Fitch Affirms Saint Anne Retirement Community (PA) at 'BB+'; Outlook Revised to Negative

The following is from Fitch Ratings on September 29:

Fitch Ratings has affirmed the 'BB+' rating on the following Lancaster County Hospital Authority revenue bonds, issued on behalf of Saint Anne Retirement Community, PA (SARC):

--$19.1 million series 2012.

The Rating Outlook is revised to Negative from Stable.

SECURITY

The bonds are secured by a gross revenue pledge, mortgage lien, and debt service reserve fund.

KEY RATING DRIVERS

WEAKER OPERATING PROFILE: The Outlook revision to Negative reflects Fitch's concern with a several-year trend in flat revenue (versus budgeted growth) as well as an ongoing decline in net operating margin. In fiscal 2015 (June 30 year-end), SARC generated $14.8 million in resident service revenue, which is nearly flat from the previous four fiscal years. Further, net operating margin decreased to 5.9 percent from 7 percent in fiscal 2013, and well below the 12 percent generated in fiscal 2011. SARC's profitability metrics remain consistent with the below-investment-grade (BIG) rating category and are currently adequate against its debt level. However, near-term capital plans are likely to pressure these metrics.

OCCUPANCY MIXED: While independent living unit (ILU) occupancy was healthy at 95 percent in fiscal 2015, net entrance fees were below budget due to higher than anticipated refunds. In addition, personal care (assisted living, ALU) occupancy continues to be pressured as SARC converts space for its new 51-bed memory support unit (MSU). Through fiscal 2015 the skilled nursing facility (SNF) was 89 percent occupied and the personal care unit (PCU) was 79 percent occupied. While management has thus far been successful in managing expenses to census, SARC has just missed its budget for two fiscal years and has only modest room in debt service coverage to absorb further pressure.

CAPITAL PLANS PROGRESSING: SARC is moving forward on its planned ILU expansion, the pre-development of which is being funded in part with approximately $3 million in existing bond funds. The project will progress in phases, with initial financing anticipated within the next nine to 12 months.

MODERATE LIQUIDITY: At fiscal year ended June 30, SARC had $8.5 million in unrestricted cash and investments, equating to 209 days cash on hand (DCOH), 45.2 percent cash to debt and a 5.3x cushion ratio compared to Fitch's respective 'BIG' medians of 226.3 DCOH, 37.3 percent and 5x. Fitch believes that this level of liquidity is solid for a Type C fee-for-service facility at a 'BB+' rating level.

LIMITED DEBT CAPACITY: SARC's current debt burden is currently manageable, evidenced by maximum annual debt service (MADS) equal to 9.9 percent of total revenue and 8x debt to net available. Of note, SARC's revenue-only coverage has averaged 1.4x for the past five fiscal years, ahead of Fitch's BIG median of 0.8x. However, future capital plans are expected to include a debt issuance within the next nine to 12 months, which will likely pressure SARC's coverage and leverage metrics.

RATING SENSITIVITIES

CAPITAL PLANS: SARC has continued moving forward on its ILU expansion plan, and Fitch anticipates final determination of size, phasing, and financing to occur in early-to-mid calendar year 2016. Given SARC's limited capacity for additional debt, rating pressure is possible once the project plans are finalized within the next 12 months.

CREDIT PROFILE

Saint Anne's Retirement Community (SARC, a type C continuing care retirement community (CCRC), is located outside Columbia, PA in the township of West Hempfield, approximately 35 miles southwest of Harrisburg and 10 miles west of Lancaster. SARC is sponsored by the Religious Congregation of Sisters of the Adorers of the Blood of Christ, United States Province (ASC), and operates a 61-unit SNF, a 51-bed MSU, 51 personal care ALUs, and 71 rental and entrance fee ILUs. Total revenues in fiscal 2015 (year-end June 30) were $15.5 million.

PROFITABILITY

Operating performance in fiscal 2015 was just below budget, due in large part to flat revenue from occupancy pressure as well as weaker net entrance fees. While ILU occupancy remains very healthy at 95 percent, net entrance fee receipts fell to $146,000, below the average $315,000 of the prior four fiscal years. This is due in part to higher refunds than anticipated from residents transitioning out of the ILUs before the full five-year amortization of the entrance fee. Ongoing renovations to complete the new MSU have also limited census as units are taken off line and completed.

For 2016, SARC is budgeting for approximately $15.7 million in net resident service revenue and $2.1 million in revenue available (before entrance fees), which would produce approximately 1.3x revenue-only coverage of MADS. This is consistent with historical performance and per management is consistent with year-to-date census and cash flow through August.

PROJECT PLANS

As expected, SARC is proceeding with its campus expansion plans, which may add up to 106 ILUs when complete, likely in several phases over the next several years. Currently, predevelopment costs are being financed with existing bond funds (approximately $5 million at fiscal year-end, now approximately $3 million). However, it is likely that SARC will pursue additional debt financing within the next nine to 12 months. Fitch will incorporate those plans and take rating action as they are finalized.

DEBT PROFILE

At fiscal year-end June 30, SARC had $19.1 million in long-term debt, which is all fixed rate with no swaps. MADS is equal to $1.6 million, which SARC covered at 1.29x per its covenant calculation.

DISCLOSURE

SARC provides ongoing disclosure within 120 days of fiscal year and within 60 days of each fiscal quarter end via the Municipal Bondholders Rulemaking Board's EMMA system. Disclosure includes balance sheet, income statement, occupancy, budget, and covenant compliance.

Additional information is available at 'fitchratings.com'.

Applicable Criteria

Not-for-Profit Continuing Care Retirement Communities Rating Criteria (pub. 04 Aug 2015)

https://fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=868824

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

https://fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=991480

Solicitation Status

https://fitchratings.com/gws/en/disclosure/solicitation?pr_id=991480

Endorsement Policy

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

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