Fitch Affirms Lutheran Senior Services' (MO) Revs at 'BBB+'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed the 'BBB+' rating on approximately $273.3 million revenue bonds issued through the Missouri Health & Educational Facilities Authority and the Illinois Finance Authority (MO) on behalf of Lutheran Senior Services' (LSS) listed at the end of the press release.

The Rating Outlook is Stable.

SECURITY

Debt payments are secured by a pledge of the gross revenues of the obligated group; debt service reserve funds on the fixed-rate issues provide additional bondholder security.

KEY RATING DRIVERS

LARGE REVENUE BASE; STRONG REGIONAL PRESENCE: LSS benefits from the size and scale as the owner and manager of six continuing care retirement community (CCRC) facilities in Missouri and three in Illinois with a total of 1,636 ILUs (independent living units; including patio homes), 695 assisted living units (ALUs), and 954 skilled nursing facility (SNF) beds. Its stable operating performance is supported by a large revenue base (approximately $187 million in fiscal 2014; Dec. 31 year-end) and a strong, strategically minded leadership team.

STRONG REVENUE-ONLY COVERAGE: LSS' historical revenue-only coverage has been strong when compared to 'BBB' peers reflecting its type-C contract and good core profitability. In 2014, LSS generated an operating ratio of 90.2% and a net operating margin of 15.3%; both of which exceed the respective 'BBB' medians of 97.4% and 9.2%. As a result revenue-only coverage was 1.5x in 2014 which is improved from 1.4x and 1.2x in 2013 and 2012, respectively.

ELEVATED DEBT BURDEN: Certain of LSS' debt metrics are elevated when compared to Fitch's 'BBB' category medians, reflecting its robust capital reinvestment strategy. Maximum annual debt service (MADS) of $27.1 million equated to 13.9% of 2014 total revenues which is improved from prior year but above the 'BBB' median of 12.3%. Debt-to net-available of 7.9x in 2014 is above the 'BBB" category median of 6.3x. MADS coverage (including turnover entrance fee receipts) was solid at 1.9x in 2014 compared to the 'BBB' median of 2.0x .

CONSISTENTLY SOLID OCCUPANCY: Occupancy across the continuum of care has been consistent and was a solid 93.6% in the ILUs, 94.2% in the ALUs, and 89.7% in the SNF as of March 31, 2015.

SIGNIFICANT CAPITAL SPENDING CONTINUES: LSS has focused on the repositioning and expansion of several of its communities over the last five years. LSS issued approximately $60 million in new money in 2014 to complete expansion and renovation projects at several of its campuses and approximately $47.8 million in 2011 for the repositioning of the Laclede Groves and Lenoir Woods campuses. Management is considering repositioning / expansion projects at Lutheran Hillside Village in Peoria, IL and Lenoir Woods in Columbia, MO.

RATING SENSITIVITIES

LIMITED DEBT CAPACITY: Management has demonstrated its ability to execute on its campus expansions and repositioning which has resulted in strong revenue growth and maintenance of liquidity, profitability and debt metrics. However, debt capacity at the current rating level is predicated on maintenance of current liquidity and debt service coverage metrics. Management is reviewing various projects that may result in the issuance of additional debt in 2016 and beyond.

STABILITY EXPECTED: LSS' operating performance and financial metrics have been very stable and consistent year over year from 2012-2014. Management is budgeting 2015 performance to be in line with 2014 results which Fitch believes is likely.

CREDIT PROFILE

LSS is a Type-C provider headquartered in St. Louis, Missouri and the majority of its entrance fee contracts are refundable. LSS directly or through various affiliated nonprofit corporations, owns, operates, and manages a regional, multi-site senior living system comprising 15 owned facilities or campuses, and three communities under LSS management but not owned by LSS or any of its affiliates. These communities are located throughout Missouri and Illinois, with a high concentration in the St. Louis area. In the obligated group, LSS has 1,233 ILUs, 396 patio homes, 521 ALUs, 221 memory care units and 970 SNF units for a total of 3,341 units. LSS had total operating revenue of $187 million in fiscal 2014.

CONSISTENT FINANCIAL PROFILE

LSS' operating profitability has been solid and consistent over the last four years. In 2014 (Dec. 31 year-end), LSS posted an operating ratio of 90.2% which is improved over the prior year's 91.2%. Net operating margin (NOM) and NOM-adjusted of 15.3% and 19.6%, respectively, are virtually unchanged from 2013 and compare favorably to the 'BBB' median NOM of 9.2% and NOM-adjusted of 20.4% Further, LSS revenue growth has been strong. Resident service revenues have grown 8.5% annually over the last four years from $134.2 million in 2011 to $171.8 million in 2014. The revenue growth and consistent profitability are indicative of management's ability to expand services and execute on campus expansions / improvements without diluting system profitability. Fitch believes that LSS has been able to grow its Medicare payor mix in the SNF to 36.5% in 2014 from 33.6% in 2013 due, in part, to the capital investments made in SNF facilities throughout the system. Management's 2015 budget is virtually unchanged from 2014 results which Fitch believes is likely.

