Fitch Affirms Messiah Lifeways (PA) 2015A Revs at 'BBB-'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed the following bonds issued on behalf of Messiah Lifeways at 'BBB-':
--$24,080,000 West Shore Area Authority Revenue Bonds (Messiah Village Project), Series A of 2015;
--$9,130,000 Cumberland County Municipal Authority Revenue Bonds (Messiah Village Project) Series A of 2008.
The Rating Outlook is Stable
A pledge of gross revenues of the obligated group (OG), a mortgage, and a debt service reserve fund on the rated debt.
KEY RATING DRIVERS
LARGE REPOSITIONING PROJECT: With an October 2015 bank borrowing (not rated by Fitch), Messiah Lifeways moved forward on Project Envision, a major repositioning project at Messiah Village -- its main campus. The project will add 84 independent living (IL) units, new personal and skilled nursing units, and other upgrades to the campus including a new dining venue and pool. Total long term debt is expected to peak at approximately $85 million and assumes the pay down of $18.4 million in short term debt with new entrance fees.
RATING INCORPORATES PROJECT: Fitch rated Messiah Lifeways 'BBB-' in April 2015 in anticipation of a large borrowing to fund Project Envision. The final debt issuance was in line with Fitch's expectations relative to the potential structure and size of the debt. Messiah Lifeways opted to fund Project Envision with all variable rate bank debt, which created a high level of bank exposure and interest rate risk, and increased the risk of Messiah Lifeway's debt structure. Partially offsetting these risks is the manageability of the debt load, as MADS is almost $1 million a year less than it would have been were the bonds issued as a fixed-rate public offering.
PERIOD OF CREDIT STRESS: The project period is expected to last through July 2017, at which point a 24-month period of fill up will begin for the 84 IL units. Pay down of $18.2 million of temporary debt from new entrance fees will occur in July 2018 (approximately $13 million) and July 2019 (approximately $5 million). The credit stress will last through the pay down of the short term and until stable occupancy on the new IL units is achieved, which is expected to happen in 2020, the first year Messiah Lifeways will be tested on the new maximum annual debt service figure of $5.3 million.
SOLID OVERALL OPERATING PROFILE: Messiah Lifeways' strong historical occupancy (+90% across all levels of care) over the last three years has produced very steady operating performance. Coverage of the $5.3 million MADS figure was solid at 1.9x for FY15 (June 30th year end). Actual debt service coverage was a very strong 3.8x. In addition, MADS as percentage of revenue on the $5.3 million MADS figure was just below Fitch's 'BBB' category median of 12.4%, indicating a manageable debt burden even without the additional revenues that are expected to be generated by the project.
GOOD MARKET POSITION: Messiah Lifeways has a few strong competitors in its primary service area and a few regional competitors. However, the competition is manageable and Messiah Lifeways' entrance fees pricing remains in line with area housing prices and competitor pricing. Recent census data showed that Cumberland County was the fastest growing county in PA from 2010 to 2014. Messiah Lifeways' market position also benefits from a long operating history in the region and its diversity of services, including home and community based services and a wellness center.
CONTINUED STRENGTH OF CORE PERFORMANCE: The rating assumes that Messiah Lifeways' current financial profile, characterized by high occupancy and steady financial results and coverage, will remain stable over the next few years. Given Messiah Lifeways strong financial profile, there could be positive rating pressure should Messiah Lifeways meet its construction and fill up targets.
PROJECT MANAGEMENT: Although not expected, a material deviation from the planned timing, cost, fill up of Project Envision, or a delay in paying down the temporary debt, could lead to negative rating pressure.
Dating back to 1896, Messiah Lifeways is a non-profit corporation headquartered in Mechanicsburg, PA, that provides a network of services for adults 55 and older living in south central Pennsylvania. Messiah Lifeways operates Messiah Village, which is a Type 'C' continuing retirement community (CCRC) in Mechanicsburg that has 152 cottages, 124 IL apartments, 157 personal care apartments, and 184 skilled nursing beds.
