CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB-' rating for the following bonds issued on behalf of John Knox Village (JKV):
--$50,135,000 Lee's Summit (MO) Industrial Development Authority senior living facilities revenue bonds, series 2007A
The Rating Outlook is Stable.
Debt payments are secured by a pledge of the unrestricted gross receivables of the obligated group and a first mortgage lien on an 11.6 acre parcel which includes the care center.
KEY RATING DRIVERS
LIGHT, BUT STABLE, OPERATING PROFITABILITY: Operating profitability has been stable with net operating margin adjusted averaging 10.8% since fiscal 2009, but remains weak relative to Fitch's 'BBB' category median of 20.3%.
LOW DEBT BURDEN: JKV's low debt burden helps to mitigate historically weak operating profitability. With maximum annual debt service (MADS) equating to a light 8.3% of fiscal 2013 operating revenues, MADS coverage by turnover entrance fees of 1.6 times (x) fiscal 2013 was solid relative to Fitch's 'BBB' category median of 1.8x.
MIXED LIQUIDITY INDICATORS: With 66.7% cash to debt and a 7.2x cushion ratio, liquidity is solid relative to JKV's low debt burden; however, liquidity remains light relative to operating expenses with 238 days cash on hand at July 31, 2013.
CHALLENGED ILU OCCUPANCY: Independent living unit (ILU) occupancy decreased from 94% in fiscal 2012 to 89% at July 31, 2013. The decrease reflects above average turnover offsetting improved sales efforts. Occupancy in the skilled nursing beds (SNF) improved to 83% while assisted living (ALU) occupancy remains solid at 96%.
SUSTAINED PROFITABILITY AND COVERAGE METRICS: Fitch expects that operating cash flow will remain sufficient to sustain MADS coverage at levels consistent with the rating category. Given JKV's historically light operating profitability, negative variance from historical results may result in downward rating pressure.
John Knox Village is a continuing care retirement community located in Lee's Summit, MO, with 907 available ILUs, 155 ALUs and 373 SNFs. Total operating revenue equaled $66.0 million in fiscal 2013.
LIGHT, BUT STABLE, OPERATING PROFITABILITY
Operating profitability remains weak but has been stable over the past five years. Net operating margin (NOM) and net operating margin adjusted (NOMA) averaged 5.3% and 10.8%, respectively between fiscal years 2009 and 2013 and equaled 5.0% and 10.5% in fiscal 2013. Both metrics are weak relative to Fitch's 'BBB' category medians of 9.5% and 20.3%, respectively.
Management began implementing a $1.5 million cost reduction plan in fiscal 2013 to improve core operations. Initiatives implemented to date include labor productivity and outsourcing of certain therapy providers. Total operating expenses decreased 0.8% in fiscal 2013 and increased 0.4% in the four month interim period ending July 31, 2013 (the interim period) while operating revenues were flat in fiscal 2012 and increased 3% in the interim period. As a result, NOM and NOMA increased to 8.7% and 11.8% in the interim period reflecting the cost reduction plan.
LOW DEBT BURDEN
Relatively weak profitability is mitigated by JKV's light debt burden. MADS equaled a light 8.3% of operating revenue in fiscal 2013 relative to Fitch's 'BBB' category median of 12.9%. The light debt burden has allowed for solid MADS coverage by turnover entrance fees of 1.6x and revenue only MADS coverage of 0.9x in fiscal 2013 relative to Fitch's 'BBB' category medians of 1.8x and 1.0x.
MIXED LIQUIDITY INDICATORS
Liquidity metrics remain solid relative to JKV's light debt burden but low relative to operating expenses. Unrestricted cash and investments increased 8.9% since fiscal 2012 to $39.8 million at July 31, 2013. The improvement reflects positive cash flows, improved entrance fee generation in fiscal 2012, investment returns and relatively light strategic capital spending. Cushion ratio and cash to debt of 7.2x and 66.7% remain solid relative to Fitch's 'BBB' category medians of 6.6x and 50.9%. However 238 days cash on hand is light relative to Fitch's 'BBB' category median of 369 days.
Capital spending is not expected to negatively impact liquidity metrics and is projected to equal $8 million in fiscal 2014 and $5 million in fiscal 2015. Capital projects include the continued renovation of existing ILUs and the tear down of selected existing ILUs and replacement with 25 new ALUs.
FOCUS ON SALES AND OCCUPANCY
Credit concerns include relatively light ILU occupancy since fiscal 2009. ILU occupancy decreased from 93.3% in fiscal 2007 to 89.7% in fiscal 2010. Despite improving to 94% in fiscal 2012, ILU occupancy decreased to 89% at July 31, 2013 due to higher than average turnover.
Management continues the long term campus repositioning by removing smaller ILUs from inventory and converting them to either larger square foot units or to high demand ALUs and dementia units. A primary goal of the repositioning effort is to decrease the number of rental units and increase the number of entrance fee units.
While the number of ILUs has decreased from 962 in fiscal 2010 to 907 at July 31, 2013, the square footage remains consistent reflecting the larger units. Fitch views the campus repositioning strategy favorably as larger ILUs are typically in higher demand and more profitable than smaller units.
JKV covenants to provide quarterly and annual disclosure to the Municipal Securities Rulemaking Board's EMMA system, with cash flows, occupancy figures, and a small MD&A section. Fitch views the level of disclosure detail disclosure favorably.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Non-Profit Continuing Care Retirement Communities Rating Criteria' (July 10, 2013).
Applicable Criteria and Related Research:
Not-for-Profit Continuing Care Retirement Communities Rating Criteria