ELEVATED DEBT BURDEN; SIGNIFICANT CAPITAL SPENDING

Capital spending has been very robust, particularly over the last four years, averaging 212.4% of deprecation (2011-2014), which significantly exceeds the 2014 'BBB' category median average of 79.7% as LSS has been funding campus renovations and upgrades throughout its system. A large portion of the $55.9 million borrowed in the series 2014 issue was to fund an expansion at Concordia Village in Springfield, IL and for smaller projects at Meramec Bluffs (40 bed SNF expansion), Lenoir Woods (40 ALU/ memory care expansion) and Breeze Park (20 SNF beds expansion). The expansion at Concordia Village will add 67 new entrance fee ILUs, additional parking, update common areas and add a wellness center. The total cost is estimated at $24 million of which approximately $10 million has been spent to date. The project is on time and within budget. Approximately 65 of the 67 units have been reserved with a deposit and the first units are expected to available for occupancy in Oct. 2015. LSS' significant capital investment has resulted in a very low average age of plant of 9.3 years as of Dec .31, 2014 compared to the 'BBB' category median of 11.7 years.

Certain of LSS' debt metrics are elevated when compared to Fitch's 'BBB' category medians reflecting its robust capital reinvestment strategy. MADS as a percentage of revenues has been moderating over the last four years reflecting strong revenue growth. In 2014, MADS equated to a more moderate 13.9% of total revenues which is a sharp improvement from 17.8% in 2011. Debt to-net-available of 7.9x in 2014 is above the 'BBB" category median of 6.3x but is improved from 10.6x in 2011. MADS coverage (including turnover entrance fee receipts) was solid at 1.9x in 2014 compared to the 'BBB' median of 2.0x . LSS' revenue-only coverage in 2014 is strong at 1.5x compared to the 'BBB' median of 0.9x, reflecting predominance of LSS' type-C contract and good core profitability, and is viewed favorably by Fitch as LSS is not dependent on entrance fee receipts to cover debt service, which is more typical for a Type-C community.

LSS has approximately $367.7 million in debt outstanding at March 31, 2015, of which, 76% is fixed rate, 11% is LOC-backed variable-rate demand bonds and 13% is direct-placed bank debt. LSS is counterparty to a $25 million swap which synthetically creates a fixed-rate obligation on a portion of the bank-placed debt. The series 2000 variable-rate demand bonds are supported by a bank letter of credit (LOC) from Bank of America that was extended through October 2018.

While certain of LSS' debt metrics are elevated, debt burden has been moderating as new projects have been brought on line. However, management is considering capital projects / expansions at Lutheran Hillside Village and Lenoir Woods, which could be financed by additional debt. Fitch believes that debt capacity at the current rating level is predicated on maintenance of current liquidity and debt service coverage metrics.

ADEQUATE LIQUIDITY

LSS' liquidity measures have been improving over the last four years reflecting good growth in absolute cash and investments. At Dec. 31, 2014, LSS had $195.7 million of unrestricted cash and investments which is up from $185.7 million and $169.4 million at year-end 2013 and 2012, respectively. Liquidity metrics at year-end 2014 of 433 days cash on hand, 7.2x cushion ratio and 49.1% cash-to-long-term debt are consistent with the respective 'BBB' category medians of 408, 6.9x and 60.2%. Fitch notes that the system's type-C contract and significant capital investment tends to suppress liquidity metrics when compared to 'BBB' medians .

DISCLOSURE

LSS' disclosure practices are excellent. In addition to audited financial statements, quarterly disclosure includes balance sheet, income statement, statement of cash flows, occupancy statistics and detailed management discussion and analysis.

Fitch affirms the following outstanding debt:

--$79,475,000 Missouri Health & Educational Facilities Authority (MO) (Lutheran Senior Services) senior living facilities revenue bonds series 2014A;

--$47,425,000 Missouri Health & Educational Facilities Authority (MO) (Lutheran Senior Services) senior living facilities revenue bonds series 2011;

--$38,300,000 Missouri Health & Educational Facilities Authority (MO) (Lutheran Senior Services) revenue bonds series 2010;

--$16,490,000 Missouri Health & Educational Facilities Authority (MO) (Lutheran Senior Services) revenue refunding bonds series 2007C;

--$12,170,000 Missouri Health & Educational Facilities Authority (MO) (Lutheran Senior Services) revenue refunding bonds series 2007B;

--$21,555,000 Missouri Health & Educational Facilities Authority (MO) (Lutheran Senior Services) revenue refunding bonds series 2007A;

--$42,060,000 Illinois Finance Authority (IL) (Lutheran Hillside Village) revenue refunding bonds series 2006;

--$15,725,000 Missouri Health & Educational Facilities Authority (MO) (Lutheran Senior Services) revenue refunding bonds series 2005B;

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

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 16, 2014);

--'Not-for-profit Continuing Care Retirement Communities Rating Criteria' (July 24, 2014)

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Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

Not-for-Profit Continuing Care Retirement Communities Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752470

Additional Disclosure

Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=984072

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Contacts

Fitch Ratings
Primary Analyst
Jim LeBuhn, +1-312-368-2059
Senior Director
Fitch Ratings, Inc.
70 West Madison
Chicago, IL 60602
or
Secondary Analyst
Dmitry Feofilaktov, +1-212-908-0345
Analyst
or
Committee Chairperson
Emily Wong, +1-415-732-5620
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Jim LeBuhn, +1-312-368-2059
Senior Director
Fitch Ratings, Inc.
70 West Madison
Chicago, IL 60602
or
Secondary Analyst
Dmitry Feofilaktov, +1-212-908-0345
Analyst
or
Committee Chairperson
Emily Wong, +1-415-732-5620
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com