Fitch Rates Lifespace Communities, Inc.'s (IA) Series 2016A/B Bonds 'A'; Outlook Stable

CHICAGO--()--Fitch Ratings has assigned 'A' ratings to the following bonds expected to be issued on behalf of Lifespace Communities, Inc. (Lifespace):

--$62,660,000 Iowa Finance Authority revenue bonds, series 2016A;

--$28,990,000 Palm Beach County Health Facilities Authority revenue bonds, series 2016B.

The series 2016A/B bonds are expected to be issued as fixed rate bonds. Bond proceeds will be used to finance various capital projects, to reimburse for prior capital spending, to refund the series 2010S bonds, fund capitalized interest, fund a debt service reserve fund and pay costs of issuance. Concurrent with the series 2016 bond issuance, Lifespace will add an eleventh community to the obligated group (OG), Oak Trace (IL). Pro forma MADS is expected to increase to $14.9 million, occurring in 2020, from $12.3 million. Excluding a spike in debt service in 2020, MADS would equal $13.8 million and aggregate debt service is level through 2030. The series 2016A/B bonds are expected to price the week of Oct. 31 via negotiation.

Additionally, Fitch has assigned an 'A' rating to approximately $24 million of Iowa Finance Authority senior living facility revenue bonds Series 2014A issued on behalf of Deerfield Retirement Community (Deerfield), a Lifespace community that is not part of the OG but whose bonds are backed by a guaranty by Lifespace. Fitch has also affirmed the 'A' rating on approximately $120 million of revenue bonds issued through various authorities on behalf of Lifespace.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a pledge of unrestricted receivables of the OG, a mortgage interest in certain property and a debt service reserve fund.

KEY RATING DRIVERS

DIVERSE OPERATING PLATFORM: Operations are well diversified across 11 communities in the OG, including Oak Trace, located in six states with no individual community accounting for more than 14% of gross revenue in fiscal 2015. The diverse operating platform has helped sustain consistent occupancy despite fluctuations at individual communities.

CONSISTENTLY SOLID PROFITABILITY: The diverse operating platform and effective cost management practices have combined to produce consistently solid operating profitability. Net operating margin (NOM) and net operating margin adjusted (NOMA) averaged 6.8% and 24.2% since fiscal 2011 and equaled 6.3% and 23.7% in fiscal 2015.

MANAGEABLE DEBT BURDEN: Pro forma MADS equals a manageable 7.7% of fiscal 2015 revenue (6.9% including Oak Trace). The manageable debt burden and solid operating profitability produced strong maximum annual debt service (MADS) coverage of 3.4x in fiscal 2015 (3.7x including Oak Trace), exceeding Fitch's 'A' category median of 3.1x.

INCREASED CAPITAL SPENDING: Capital spending is expected to increase through fiscal 2021 as Lifespace executes a $367 million multi-campus redevelopment plan. The redevelopment plan is expected to be funded by the series 2016A bond issuance, a future bond issuance, entrance fee generation and operating cash flows.

RATING SENSITIVITIES

SUCCESSFUL EXECUTION OF CAPITAL PROJECTS: Fitch expects that Lifespace Communities will successfully execute its large capital projects while maintaining a credit profile consistent with the 'A' category rating. Given the large scope of the projects, failure to successfully execute the projects or material changes in leverage or liquidity metrics could result in negative rating pressure.

CREDIT PROFILE

Headquartered in Des Moines, Iowa, Lifespace operates 12 continuing care retirement communities (CCRCs) in seven states, 10 of which are in the currently in the OG. Concurrent with the series 2016 bond issuance, Lifespace will add an eleventh community to the OG, Oak Trace (IL). Including Oak Trace, the OG would have accounted for 96% of consolidated operating revenues and 90% of consolidated total assets in fiscal 2015. Of the 11 communities in the OG, five are located in Florida with the remaining communities located in Illinois, Kansas, Minnesota, Pennsylvania and Nebraska. Total OG operating revenues equaled $195 million in fiscal 2015 ($216 million including Oak Trace). Non-OG entities include Lifespace Foundation and Deerfield.

DIVERSE OPERATING PLATFORM

With 11 communities located in six states, Fitch believes bondholders benefit from the OG's geographic diversity which reduces overall operating risk relative to a single-site borrower. Moreover, revenue generation and profitability are well balanced, with no individual community accounting for more than 14% of fiscal 2015 gross revenue. However, five communities are located in Florida, accounting for 53% of Lifespace's fiscal 2015 revenue. Fitch's credit concerns include Lifespace's high concentration of revenue derived from Florida and the resulting high exposure to the state's housing markets and risks related to hurricanes.

The diverse operating platform has helped to sustain consistent occupancy rates, despite variations at individual communities. Including Oak Trace, ILU occupancy has averaged 91% since fiscal 2013 and equaled 91% at June 30, 2016. Similarly, SNF occupancy averaged 86% and equaled 89% at June 30, 2016 while ALU occupancy averaged 88% and equaled 88%. In addition to the diverse operating base, the consistent occupancy rates reflect solid management practices and the competitive position of each community.

