OREANDA-NEWS. Fitch Ratings has assigned a 'BBB+' rating to the following bonds issued by the Missouri Health and Educational Facilities Authority on behalf of Lutheran Senior Services (LSS):

--$58.575 million senior living facilities revenue bonds, series 2016A.

Bond proceeds will acquire a 230-unit skilled-care community ($34 million) located in Chesterfield, MO, provide $5 million of funds to renovate the acquired facility, finance a portion of a replacement care center at its Peoria, IL campus ($15 million), fund a debt service reserve fund, and pay issuances costs. The bonds are scheduled to sell via negotiated sale during the week of Jan. 18, 2016.

In addition, Fitch affirms the 'BBB+' rating on LSS' outstanding debt, which is listed at the end of the press release.

The Rating Outlook is Stable.

SECURITY
The bonds are secured by a pledge of the LSS obligated group's gross revenues and debt service reserve funds.

KEY RATING DRIVERS

LARGE BUSINESS BASE; STRONG REGIONAL PRESENCE: LSS benefits from the size and scale as the owner of five continuing care retirement communities (CCRC) in Missouri, three CCRCs in Illinois and several other senior care providers with a total of 1,582 independent living units (ILU), 699 assisted living units (ALUs), and 990 skilled nursing facility (SNF) beds. LSS' very good operating performance is supported by a large revenue base (approximately $187 million in fiscal 2014; Dec. 31 year-end) and a strategically-focused leadership team that has consistently executed on its growth and development plans.

SIGNIFICANT CAPITAL SPENDING: LSS has focused on the repositioning and expansion of several of its CCRCs over the last five years. In addition to the series 2016A bonds, LSS issued about $56 million in new money debt in 2014 to complete expansion and renovation projects at several of its campuses and approximately $48 million in 2011 for the repositioning of two other CCRCs. In addition to the projects being funded with the series 2016A bonds, management is progressing with a repositioning and expansion project at Lenoir Woods in Columbia, MO, a new start-up CCRC campus in Lake St. Louis, MO, and the potential addition of ILUs to the newly acquired campus in Chesterfield, MO.

ELEVATED DEBT BURDEN: Certain of LSS' debt metrics are elevated when compared to Fitch's 'BBB' category medians, reflecting its robust capital reinvestment strategy and expansion plans. Pro forma maximum annual debt service (MADS) of $29.8 million equated to 15.3% of 2014 total revenues which is improved from prior year but above the 'BBB' median of 12.4%. Pro forma debt to net-available of 9x in 2014 is above the 'BBB' category median of 5.9x. Pro forma MADS coverage (including turnover entrance fee receipts) was solid at 1.6x in 2014 compared to the 'BBB' category median of 2x.

STRONG REVENUE-ONLY COVERAGE: LSS' historical revenue-only debt service coverage has been strong when compared to 'BBB' category rated peers reflecting its Type-C resident contracts and solid core profitability. For the 10 month interim period of fiscal 2015, LSS generated an operating ratio of 90.6% and a net operating margin (NOM) of 16.2% both of which exceed the respective 'BBB' category medians of 96.1% and 8.9%. As a result, pro forma revenue-only coverage was 1.2x through Oct. 31, 2015, which is mostly in line with the 1.4x and 1.3x ratios posted in fiscal 2014 and 2013, respectively.

CONSISTENTLY SOLID OCCUPANCY: Occupancy across the continuum of care has been consistent despite fill-up periods at several facilities and averaged a very good 95% in the ILUs, 91.1% in the ALUs, and 89.8% for the SNF during the 10 month period ending Oct. 31, 2015.

RATING SENSITIVITIES

LIMITED DEBT CAPACITY AT CURRENT RATING: Management has demonstrated its ability to execute on its campus expansion and repositioning projects which has resulted in strong revenue growth and maintenance of liquidity, profitability and debt metrics. However, there is limited debt capacity at the current rating level unless ILU demand is evident and balance sheet and debt service coverage metrics remain consistent. Management is reviewing various projects that may result in the issuance of additional debt later in 2016 and beyond. Fitch will incorporate any potential additional debt issuance into the rating at the time when plans are finalized.

