Fitch Rates Saint John's Communities, Inc. (WI) Ser 2015B Revs 'BBB+'; Outlook Stable

CHICAGO--()--Fitch Ratings has assigned a 'BBB+' rating to the following revenue bonds that are expected to be issued by the Wisconsin Health and Educational Facilities Authority on behalf of Saint John's Communities, Inc. (SJC):

--$25.5 million series 2015B.

In addition, Fitch affirms the 'BBB+' rating on SJC's outstanding $39.1 million of series 2009A revenue bonds issued through the Wisconsin Health and Educational Facilities Authority.

The Rating Outlook is Stable.

The series 2015B bonds are expected to be issued as fixed rate debt. Concurrent with the issuance of the 2015B bonds, SJC expects to issue approximately $20.5 million of series 2015A adjustable rate bonds as direct bank placement. Proceeds from the series 2015 bonds will be used to advance refund the series 2009A bonds, provide $3.7 million of new money/ reimbursement, fund a debt service reserve fund and pay costs of issuance.

SECURITY

The bonds are secured by a gross revenue pledge of the Obligated Group, a mortgage and security interest in the property and a debt service reserve fund on the series 2015B bonds.

KEY RATING DRIVERS

STRONG DEMAND AND OCCUPANCY: SJC benefits from a strong demand for services despite operating in a fairly competitive service area. SJC opened its South Tower expansion in July 2011, which added 88 new independent living units (ILUs) as well as new common space. In 2013, two additional units were added to meet demand, bringing the total to 90. The new units filled quickly and overall occupancy among SJC's 201 ILUs has exceeded 95% in 2014 and was 99% at Aug. 31, 2015. Further, SJC maintains an active wait list with over 130 interested parties.

ROBUST PROFITABILITY: SJC enjoys robust profitability due to high occupancy, good expense control and an improving payor mix in the skilled nursing facility (SNF). The operating ratio has improved from a solid 98.8% in 2013 to a very strong 90.1% through the eight month interim period, particularly for a type-A provider. Similarly, net operating margin (NOM) and NOM-adjusted of 24.1% and 39.9% in 2014 well exceed the respective Fitch 'BBB' medians of 8.9% and 19.3%. NOM and NOM-adjusted through the eight month interim was 26.1% and 33.6%, respectively.

MODERATE LEVERAGE POSITION: Upon closing of the series 2015 financing, certain of SJC's leverage and debt metrics will moderate materially. Pro forma maximum annual debt service (MADS) of $3.2 million is sharp decline from prior MADS of $4.3 million and equates to a moderate 15% of 2014 revenues. Reflecting SJC's robust profitability, historical coverage of pro forma MADS including entrance fees and on a 'revenue only' basis was a strong 3.3x and 1.9x, respectively, in 2014.

IMPROVING LIQUIDITY POSITION: At Aug. 31, 2015 SJC's unrestricted cash and investments totaled $29.8 million which translates into 685 days cash on hand, a cushion ratio (based on pro forma MADS) of 9.4x and cash-to-pro forma debt of 57.7% which compare favorably to the respective 'BBB' category medians of 400 DCOH, 7.3x cushion and 60% cash to debt.

RATING SENSITIVITIES

IMPROVEMENT IN LIQUIDITY: Continued improvement in Saint John's Communities' unrestricted liquidity relative to debt while maintaining strong profitability will likely generate upward movement of the rating over the next two to three years.

CREDIT PROFILE

SJC operates a not-for-profit Type-A and Type-B continuing care retirement community (CCRC) in Milwaukee, WI. Founded in 1868, SJC consists of 201 ILU apartments, 24 assisted living units (ALUs) and a 50 bed SNF. In 2014, SJC reported total revenues of $21.2 million.

STRONG DEMAND AND OCCUPANCY

SJC's strong demand for services is driven by the community's desirable location and favorable reputation. Located just north of downtown Milwaukee and overlooking Lake Michigan, SJC primarily attracts residents from northeastern Milwaukee County including the communities of Shorewood, Whitefish Bay and Fox Point. The South Tower addition ultimately added 90 total new ILU apartments as well as additional common space. The new addition reached stabilized occupancy in 2012 ahead of projections. Since 4Q13, SJC has maintained occupancy in its 201 ILUS above 95%. SJC benefits from a very satisfied resident base that is the primary source of referrals and leads. According to management, 72% of move-ins were referred to SJC by residents, board members or affiliated Episcopal churches. Moreover, SJC maintains an active waitlist of over 130 potential residents that have paid a $2,500 deposit to confirm their interest in residency. Average occupancy in the 24 ALUs was 94% in 2013, 87% in 2014 and 86% through the eight month interim period. Similarly, average occupancy in the SNF has hovered right around 90% since 2013.

