lifespace will maintain stable occupancy and turnover leading to solid operating performance and strong coverage.
Headquartered in Des Moines, Iowa, Lifespace operates 12 continuing care retirement communities (CCRCs) in seven states, 10 of which are in the OG. Of the 10 communities in the OG, five are located in Florida with the remaining communities located in Illinois, Kansas, Minnesota, Pennsylvania and Nebraska. Total operating revenues equaled \$185.3 million in fiscal 2014. Fitch's fiscal 2014 analysis is based on unaudited interim financial statements of the OG. Audited financial statements were not available at the time of publication. Non-OG entities include Lifespace Foundation, Deerfield Retirement Community (Urbandale, IA) and Oak Trace (Downers Grove, IL).
Subsequent to the planned retirement of Lifespace's CEO in March 2014 and a national search, the board of directors appointed Sloan Bentley as Lifespace's new CEO. Ms. Bentley joined Lifespace from American Baptist Homes of the West (revenue bonds rated 'BBB+', Stable Outlook by Fitch) where she served as president of a unit that provides marketing and management services to senior living communities. The new CEO updated Lifespace's strategic plan in January 2015. Related initiatives include identifying revenue generating opportunities such as pricing adjustments, new products and new services; bridging existing service gaps with assisted living and memory support; and identifying future growth opportunities through acquisitions, new communities and development of existing communities. The management team is currently working on updating the associated capital plan.
DIVERSE OPERATING PLATFORM
With 10 communities located in six states, Fitch believes bondholders benefit from the OG's geographic diversity which reduces overall operating risk relative to a single-site borrower. Moreover, revenue generation and profitability are well balanced, with no individual community accounting for more than 15% of fiscal 2014 gross revenue. However, with five communities located in Florida, 58.7% of Lifespace's fiscal 2014 revenue was generated in Florida, resulting in high exposure to the state's housing markets and risks related to hurricanes. Fitch's credit concerns include Lifespace's high concentration of revenue derived from Florida.
CONSISTENTLY SOLID PROFITABILITY
Profitability has been consistently solid for the rating category with 94.9% operating ratio, 6.7% net operating margin and 25% net operating margin adjusted in fiscal 2014, all favorable to Fitch's respective 'A' category medians of 97.1%, 6.2% and 23.4%. The consistently solid operating profitability is driven by strong occupancy rates, continued net entrance fee generation, effective cost management practices and yearly fee increases.
Pro forma MADS is not expected to change materially despite the issuance of approximately \$20 million of new money, due to lower interest rates on the refunded portion of the series 2015 issuance. The refunding savings will partially offset the impact of the new money. Pro forma MADS is expected to equal approximately \$12.34 million. Lifespace's pro forma debt burden remains moderate with MADS equal to 6.6% of fiscal 2014 operating revenue, relative to Fitch's 'A' category median of 8.9%.
The moderate debt burden, solid operating profitability and entrance fee generation continue to provide for strong debt service coverage. Pro forma MADS coverage equaled 4.2x in fiscal 2014, exceeding Fitch's 'A' category median of 3.7x. Revenue-only MADS coverage equaled a solid 1.2x fiscal 2014.
Occupancy remains consistently strong and stable reflecting Lifespace's solid management and marketing practices in addition to the competitive position of each community in the OG. Occupancy remains firm across all levels of care with ILU, ALU and SNF occupancy equal to 92.5%, 89.5% and 90.1%, respectively, at Dec. 31, 2014. Management reviews occupancy levels at each community on a weekly basis to ensure that occupancy remains strong. Lifespace's diversified operating platform has allowed occupancy to remain stable despite some fluctuation in individual communities.
STRONG INVESTMENT IN FACILITIES
Capital spending has been solid, averaging 147.9% of depreciation expense since fiscal 2011. In addition to the aforementioned project at Beacon Hill, capital projects in progress include renovating common areas and expanding dining venues in certain communities. Management targets capital spending to equal between 75% and 130% of depreciation. However, as previously noted, Lifespace's capital plan is in the process of being updated in conjunction with the finalized strategic plan.
Depending upon the final capital plan, capital projects could include the issuance of new debt. Fitch will assess the credit impact of any new debt as details become more certain.
Despite the solid capital spending, unrestricted cash and investments have continued to grow, increasing 3.5% since fiscal 2013 to \$165 million at Dec. 31, 2014. The continued growth is primarily due to solid entrance fee generation and operating cash flows. Liquidity is adequate for the rating category relative to the debt burden with 110.8% cash-to-pro forma debt and 13.3x cushion ratio at Dec. 31, 2014 relative to Fitch's 'A' category medians of 127.2% and 15.8x.
Total pro forma debt outstanding is expected to equal \$148.6 million compared to \$132 million at Dec. 31, 2014. Lifespace's pro forma debt profile will consist of 73% underlying fixed rate bonds and 27% underlying variable rate bonds, representing an increase from 51% underlying fixed rate bonds. Of the variable rate bonds, only approximately 3% are subject to remarketing and put risk. Lifespace is not counterparty to any swaps. Fitch views the conservative debt portfolio favorably.
On Feb. 17, 2014, Lifespace entered into a forbearance agreement whereby Lifespace agreed in principle to provide a guaranty on approximately \$28.9 million of Deerfield's series 2014A, C and D bonds in exchange for deferral on debt service payments in years 2015 through 2017, and parity status for any future capital expenditures for repositioning provided to Deerfield by Lifespace with Deerfield's senior indebtedness. Lifespace currently owns the outstanding series 2014C and 2014D bonds. The forbearance agreement is effective through Aug. 17, 2015, by which the two parties expect to sign a term sheet with essentially the same terms contained in the forbearance agreement. The forbearance is expected to provide financial flexibility while Deerfield repositions itself to address occupancy and cash flow concerns. Given the deferral on debt service payments through 2017, Fitch does not expect the guaranty to materially impact the OG's credit profile until 2018, if at all, when debt service payments resume. Additionally, Lifespace's financial profile currently mitigates concerns should any payments be required under the guaranty. However, Fitch will access any impact on the overall credit profile once the term sheet is finalized.
Lifespace covenants to provide annual disclosure within 150 days of the fiscal year-end and quarterly disclosure within 45 days of each fiscal quarter-end. Disclosure is provided through the Municipal Securities Rulemaking Board's EMMA system.
Fitch affirms the 'A' rating on the following bonds issued on behalf of Lifespace:
--\$3.97 million Illinois Health Facilities Authority (Beacon Hill) revenue bonds series 1999A;
--\$5.51 million, Palm Beach County Health Facilities Authority (FL) (Abbey Delray) revenue bonds series 2001 A and B;
--\$4.75 million Chartiers Valley Industrial & Commercial Development Authority (PA) (Friendship Village of South Hills) revenue refunding bonds series 2003A;
--\$4.30 million Palm Beach County Health Facilities Authority (FL) (Harbour's Edge) revenue bonds series 2004 A and B;
--\$6.07 million Illinois Finance Authority (Beacon Hill) revenue refunding bonds series 2005 B;
--\$24.97 million Palm Beach County Health Facilities Authority (FL) (The Waterford) revenue bonds series 2007;
--\$4.70 million Kansas Development Finance Authority (Lifespace Communities, Inc.) taxable revenue bonds series 2010T;
--\$25.69 million Kansas Development Finance Authority (Lifespace Communities, Inc.) revenue bonds series 2010S.