Fitch Affirms United Methodist Homes of New Jersey at 'BBB-'; Outlook Stable
--\\$18.9 million revenue bonds, series 2014A
--\\$36.7 million revenue bonds, series 2013
The Rating Outlook is Stable.
The bonds are supported by a pledge of gross receipts of the obligated group (OG), a debt service reserve fund, and a mortgage lien on obligated group property.
KEY RATING DRIVERS
STEADY OPERATING PERFORMANCE: The 'BBB-' rating affirmation reflects UMH's very consistent and solid operating performance, coupled with minimal reliance on entrance fees or investment gains. UMH produced an 88.6% operating ratio and 15.7% net operating margin through the nine-month interim period ended March 31, 2015, both favorable to Fitch's 'BBB' medians of 97.4% and 9.9%, respectively.
MANAGEABLE DEBT BURDEN: UMH's debt burden is moderate, and no additional debt is currently planned. Through the nine-month interim period, UMH generated 1.7x coverage of maximum annual debt service (MADS) and had 6.8x debt-to-net available, against Fitch's 'BBB' medians of 2.0x and 6.3x, respectively. Of note, UMH's revenue-only coverage is very healthy at 1.8x, demonstrating little reliance on entrance fees and solid operating efficiency.
MODEST BUT IMPROVING LIQUIDITY: Unrestricted liquidity continues to improve, equal to 335 days of cash on hand (DCOH), a 7.1x cushion ratio, and 61.8% cash-to-debt at March 31, 2015 as compared to Fitch's respective 'BBB' category medians of 408 DCOH, 6.9x cushion, and 60.2% cash-to-debt. Over the next 2-3 years UMH's capital plans are manageable at near \\$4.5 million annually, though Fitch notes some facilities may have longer-term capital needs in order to remain competitive in their markets.
CONSISTENT MARKET DEMAND: Despite operating in a competitive landscape, UMH's relationship with the Methodist churches across New Jersey, coupled with strong quality metrics has garnered consistent demand for its services. Through the nine-month interim period UMH averaged 89% occupancy within its assisted living (AL) and memory care units, and 94% occupancy within its skilled nursing facility (SNF). While independent living units (ILU) was slightly soft at 84% occupancy, this service represents a low 6% of UMH's net revenues.
HIGH GOVERNMENT PAYOR MIX: Approximately 60% of UMH's skilled nursing net revenues are derived from Medicare and Medicaid, which presents some concern should reimbursement levels or methodology change. Fitch does note that UMH is positioned well to grow its managed care business, as a low-cost provider with low readmission rates.
SUSTAINED OPERATING PERFORMANCE: The rating reflects Fitch's expectation that United Methodist Homes of New Jersey (UMH) will continue producing consistent operating performance and debt service coverage (DSC), which should result in further balance sheet strengthening and additional moderation in debt burden over the longer term. Upward rating movement is possible with further moderation of debt metrics, coupled with demonstrable ability to sustain liquidity metrics at or above Fitch's 'BBB' median. Future capital needs could limit upward rating potential, particularly if scope/scale necessitates additional debt issuance.
UMH operates 10 senior housing, comprehensive assisted living, memory support and skilled nursing facilities across the state of New Jersey. Total reported revenues were \\$75.2 million in fiscal 2014 (year ended June 30), of which \\$61.1 million was derived from the OG. Non-OG entities include one assisted living and skilled nursing facility, and five HUD section 202 housing facilities.
The rating is based on the OG financial results and operations. The OG consists of four owned and/or operated facilities with a total of 779 units. They are: Francis Asbury Manor, located in Ocean Grove; Collingswood Manor, located in Collingswood; Bristol Glen, located in Newton and Fredon; and The Shores at Wesley Manor, located in Ocean City.
The rating affirmation reflects continued healthy operating performance, sufficient for DSC near the median, despite some ILU occupancy pressure and a government-payor-heavy revenue mix. UMH expects to finish fiscal 2015 with a steady 1.6x coverage ratio, and maintain its liquidity, which is feasible against year-to-date performance. While capital needs should remain level near \\$4.5 million over the near term, Fitch notes that some campuses may have elevated needs over the longer term in order to remain competitive.
CONSERVATIVE CAPITAL STRUCTURE
UMH plans to terminate its pension plan in fall 2015, eliminating the associated \\$1 million in expense going forward. Fitch views this positively, particularly in conjunction with an already conservative debt structure. Upward rating movement could occur should UMH sustain its cash flow, and generate further growth in liquidity to levels in excess with the 'BBB' rating category.
Total OG debt equaled \\$82.4 million at March 31, 2015, which is all fixed-rate debt. MADS is measured at equal to \\$7.2 million, and debt service is level through maturity in 2038. UMH generated 1.68x DSC per its March 31, 2015 indenture calculation.
An additional \\$2 million in total long-term system debt is non-obligated, governed under HUD regulation, and secured by FHA mortgages on related properties.
UMH provides audited financials within 120 days and quarterly financials within 45 days to the EMMA system, which includes OG financial statements, covenant performance, and occupancy.