Fitch Affirms Morningside Ministries (TX) Rev Bonds at 'BBB-'; Outlook Stable
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a pledge of all revenues, first mortgage on all assets, and by a debt service reserve fund.
KEY RATING DRIVERS
SATISFACTORY FINANCIAL PROFILE: Morningside Ministries has a satisfactory financial profile, as evidenced by its solid profitability, consistent historical debt service coverage, and adequate liquidity position. Debt service coverage by revenue only is strong at 1.8x in fiscal 2014 (Dec. 31, 2014; audited) compared against Fitch's 'BBB' rating category median of 0.9x, driven by MM's predominately rental-fee model and substantial amount of assisted living and skilled nursing services offered.
SOLID OVERALL OCCUPANCY: MM has strong demand for its services, as demonstrated by a 92.3% occupancy average in its independent living units (ILU) over the past four fiscal years. Additionally, occupancy in the assisted living units (ALU) and skilled nursing facilities (SNF) is solid, averaging 91.5% and 88.3%, respectively, over the same period.
LARGE CAPITAL PROJECT: Management is in process of expanding services at its Menger campus, which will total approximately $42 million upon completion and includes 68 new ILUs and 48 new ALUs. The project is being funded by a bank construction loan. To date, the project is on budget with completion expected by the end of 2015.
MANAGEABLE DEBT BURDEN: Despite MM's large campus expansion project, maximum annual debt service (MADS) of $4.7 million equated to 9.3% of the organization's total revenue as of Dec. 31, 2014, which compared favorably against Fitch's 'BBB' median of 12.3%.
RENTAL SERVICE PROVIDER: MM does not rely on turnover entrance fees for debt service coverage as it is a predominately rental continuing care retirement community (CCRC). MM has a long operating history dating back to 1959 with limited competition, which are viewed as primary credit strengths.
RATING SENSITIVITIES
COMPLETION OF EXPANSION PROJECT: Morningside Ministries is on track with presales of its new independent living units as of June 30, 2015 (81%) and it is Fitch's expectation that Morningside Ministries will sustain the sales velocity and achieve fill up in a timely manner to reach stabilized occupancy by 2017. Additionally, project construction completion is expected by 2015, which Fitch believes is attainable. Failure to successfully execute on project completion and stabilization would be viewed negatively.
CREDIT PROFILE
Morningside Ministries was established in 1959 and began serving seniors in 1961. MM currently operates three senior living communities in the greater San Antonio, Texas metropolitan area. Specifically, MM at Menger Springs (MMMS) is a rental independent- and assisted-living community that consists of 92 ILUs, 40 entrance fee (EF) independent cottages, 42 ALUs, and 40 skilled nursing units located in Boerne, Texas outside of San Antonio.
MM at the Meadows (MMM) comprises Morningside Meadows Retirement Community and Morningside Manor Health Care, totaling 142 ILUs, 68 ALUs, and 167 nursing beds. In addition, there is MM at The Chandler Estate (MMCE) which is a rental CCRC in San Antonio that is made up of 38 ILUs, 24 ALUs, and 113 nursing beds. MM also operates a pharmacy and a training institute. In fiscal 2014 (Dec. 31; audited), MM had total operating revenues of $48.2 million.
SATISFACTORY FINANCIAL PROFILE
As of Dec. 31, 2014 (audited), MM had unrestricted cash and investments of $29.3 million, which translated into 240 days cash on hand, a 6.3x cushion ratio, and 47.9% cash to debt position. These metrics are slightly below Fitch's 'BBB' category medians of 408 days, 6.9x, and 60.2%, respectively, but are considered adequate for the 'BBB-' rating level.
Through the same period MM generated consistent operations, which produced a 93% operating ratio, 11.9% net operating margin, and 13.7% net operating margin-adjusted margin, which were in line with Fitch's respective medians of 97.4%, 9.2%, and 20.4%,. Overall, Fitch views the organization's ability to generate profits by operating efficiently as a credit positive.
SOLID OVERALL OCCUPANCY
As of June 30, 2015 (six-month interim; unaudited) occupancy in all MM's facilities was strong with overall ILU occupancy of approximately 92% (down from 95% at Dec. 31, 2014) and ALU occupancy averaging approximately 91% among the three campuses. Historically, MM's ILU occupancy has averaged between 90% and 97.7%, which Fitch views favorably, but is down through the six-month interim period due to higher than normal attrition. Skilled nursing occupancy in June 2015 averaged approximately 91% across campuses.
MADS coverage through the six-month interim period did compress to 1.4x due to lower occupancy, but Fitch expects this to return to historical levels as occupancy rebounds.
LARGE CAPITAL PROJECT
The Menger Springs expansion project includes 68 new ILUs and 48 new ALUs, and 55 of the 68 units have been pre-sold (10% of entrance fee received). The ILUs are expected to be completed by December of 2015 with ALU completion in September 2015. Management noted that construction timing has been slightly delayed due to weather conditions, but there have been no associated cost overruns.
The project is being financed with a $42 million draw-down bank loan, which will be at a variable rate and matures in 2021. The bank loan has a custom amortization, and aggregate MADS (which includes the bank loan) of approximately $4.7 million assumes the paydown of $12.8 million of the bank loan in 2017 with initial entrance fees received. At June 30, 2015, MM has drawn $23.7 million of the $42 million; however, the full amount of the loan has been incorporated in Fitch's analysis.
Total initial entrance fees expected from the project is $16.5 million and Fitch expects MM to fill up the units according to schedule, which should generate sufficient funds to pay down the $12.8 million of debt in 2017.
MANAGEABLE DEBT BURDEN
Fitch views MM's debt profile as manageable with no outstanding swaps. Despite additional debt incurred in 2014 for the expansion project, the organization's debt burden remains in line with Fitch's 'BBB' category medians. MADS as a percentage of revenue has dropped over the past four years, declining to 9.3% in fiscal 2014 from 10.5% in fiscal 2011.
SKILLED NURSING QUALITY
In May 2014, MM had an elder abuse incident that was publicized and there continues to be an ongoing lawsuit. Additionally, the CMS rating at MMM's Manor skilled nursing facility was lowered to a 3-star overall rating in 2015 and placed on immediate jeopardy for issues concerning water temperatures in vacant units. Overall, Fitch views these issues as concerning and although there has not been an impact to occupancy to date or the organization's financial profile, any negative repercussions to the organization will be monitored, as reputation and its long operating history have been viewed as credit strengths. Fitch also notes that management most recently reported an excellent life-safety and health survey at MMM's Manor skilled nursing facility.
DISCLOSURE
Morningside Ministries covenants to provide annual, semiannual and quarterly disclosure through the EMMA system.
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