Fitch Affirms Three Pillars, WI's Revs at 'A-'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed the 'A-' rating on the approximately $22.8 million series 2013 revenue bonds issued by the Wisconsin Health and Educational Facilities Authority on behalf of Three Pillars Senior Living Communities (Three Pillars).

The Rating Outlook is Stable.

SECURITY

Debt payments are secured by a pledge of the gross revenues of the obligated group and a mortgage pledge.

KEY RATING DRIVERS

HEALTHY LIQUIDITY: Liquidity continues to be a credit strength. At Dec. 31, 2014 (six month interim) unrestricted cash and investments was $36.2 million, which equates to a solid 880 days cash on hand and 151.3% cash to debt, both exceeding the respective 'A' category medians of 692 days and 127.2%.

SOLID OPERATIONS: Management's focus on operations coupled with the benefits realized from its skilled nursing facilities (SNF) repositioning in 2010 has led to improved operating performance, which now meets or exceeds most category medians. Operating ratio of 87.1% and net operating margin of 9% in fiscal 2014 are improved from 90.6% and 6.8% the prior year and above the respective 'A' category medians of 97.1% and 6.2%.

STRONG OCCUPANCY: Occupancy has stabilized and has remained above 90% across all levels of care for the past two years.

MODERATE DEBT BURDEN: MADS equates to a moderate 7.5% of fiscal 2014 revenue compared to the 'A' category median of 8.9%. MADS coverage in fiscal 2014 was a very solid 4.3x but fell to 2.2x at December 31, 2014 (six-month interim), reflecting the lower than normal turnover entrance fees during the interim.

RATING SENSITIVITIES

SUSTAINED FINANCIAL PROFILE: Fitch expects Three Pillars' financial profile to remain in line with 'A' category medians and debt service coverage levels to return to historical norms.

CREDIT PROFILE

Three Pillars is a type-C CCRC based in Dousman, Wisconsin (about 35 miles west of downtown Milwaukee), with 151 ILUs, 95 ALUs and 84 SNF beds. Total operating revenue in fiscal 2014 was $17.4 million. For most of its ILU units, Three Pillars offers 90% refundable entrance fee contracts. The 'A-' rating reflects Three Pillars' solid financial profile, which includes good liquidity, solid profitability and a moderate debt profile.

GOOD LIQUIDITY

Three Pillars' liquidity indicators exceed Fitch's 'A' category medians and are viewed as primary credit strength. At December 31, 2014, Three Pillars had $36.2 million in unrestricted cash and investments, which equated to a strong 880 days cash on hand, 151.3% cash to debt and 24.5x cushion ratio, which all exceed Fitch's respective 'A' category medians of 692 DCOH, 127.2% and 15.8x. An additional positive rating factor is Three Pillars' affiliation with and financial support from the Wisconsin Masonic Foundation, which contributed $730,844 in fiscal 2014 and $690,825 in fiscal 2013 to support operations at Three Pillars.

IMPROVED OCCUPANCY

Three Pillars repositioned its skilled nursing facility in 2010 by converting some of the semiprivate rooms to private and adding a wellness center to include an aerobics studio and demonstration kitchen for residents, employees and the community. Three Pillars has had relationships with local hospitals for rehab services and recently began more formal discussions with a key local health system that could bolster its rehab referrals and management expects this relationship will grow and expand to include community based-services and population health management, which Fitch views favorably.

Utilization was impacted by the recession but has now stabilized and is above 92% across all three levels of care. Occupancy in the independent living units (ILUs) at Dec. 31, 2014 was 95%, up from a low of 81% in fiscal 2011. Some of this improvement can be attributed to the hiring of a wellness director in 2011, who added educational programs and social events, leading to increased move-ins. Assisted living unit (ALU) occupancy was also very strong at 95% through the six month interim ended December 31, 2014 and in fiscal 2014. SNF occupancy was also strong during the interim at 93%.

SOLID OPERATIONS

Management continues to focus on operating efficiencies and this effort can be seen in its operating performance that has continued to improve since last review. Operating ratio in fiscal 2014 was a solid 87.1% compared to 90.6% in fiscal 2013 and favorable against the 'A' category median of 97.1%. Net operating margin of 9% is up from 6.8% in fiscal 2013 and 5.5% in fiscal 2012 and above the 'A' category median of 6.2%. Adjusted new operating margin of 13.7% in fiscal 2014 is light against the 'A' category median of 23.4%, mostly reflecting the type-C contract and lower turnover entrance fee receipts. Turnover entrance fees in fiscal 2014 were $837,000, down from $1.6 million in fiscal 2013 and $938,000 in fiscal 2012. Turnover entrance fees through the interim ended December 31, 2014 were negative $26,000 reflecting the high level of refunds. Fitch expects net turnover entrance fee receipts to stabilize.

DEBT PROFILE

Three Pillars has $22.8 million in debt outstanding, which is all fixed rate with level debt service. The debt burden is moderate at 7.5% of fiscal 2014 revenue, which is solid compared

to Fitch's 'A' category median of 8.9%. MADS coverage in fiscal 2014 was strong at 4.3x, which is above the 'A' category median of 3.7x. At Dec. 31, 2014, MADS coverage fell to 2.2x, reflecting the significant refunds through the interim period. However, revenue only coverage of 2.2x at December 31, 2014 and 3.7x in fiscal 2014 compare favorably to the 'A' category median of 1.2x.

DISCLOSURE

Three Pillars has covenanted to provide Fitch and bondholders annual audits 150 days of the end of the fiscal year and quarterly statements within 45 days of quarter end.

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

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 16, 2014);

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

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

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=981657

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Contacts

Fitch Ratings
Primary Analyst
Dana S. Ringer
Director
+1-312-368-3215
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Dmitry Feofilaktov
Analyst
+1-212-908-0345
or
Committee Chairperson
Jim LeBuhn
Senior Director
+1-312-368-2059
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Dana S. Ringer
Director
+1-312-368-3215
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Dmitry Feofilaktov
Analyst
+1-212-908-0345
or
Committee Chairperson
Jim LeBuhn
Senior Director
+1-312-368-2059
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com