CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB-' rating to the following bonds expected to be issued on behalf of John Knox Village (JKV):
--$20,160,000 Lee's Summit (MO) Industrial Development Authority senior living facilities revenue bonds, series 2014A;
Additionally, Fitch has affirmed the 'BBB-' rating on the following bonds issued on behalf of JKV:
--$50,135,000 Lee's Summit (MO) Industrial Development Authority senior living facilities revenue bonds, series 2007A.
The series 2014A bonds are expected to be issued as fixed rate bonds. Proceeds will be used to refinance an existing bank loan, reimburse approximately $3.4 million of prior capital expenditures, fund approximately $7.2 million of routine capital expenditures, fund $3.9 million of a new 51 unit independent living building, fund a debt service reserve fund and pay costs of issuance. The series 2014A bonds are expected to price the week of July 14 through negotiation.
The Rating Outlook is Stable.
SECURITY
Debt payments are secured by a pledge of the unrestricted gross revenues of the obligated group and a first mortgage lien on an 11.6 acre parcel which includes the care center.
KEY RATING DRIVERS
IMPROVING OPERATING PROFITABILITY: Operating profitability improved in fiscal 2014 with net operating margin adjusted increasing to 14.7% from 10.1% in the prior year. However, JKV's profitability remains weak relative to Fitch's 'BBB' category median of 21.3%.
LOW DEBT BURDEN: JKV's low debt burden helps to mitigate the light operating profitability. Pro forma maximum annual debt service (MADS) equates to a light 9.3% of revenues in fiscal 2014, allowing for solid MADS coverage of 2.0x which is consistent with Fitch's 'BBB' category median of 1.9x.
MIXED LIQUIDITY INDICATORS: With 56.7% cash to pro forma debt and a 6.4x cushion ratio, liquidity is solid relative to JKV's low debt burden; however, liquidity remains light relative to operating expenses with 239.8 days cash on hand at March 31, 2014.
INCREASED CAPITAL SPENDING PLANS: Capital spending is projected to increase through fiscal 2017 as management continues its campus repositioning plan and may involve issuance of additional debt in 2016 or 2017. Fitch will assess the credit impact of any associated debt issuance or decline in liquidity as plans become more certain.
RATING SENSITIVITIES
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.
SUCCESSFUL EXECUTION OF CAPITAL PROJECT: Fitch expects that JKV will successfully execute the construction and fill up of the new 51 independent living unit (ILU) building expected to break ground this fall, allowing for the retirement of the majority of a bank construction loan through entrance fee proceeds.
CREDIT PROFILE
John Knox Village is a continuing care retirement community located in Lee's Summit, MO, with 919 available ILUs, 155 assisted living units (ALUs) and 373 skilled nursing facility beds (SNFs). Total operating revenue equaled $66 million in fiscal 2014.
IMPROVING OPERATING PROFITABILITY
Operating profitability improved in fiscal 2014, but remains weak relative to 'BBB' category medians. Net Operating margin and net operating margin adjusted increased to 5.3% and 14.7% in fiscal 2014 from 4.5% and 10.1% in fiscal 2013. The improvements reflect the continued implementation of management's cost management initiatives and increased net entrance fees generation. 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. Operating expenses decreased for two consecutive years, decreasing 0.4% in fiscal 2013 and 0.1% in fiscal 2014. However, operating revenues remained flat in both fiscal years.
LOW DEBT BURDEN
Relatively light profitability is mitigated by JKV's light debt burden. Pro forma MADS is expected to increase to $6.3 million from $5.1 million. Despite the increased debt, JKV's debt burden remains light with pro forma MADS equal to 9.3% of operating revenue in fiscal 2014 compared to Fitch's 'BBB' category median of 12.9%. The light debt burden has allowed for solid pro forma MADS coverage 2.0x and 'revenue only' MADS coverage of 0.9x in fiscal 2014 relative to Fitch's 'BBB' category medians of 1.9x and 0.9x. JKV may issue additional debt in fiscal years 2016 or 2017 to fund capital projects.
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 10.3% since fiscal 2012 to $40.3 million at March 31, 2014. The improvement reflects positive cash flows, improved entrance fee generation, investment returns and relatively light strategic capital spending. Cushion ratio and cash to pro forma debt of 6.4x and 56.7% remain solid relative to Fitch's 'BBB' category medians of 6.9x and 58.9%. However, JKV's 239.8 days cash on hand is light relative to Fitch's 'BBB' category median of 371.3 days. Liquidity is expected to be bolstered by $3.4 million in reimbursement from the series 2014A issuance. However, capital plans are expected to draw upon $4.4 million of cash in the fall of 2014.
INCREASED CAPITAL SPENDING PLANS
Capital spending is projected to increase as JKV continues to pursue its campus redevelopment plan. A primary goal of the repositioning effort is to decrease the number of rental contracts and increase the number of entrance fee contracts. Over the past several years, management has removed smaller ILUs from inventory and converted them to either larger square foot units or to high demand ALUs and dementia units.
The next stage in the redevelopment plan includes the demolition of an existing, vacated ILU building and construction of a new 51 unit ILU building. The project is expected to cost approximately $16.7 million will be funded by $3.9 million from the series 2014A bond issuance and an approximately $8.4 million bank loan which is expected to close in November, with the remainder being funded through cash. The majority of the bank loan is expected to be repaid with entrance fee receipts, of which approximately $7.3 million is expected to be generated. JKV expects to break ground in November.
Additionally, the redevelopment plans include the demolition of two older vacated ILU buildings and construction of 112 new ILUs. The project is not yet board approved and will need to meet a 70% pre-sale requirement before financing is pursued, which is expected to be achieved in fiscal 2016 or 2017. The total cost is expected to equal $55 million and is expected to be funded through either a bank loan or bond issuance. Fitch views the campus repositioning strategy favorably as larger ILUs are typically in higher demand and more profitable than smaller units. However, Fitch will assess the impact on JKV's credit profile of any additional debt or decrease in liquidity as more details become available.
DISCLOSURE
JKV covenants to provide audited financial statements within 180 days of each fiscal year-end and quarterly interim statements within 60 days of each quarter-end. Disclosure is provided through the Municipal Securities Rulemaking Board's EMMA system.
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
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=712401
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=838381
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