CONSOLIDATION OF ACQUIRED FACILITY: While LSS projects operating losses during the consolidation of its acquired skilled care facility, Fitch believes the losses are manageable at the current rating level. Over time, the new campus is expected to provide LSS with growth opportunities to broaden its business base and enhance returns. However, the increased operating and financial risks at the acquired facility could lead to negative rating pressure if LSS does not meet its projections.

CREDIT PROFILE

LSS is a Type-C CCRC system headquartered in St. Louis, MO and the majority of its entrance fee contracts are refundable. LSS directly or through various affiliated nonprofit corporations, owns, operates, and manages a regional, multi-site senior living system comprising 16 owned communities or providers, and five communities under management but not owned by LSS or any of its affiliates. These communities are located throughout Missouri and Illinois, with a high concentration in the St. Louis area. In the obligated group, LSS has 1,264 ILU apartments, 318 ILU patio homes, 699 ALUs, and 990 SNF units for a total of 3,271 units. LSS had total operating revenue of $187 million in fiscal 2014.

Four of LSS' full service retirement communities, one stand-alone assisted living facility and one skilled care center are located in the St. Louis metropolitan area. Additionally, the senior care center that will be acquired with the series 2016A bonds is also located in suburban St. Louis. As a result, LSS enjoys strong brand recognition, favorable geographic coverage and benefits from economies of scale in the region.

CEDARS OF TOWN AND COUNTRY ACQUISITION

Most of the series 2016A bond proceeds will be used to acquire a 230-unit skilled care community (Cedars at Town and Country or CTC) and to consolidate and replace the care center operations of a business that LSS assumed from Mercy Hospital of St. Louis during August 2015. Under the current three year lease with Mercy Hospital, LSS will operate the 120-bed skilled care center until it transitions residents to a replacement facility. After the acquisition and renovation to accommodate the skilled care services, LSS will cancel the lease with Mercy Hospital and move all operations to the new site and which will be renamed Mason Pointe. The new skilled care center provides LSS with a fifth location in the St. Louis area, providing enhanced geographic coverage, broader sub-acute care service offerings, and increased scale to support its Medicare business and bundled payment initiatives for certain short-stay rehabilitation cases.

CAPITAL SPENDING AND DEVELOPMENT PLANS
Capital spending has been very robust, particularly over the last five years, averaging about 200% of depreciation (2011-2015), which exceeds Fitch's 2015 'BBB' category median average of 106.2%, as LSS has been funding campus renovations and upgrades throughout its system. A large portion of the $56 million borrowed with the series 2014 bond issue was to fund an expansion at Concordia Village in Springfield, IL and for smaller projects at Meramec Bluffs in Ballwin, MO (40 bed SNF expansion), Lenoir Woods in Columbia, MO (40 ALU/memory care expansion) and Breeze Park in Weldon Spring, MO (20 SNF beds expansion). The $24 million expansion at Concordia Village was completed in October and added 67 new entrance fee ILUs, additional parking, updated common areas and a new wellness center. All of the 67 ILUs have been reserved with a deposit and management expects that 100% of the new units will be occupied by the end of January 2016 with $16 million of initial entrance fees collected. LSS' significant capital investment has resulted in a very low average age of plant of 9 years as of Oct. 31, 2015, compared to the 'BBB' category median of 11.5 years.

DEBT POSITION
Certain of LSS' debt metrics are elevated when compared to Fitch's 'BBB' category medians reflecting its robust capital reinvestment strategy and expansion plans. MADS as a percentage of revenues has been moderating over the last four years reflecting strong revenue growth. For 2014, pro forma MADS equated to 15.3% of total revenues which is a sharp improvement from 19.6% in 2011. Pro forma debt to net-available of 9x in 2014 is above the 'BBB' category median of 5.9x but is improved from 13.4x in 2011. Pro forma MADS coverage (including turnover entrance fee receipts) was solid at 1.6x in 2014 compared to the 'BBB' median of 2x. LSS' pro forma revenue-only coverage in 2014 is strong at 1.2x compared to the 'BBB' category median of 1.0x, reflecting the predominance of LSS' Type-C resident contracts and good core profitability. This is viewed favorably by Fitch as LSS is not dependent on entrance fee receipts to cover debt service, which is more typical for Type-C communities.

