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Fitch Rates Saint Anne's Retirement Community (PA) Revs 'BB+'; Outlook Stable

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has assigned a 'BB+' rating to the following Lancaster County hospital authority bonds, issued on behalf of Saint Anne's Retirement Community (SARC):

--$20,980,000 revenue bonds, series 2012.

The series 2012 bonds are expected to price the week of Oct. 15 via negotiation, and will be used to refund $15.6 million in series 1999 fixed rate revenue bonds, fund a debt service reserve, finance capital projects, and pay costs of issuance.

The Rating Outlook is Stable.

SECURITY

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

KEY RATING DRIVERS

SOLID OPERATING PROFITABILITY: SARC's profitability metrics are strong for the rating category. Its operating ratio of 95.7% and net operating margin of 9.5% in unaudited fiscal 2012 (June 30 year end) have been very consistent since fiscal 2009, averaging a 95.3% operating ratio and 10.5% net operating margin. Good operating performance over the last few years can be attributed to cost control measures and strong occupancy and turnover.

MANAGEABLE DEBT BURDEN: SARC's pro forma debt burden is moderate, evidenced by pro forma maximum annual debt service (MADS) equal to 10.2% of total revenue and 64% adjusted debt to capitalization. More importantly, SARC's revenue-only coverage has averaged 1.3x since fiscal 2009.

STEADY OCCUPANCY: Since 2009, SARC's total occupancy has averaged 93% and independent living occupancy has averaged 91.7%, demonstrating a stable position in a competitive but mature service area.

LIGHT LIQUIDITY: At June 30, 2012, SARC's had $8.1 million in unrestricted cash and investments, equating to 202.7 days cash on hand (DCOH), 38.1% cash to pro forma debt and 5.0x pro forma cushion ratio compared to Fitch's respective 'BBB' medians of 369 DCOH, 50.9% and 6.6x. Since SARC's is a fee-for-service facility, Fitch believes that this level of liquidity is sufficient for the rating.

SIZEABLE NURSING COMPONENT: Fitch notes that approximately 70% of SARC's total revenues are driven by its 121-bed skilled nursing facility (SNF). While management has been successful in improving operating performance, potential cuts to Medicare and Medicaid (23.5% of 2012 SNF revenues) presents risk to SARC's revenue base.

CREDIT PROFILE

The 'BB+' rating is supported by SARC's strong profitability and consistent debt service coverage, manageable pro forma debt burden, steady occupancy in a saturated and somewhat competitive market, and light liquidity.

SARC has consistently produced good operating performance, which helps to offset the risks associated with its relatively small revenue base ($15.5 million in unaudited fiscal 2012, year ended June 30) and reliance on SNF operations. Consistent occupancy has supported these results, and SARC finished fiscal 2012 with 94% ILU), 92.3% ALU and 92.5% SNF occupancy levels. Despite a number of area continuing care retirement communities (CCRCs) with comparable services and pricing, SARC has maintained solid occupancy and solidified its position as the only Catholic-sponsored organization within approximately 40 miles.

While SARC's liquidity is sufficient given its Type C/rental contract which nullifies any healthcare liability, Fitch notes the investment allocation is aggressive with 84% equities to 16% fixed income at June 30, 2012. SARC's investments are managed by its sponsor as part of a larger pool (over $100 million), and management states the assets are very liquid with no lockup period. Still, SARC has not historically relied on its investment returns to produce operating results, which alleviates this concern somewhat.

The pro forma debt burden is manageable, reflecting a marginal increase over SARC's current debt level and no increase in maximum annual debt service requirements. MADS is measured at $1.6 million per the underwriter, and debt service is level with final maturity in 2033. SARC expects to use $4.8 million in bond proceeds to ready infrastructure for future ILU expansion. Fitch expects the expansion to be done in phases, and constructed as units are sold over the next three to five years.

The Stable Outlook is supported by Fitch's expectation that SARC will continue to maintain solid occupancy and produce consistent operating results and revenue-only debt service coverage. Upward rating movement could occur should revenue only coverage improve to nearer 2.0x coupled with stronger liquidity over the next 12-24 months. SARC is budgeting for steady results in fiscal 2013, including a 10.2% net operating margin and 1.2x revenue only coverage.

Saint Anne's Retirement Community (SARC) is located outside Columbia, PA in the township of West Hempfield, approximately 35 miles southeast 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 121-bed SNF, 53 ALUs, and 71 rental and entrance fee ILUs. In unaudited fiscal 2012, SARC reported approximately $15.5 million of total revenues.

Disclosure will be provided to bondholders within 120 days following the fiscal year end, and 60 days following each fiscal quarter end. Disclosure provided via the Municipal Securities Rulemaking Board's EMMA system, and will include a balance sheet, income statement, cash flows, occupancy, budget, and covenant compliance. Fitch has had good access to management.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

This rating action was additionally informed by Piper Jaffray as Underwriter.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria', dated June 12, 2012;

--'Rating Guidelines for Nonprofit Continuing Care Retirement Communities' July 12, 2012.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015

Rating Guidelines for Nonprofit Continuing Care Retirement Communities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=40171

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Fitch Ratings
Primary Analyst
Emily E. Wadhwani, +1-312-368-3347
Associate Director
Fitch, Inc.
70 W. Madison Street
Chicago IL 60602
or
Secondary Analyst
James LeBuhn, +1-312-368-2059
Senior Director
or
Committee Chairperson
Eva Thein, +1-212-908-0674
Senior Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings