Fitch Rates United Methodist Homes (NJ) Ser 2014A Revs 'BBB-'; Outlook Stable

CHICAGO--()--Fitch Ratings has assigned a 'BBB-' rating to the following New Jersey Economic Development Authority (NJEDA) revenue bonds issued on behalf of United Methodist Homes of New Jersey (UMH):

--$19.9 million revenue bonds, series 2014A.

The series 2014A bonds are expected to be issued as fixed rate, and will be used to refund the existing series 1999 bonds, fund a debt service reserve, and pay costs of issuance. The series 2014A bonds are expected to price the week of Sept. 8, 2014 via negotiation. UMH is also expected to issue $15.1 million in series 2014B bonds directly placed with a bank, not rated by Fitch, which will be used to refund the existing 1998 bonds.

In addition, Fitch affirms the following NJEDA revenue bonds issued on behalf of UMH at 'BBB-':

--$36.8 million revenue bonds, series 2013;

--$19.6 million revenue bonds, series 1999;

--$18.4 million revenue bonds, series 1998.

The Rating Outlook is Stable.

SECURITY

The bonds are supported by a pledge of gross receipts of the obligated group (OG), a debt service reserve fund, and a mortgage lien on obligated group property.

KEY RATING DRIVERS

REFINANCING SAVINGS: The series 2014 refinancing will provide UMH with present value savings and lower debt service requirements. Total pro forma debt of $88 million is equal to 5.6x of net available, below Fitch's 'BBB' median of 6.6x and down from 7.4x in fiscal 2009. Coverage of pro forma maximum annual debt service (MADS) was solid at 2.2x in unaudited fiscal 2014 (year ended June 30), and no additional debt is currently planned.

STEADY OPERATING PERFORMANCE: The 'BBB-' rating reflects UMH's very consistent and solid operating performance, coupled with minimal reliance on entrance fees or investment gains. UMH produced an 87.3% operating ratio and 18.2% net operating margin in unaudited fiscal 2014 (year ended June 30), both favorable to Fitch's 'BBB' medians of 97.2% and 9.9%, respectively.

MODEST BUT IMPROVING LIQUIDITY: Unrestricted liquidity remains modest, equal to 356.1 days of cash on hand (DCOH), a 7.3x cushion ratio, and 59.1% cash-to-debt at June, 30, 2014, as compared to Fitch's respective 'BBB' category medians of 371.3, 6.9x, and 58.9%. Over the next two to three years UMH's capital plans are manageable, though Fitch notes some facilities have longer term capital needs in order to remain competitive in the market.

MARKET POSITION REMAINS SOLID: Despite operating in a competitive landscape, UMH's relationship with the Methodist churches across New Jersey, coupled with strong quality metrics has garnered consistent demand for its services. Through unaudited fiscal 2014 UMH averaged 87.5% occupancy within its independent living units (ILUs), 90.4% occupancy within its assisted living (AL) and memory care units, and 92.2% occupancy within its skilled nursing facilities (SNFs).

RATING SENSITIVITIES

SUSTAINED OPERATING PERFORMANCE: The rating includes Fitch's expectation that UMH will continue producing consistent operating performance and debt service coverage, which should result in further balance sheet strengthening and additional moderation in debt burden over the longer term. Upward rating consideration could occur with further moderation of debt metrics, coupled with demonstrable ability to sustain liquidity metrics at or above Fitch's 'BBB' median. Future capital needs could limit upward rating potential, particularly if scope/scale necessitates additional debt issuance.

CREDIT PROFILE

UMH operates 10 senior housing, comprehensive personal care, memory support and skilled nursing facilities across the state of New Jersey.

The rating is based on obligated group (OG) financial results and operations. The obligated group consists of four owned and/or operated facilities with a total of 779 units. They are: Francis Asbury Manor, located in Ocean Grove; Collingswood Manor, located in Collingswood; Bristol Glen, located in Newton and Fredon; and The Shores at Wesley Manor, located in Ocean City.

Total reported OG revenues were $62.4 million in unaudited fiscal 2014, out of a total $75.2 million in consolidated revenues. Non-obligated entities include one personal care and skilled nursing facility, and five HUD section 202 housing facilities.

DEBT REFINANCING

In conjunction with the series 2014A and series 2014B debt issuance, UMH will refund its existing series 1999 and 1998 bonds and will then have approximately $88 million in total long-term debt outstanding. The series 2014B bonds are expected to be directly placed with a bank, and the terms were not available at the time of Fitch's rating review. Pro forma MADS of $7.2 million reflect present value savings, and debt service is level through 2025. UMH has no derivative instruments.

Overall, UMH will sustain its conservative capital structure and manageable debt burden. In fiscal 2014 UMH generated steady revenue-only coverage of 2.0x debt service coverage, illustrating the marginal impact of net entrance fees, which added an additional 0.2x coverage.

Capital needs are manageable over the near term, estimated to be $3.5 million-$4 million through 2017. No additional debt is expected over the near term as capital needs will be funded via cash flow. Fitch notes UMH's average age of 12.2 years indicates some need for further capital replenishment, which is likely to occur over the longer term.

STEADY OPERATING PROFITABILITY

UMH's consistent occupancy coupled with solid core expense controls continues to support stable profitability and incremental balance sheet improvement. For fiscal 2014 UMH produced an 87.3 operating ratio operating margin and 18.2% net operating margin, compared to Fitch's 'BBB' category medians of 97.2% and 9.9%, respectively. UMH is budgeting for steady profitability and for fiscal 2015.

Fitch does note that UMH's reliance on Medicare and Medicaid presents some credit concern, representing a somewhat high 61% of skilled nursing net revenues. Skilled nursing represented approximately 40% of fiscal 2014 total net revenues; therefore, UMH will need to continue to manage its operations in line with any shifts in government reimbursement.

ONGOING DISCLOSURE

UMH provides audited financials within 120 days and quarterly financials within 45 days to the EMMA system, which includes OG financial statements, covenant performance, and occupancy.

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

Applicable Criteria and Related Research:

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

'Fitch Affirms United Methodist Homes (NJ) Revs at 'BBB-'; Outlook Stable' (April 20, 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=856314

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Emily E. Wadhwani, +1-312-368-3347
Director
Fitch Ratings, Inc.
70 W. Madison Street, Chicago IL 60602
or
Secondary Analyst
Gary Sokolow, +1-212-908-9186
Director
or
Committee Chairperson
Eva Thein, +1-212-908-0764
Senior Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings, Inc.
Primary Analyst
Emily E. Wadhwani, +1-312-368-3347
Director
Fitch Ratings, Inc.
70 W. Madison Street, Chicago IL 60602
or
Secondary Analyst
Gary Sokolow, +1-212-908-9186
Director
or
Committee Chairperson
Eva Thein, +1-212-908-0764
Senior Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com