OCCUPANCY

Occupancy across the continuum of care has been consistent despite fill-up periods at several facilities. LSS enjoys strong demand due to its long operating history, proactive marketing strategies, favorable locations and attractive facilities. ILU occupancy averaged 92.6% from fiscal 2012-2014, increasing slightly each year. For the 10 month period ending Oct. 31, 2015, ILU occupancy averaged 95.1% even as LSS was in the process of filling 67 newly opened units at Concordia Village that were placed in service during October. ALU occupancy averaged 93.2% from fiscal 2012-2014, also increasing slightly each year. For the 10 month period ending Oct. 31, 2015, ALU occupancy was down a bit and averaged 91.1% as a result of higher than expected unit turn over. SNF occupancy averaged 90.6% from fiscal 2012-2014 and decreased to 89.6% for the 10 month period ending Oct. 31, 2015, as management has focused on growing its short-stay rehabilitation business in its care centers.

FINANCIAL PROFILE

LSS' operating profitability has been solid and consistent over the last five years. For the 10-month fiscal 2015 period, LSS posted an operating ratio of 90.6% which is on par with fiscal 2014 and improved over fiscal 2013's 91.2% operating ratio. Interim fiscal 2015's NOM and NOM-adjusted of 16.2% and 19.1%, respectively, are improved versus the last few years and compares well to the 'BBB' category median NOM of 8.9% and NOM-adjusted of 19.3%. Further, LSS' revenue growth has been strong. Total operating revenues have grown steadily over the last four years from $147.6 million in 2011 to $187 million in 2014. The revenue growth and consistent profitability are indicative of management's ability to grow services and execute on campus expansions and improvements without diluting system profitability. Additionally, LSS benefits from good revenue diversity due to its multiple locations, with no single community or enterprise representing more than 22% of total operating revenues.

SATISFACTORY LIQUIDITY

LSS' liquidity measures have been improving over the last four years reflecting good growth in absolute cash and investments as a result of robust profitability and cash flow, and debt-financed capital spending. At Oct. 31, 2015, LSS had $211.5 million of unrestricted cash and investments which is up from $169.4 million at year-end 2012. Liquidity metrics at Oct. 31, 2015 of 454 days cash on hand, 7.1x pro forma cushion ratio and 48% pro forma cash-to-long-term debt are consistent with the respective 'BBB' category medians of 400 days, 7.3x and 60%. Fitch notes that LSS' Type-C resident contracts and significant capital investment tends to suppress liquidity metrics when compared to 'BBB' category medians.

DISCLOSURE

LSS' disclosure practices are excellent. In addition to audited financial statements, quarterly disclosure includes balance sheet, income statement, statement of cash flows, occupancy statistics and detailed management discussion and analysis.

Outstanding LSS debt rated by Fitch as of Jan. 5, 2016:

--$79.4 million Missouri Health and Educational Facilities Authority senior living facilities revenue bonds, series 2014A;
--$47.4 million Missouri Health and Educational Facilities Authority senior living facilities revenue bonds, series 2011;
--$38.3 million Missouri Health and Educational Facilities Authority revenue bonds, series 2010;
--$16.5 million Missouri Health and Educational Facilities Authority revenue refunding bonds, series 2007C;
--$12.2 million Missouri Health and Educational Facilities Authority revenue refunding bonds, series 2007B;
--$21.6 million Missouri Health and Educational Facilities Authority revenue refunding bonds, series 2007A;
--$42 million Illinois Finance Authority revenue refunding bonds, series 2006;
--$15.7 million Missouri Health and Educational Facilities Authority revenue refunding bonds, series 2005B.