News Column

Fitch Rates Lutheran Senior Services' (MO) Series 2014A Revs 'BBB+'; Outlook Stable

May 6, 2014

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has assigned a 'BBB+' rating to the approximately $80 million fixed rate series 2014A revenue bonds expected to be issued by the Missouri Health & Educational Facilities Authority (MO) on behalf of Lutheran Senior Services' (LSS).

In addition, Fitch affirms LSS' outstanding debt, which is listed at the end of the press release.

The Rating Outlook is Stable.

The series 2014A bonds are expected to be issued as fixed rate debt. Bond proceeds will be used for project costs associated with various facilities (including repayment of a PNC construction loan that has financed the start of several projects), refunding of the series 2004 bonds (approximately $19.4 million), fund capitalized interest on certain new projects, fund a debt service reserve fund and pay for certain costs of issuance. Maximum annual debt service, as calculated by the underwriter, is relatively level at $27.958 million. The bonds are expected to price the week of May 19, 2014 via negotiated sale. The series 2008 bonds will be refunded with a direct placement from PNC and will close simultaneously with the series 2014 fixed rate bonds. The 2008 bonds are not rated by Fitch but are considered in the analysis.

SECURITY

Debt payments are secured by a pledge of the gross revenues of the obligated group. In addition, debt service reserve funds on the fixed-rate issues provides 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 $171.2 million in fiscal 2013; Dec. 31 year-end) and a strong, strategically minded leadership team.

ELEVATED DEBT BURDEN: LSS' debt burden is high and increasing with the issuance of the series 2014 bonds reflecting its robust capital reinvestment strategy. Pro forma maximum annual debt service (MADS) represents 15.6% of total fiscal 2013 revenue but coverage of pro forma MADS (including turnover entrance fee receipts) was good at 1.9x in 2013. Fitch believes LSS' effective management practices and solid track record somewhat mitigates the risks of its high leverage position. In addition, the projects that are being financed are expected to be accretive to the overall financial profile over the next three to five years.

SIGNIFICANT CAPITAL SPENDING CONTINUES: LSS has focused on the repositioning and expansion of several of its communities over the last five years. LSS is issuing approximately $60 million in new money to complete expansion and renovation projects at several of its campuses, including Meramec Bluffs, Breeze Park, Concordia Village, Lenoir Woods and Laclede Groves. This follows the approximately $47.8 million issuance in 2011 for the repositioning of the Laclede Groves and Lenoir Woods campuses.

STABLE 2013 RESULTS: Operating performance and financial metrics in fiscal 2013 were consistent with fiscal 2012 results and exhibited good profitability, stable liquidity and somewhat improved debt service coverage.

CONSISTENTLY SOLID OCCUPANCY: Occupancy across the continuum of care has been consistent and was a solid 92.2% in the ILUs, 92.7% in the ALUs and 91.4% in the SNF as of March 31, 2014.

RATING SENSITIVITIES

LIMITED DEBT CAPACITY: LSS' debt burden is elevated, and debt capacity is limited at the current rating level without commensurate improvement in liquidity and debt service coverage metrics.

STABILITY EXPECTED: Although there may be some near-term pressure on coverage metrics as a result of the additional debt without immediate additional revenue, Fitch expects debt service coverage to return to levels more consistent with the rating category within a three-year period. In addition, Fitch expects LSS to maintain solid occupancy, leading to good operating profitability. A decline in debt service coverage ratios greater than projected could lead to negative rating pressure.

CREDIT PROFILE

LSS is a Type-C provider headquartered in St. Louis, Missouri. 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. Despite significant competition within the St. Louis metropolitan area, LSS has been able to maintain very solid occupancy across the continuum of care with occupancy across all levels above 91% over the last two years. In the obligated group, LSS has 1,283 ILUs, 353 patio homes, 695 ALUs and 954 SNF units for a total of 3,285 units. LSS had total operating revenue of $171.2 million in fiscal 2013.

The 'BBB+' affirmation reflects LSS' consistent profitability, solid occupancy, and good liquidity indicators, which are tempered by a growing debt burden.

