CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB+' rating on the following revenue bonds issued by the Wisconsin Health and Educational Facilities Authority on behalf of Saint John's Communities, Inc. (SJC):
--$39.2 million series 2009A.
The Rating Outlook is Stable
SECURITY
The bonds are secured by a gross revenue pledge of the Obligated Group, a mortgage and security interest in the property and a debt service reserve fund on the series 2009A bonds.
KEY RATING DRIVERS
STRONG DEMAND AND OCCUPANCY: SJC benefits from a strong demand for services despite operating in a fairly competitive service area. SJC opened its South Tower expansion in July 2011, which added 88 new independent living units (ILUs) as well as new common space. In 2013, two additional units were added to meet demand, bringing the total to 90. The new units filled quickly and overall occupancy among SJC's 201 ILUs has exceeded 95% in 2014 and through the six-months ended June 30. Further, SJC maintains an active wait list with over 130 interested parties.
ROBUST PROFITABILITY: SJC enjoys robust profitability due to high occupancy, good expense control and an improving payor mix in the skilled nursing facility (SNF). The operating ratio has improved from a solid 98.8 in 2013 to a very strong 89.8 through the six month interim period, particularly for a type-A provider. Similarly, net operating margin (NOM) and NOM-adjusted of 24.1% and 39.9% in 2014 well exceed the respective Fitch 'BBB' medians of 9.2% and 20.4%.
ELEVATED LEVERAGE POSITION: SJC's leverage and debt burden is consistent with the 'BBB+' rating and reflects the investment in the campus repositioning undertaken in 2009. Existing maximum annual debt service (MADS) of $4.37 million equates to a high 20.7% of 2014 revenues when compared to the 'BBB' median of 12.3%. However, Fitch notes that debt service coverage including entrance fees and on a 'revenue only' basis in 2014 was a solid 2.4x and 1.4x, respectively, reflecting SJC's strong profitability.
IMPROVING LIQUIDITY POSITION: SJC's position of unrestricted cash and investments has improved over the last two and half years growing from $19.7 million at Dec. 31, 2012 to $32.1 million at June 30, 2015. As a result, key liquidity metrics including days cash on hand (DCOH), cushion ratio (x) and cash to debt (%) have improved to 743, 7.3x and 66.3% as of the second quarter of 2015 (2Q15) and are in line with or exceed Fitch's 'BBB' category medians of 408 DCOH, 6.9x cushion and 60.2% cash to debt.
RATING SENSITIVITIES
MODERATION IN DEBT BURDEN: Saint John's Communities, Inc.'s (SJC) strong cash flow combined with modest capital needs should allow for a moderation in leverage over time. The potential refunding of the series 2009A bonds could result in stronger coverage more consistent with an 'A' category rating.
IMPROVEMENT IN LIQUIDITY: Continued improvement in unrestricted liquidity relative to debt while maintaining strong profitability would likely generate upward movement of the rating over the next two to three years.
CREDIT PROFILE
SJC operates a not-for-profit Type-A and Type-B continuing care retirement community (CCRC) in Milwaukee, WI. Founded in 1868, SJC consists of 201 ILU apartments, 24 assisted living units (ALUs) and a 50 bed SNF. In 2014, SJC reported total revenues of $21.2 million.
STRONG DEMAND AND OCCUPANCY
SJC's strong demand for services is driven by the community's desirable location and favorable reputation. Located just north of downtown Milwaukee and overlooking Lake Michigan, SJC primarily attracts residents from northeastern Milwaukee County including the communities of Shorewood, Whitefish Bay and Fox Point. The South Tower addition ultimately added 90 total new ILU apartments as well as additional common space. The new addition reached stabilized occupancy in 2012 ahead of projections. Since 4Q13, SJC has maintained occupancy in its 201 ILUS above 95%. SJC benefits from a very satisfied resident base that is the primary source of referrals and leads. According to management, 72% of move-ins were referred to SJC by residents, board members or affiliated Episcopal churches. Moreover, SJC maintains an active waitlist of over 130 potential residents that have paid a $2,500 deposit to confirm their interest in residency. Average occupancy in the 24 ALUs was 94% in 2013, 87% in 2014 and 87% through 2Q 15. Similarly, average occupancy in the SNF has hovered right around 90% since 2013.
Fitch views SJC service area as fairly competitive with Milwaukee Catholic Home, the Jewish Home/Chai Point Senior Living and Eastcastle Place all located within one mile of SJC. While competitive, the communities tend to differentiate themselves by contract type and sponsorship. Fitch believes that SJC benefits from its type-A lifecare contract, its location overlooking Lake Michigan and recently expanded/renovated physical plant.
ROBUST PROFITABILITY
SJC's profitability from core operations has been improving since 2012 reflecting stabilization of the South Tower expansion which added 90 new ILUs, the improvement in payor mix in the SNF, the benefit of annual rate increases and effective cost control and labor management. SJC's operating ratio has improved from 112.0 in 2012 to very good 92.7 in 2014 and an even better 89.8 through the six month interim. Similarly, NOM has improved from 14.4% in fiscal year (FY) 2012 to 24.1% in 2014 while NOM-adjusted improved from a very strong 33.1% in 2012 to an even stronger 39.9% in 2014. Through the six months ended June 30, 2015, NOM and NOM-adjusted have remained robust at 26.8% and 33.1% respectively.
ELEVATED DEBT BURDEN
Fitch views SJC's leverage and debt burden as somewhat elevated relative to Fitch's 'BBB' medians reflecting the investment in the campus repositioning undertaken in 2009. Existing maximum annual debt service (MADS) of $4.37 million equates to a high 20.7% of 2014 revenues when compared to the 'BBB' median of 12.3%. Adjusted debt to capitalization of 60.1% in 2014 is in line with the 'BBB' median of 59%.
Debt service coverage including entrance fees was a solid 2.5x in 2013 and 2.4x in 2014 compared to the 'BBB' median of 2.0x. On a 'revenue only' basis, coverage of MADS was 1.0x and 1.4x in 2013 and 2014, respectively, which is strong for a type-A provider and reflects SJC's excellent profitability. Management has announced its intention to refund the series 2009A bonds (7.625% maximum coupon) which should help moderate SJC's annual debt service cost and allow for better debt service coverage going forward.
IMPROVING LIQUIDITY POSITION
SJC's position of unrestricted cash and investments has improved over the last two and half years growing from $19.7 million at Dec. 31, 2012 to $32.1 million at June 30, 2015. As a result, key liquidity metrics including DCOH, cushion ratio and cash to debt have improved to 743, 7.3x and 66.3% as of 2Q15 and are in line with or exceed Fitch's 'BBB' category medians of 408 DCOH, 6.9x cushion and 60.2% cash to debt.
SJC's capital spending needs are moderating which Fitch believes should allow for further improvement in liquidity metrics over the medium term. Capital spending is projected at roughly $6 million in 2015, $3.6 million in 2016, $2.8 million in 2017 and less than $1 million in 2018 and 2019. Among the larger expenditures are $3.5 million to renovate and reconfigure certain areas of the dining and community space and $3 million for window replacements in the North Tower.
DISCLOSURE
SJC covenants to disclose annual reports no later than 150 days after each fiscal year end and quarterly reports no later than 45 days after quarter end for the first three quarters and 60 days after the fourth quarter end. SJC posts its disclosure to the Municipal Securities Rulemaking Board's EMMA website.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Not-for-Profit Continuing Care Retirement Communities Rating Criteria (pub. 04 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=868824
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=989919
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=989919
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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