Others services provided by Messiah Lifeway include two adult day care centers, a home care services program, sponsorship of two senior centers, and a second campus, Mt. Joy Country Homes, which provides Independent Living for adults 55 and older. Total operating revenue in FY15 was $42.8 million.
STEADY OPERATIONAL PERFORMANCE
Messiah Lifeways had solid operating year in FY15, posting a 91.2% operating ratio and a 15.2% net operating margin -- adjusted, both of which compare well to 'BBB' category medians. Six month FY16 results remain solid with a 93.4% operating ratio and a 16.1% net operating margin -- adjusted. Entrance fees were steady over the historical period averaging $3 million a year and remained stable in FY16, with $1.8 million in net entrance fee receipts for the first six months of the year.
The steady operating performance is supported by consistently high occupancy on the Messiah Village campus. At Dec. 31, 2015, IL, personal care, and skilled nursing occupancies were 96%, 95%, and 95%, respectively, which is consistent with the historical period. The number of personal care and skilled nursing units on the campus, more than 300 combined, and their high occupancy support the good operating metrics, including above median revenue only coverage on the $5.3 million MADS of 1.2x in FY15.
Liquidity remained good at Dec. 31, 2015, with $30.7 million in unrestricted cash and investments equating to 309 days of cash on hand (DCOH), a 5.8x pro forma cushion ratio, and 87.5% cash to debt. However, cash to debt will weaken significantly as Messiah Lifeways draws down bond funds for Project Envision.
The unrestricted cash and investments do not include an additional $16.6 million of restricted endowment funds. Messiah Lifeways can draw up to 7% of these funds yearly for operational support. Through the historical period, Messiah Lifeways has drawn down less than 5% per year, averaging approximately $665,000 a year over this time. Fitch views these additional funds positively, believing they provide an additional financial resource even though they are restricted.
Sizable Repositioning Project
Messiah Lifeways is moving forward on a major capital plan that is currently underway and expected to be completed by July 2017. The project is a large repositioning project at Messiah Village that will add 84 IL apartments, include 26 new personal care apartments, two new skilled nursing neighborhoods (16 private rooms in each neighborhood, and allow some of Messiah Lifeways skilled nursing to be converted to private from semi-private. The project plans also include for a major upgrade of amenities on the campus including a new aquatic center, spa, restaurant and bistro, auditorium, and other common spaces.
Fitch visited the campus last year and believes that even though the projects will stress Messiah Lifeways' financial profile over the near term they significantly enhance the marketability of the current campus once completed.
Specifically, the new IL building that will house the upgraded amenities and common spaces will also anchor a new campus main street, creating a completely new campus front entrance.
Messiah Lifeways began pre-sales for the new IL apartments in April 2015 and currently has 45 depositors. The project was delayed slightly because of remediation issues with the removal of the cottages, which pushed the project completion back by a month, but is not a credit concern. A mild winter has helped the construction progress.
As of Dec. 31, 2015, Messiah Lifeways had approximately $35.1 million in long-term debt. The debt currently is composed of two fixed-rate series. The debt load will increase over the next year as Messiah Lifeways draws down funds for Project Envision.
In 2015, a series 2015B and C series of tax-exempt bonds were issued on behalf of Messiah Lifeways. These bonds were privately placed with Susquehanna Bank, a division within BB&T (Rated 'A+/F1'). The 2015B bonds were $54.7 million and will be the permanent debt. They are variable rate bonds with an interest rate of (78% x 1-Month LIBOR) + 1.42%. They mature in 2045.
The $18.2 million in 2015C bonds is the temporary debt. The bonds will bear interest at a rate of (78% x 1-Month LIBOR) +1.07% and be redeemed from initial entrance fees on the 84 new IL units. The bonds will mature in 2020 but are expected to be paid down by 2019.
Messiah Lifeways has two outstanding fixed payor swaps. Morgan Stanley and PNC Bank are the counterparties. The two swaps hedge approximately 50% of the 2015B variable rate bonds, do not require collateral posting, and had a negative $1.8 million mark to market as of Dec. 31. 2015.