Fitch views the SJC service area as fairly competitive with Milwaukee Catholic Home, the Jewish Home/Chai Point Senior Living and Eastcastle Place all located within one mile of SJC. While competitive, the communities tend to differentiate themselves by contract type and sponsorship. Fitch believes that SJC benefits from its type-A lifecare contract, its location overlooking Lake Michigan and its recently expanded/renovated physical plant.

ROBUST PROFITABILITY

SJC's profitability from core operations has been improving since 2012 reflecting stabilization of the South Tower expansion, the improvement in payor mix in the SNF, the benefit of annual rate increases and effective cost control and labor management. SJC's operating ratio has improved from 112.0 in 2012 to very good 92.7 in 2014 and an even better 90.5 through the eight months ended Aug. 31. Similarly, NOM has improved from 14.4% in fiscal year (FY) 2012 to 24.1% in 2014 while NOM-adjusted improved from a very strong 33.1% in 2012 to an even stronger 39.9% in 2014. Through the eight month interim period, NOM and NOM-adjusted have remained robust at 26.1% and 33.6% respectively.

MODERATING DEBT BURDEN

The series 2015 financing will create substantial cashflow savings resulting in a solid improvement in certain debt metrics. Upon closing of the series 2015 financing, pro forma MADS is estimated to drop to $3.172 million from the current MADS of $4.37 million. Thus, MADS as a percentage of 2014 revenues will decline to a moderate 15% from a high 20.7% currently. Adjusted debt to capitalization is expected to rise slightly on a pro forma basis (62.1% at Aug. 31) but is in line with the 'BBB' median of 58.8%.

The cash flow savings generated by the refunding results in a sharp improvement in MADS coverage on a historical pro forma basis. Historical coverage of pro forma MADS in 2013 and 2014 improves to a strong 3.4x and 3.3x, respectively, compared to coverage of current MADS of 2.5x and 2.4x in each year. Similarly, on a 'revenue only' basis, coverage on a historical pro forma basis improves to 1.9x from 1.4x in 2014, which is strong for a type-A provider and reflects SJC's excellent profitability.

IMPROVING LIQUIDITY POSITION

SJC's position of unrestricted cash and investments has improved over the last two and half years growing from $19.7 million at Dec. 31, 2012 to $29.8 million at Aug. 31, 2015. Key liquidity metrics at Aug. 31 including DCOH of 685, cushion ratio of 9.4x and cash to debt of 57.7% are in line with or exceed the respective 'BBB' category medians of 400, 7.3x cushion and 60%.

SJC's capital spending needs are moderating, which Fitch believes should allow for further improvement in liquidity metrics over the medium term. Capital spending is projected at roughly $6 million in 2015, $1.8 million in 2016, $1.3 million in 2017 and less than $1 million in 2018 and 2019. Among the larger expenditures are $3.5 million to renovate and reconfigure certain areas of the dining and community space. The series 2015 issue will provide approximately $2.5 million reimbursement for capital costs incurred by the corporation and $1.2 million for current expenditures.

DISCLOSURE

SJC covenants to disclose annual reports no later than 150 days after each fiscal year end and quarterly reports no later than 45 days after quarter end for the first three quarters and 60 days after the fourth quarter end. SJC posts its disclosure to the Municipal Securities Rulemaking Board's EMMA website.

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=993893

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=993893

Endorsement Policy

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

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Contacts

Fitch Ratings
Primary Analyst
Jim LeBuhn
Senior Director
+1-312-368-2059
Fitch Ratings, Inc.
70 West Madison St.
Chicago, IL 60602
or
Secondary Analyst
Emily Wadhwani
Director
+1-312-368-3347
or
Committee Chairperson
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Jim LeBuhn
Senior Director
+1-312-368-2059
Fitch Ratings, Inc.
70 West Madison St.
Chicago, IL 60602
or
Secondary Analyst
Emily Wadhwani
Director
+1-312-368-3347
or
Committee Chairperson
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com