Fitch Affirms Lutheran Social Ministries at Crane's Mill (NJ) Bonds at 'BBB-'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed the 'BBB-' rating on the following New Jersey Economic Development Authority (Lutheran Social Ministries at Crane's Mill) ratings:

--Approximately $15.5 million fixed-rate revenue bonds, series 2008A;

--Approximately $11.3 million fixed-rate revenue refunding bonds, series 2005A;

--Approximately $10.8 million variable-rate revenue refunding bonds, series 2005B*.

*Variable-rate demand bonds (VRDBs) is backed by a letter of credit (LOC) from TD Bank.

The Rating Outlook is Stable.

SECURITY

Debt payments are secured by a pledge of the gross revenues, a mortgage on the property and debt service reserve fund for the fixed-rate bonds.

KEY RATING DRIVERS

SOLID OPERATING PROFITABILITY: Crane's Mill's higher independent living unit (ILU) occupancy, coupled with strong entrance fee receipts, resulted in adjusted net operating margin of 24.9% through Sept. 30, 2014 (nine month interim). Net operating margin of 12.4% in fiscal 2014 and the same through the nine months ended Sept. 30, 2014 compares favorably to the 'BBB' category median of 9.2%.

HIGH BUT MANAGEABLE DEBT BURDEN: Crane's Mill's debt burden remains high as measured by maximum annual debt service (MADS) at 15.8% of fiscal 2013 revenue. Coverage of MADS at 1.1x in fiscal 2013 was light but improved to 1.7x at Sept. 30, 2014. Revenue only coverage at or near 0.9x for the last three years provides some comfort.

FLUCTUATING LIQUIDITY: Crane's Mill's liquidity position has been impacted over the last several years because of cash contributions to the parent organization to further the mission. Liquidity in fiscal 2013 and through the nine month interim period has improved and is in line with most 'BBB' category medians.

CONTINUED OCCUPANCY IMPROVEMENT: Crane's Mill's ILU occupancy has improved from a low of 79% in fiscal 2011 when the community brought on 66 ILUs and 10 cottages as part of an expansion project to 84% at Sept. 30, 2014. Assisted living unit (ALU) occupancy has also improved and was 97% at Sept. 30, 2014, up from a low of 74% in fiscal 2011. Management expects ILU occupancy to improve to 90% by fiscal 2015 year-end, which Fitch views as reasonable given the steady fill-up.

RATING SENSITIVITIES

SUFFICIENT CASH FLOW: Fitch expects Crane's Mill to generate cash flow sufficient to cover its high debt burden. Failure to generate strong cash flow may result in negative rating pressure.

CREDIT PROFILE

Located on a 48-acre site in West Caldwell, NJ, Crane's Mill is a type A and type B continuing care retirement community (CCRC) consisting of 281 ILUs, 48 ALUs, 66 nursing beds, and 18 memory support beds. In fiscal 2013, Crane's Mill had total revenues of $27.7 million.

Crane's Mill completed its expansion project (66 ILUs, 10 cottages, six new ALUs and the renovation of 12 existing ALUs) with the new units available for occupancy in March 2010. Although Fitch views the project favorably, which include improvements to Crane's Mill's existing campus and services, Crane's Mill suffered a sizable number of pre-sale cancellations and fill-up still remains below expectations.

Crane's Mill has been converting its residency contracts from a predominantly type A contract to a predominantly type B contract as units turnover, which Fitch views as beneficial since it should lower Crane's Mill's overall risk profile. Currently, Crane's Mill has about 60% type B contracts and 40% type A contracts.

