OREANDA-NEWS. SLIGHT YEAR OVER YEAR OPERATING IMPROVEMENT: After softer results in fiscal year (FY) 2014 (Sept. 30 year end), in which Masonicare's operating ratio climbed to a high 105.5%, operations have trended in a positive direction for the 10 month FY15 interim period. The poorer FY14 performance was driven by a project at Masonicare at Newton (MAN), which temporarily removed 34 beds from service, and a weaker performance at Masonicare's Home Health and Hospice (HH&H) division. These items also impacted the early FY15 performance. Fitch expects further improvements to Masonicare's operational performance in FY16.

LARGE SENIOR SERVICES PROVIDER: Masonicare has a presence throughout much of Connecticut and its operations include a market rate senior living community, two skilled nursing sites, a small acute care hospital, and a home health agency. Total operating revenue was a sizable $163 million in FY14, with none of its divisions accounting for more than 45% of revenue. Fitch believes Masonicare's size, geographic presence in CT, and revenue diversity contribute to a stable credit profile.

MANAGEABLE DEBT BURDEN: In fiscal 2014, Masonicare's maximum annual debt service (MADS) equated to 4.2% of total revenues and debt to net available equaled 5.1x; both better than Fitch's 'BBB' category medians of 12.3% and 6.3x, respectively. As a result, in spite of the weaker operating performance, revenue only MADS coverage remained solid at 2x in FY14 and was 1.8x in the 10 month FY15 interim period. Masonicare's manageable debt burden is a key credit strength at the current rating level.

AGGRESSIVE DEBT STRUCTURE: All of Masonicare's $98 million in long-term debt is variable rate, which Fitch views as a very aggressive debt structure. Approximately 70% of the debt is being hedged with fixed payor swaps. Masonicare's unrestricted cash and investment exceed its total long-term debt which offsets some of the concern regarding this debt structure.

ONGOING CAPITAL PROJECTS: Masonicare is in the midst of or has plans for a number of capital projects, both within the obligated group (OG) and outside the OG. Within the OG, the largest of these is expected to be a repositioning project at Masonicare Health Center (MHC), which is in the early planning stages, and outside the OG, the projects are expected to be a series of start-up campuses. A rental facility in Mystic is currently underway outside the OG and is expected to open in the fall of 2016. Fitch believes Masonicare has the capacity at the current rating level to pursue these projects, which includes the OG providing guarantees for non-OG debt.

STABLE FINANCIAL PERFORMANCE: As Masonicare Obligated Group moves forward on projects both inside the obligated group (OG) and outside the OG, Fitch believes Masonicare Obligated Group's manageable debt burden and liquidity position will continue to sustain its overall credit profile.

DILUTION FROM GUARANTEES: While Fitch believes that Masonicare Obligated Group can extend financial support to non-obligated entities at the current rating level, should the OG be forced to absorb the entire costs of the guarantees it could pressure the rating.

Headquartered in Wallingford, CT, Masonicare is a large, multi-service non-profit senior living provider with an operating history of over 100 years. Masonicare's senior services include independent living (IL), assisted living (AL), skilled nursing, acute care, inpatient psychiatric, home health and hospice, and its current unit mix is composed of 453 IL units, 191 AL units, 529 skilled nursing beds, 30 acute care beds, and 29 psychiatric beds.

The 'BBB+' rating reflects above median debt service coverage, a manageable debt burden, good liquidity and a solid market position. These positive credit factors are offset by a thinner operating performance, an aggressive debt structure, and future capital plans that include a potential debt issuance.

Fitch's rating is based on the financial results of the OG, which includes all of Masonicare's major service lines and a foundation, and currently represents the vast majority of the consolidating entities assets and revenues. However, moving forward Fitch expects the non-OG component to grow as Masonicare looks to develop new campuses.

