Fitch Rates Presbyterian Homes Obligated Group (IL) Revs 'A-'; Outlook Stable
--\\$67,375,000 revenue refunding bonds, series 2016A;
--\\$40,000,000 variable-rate revenue bonds, series 2016B.
The Rating Outlook is Stable.
The series 2016 bonds will be used to refund existing debt, fund a portion of the construction costs of 14 independent living cottages and renovations to the town center at Lake Forest Place and pay cost of issuance. The bonds are expected to price the week of April 11th via negotiated sale.
A pledge of gross revenues of the obligated group (OG), a mortgage on the Lake Forest Place (LFP) property, a springing mortgage on the Westminster Place (WP) property and a springing debt service reserve fund.
KEY RATING DRIVERS
ADEQUATE LIQUIDITY POSITION: With the transfer of \\$98.6 million of cash and investments from the parent, Presbyterian's liquidity metrics are light but consistent with the 'A' category rating. At Dec. 31, 2015, Presbyterian's 552 days cash on hand (DCOH), 12.8 times (x) cushion ratio, and 91.8% cash to pro forma debt are consistent with the respective 'A' category medians of 681, 18.5x and 125.1%. Further, Presbyterian should able to increase its unrestricted cash and investments position due to limited capital needs and healthy turnover entrance fee receipts.
IMPROVING OPERATING PERFORMANCE: Presbyterian's improving occupancy trend has helped generate solid net operating-adjusted (NOM-adjusted) which is expected to remain in line with Fitch's 'A' median of 22.2% going forward. Revenue-only coverage of 1.4x through Dec. 31, 2015 reflects Presbyterian's improving occupancies and solid profitability from core operations.
MODERATE DEBT BURDEN: Pro forma maximum annual debt service (MADS) of \\$7.64 million equates to a moderate 9.4% of fiscal 2015 total revenues. Coverage of pro forma MADS was healthy at 4.0x in fiscal 2015 and 3.1x through the nine-month interim period ended Dec. 31, 2015, both consistent with Fitch's 'A' category median of 3.1x.
FAVORABLE MARKET CHARACTERISTICS: Fitch views Presbyterian's service area within one of Chicago's most affluent communities as a credit strength. Residents at Presbyterian have median net worth levels of 8x the average entrance fee and median income levels over 2.5x the average annualized monthly fees in the community. Further, the competitive landscape is limited, and barriers to entry are relatively high.
SUPPORT OF FOUNDATION: Presbyterian benefits from consistent support of the non-OG Geneva Foundation, which with \\$150 million in assets, provides consistent support for system affiliates. This support equaled approximately \\$5.6 million in fiscal 2015. Further, non-obligated entities are largely cash flow positive, and the consolidated entity had over 200% cash to debt and 11% excess margin at Dec. 31, 2015.
CONSISTENT OCCUPANCY & PROFITABILITY: Presbyterian Homes Obligated Group is expected to generate cash flow levels consistent with Fitch's 'A' medians via steady entrance fee receipts and consistent occupancy. After completion of the independent living unit (ILU) expansion and town center renovation, Presbyterian's future capital needs are modest which should support further improvement in balance sheet strength over the longer term.
Presbyterian Homes has served older adults in the greater Chicago metropolitan area since 1904. The consolidated Presbyterian Homes system serves 1,600 people on six campuses, in 855 independent living, 225 assisted living, and 365 licensed/skilled/intermediate beds. The system also includes a Foundation, created in 2002 for the benefit of the system and its residents. Total revenues were \\$109.9 million in fiscal 2015 (year ended March 31).