GOOD PROFITABILITY

Crane's Mill's net entrance fee receipts totaled $3.1 million at Sept. 30, 2014, the highest it's been in five years. ILU occupancy has been steadily improving despite slow fill-up of Crane's Mill's expansion project that was completed in 2010. As of Sept. 30, 2014, ILU occupancy was 84%, up from 81% in fiscal 2013 and 79% in fiscal 2012. However, even through the slow fill of the expansion project, management was able to effectively control expenses and Crane's Mill's operating profile has consistently remained in line with 'BBB' category medians. Crane's Mill's operating margin of 93.7% and 92.8% in fiscal 2013 and through Sept. 30, 2014, respectively, were favorable compared to the 'BBB' category median of 97.4%. Improved entrance fee receipts resulted in a 24.9% adjusted net operating margin through Sept. 30, 2014 (nine month interim) up from 15.8% in fiscal 2013.

HIGH BUT MANAGEABLE DEBT BURDEN

As of Sept. 30, 2014, Crane's Mill had approximately $37.5 million of debt outstanding, which is about 30% variable-rate and 70% fixed-rate. The debt burden has been steadily declining and MADS as a percent of fiscal 2013 revenue was 15.8%, down from 16.7% in fiscal 2012 but still high against the 'BBB' category median of 12.3%. Crane's Mill's has approximately $10.7 million of VRDBs supported by a TD Bank, N.A. LOC, which is subject to annual renewals. The LOC expires in July, 2015 which is viewed negatively; however, cash to puttable debt of 2.58x (not including deduction for the line of credit) mitigates the risk of non-renewal.

Maximum annual debt service (MADS) of $4.5 million does not occur until 2027. Current actual debt service is about $3.1 million and actual debt service coverage by turnover entrance fees at Sept. 30, 2014 (nine month interim) was 2.5x and revenue only coverage was 1.1x. MADS coverage and revenue-only MADS coverage during the same time period was adequate at 1.7x, and 0.8x, respectively, compared to the 'BBB' category median of 2x and 0.9x. There is no occupancy covenant on the new units as long as Crane's Mill maintains a debt service coverage ratio of at least 1.25x for the previous two quarters, calculated on a rolling two-quarters basis, which Crane's Mill has achieved to-date.

FLUCTUATING LIQUIDITY POSITION

Over the past few years, Crane's Mill has transferred cash to the parent organization, Lutheran Social Ministries of New Jersey (LSMNJ), the sole corporate member, to further the mission of the organization. The distribution of cash to the parent historically was only limited by Crane's Mill's bond covenant compliance of maintaining 240 days cash on hand. In September 2014, Crane's Mill executed a formal intercompany loan agreement with LSMNJ allowing the parent to draw up to $5 million from a line of credit at 2.5% interest and five year pay-back period. Management expects a draw of between $3 million-$4 million before year-end. Fitch views this agreement positively as it identifies the maximum amount of liquidity that can flow up to the parent organization. For purposes of this analysis, Fitch will review Crane's Mill's cash position both including and excluding the $5 million potential draw from the parent company. At Sept. 30, 2014, unrestricted cash and investments with the full $5 million drawn down would be $22.7 million, equaling 351 days cash on hand (DCOH), 60.9% cash to debt and 5.1x cushion ratio. Actual unrestricted cash and investments at the interim was $27.7 million, resulting in DCOH, cash to debt and cushion ratio of 428,74.3%, and 8.2x; all favorable compared to the respective 'BBB' category medians of 408,60.2% and 6.9x. Fitch expects Crane's Mill to continue to maintain liquidity in line with its rating level despite the cash transfers to LSMNJ.

DISCLOSURE

Crane's Mill has covenanted to provide annual audited financial statements within 120 days of its fiscal year end and un-audited financial statements within 45 days of each fiscal quarter.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Rating Guidelines for Nonprofit Continuing Care Retirement Communities' (July 24, 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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=928835

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Contacts

Fitch Ratings
Primary Analyst
Dana S. Ringer
Director
+1-312-368-3215
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Eva Thein
Senior Director
+1-212-908-0674
or
Committee Chairperson
Marcy Block
Senior Director
+1-212-908-0239
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Dana S. Ringer
Director
+1-312-368-3215
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Eva Thein
Senior Director
+1-212-908-0674
or
Committee Chairperson
Marcy Block
Senior Director
+1-212-908-0239
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com