Softer Operating Performance
In FY14 and through the 10 month FY15 interim period, Masonicare's financial performance has been lower than the prior three audited years. In FY11, Masonicare had a 96.6% operating ratio, an 8.3% net operating margin--adjusted, and 3.4x MADS coverage. In the 10 month FY15 interim period all those figures had softened with an operating ratio of 103.3%, net operating margin - adjusted of 2.3x and MADS coverage at 2.4x. However, in spite of the weaker performance, MADS coverage has remained above the median.

The drivers of the weaker performance over the last 18 months have been a project at MAN and underperformance at HH&H. HH&H has historically been a strong performer for Masonicare and is sizable part of the revenue base, with nearly $60 million in operating revenue in FY14. Masonicare reorganized the management team at HH&H and early indications are that performance is improving.

At MAN, Masonicare finished a project that refurbished skilled nursing and assisted living, creating 17 private skilled nursing rooms. The project came on line in early July 2015, and revenues at MAN were impacted during the project period. However, Masonicare management reports that occupancy at MAN is currently above 90%. Overall occupancy across the Masonicare system is good with IL occupancy at 95%, AL occupancy at 86% and skilled nursing occupancy at 92% at July 31, 2015.

Masonicare's unrestricted cash and investments continue to show steady growth. At July 31, 2015, Masonicare had $116.5 million in unrestricted cash and investments, which equated to 258 days cash on hand (DCOH), a 15.3x cushion ratio, and 117.6% cash to debt. DCOH is adequate for the rating level, while the cushion ratio and cash to debt are very strong for the 'BBB' category.

Capital Plans
With the project at Newtown complete, Masonicare's next large project within the OG will be at the Masonicare Health Center (MHC). MHC is located on Masonicare's main campus in Wallingford on the same campus as Ashlar Village, its market rate CCRC. MHC is unique in that it offers IL, acute care, psychiatric, and skilled nursing services, and has over 40 employed physicians and mid-level providers and a number of independent specialists with offices on the campus.

The MHC building is in good condition but is an older building, and part of the focus of the project will be to address the lack of private skilled nursing rooms at the campus. The project is in its planning stages and Fitch expects to have more clarity on the size and scope of the project within the next 18 months. Fitch will factor any debt into the rating closer to the point of issuance. However, Masonicare does have some debt capacity at the current rating level.

Outside the OG, Masonicare is moving forward on building a rental senior living facility in Mystic, CT. The campus will have a total of 179 units (81 IL units, 50 AL units, and 48 memory care units). The project is being built in partnership with a third party and is being funded by a $38.2 million bank loan. The OG is making a $5 million equity contribution and is guaranteeing its share of the debt service coverage and loan repayment, which is 78.125% (its current share of the partnership company), with the JV partner guaranteeing the remaining share.

The project is behind schedule by one year as Masonicare had to replace the first contractor hired for the project. Masonicare is currently in the early stages of litigation with the first contractor. The new contractor is making progress and the expected opening date is the fall of 2016, a year later than originally planned. The delay led to $19 million in additional costs.

While the delay and cost overrun are concerns, Fitch believes the project's location and strong pre-opening demand, which has been sustained even through the delay, mitigate some of this concern. Fitch also believes that Masconicare has the financial capacity to absorb its guarantee on the debt at the current rating level, should it become necessary.

Masonicare has plans for two other projects outside the OG, which are expected to be entrance fee communities and will likely require a larger debt issuance. As these projects are at least three years away, their potential impact on the OG is not factored into the rating. Fitch will continue to monitor the projects and any commitments that Masonicare's OG makes to them.

Debt Profile
All of Masonicare's $98 million in long term debt is variable. Approximately $70 million are variable rate demand bonds supported by a letter of credit (LOC) from M&T Bank. The LOC was extended in 2015 for an additional five year term and now expires Nov. 4, 2020. The other $31 million in debt is privately placed with Webster Bank. The interest rate is 78% of Libor plus 1.50%.

The LOC supported debt is currently being hedged with fixed payor swaps with four counterparties, which Fitch believes is a good diversity of counterparties. The mark to market as of July 31, 2015 was a negative $18 million, and no collateral is currently being posted.