ELEVATED DEBT BURDEN; SIGNIFICANT CAPITAL SPENDING

Pro forma MADS of $28 million, an increase from $23.7 million during Fitch's last review, equates to 15.6% of fiscal 2013 revenue. This is high compared to Fitch's 'BBB' category median of 12.4%. Coverage of pro forma MADS (including only turnover entrance fee receipts) was 1.9x, which is in line with the 'BBB' category median of 1.9x and improved from 1.4x in fiscal 2012. Revenue-only coverage of pro forma MADS at 1.4x in fiscal 2013 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 will have approximately $392.93 million in debt outstanding after the series 2014 issuance, up from $332.3 million. The underlying structure of the pro forma debt is 77% fixed-rate and 23% variable-rate. The series 2008 bonds will be refunded with a direct placement from PNC at the closing of the series 2014 bonds. The $25 million swap will be transferred to the direct placement debt. The series 2000 variable rate demand bonds are supported by a bank letter of credit (LOCs) from Bank of America that was extended through October 2018.

Capital spending has been very robust, particularly over the last four years, averaging 211.4% of deprecation (2010-2013), which significantly exceeds the 'BBB' category median average of 85.3% as LSS has been funding campus renovations and upgrades throughout its system. A large portion of the spending from the last issuance in 2011 was on additional ILUs at Laclede Groves and 40 bed assisted living facility at Lenoir Woods. Both were well received and management continues to update and upgrade its facilities. The series 2014 financing will be used to finance a 40-bed expansion at Meramec Bluffs ($9 million), expansion of the Care Center at Breeze Park ($4.5 million), add 40 ALUs and memory care units at Lenoir Woods ($9.4 million), pay for renovations of approximately 200 apartments at Laclede Groves ($5 million), add ILUs and renovate common areas at Concordia Village ($22 million) and pay for the purchase of land in Lake St. Louis for future expansion ($4 million). LSS' significant capital investment has resulted in a very low average age of plant of 8.7 years as of March 31, 2014 compared to the 'BBB' category median of 10 years.

Although LSS' debt burden is elevated, Fitch believes the capital spending has been a contributing factor to the system's strong historical occupancy levels and expects LSS will grow into its debt burden within the next three years as the projects come online. Given LSS' size, there are ongoing potential projects, which could be financed by additional debt. Fitch believes there is limited debt capacity at the current rating level without commensurate improvement in liquidity and debt service metrics.

CONSISTENT FINANCIAL PROFILE

LSS' operating profitability has been solid and consistent over the last four years. In 2013 (Dec. 31 year-end), operating ratio of 91.2% and net operating margin of 15.3% were solid compared to the respective 'BBB' category medians of 97.2% and 9.9%. Adjusted net operating margin of 22.1% (including turnover entrance fees) compares favorably to the 'BBB' category median of 21.3%. Fitch expects LSS to maintain its strong operations going forward.

GOOD LIQUIDITY

Many of LSS' liquidity indicators have been light in the past, reflecting the system's type-C contract and significant capital investments. However, LSS has been building its balance sheet and despite the additional $63 million in new money with the series 2014 debt issuance, most liquidity metrics remain in line with Fitch's 'BBB' category medians. At March 31, 2014, LSS had solid liquidity against expenses of 429.1 days compared to the 'BBB' category median of 371.3 days. Pro forma cushion ratio of 6.5x and pro forma cash to debt of 46.2% during the interim period are in line with the respective 'BBB' category medians of 6.9x and 58.9%.

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:

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

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

--$17,060,000Missouri Health & Educational Facilities Authority (MO) (Lutheran Senior Services) revenue refunding bonds series 2007C;

--$12,720,000Missouri Health & Educational Facilities Authority (MO) (Lutheran Senior Services) revenue refunding bonds series 2007B;

--$24,095,000Missouri Health & Educational Facilities Authority (MO) (Lutheran Senior Services) revenue refunding bonds series 2007A;

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

--$17,400,000Missouri Health & Educational Facilities Authority (MO) (Lutheran Senior Services) revenue refunding bonds series 2005B;

--$30,000,000Missouri Health & Educational Facilities Authority (MO) (Lutheran Senior Services) health facilities revenue bonds series 2005A;

--$19,970,000Cole County Industrial Development Authority (MO) (Lutheran Senior Services) health facilities revenue bonds series 2004 .

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

Applicable Criteria and Related Research:

--'Rating Guidelines for Nonprofit Continuing Care Retirement Communities' (July 10, 2013).

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

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst:

Dana S. Ringer, +1-312-368-3215

Director

70 West Madison

Chicago, IL 60602

or

Secondary Analyst:

Jim LeBuhn, +1-312-368-2059

Senior Director

or

Committee Chairperson:

Emily Wong, +1-415-732-5620

Senior Director

or

Media Relations:

Elizabeth Fogerty, New York, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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