Fitch Affirms Philadelphia Presbytery Homes, Inc. (PA) Revs at 'BBB'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'BBB' rating on the following bonds issued on behalf of the Philadelphia Presbytery Homes, Inc. (PPHI) obligated group (OG):

--$38,300,000 Montgomery County Industrial Development Authority revenue bonds (Philadelphia Presbytery Homes, Inc. Project) series 2010A.

The Rating Outlook is Stable.

SECURITY

Pledge of gross revenues, first lien mortgage and security interest in obligated group facilities and property, and a debt service reserve fund.

KEY RATING DRIVERS

CONSISTENT DEBT SERVICE COVERAGE: Maximum annual debt service (MADS) coverage has been very consistent, averaging 2.6x over the last four audited years, above Fitch's 'BBB' category median of 1.9x. MADS coverage rose to 3x in 2015, due to a second strong year of net entrance fee receipts. MADS coverage was lower in the nine-month 2016 interim period at 1.5x, and Fitch expects that number to improve slightly by year's end.

SOFTER YTD PERFORMANCE: PPHI had a strong year of performance in 2015, with its operating ratio falling to below 100% and its net operating margin-adjusted rising to 18.6%, the highest over the last four audited years. Nine-month 2016 interim figures show a weakening in performance with the operating ratio climbing above 100%.

LIQUIDITY GROWTH STABILIZES: Unrestricted cash and investments grew by 41% from 2011 through 2014, and has remained stable over the last 18 months, due largely to unrealized losses on investments, capital spending, and the softer YTD performance. At Sept. 30, 2016, PPHI had 411 days cash on hand (DCOH), a 10.3x cushion ratio and 71.1% cash-to-debt, all of which compare well to Fitch's 'BBB' category medians.

IMPROVED IL OCCUPANCY: Independent living (IL) occupancy improved to 85% in the nine-month 2016 interim period, with Rydal Park's IL occupancy now at 90% and the Woodside and Parkside expansions now 100% occupied. Personal care and skilled nursing occupancy remained consistent with prior years.

CAPITAL SPENDING CONTINUES: Capital spending as a percent of depreciation has averaged 124.3% per year over the last four audited years, relative to a median of 106.1%. Fitch expects this level of spending to continue as PPHI continues to invest in its campuses to keep them marketable in the competitive greater Philadelphia senior living market. PPHI is closer to moving forward on a sizable IL expansion on property contiguous with Rydal Park.

RATING SENSITIVITIES

STABILITY EXPECTED: In spite of Philadelphia Presbytery Home, Inc.'s (PPHI) weaker YTD performance, Fitch expects PPHI's performance to improve, producing median level coverage over the rating cycle. A sustained drop-off in either liquidity or debt service coverage over multiple years would be a credit concern and could lead to negative rating pressure.

IL EXPANSION PROJECT: Fitch expects to have more detail on the independent living expansion at the next review. The final size, scope, and financing of the project could affect the rating.

CREDIT PROFILE

PPHI is part of Presby's Inspired Life, a senior living organization headquartered in Lafayette Hills, PA, with facilities located in and around the greater Philadelphia region.

Fitch bases its analysis on the PPHI OG, which is composed of four market rate communities - Rydal Park, Rosemont Presbyterian Village (RPV), Broomall Presbyterian Village (BPV), and Spring Mill Presbyterian Village - and a management services group. The OG has 472 IL units, 199 personal care units, and 260 skilled nursing beds as of Sept. 30, 2016. The OG had operating revenues of approximately $70.2 million in fiscal 2015 (Dec. 31 year-end).

Entities outside the OG include a large affordable housing portfolio (comprised mostly of HUD housing) and the Bala Foundation, which has approximately $30.8 million in cash and investments and provides approximately $1.1 million in support to the OG annually. PPHI's historical support of the other non-OG entities has been minimal and is not a credit concern.

Softer Year-to-Date Performance

PPHI's operating metrics weakened in the nine-month 2016 interim period. Year over year, PPHI's operating ratio rose to 105.4% from 103.8% and its net operating margin-adjusted weakened to 11.5% from 13.6%. As a result, MADS coverage fell to 1.5x from 2x.

The softer performance is driven by various challenges across PPHI's campuses. At both BVP and Rydal Park, performance was affected by changes in the post-acute care environment, including shorter lengths of stay for rehabilitation patients being released from acute care settings and changes to referral patterns, which pressured Medicare revenues. PPHI is responding to these changes, including managing overtime and staffing. PPHI is expected to finish renovations on the A-Wing at Broomhall, which along with other capital investments should enhance the marketing on that campus.

At Spring Mill Presbyterian Village, the memory care census has been below budget, and at RPV, turnover of IL units has remained elevated, both of which have affected performance.

Rydal Park has had an uptick in IL occupancy, with its Woodside and Parkside two-bedroom units now 100% occupied for most of 2016. PPHI had challenges filling up the Parkside units which were part of an expansion. In addition, PPHI management reports good sales on newly configured larger one-bedroom units.

While the YTD drop in performance is a concern, PPHI has historically had strong fourth quarters. Additionally, PPHI continues to invest in its campuses, which should keep marketing strong over the medium term, and has shown the ability to adjust operations in order to improve financial performance. PPHI's balance sheet also provides a measure of financial flexibility at the current rating level. However, a sustained period of lower performance would be a concern.

Debt Profile

Total long-term debt as of Sept. 30, 2016 is $97.71 million. Overall debt mix is 71% fixed and 29% variable.

PPHI has two tranches of bank debt with Citizens Bank (rated 'BBB+/F2'), both issued in 2013. One tranche for $27.8 million is fixed rate (3.75%) and callable by the bank in 2020. The other tranche for $22.3 million is variable rate (rate varies but is based off of 70% LIBOR) and callable by the bank in 2023. The bank debt is on parity with the master trust indenture MTI debt and the covenants are the same. In addition, PPHI continues to have two loans totaling $15.2 million from its non-obligated affiliate, the Bala Foundation.

PPHI's debt burden is mixed. At Sept. 30, 2016, MADS as a percent of revenue of 10.5% was better than Fitch's 'BBB' median of 12.7%, while debt-to-net available of 9.8x was weaker than the median of 6.3x.

DISCLOSURE

PPHI covenants to submit annual audited information within 120 days of the fiscal year end to the EMMA system, and the first three quarters of unaudited data within 45 days of the quarter end, and the fourth quarter of unaudited data within 60 days of the quarter end to EMMA.

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

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1014693

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014693

Endorsement Policy

https://www.fitchratings.com/regulatory

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Contacts

Fitch Ratings
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Director
+1-212-908-9186
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
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Director
+1-212-908-0772
or
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or
Media Relations
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Contacts

Fitch Ratings
Primary Analyst
Gary Sokolow
Director
+1-212-908-9186
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Olga Beck
Director
+1-212-908-0772
or
Committee Chairperson
Eva Thein
Senior Director
+1-212-908-0674
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com