Fitch Affirms Morningstar Senior Living (PA) Revs at 'BBB-'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed the 'BBB-' rating on the following Northampton County

Industrial Authority bonds, issued on behalf of Morningstar Senior Living (MSL):

--$29.5 million series 2012.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a pledge of gross revenues, a first mortgage lien, and a debt service reserve fund.

KEY RATING DRIVERS

CURRENT DEBT BURDEN MANAGEABLE: MSL's existing debt profile remains consistent with the 'BBB-' rating, and its 100% fixed rate structure with no swaps is conservative. MSL covered $2.2 million in maximum annual debt service (MADS) at 2.3x including turnover entrance fees, and 0.6x by revenue only in fiscal 2014, against Fitch's 'BBB' category medians of 2.0x and 0.9x, respectively. Further, MADS was 10.2% of fiscal 2014 Revenue and Debt to Net Available was 6x, versus Fitch's 'BBB' category respective medians of 12.3% and 6.3x. MSL may pursue debt financing related to its campus expansion project within 24 months, which is not incorporated into this rating action.

SUFFICIENT PROFITABILITY & OCCUPANCY: In fiscal 2014, MSL generated an 18.9% adjusted net operating margin and a 102.3% operating ratio; both are comparable to Fitch's 'BBB' category medians of 20.4% and 97.4%, respectively. MSL's operating ratio was weaker than the prior year, due in some part to higher than expected lifecare occupancy in nursing care. The three-month interim period ended Sept. 30, 2014 evidences better operating profitability year-over-year with a 99.6% operating ratio. Overall occupancy remains steady, above 90% across the campus.

MODEST LIQUIDITY: MSL maintains adequate balance sheet metrics for the rating category, bolstered by steady operating cash flow and entrance fee receipts in fiscal 2014. At fiscal year end June 30, 2014 MSL had $17.8 million in unrestricted cash and investments, equal to 340 days of cash on hand (DCOH), 58.5% cash to debt, and an 8.3 times (x) cushion ratio and against Fitch's 'BBB' category medians of 407.6 DCOH, 60.2% cash to debt, and 6.9x cushion ratio.

STABLE COMPETITIVE POSITION: While competitive for senior living services, service area characteristics are generally favorable, including a stabilized housing market, higher than average income levels, and lower than average poverty rates. Further, MSL's position as the only Type A contract provider, its reputation for high quality nursing care, and competitive fee structure have all bolstered its market position and supported consistent demand for its services.

RATING SENSITIVITIES

CAPITAL PROJECT UNDERWAY: MSL has started presales on its Heritage Village ILU expansion project, which is a key part of its overall strategic master plan. This will likely include the issuance of additional debt, and/or equity funding expected in early 2016. Fitch will continue to monitor presale activity, and debt plans as they become imminent, taking rating action as necessary.

CREDIT PROFILE

MSL is located in Nazareth, PA, within the Lehigh Valley area, approximately 70 miles north of Philadelphia. It sits on 16 acres, and includes 131 independent living apartments, 61 personal care units, 25 dementia care beds (licensed as personal care), and 61 licensed nursing care beds. In fiscal 2014 (June 30 year-end), MSL reported total revenues of approximately $21.2 million.

Fitch uses consolidated financial statements in its analysis. The obligated group (OG) includes Morningstar Senior Living, which represented substantially all assets and 98.8% of total revenues of the consolidated entity in fiscal 2014. Not included is Morningstar Senior Solutions, which is a non-medical home care and care management business serving Lehigh Valley, and a wholly-owned subsidiary of MSL.

STEADY OPERATING PERFORMANCE

Through fiscal 2014, MSL continued to generate sufficient operating cash flow via solid occupancy and relatively steady unit turnover. MSL continues to benefit from a competitive fee structure and Type-A contract provision, as demonstrated by a growing wait list and evidence of demand for new units. Further, demand for its home care service is growing, with a second office now open.

MSL is budgeting for steady operating results in fiscal 2015, with year-to-date performance in line with that expectation. Through the three-month interim period ended Sept. 30, MSL produced a 26% adjusted net operating margin and 0.6x revenue only coverage.

CAMPUS EXPANSION

As expected, MSL has begun presales for its 'Heritage Village' ILU expansion project, a sizeable expansion on 46 acres in upper Nazareth, approximately one mile from the existing campus. While the final size of the expansion will depend upon market demand, the initial phase is expected to include 104 total ILUs with units varying from cottages to townhomes. Presales kicked off in September 2014, for an estimated 18-24 month period. To date, 14 units have been sold (nine cottages, five townhomes) with four cancellations.

Debt financing for the project is likely occur in early 2016, estimated near $37 million currently. Final size and structure are not yet finalized, and Fitch will continue to monitor the pace of presales and the timing of any financing over the next 12-24 months. Fitch believes that MSL has limited balance sheet flexibility and limited additional debt capacity at an investment grade rating level.

DEBT PROFILE

As of fiscal year ended June 30 2014, total debt equaled $29.5 million, which is 100% fixed rate, unenhanced, callable term bonds. MADS equals nearly $2.2 million, and debt service is level through maturity in 2035. MSL has no swaps and no capital leases.

DISCLOSURE

MSL provides quarterly (within 45 days) and annual (within 120 days) disclosure via the Municipal Securities Rulemaking Board's 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=933315

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Contacts

Fitch Ratings
Primary Analyst
Emily E. Wadhwani
Director
+1-312-368-3347
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Dmitry Feofilaktov
Analyst
+1-212-908-0345
or
Committee Chairperson
Eva Thein
Senior Director
+1-212-908-0674
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Emily E. Wadhwani
Director
+1-312-368-3347
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Dmitry Feofilaktov
Analyst
+1-212-908-0345
or
Committee Chairperson
Eva Thein
Senior Director
+1-212-908-0674
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com