CONSISTENTLY SOLID PROFITABILITY

Profitability has been consistently solid with operating ratio, NOM and NOMA averaging 94.1%, 6.8%, and 24.2%, respectively since fiscal 2011 and equal to 93.8%, 6.3% and 23.7% in fiscal 2015 excluding Oak Trace. The solid operations continued in the six month interim period ending June 30, 2016 (the interim period) with NOM and NOMA equal to 7.8% and 19.4%. Including Oak Trace, operating profitability remains solid with NOM and NOMA equal to 6.1% and 23.1% in fiscal 2015 and 8.7% and 20% in the interim period. The consistently solid operating profitability is driven by strong occupancy rates, continued net entrance fee generation, effective cost management practices and yearly fee increases.

MANAGEABLE DEBT BURDEN

Despite the issuance of new debt, Lifespace's debt burden remains very manageable. Including Oak Trace in the OG, pro forma MADS equals 6.9% of fiscal 2015 revenue, comparing favorably to Fitch's 'A' category median of 9.2%, and pro forma MADS coverage equaled a solid 3.7x in fiscal 2015, exceeding Fitch's 'A' category median of 3.1x. Without Oak Trace in the OG, pro forma MADS equals 7.7% of fiscal 2015 revenue and pro forma MADS coverage equaled a solid 3.4x. Excluding the spike in debt service in 2020, MADS coverage would equal 4.0x including Oak Trace in fiscal 2015 and 3.7x excluding Oak Trace.

As discussed below, capital plans could include the issuance of additional debt in 2018, however plans are not final. Fitch will assess the impact to Lifespace's credit profile of any new debt issuance as the timing and size of the debt issuance is more certain.

INCREASED CAPITAL SPENDING

In addition to routine capital spending, Lifepoint expects to spend approximately $367 million between fiscal years 2016 and 2021, averaging $61 million per year, on a campus repositioning project. Historical capital spending has been solid, averaging $42.3 million per year (149% of depreciation) between fiscal 2011 and 2015. Campus redevelopment plans include adding assisted living and memory support services at five communities in addition to enhancing common areas and independent living at certain communities. The project is expected to be funded by series 2016A bond proceeds, an approximately $125 million issuance in 2018 (a portion of which will be temporary debt), entrance fee generation and operating cash flows. The final scope and timing of the projects are subject to change and dependent upon sustained operating performance.

Fitch views the projects favorably and expects successful execution to enhance Lifespace's competitive position in each market, expand consolidated revenue and increase cash flows. However, the large combined size of the projects exposes Lifespace to execution risk. Fitch expects Lifespace to maintain a credit profile consistent with its 'A' category rating while executing the projects.

ADEQUATE LIQUIDITY

Despite solid historical capital spending, unrestricted cash and investments have continued to grow, increasing 5.4% since fiscal 2014 to $174 million at June 30, 2016. The continued growth reflects solid entrance fee generation and operating cash flows, offsetting the healthy capital spending. Given the scope and diversification of operations, pro forma liquidity metrics are adequate for the rating category relative to debt with 82% cash to pro forma debt and 11.4x cushion ratio at June 30, 2016. Fitch's pro forma liquidity metrics include approximately $11.8 million of series 2016A reimbursement proceeds and excludes approximately $19 million of cash that will be used to defease Oak Trace's outstanding debt. Given the sizable capital plans, liquidity metrics are expected to compress in the medium term before strengthening due to the benefit of the capital projects. A compression of liquidity metrics to levels inconsistent with the 'A' rating could result in negative rating pressure.

DEBT PROFILE

Post issuance, total debt is expected to increase to approximately $207 million from $149 million at June 30, 2016. The pro forma debt profile will consist of 89% underlying fixed rate bonds and 11% underlying variable rate bonds. Lifespace is not counterparty to any swaps. Fitch views the conservative debt portfolio favorably.

In October 2015, Lifespace entered into an agreement to guaranty approximately $36 million of Deerfield's series 2014A, C and D bonds in exchange for deferral on debt service payments through May 2018, and parity status for any future capital expenditures for repositioning provided to Deerfield by Lifespace with Deerfield's senior indebtedness. Lifespace currently owns the outstanding series 2014C and 2014D bonds. Therefore, Lifespace's exposure under the guaranty is limited to approximately $24 million of outstanding series 2014A bonds. Given the deferral on debt service payments through 2018, Fitch does not expect the guaranty to materially impact the OG's credit profile until 2018, if at all, when debt service payments resume. Additionally, Lifespace's financial profile currently mitigates concerns should any payments be required under the guaranty.

DISCLOSURE

Lifespace covenants to provide annual disclosure within 150 days of the fiscal year-end and quarterly disclosure within 45 days of each fiscal quarter-end. Disclosure is provided through the Municipal Securities Rulemaking Board's EMMA system.

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/site/re/868824

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/site/re/750012

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https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1013323

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013323

Endorsement Policy

https://www.fitchratings.com/regulatory

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Contacts

Fitch Ratings
Primary Analyst
Adam Kates, +1-312-368-3180
Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Paul Rizzo, +1-212-612-7875
Director
or
Committee Chairperson
James LeBuhn, +1-312-368-2059
Senior Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com