Fitch Affirms Marquette (IN) at 'BBB'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'BBB' rating on following bonds issued by the Indiana Finance Authority on behalf of Marquette:

--$25,090,000 series 2015A fixed-rate bonds;

--$30,885,000 series 2012 fixed-rate bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a gross revenue pledge, a mortgage, and a debt service reserve fund.

KEY RATING DRIVERS

STABLE FISCAL 2015 RESULTS: Operating and financial performance in the fiscal year ended Dec. 31, 2015 (unaudited interim financials) was stable, reflecting sound occupancy rates in independent living (IL) and assisted living (AL) at 95.8% and 92.1%, respectively. Skilled nursing occupancy was weaker at 74%, but was moderately improved from the prior year. Overall, census and rate increases supported revenue growth and stable profitability metrics.

ELEVATED BUT MANAGEABLE COMPETITION: Marquette's service area has experienced a considerable influx of new units across the continuum, but IL and AL occupancy remains strong. Marquette is actively working towards addressing weaker census in skilled nursing.

GOOD BALANCE SHEET PROFILE: Liquidity metrics remain solid, despite a slight decline in unrestricted cash and investments due to poor investment returns in 2015. Balance sheet strength is further supported by a debt portfolio that now consists entirely of fixed-rate debt with level debt service. Debt metrics are consistent with the 'BBB' medians.

IMPENDING CAPITAL PLANS: Marquette is in the process of executing plans from its master planning process completed in 2014, which will likely result in major construction projects funded by new debt. Key priority capital items include increasing private beds in skilled nursing as well as dementia care and a new therapy gym. Management expects to finalize plans in 2016.

RATING SENSITIVITIES

CLARITY ON CAPITAL PLANS: Fitch will evaluate the overall impact of the projects and funding sources once plans are finalized, but believes there is limited debt capacity at the current rating. In the meantime, Fitch expects the organization to continue producing stable financial results consistent with the 'BBB' rating.

CREDIT PROFILE

Located in northern Indianapolis, IN, Marquette is a type-B continuing care retirement community (CCRC) with 312 IL units (268 apartments and 44 cottages), 50 standard AL units, 13 dementia care ALUs, and 96 skilled nursing beds. Total revenue in fiscal 2015 was $30.1 million. Marquette is managed by Life Care Services, which manages approximately 120 retirement communities nationwide.

Stable 2015 Results

Sustained operating performance produced sound profitability metrics in fiscal 2015, despite lower entrance fee receipts from decreased ILU inventory and turnover. IL and AL occupancy rates were 95.8% and 92.1%, respectively, which is comparable to previous years. Skilled nursing occupancy improved to 74% from 67.7% the prior year, but remains weaker than historical levels of above 80% due largely to increased supply in the market.

Fiscal 2015 operating ratio of 98.3% was in line with prior years, as well as the respective median of 96.1%. Due to lower entrance fee receipts, net operating margin - adjusted weakened to 21.5% from 26.5% the prior year, but remains robust against the median of 19.3%. Management attributes sustained results to Marquette's service offerings, long history, and good reputation in the market.

Heightened but Manageable Competitive Landscape

There is a fair amount of competition in Marquette's immediate service area, but competitive pressures for IL remain manageable with most providers maintaining stable occupancy levels. Over the last three years, Marquette's IL occupancy remained solid between 95% and 97%, despite significant increase in IL inventory during that same period. Continued growth in IL supply is expected in the market. However, most new entrants are likely to offer rental products for freestanding products, and are not likely to compete directly with Marquette.

Competition in skilled nursing remains elevated due to proliferation of new beds looking to take advantage of Indiana's intergovernmental transfer program for nursing facilities. Fitch believes a combination of older, semi-private units and increased competition affected skilled nursing facility (SNF) occupancy, which was 74% in 2015 compared to 82% in 2013. While reduced skilled nursing census has not yet had a material impact on financial results, management recognizes that a longer-term strategy to update the plant is needed. Marquette has been incrementally updating its SNF units, and will be converting all but five as a part of its master facility plan.

Master Planning

Management and board completed the master planning process in 2014, and are now working toward execution. The top priority is the health care center including the build-out of private units and potential expansion in order to offset the decrease in total beds during consolidation. Dementia care and a new therapy gym are also on the horizon. Management expects to make a decision on project scope and financing plans in 2016. Fitch will assess the impact of project costs and new debt once plans are finalized. Otherwise, capital spending has been muted over the last three fiscal years, averaging 46.2% of depreciation expense. The capital budget for 2016 is also moderate at $2 million.

Solid Liquidity

Unrestricted cash and investments totaled $35.7 million at FYE 2015, equating to 535 days cash on hand, 61.1% cash-to-debt, and 8.8x cushion ratio, which compare favorably against the respective 'BBB' category medians of 400 days, 60%, and 7.3x. A slight year-over-year decline in liquidity was largely due to unrealized investment losses, and Fitch does not view it as a material concern.

DEBT PROFILE

At FYE 2015, Marquette had $58.4 million in long-term debt outstanding, consisting of series 2012 and 2015A fixed-rate bonds. Annual debt service is level at $4 million. There are no swaps outstanding.

Debt metrics are sound, with maximum annual debt service (MADS) coverage of 1.8x and revenue-only coverage of 0.8x, against the respective 'BBB' medians of 2x and 1x. Debt burden is manageable with MADS equating to 13.4% of revenues and 56.5% debt-to-capitalization relative to the medians of 12.4% and 58.8%.

DISCLOSURE

Marquette covenants to provide annual disclosure within 150 days of the end of the fiscal year and quarterly disclosure within 45 days of the end of each quarter. Bond covenants include 1.2x debt service coverage and 150 days cash on hand.

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=1000792

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1000792

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Jennifer Kim, CFA
Director
+1-212-908-0740
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Emily Wadhwani
Director
+1-312-368-3347
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
Jennifer Kim, CFA
Director
+1-212-908-0740
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Emily Wadhwani
Director
+1-312-368-3347
or
Committee Chairperson
Eva Thein
Senior Director
+1 212-908-0674
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com