NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns a 'BBB-' rating to the following West Shore Area Authority bonds expected to be issued on behalf of Messiah Lifeways:
--$24,435,000 Revenue Bonds (Messiah Village Project) series A of 2015.
In addition, Fitch assigns a 'BBB-' to the following parity debt also issued on behalf of Messiah Lifeways:
--$8,935,000 Cumberland County Municipal Authority Revenue Bonds (Messiah Village Project) series A of 2008
The Rating Outlook is Stable.
The bonds are expected to be issued as fixed rate. Proceeds will be used to refund Messiah Lifeways' series 2008Bs and 2009 bank qualified bonds, pay for a variety of capital projects, fund a debt service reserve fund, and pay for the cost of issuance. Bonds are expected to sell via negotiation the week of April 20.
SECURITY
A pledge of gross revenues of the obligated group (OG), a mortgage, and a debt service reserve fund.
KEY RATING DRIVERS
LARGE REPOSITIONING PROJECT: The 'BBB-' rating incorporates the impact of an expected borrowing in the fall of 2015 that will fund a major repositioning project at Messiah Lifeways' main campus, Messiah Village. The project will add 84 independent living (IL) units, include new personal care apartments and skilled nursing units, and provide other upgrades to the campus including new dining venues, a large common meeting space, and wellness center.
SOLID OVERALL OPERATING PROFILE: Messiah's strong historical occupancy (+90% across all levels of care) over the last three years has produced very steady operating performance. Historical pro forma coverage of the series 2015A bonds was a very strong 3x for FY2014 (Jun. 30 year end). Historical pro forma coverage assuming issuance of the larger repositioning issue drops to 1.3x for FY2014 (1.0x revenue only) but does not include the additional revenues from the expansion indicating the current strength of Messiah Lifeways underlying operations.
GOOD MARKET POSITION: Messiah Lifeways does have two competitors in its primary service area and a few other competitors regionally. However, the competition is manageable and Messiah Lifeways' entrance fees remain in line with area housing prices and competitor pricing. Messiah Lifeways' market position is helped as well by a long operating history in the region and the offering of a diversity of services, including adult daycare centers, senior centers, and home care services.
MAINTAINING INVESTMENT GRADE: Despite the likely issuance of a maximum $85 million of series 2015B bonds (assuming all fixed rate debt) in the second half of 2015 to fund a campus repositioning, Fitch believes that Messiah Lifeways should maintain an investment grade rating due to its steady historical operating performance, good revenue only coverage, high occupancy, and solid liquidity (not including approximately $17 million in endowment funds). An initial pro forma analysis by Fitch shows most of Messiah Lifeways' ratios remaining adequate relative to the lower end of the 'BBB' category through the construction and occupancy stabilization periods. Stabilization of the new IL units is expected to occur in 2020.
RATING SENSITIVITIES
LARGE FALL 2015 FINANCING: While the 'BBB-' rating incorporates the likely impact of the larger debt issuance, the issuance of the bonds is approximately six to eight months away. Should the timing, scope of the project, or financing details change materially, those changes could affect the rating at the time of issuance.
CONTINUED STRENGTH OF CORE PERFORMANCE: The rating assumes that Messiah Lifeways' current financial profile, characterized by high occupancy and steady financial results and coverage, will remain stable over the next few years. A deviation from this performance could pressure the rating.
CREDIT PROFILE
Dating back to 1896, Messiah Lifeways is a non-profit corporation headquartered in Mechanicsburg, PA, that provides a network of services for adults 55 and older living in south central Pennsylvania. Messiah Lifeways operates Messiah Village, which is a Type 'C' continuing retirement community (CCRC) in Mechanicsburg that has 152 cottages, 124 IL apartments, 157 personal care apartments, and 184 skilled nursing beds.
Others services provided by Messiah Lifeway include two adult day care centers, a home care services program, sponsorship of two senior centers, and a second campus, Mt. Joy Country Homes, which provides IL for adults 55 and older. Total operating revenue in fiscal 2014 was $41.2 million
SIZABLE REPOSITIONING PROJECT
Messiah Lifeways is moving forward on a major capital plan expected to begin in the fall of 2015. The project will be a large repositioning project at Messiah Village that is expected to add 84 IL apartments (a net gain of 68 units as 16 older cottages are being torn down for the project), include 26 new personal care apartments, two new skilled nursing neighborhoods (16 private rooms in each neighborhood), and allow for the rest of Messiah Lifeways skilled nursing to be converted to private from semi-private. The project plans also include for a major upgrade of amenities on the campus including a new aquatic center, spa, restaurant and bistro, auditorium, and other common spaces.
