Fitch Affirms Morningside Ministries (TX) Rev Bonds at 'BBB-'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings has affirmed the 'BBB-' rating on the $49.2 million New Hope Cultural Education Facilities Finance Corporate First Mortgage fixed-rate revenue bonds (Morningside Ministries Project) series 2013 issued on behalf of Morningside Ministries (MM).

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a pledge of all revenues, first mortgage on all assets, and by a debt service reserve fund.

KEY RATING DRIVERS

SATISFACTORY FINANCIAL PROFILE: Morningside Ministries has a satisfactory financial profile, as evidenced by its solid profitability, consistent historical debt service coverage, and good liquidity. Debt service coverage by revenue only is strong at 1.8x through the six-month interim period (June 30, 2014; unaudited) and was 1.3x in 2013 (Dec. 31 fiscal year end) compared to Fitch's 'BBB' rating category median of 0.9x driven by MM's predominately rental fee model.

STRONG OVERALL OCCUPANCY: MM has strong demand for its services, as demonstrated by a 92.2% occupancy average in its independent living units (ILU) over the past four years. Additionally, occupancy in the assisted living units (ALU) is solid averaging 90.7% over the same period.

LARGE CAPITAL PROJECT: Management has moved forward with expansion plans at its Menger campus, which totals approximately $42 million upon completion and includes 68 new ILUs and 48 new ALUs. The project will be funded by a bank loan. Fitch was aware of this project and financing at the time of the initial assignment of the 'BBB-' rating in August 2013, which was incorporated into the rating at that time.

MANAGEABLE DEBT BURDEN: Despite MM's large campus expansion project, maximum annual debt service (MADS) of $5.25 million equated to 10.8% of the organization's total revenue as of June 30, 2014, which compared favorably against Fitch's 'BBB' median of 12.4%.

RENTAL SERVICE PROVIDER: MM does not rely on turnover entrance fees for debt service coverage as it is a predominately rental continuing care retirement community (CCRC). MM has a long operating history dating back to 1959 with limited competition, which are viewed as primary credit strengths.

RATING SENSITIVITIES

EXECUTION OF EXPANSION PROJECT: MM is currently on track with the pre sales of its new ILUs and it is expected that MM will sustain the sales velocity and achieve fill up in a timely manner and reach stabilized occupancy by 2017. The failure to execute on its expansion project would likely result in negative rating pressure.

CREDIT PROFILE

Morningside Ministries was established in 1959 and began serving seniors in 1961. MM currently operates three senior living communities in the greater San Antonio, Texas metropolitan area. Specifically, MM at Menger Springs (MMMS) is a rental independent and assisted living community that consists of 95 ILUs, 40 entrance fee (EF) independent cottages, 42 ALUs, and 40 skilled nursing units (SNF) located in Boerne, Texas outside of San Antonio.

MM at the Meadows (MMM) is comprised of Morningside Meadows Retirement Community and Morningside Manor Health Care, totaling 149 ILUs, 70 ALUs, and 170 nursing beds. Lastly is MM at The Chandler Estate (MMCE) which is a rental CCRC in San Antonio that's made up of 38 ILUs, 24 ALUs, and 123 nursing beds. Additionally, MM operates a pharmacy and a training institute. In fiscal 2013 (Dec. 31; audited), MM had total operating revenues of $44.6 million.

SATISFACTORY FINANCIAL PROFILE

As of Dec. 31, 2013 (audited), MM had unrestricted cash and investments of $40.9 million, which translated into 368.2 days cash on hand, a 7.8x cushion ratio, and 82.8% cash to debt position. These metrics are consistent with Fitch's 'BBB' category medians of 371.3 days, 6.9x, and 58.9%, respectively.

Through the same period MM earned $380,000 in operating income, which demonstrated another consecutive year of solid profitability. Specifically, MM had a 91.1% operating ratio, 11.9% net operating margin, and 16.3% net operating margin-adjusted margin, which were consistent with Fitch's medians of 97.2% and 9.9%, respectively. Overall, Fitch views the organization's ability to generate profits by operating efficiently as a primary credit strength.

STRONG OVERALL OCCUPANCY

As of June 30, 2014 (six-month interim; unaudited) occupancy in all MM's facilities was strong with overall ILU occupancy being approximately 95.8% (up from 92% at June 30, 2013) and ALU occupancy averaging approximately 94.4% among the three campuses. Historically, MM's ILU occupancy has averaged between 90% and 97.7%, which Fitch views favorably. Skilled nursing occupancy in June 2014 averaged approximately 90.6% across campuses.

LARGE CAPITAL PROJECT

The Menger Springs expansion project includes 68 new ILUs and 48 new ALUs and 50 of the 68 units have been pre sold (10% of entrance fee received). The ILUs are expected to be completed by summer of 2015 and the ALUs are expected to be completed in May 2015.

The project is being financed with a $42 million draw down bank loan. The bank loan will be at a variable rate and matures in 2021. The bank loan has a custom amortization and aggregate MADS of $5.2 million assumes the pay down of $12.8 million of the bank loan in 2017 with initial entrance fees received. At June 30, 2014, MM has only drawn $4.9 million of the $42 million; however the full amount of the loan has been incorporated in Fitch's analysis.

Total initial entrance fees expected from the project is $16.5 million and Fitch expects MM to fill up the units according to schedule, which should generate sufficient funds to pay down the $12.8 million of debt in 2017.

MANAGEABLE DEBT BURDEN

Fitch views MM's debt profile as manageable with no outstanding swaps. Despite additional debt for the expansion project, the organization's debt burden remains in line with Fitch's 'BBB' category medians. MADS as a percentage of revenue was 11.5% at fiscal 2013 and fell to 10.8% through the six month interim period as a result of continued revenue growth.

LITIGATION

MM had an elder abuse incident that was publicized in May 2014 and there is an ongoing lawsuit. Fitch views this as concerning and although there has not been an impact to occupancy to date, any negative repercussions to the organization will be monitored as reputation and its long operating history have been viewed as credit strengths.

DISCLOSURE

Morningside Ministries covenants to provide annual, semiannual and quarterly disclosure through the EMMA system.

Additional information is available at 'www.fitchratings.com'

Applicable Criteria and Related Research:

--'Rating Guidelines for Nonprofit Continuing Care Retirement Communities (July 24, 2014).

Applicable Criteria and Related Research:

Rating Guidelines for Nonprofit Continuing Care Retirement Communities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=40171

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=848195

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Contacts

Fitch Ratings
Primary Analyst
Michael Burger
Director
+1-415-659-5470
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Katie Proux
Analyst
+1-312-368-3348
or
Committee Chairperson
Emily Wong
Senior Director
+1-415-732-5620
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Michael Burger
Director
+1-415-659-5470
Fitch Ratings, Inc.
650 California Street, 4th Floor
San Francisco, CA 94108
or
Secondary Analyst
Katie Proux
Analyst
+1-312-368-3348
or
Committee Chairperson
Emily Wong
Senior Director
+1-415-732-5620
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com