On Dec. 1, 2015, Presbyterian Homes, was renamed Westminster Place as part of a significant corporate reorganization. The reorganization resulted in the creation of Presbyterian Homes Obligated Group which includes Westminster Place, a predominately type B continuing care retirement community (CCRC) consisting of 254 ILUs, 91 assisted living units (ALUs), 95 intermediate/memory care beds and 100 bed skilled nursing facility (SNF) located on a 40 acre parcel in Evanston, IL; Highlands at King Home, a six story 53 unit assisted living facility and Lake Forest Place, a predominately type B CCRC consisting of 268 ILU cottages and apartments, 31 ALUs, 20 memory care and 50 bed SNF. Non-obligated entities include The Moorings, a CCRC consisting of 275 ILUs, 42 ALUs, 39 intermediate care beds and a 60 bed SNF located in Arlington Heights, IL; Ten Twenty Grove, a nine story, 46 apartment senior rental facility, PH Manager, a management service company and the Geneva Foundation. Westminster Place and Lake Forest Place, made up approximately 74% of total assets and 72% of total revenues of the consolidated system as of nine-months ended Dec. 31, 2015.
ADEQUATE LIQUIDITY POSITION
As part of the corporate reorganization, the parent organization, Westminster Place, transferred approximately \\$98.5 million to Presbyterian. Based on historical pro forma operations of the OG and issuance of approximately \\$107.4 million of series 2016 bonds, Presbyterian liquidity metrics at Dec. 31 2015 of 552 days cash on hand, a 12.9x cushion ratio and 91.8% cash to debt are consistent with Fitch's 'A' category medians and peer group. After the construction of the 14 new ILUs at Lake Forest Place, capital spending requirement are modest and projected to be around 100% of depreciation allowing for improvement in balance sheet liquidity.
Additionally, Fitch views the support of and relationship to the non-obligated Geneva Foundation as a positive credit factor. With \\$150 million in assets, Geneva Foundation has provided consistent operating support for the Westminster Place and Lake Forest Place communities and equaled approximately \\$5.6 million in fiscal 2015.
CONSISTENT CASH FLOW
Improving occupancies at Westminster Place and Lake Forest Place have driven improving profitability from core operations. In fiscal year (FY) 2015 (year ending March 31st) and through the nine month interim period ended Dec. 31, 2015, Presbyterian generated operating ratios of 95.8% and 96%, respectively. Net operating margin (NOM) of 7.2% and 6.6% over the same periods is consistent with Fitch's 'A' category median of 7%. Revenue-only coverage of 1.5x through the nine month interim period is viewed favorably reflecting solid profitability from core operations.
ROBUST MARKET CHARACTERISTICS
Overall, the characteristics of the service area are robust, and are a key credit strength. The obligated group operates in two services areas - Lake Forest and Evanston. Both have solid socioeconomic and demographic indicators, which are credit strengths and affords Presbyterian good flexibility with regard to rate increases and pricing. Presbyterian's pricing entrance and monthly fee levels are competitive, and consistent with service area home values and income levels.
Additionally, the competitive landscape is fairly limited, with only a small number of competing CCRCs and elevated barriers to entry due to very limited development space and somewhat onerous zoning requirements. As such, occupancy has remained very healthy across Presbyterian's campuses, and is expected to remain steady through the forecast period. In addition, demand for LFPs new cottage units is clear with five of 14 presold to date.
The \\$107.4 million in series 2016A and 2016B bonds will be the only debt left outstanding; bond proceeds will be used to defease all existing long term debt, as well as to fund capital expenditures and pay costs of issuance. The bonds will be issued in two series, as \\$67.4 million in fixed rate term bonds and \\$40 million in variable rate bonds. The series 2016B variable rate bonds will be issued in index rate mode, initially bearing interest at an index rate based on LIBOR through the initial five-year index rate period ending in 2021. Fitch views the interest rate and put risk on the FRN structure neutrally given Presbyterian's unrestricted cash and investment position.
Presbyterian was party to two swap agreements with a combined notional value of \\$43 million; however, both swaps were terminated on March 18, 2016 for a total of \\$8.25 million.
Presbyterian will covenant to disclose audited financial statements within 150 days of fiscal year end and quarterly financial statements within 45 days of each fiscal quarter to the municipal securities rulemaking board's EMMA system. Disclosure will include balance sheet, statement of revenues and expenses, statement of cash flows, occupancy and covenant calculations.