The financing for the capital plan is expected to occur in the fall of 2015 and will include a mix of temporary and permanent debt. Fitch's 'BBB-' rating assumes the additional debt for the repositioning project. Total long term debt is expected to peak at approximately $95 million and assumes the pay down of temporary from initial entrance fees. Fitch used a MADS figure of $6.1 million for analysis, but that will likely change at the time of issuance.
A pro forma analysis of the larger MADS figure shows coverage in FY2014 of 1.3x and MADS as a percent of revenue of 14%. Cash to debt drops to about 35%. All of these figures are adequate for the lower end of the 'BBB' rating category. However, changes to the timing, scope, or financing of the project could impact the rating at the time of issuance.
Fitch visited the campus and believes even though the projects will stress Messiah Lifeways' financial profile over the near term, they will significantly enhance the marketability of the current campus once completed. Specifically, the new IL building that will house the upgraded amenities and common spaces will also anchor a new campus main street, creating a completely new campus front entrance.
The campus entrance as currently configured has older cottages, which are being torn down, on one side and the main personal care and skilled nursing building on the other. The pool and main dining area are currently housed in this personal care and skilled nursing building, as well as most common meeting spaces. Fitch believes the upgrading of these amenities and the moving of them to the new IL building located alongside the new main street will provide a major lift to the campus.
Messiah Lifeways will begin pre-sales for the new IL apartments in April 2015 and has already undertaken an extensive marketing campaign, leading to a 300 plus priority waiting list for the new IL apartments.
The additions to personal care and skilled nursing should also prove accretive. The personal care apartments will be larger than the current personal care apartments, and the skilled nursing project will expand the number of private skilled nursing rooms on the campus. These additions will strengthen two already strong service lines for Messiah Lifeways.
STEADY OPERATIONAL PERFORMANCE
Messiah Lifeways had a solid operating year in fiscal 2014, posting a 91.6% operating ratio and an 8.3% net operating margin, both of which compare well to 'BBB' category medians and are the strongest through the three-year historical period. Six month fiscal 2015 results remain solid with an 86.7% operating ratio and an 8.7% net operating margin. Entrance fees were steady over the historical period averaging $3.6 million a year and were off to a strong start in fiscal 2016, with $2.1 million in net entrance fee receipts for the first six months of the year.
The steady operating performance is supported by consistently high occupancy on the Messiah Village campus. At December 31, 2014, IL, personal care, and skilled nursing occupancies were 93%, 96%, and 92%, respectively, which is consistent with the historical period. The number of personal care and skilled nursing units on the campus, more than 300 combined, and their high occupancy support the good operating metrics, including above median pro forma revenue only coverage, which was a robust 2.9x times in fiscal 2014.
Liquidity was solid at Dec. 31, 2014, with $29.5 million in unrestricted cash and investments equating to 306 days of cash on hand (DCOH), a 14x pro forma cushion ratio, and 110.7% cash to debt. However, the cushion ratio and cash to debt will weaken significantly after the fall debt issuance.
The unrestricted cash and investments do not include an additional $16.6 million of restricted endowment funds. Messiah Lifeway can draw up to 7% of these funds yearly for operational support. Through the historical period, Messiah Lifeway has drawn down less than 5% per year, averaging approximately $665,000 a year over this time. Fitch views these additional funds positively, believing they provide an additional financial resource even though they are restricted.
DEBT PROFILE
As of Dec. 31, 2014, Messiah Lifeways had approximately $26.7 million in long term debt divided among three series. Two of the series are variable rate and one is fixed. With this debt issuance, Messiah Lifeways will move to all fixed rate debt. For the larger fall debt issuance, Messiah Lifeways' management team is contemplating a number of financing scenarios, some of which include the issuance of variable rate bonds.
Fitch's pro forma analysis of the larger debt issuance assumes all fixed rate debt. Messiah Lifeways has one outstanding fixed payor swap. Morgan Stanley is the counterparty. Messiah Lifeways pays 2.985% and there are no collateral posting requirements. The current mark to market is a negative $1.1 million.
DISCLOSURE
Messiah Lifeways covenants to provide annual disclosure within 120 days of fiscal year end, and quarterly disclosure within 45 days of each quarter end. Disclosure will be made 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).
--'Revenue-Supported Rating Criteria' (June 16, 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
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=982546
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