Fitch Upgrades Lutheran Social Ministries at Crane's Mill (NJ) Bonds to 'BBB'; Outlook Stable
--Approximately $15.5 million revenue bonds, series 2008A;
--Approximately $11.3 million revenue refunding bonds, series 2005A.
Fitch's analysis also considers approximately $16 million series 2015 unrated direct placement debt.
The Rating Outlook is Stable.
Debt payments are secured by a pledge of the gross revenues, a mortgage on the property and debt service reserve fund.
KEY RATING DRIVERS
IMPROVING LIQUIDITY AND OPERATIONS: The upgrade to 'BBB' reflects Crane's Mill's continued improvement in liquidity, which has grown on an absolute basis over the past five years as well as the improvement in operations, with solid adjusted net operating margin, operating ratio, and net entrance fees in 2014 and through the nine months ended Sept. 30, 2015 (interim period). Historically, one of Fitch's main credit concerns was the draw on cash at the obligated group (OG) level with ongoing transfers to the parent for mission activities. An intercorporate agreement was formalized in September 2014 that narrowed the amount that could be transferred, and following these parameters will be key to maintaining the rating.
SOLID DEBT SERVICE COVERAGE: Debt service coverage was very strong in 2014 at 3.7x due to higher than normal net entrance fee receipts, and remained solid in the interim period at 2.4x, consistent with forward expectations.
INCREASED DEBT: In October 2015, Crane's Mill refinanced its series 2005B variable-rate demand bonds with a direct bank loan and added $5 million of new money for the renovation of its health center. Total pro forma debt outstanding is approximately $42 million and the additional debt is incorporated in this analysis.
SOLID OPERATING PROFITABILITY: Crane's Mill's higher independent living unit (ILU) occupancy and strong entrance fee receipts resulted in adjusted net operating margin of 24.1% through the interim period compared to 34.1% in 2014 and the 'BBB' category median of 19.3%.
CONTINUED OCCUPANCY IMPROVEMENT: Crane's Mill's ILU occupancy has improved to 86% as of Sept. 30, 2015, from a low of 79% in fiscal 2011 when the community brought on 66 ILUs and 10 cottages as part of an expansion project. Assisted living unit (ALU) occupancy remained strong at 96% and skilled nursing occupancy remained steady at 86%.
CONSISTENT PERFORMANCE: Fitch expects Crane's Mill to maintain financial performance in line with the interim results, which will require sustaining improved occupancy trends and limiting transfers outside of the OG.
Located on a 48-acre site in West Caldwell, NJ, Crane's Mill is a type A and type B continuing care retirement community (CCRC) consisting of 281 ILUs, 48 ALUs, 66 nursing beds, and 18 memory support beds. Currently, Crane's Mill has about 67% type B contracts and 33% type A contracts. In fiscal 2014 (Dec. 31 year-end), Crane's Mill had total revenues of $29.3 million.
Crane's Mill experienced a slow fill-up on its expansion project (66 ILUs, 10 cottages, six new ALUs and the renovation of 12 existing ALUs) with the new units available for occupancy in March 2010. Better marketing and selective renovations have significantly improved occupancy and turnover unit entrance fees in 2014 and 2015. ILU occupancy was 86% through the interim period and management projects to end the year around at 88%.
Crane's Mill's adjusted net operating margin was very strong in 2014 and through the interim period, at 34.1% and 24.1%, respectively, well above the 19.3% 'BBB' category median. Net entrance fee receipts were higher than normal in 2014 at almost $8 million compared to less than $1 million the prior year. Through the interim period, net entrance fee receipts have also improved from the prior year period totaling $3.6 million. Management's focus on operating more efficiently, enhancing revenue, community programming, and better aligning with its parent have resulted in continued improvements in operating ratio to 91.5% in 2014, well below the 'BBB' category median of 96.1%. Improvements were driven by 5.5% revenue growth outpacing expense growth of 2.5%.
IMPROVING LIQUIDITY POSITION
Crane's Mill's liquidity has improved over the past four years from operating cash flow and from a formal agreement with its parent on the draw of Crane's Mill's cash to further the parent's mission. Unrestricted liquidity was $34.3 million as of Sept. 30, 2015, up markedly from $21 million in 2011 and represented 509 days cash and 96% cash-to-debt.
Prior to September 2014, Crane's Mill would transfer cash to the parent organization, Lutheran Social Ministries of New Jersey (LSMNJ), the sole corporate member, to further the mission of the organization and management stated that the amount of funds transferred was only limited by its liquidity covenant.
Crane's Mill executed a formal intercompany loan agreement with LSMNJ in September 2014 allowing the parent to draw up to $5 million and this amount is now in the form of a line of credit at 2.5% interest with a repayment period of five years. There was $1 million outstanding on the line of credit at Sept. 30, 2015. Fitch views this agreement positively as it sets parameters in place for the amount that can be drawn out of the OG. Fitch recognizes that this agreement does not prohibit additional transfers out of the OG, but the intent and practice of the agreement is key to maintaining the rating. A full draw on the line of credit represented 75 days cash on hand in 2015, and liquidity ratios would remain at or favorable to 'BBB' category medians.
Crane's Mill privately placed $16.3 million bonds with First Niagara Bank ('BBB-'/Rating Watch Positive) in October 2015, which are synthetically fixed, and refunded outstanding variable-rate series 2005B, resulting in lowered variable exposure. The bank commitment is for 10 years with a 25-year amortization. Total debt was $42 million, including full draw on funds for capital renewal: current debt mix is now 66% fixed and 34% synthetically fixed. Bonds are secured on parity with outstanding debt under the master trust indenture.
Fitch's analysis is based primarily on annual debt service of approximately $3.26 million compared to actual maximum annual debt service (MADS) of $4.3 million because of the structure of Crane's Mill's debt service schedule which incorporates larger final principal maturity payments, since there are associated debt service reserve funds that are expected to be used to partially pay debt service in those years.
Annual debt service coverage is also in line with bond covenant calculations and coverage was 3.7x in 2014, 1.5x in 2013 and 2x in 2012.
Crane's Mill's debt has moderated since its expansion project came online; MADS as a percent of revenue was 11% in 2014, below the 12.4% category median and down from 18% in 2010.
Crane's Mill has covenanted to provide annual audited financial statements within 120 days of its fiscal year end and un-audited financial statements within 45 days of each fiscal quarter.