NEW YORK--(BUSINESS WIRE)--
Fitch Ratings has affirmed the 'BBB+' rating on the following Cumberland
County Municipal Authority (PA) bonds issued on behalf of Diakon
Lutheran Social Ministries (Diakon):
--$123,210,000 revenue refunding bonds, series 2009;
--$61,955,000 revenue bonds series, 2007A.
The Rating Outlook is Stable.
SECURITY: Gross receipts of the obligated group, a mortgage of certain
properties, and a debt service reserve fund.
KEY RATING DRIVERS
STABLE FINANCIAL PROFILE: Diakon's overall financial profile has
remained stable over the last few years, characterized by good debt
service coverage, thin but consistent operational performance, and mixed
liquidity. Diakon's debt profile is conservative with 70% fixed-rate
debt, which adds a measure of stability at the current rating level.
While first-quarter 2014 (1Q'14) financial results are lower year over
year, the results are being driven by a softer quarter for entrance fees
($1.2 million lower) and not by a deterioration in core operations.
STRONG ENTRANCE FEE YEAR: In 2013 Diakon had $14.3 million in net
entrance fee receipts, its highest figure through the four-year
historical period. Move-ins for independent living units (ILUs) were 140
in 2013, up from 121 in 2012, and materially over the 87 in 2011.
OVERALL OCCUPANCY SOLID: At March 2014, total occupancy across all three
levels of care was approximately 92%, consistent with prior year
REGIONAL DIVERSITY AND SIZE: Fitch believes Diakon's level of geographic
diversity (eight obligated group campuses located in several
Pennsylvania markets) and its size (more than $200 million in
consolidated operating revenue) contribute to operational and financial
stability. This enables Diakon to maintain consistent levels of
performance even if individual campuses are underperforming or
undergoing significant capital projects.
REVENUE-ENHANCING INITIATIVES: In July 2013, Diakon implemented revenue
initiatives focused on better coding, enhancements to physical therapy
services, the strengthening of post-acute-care referrals, and the
increasing of the overall census across the continuum of care. Early
indications show positive returns on the initiatives. In 1Q'14, Diakon's
patient service revenue grew a solid 10% year over year, and its net
operating margin - a good measure of operating revenue relative to
operating expenses - improved to 3.7% from 2.3% for the same time in
2013. However, it still significantly trails Fitch's 'BBB' category
median of 9.9%.
ADEQUATE LIQUIDITY: At March 31, 2014, Diakon had $99 million in
unrestricted cash and investments (net of a $14.9 million draw on a line
of credit), which equated to 169.8 days cash on hand (DCOH), a 5.6x
cushion ratio, and 44.4% cash-to-debt, all of which trail their
respective 'BBB' medians. Diakon's unrestricted cash and investments
have remained relatively stable throughout the historical period and
Diakon's DCOH is suppressed by approximately 60 days due to expenses
related to a state adoption contract.
SUSTAINING OPERATING PERFORMANCE: Fitch believes Diakon's revenue
enhancing initiatives will enable the organization to sustain current
levels of performance, including maximum annual debt service (MADS)
coverage at approximately 1.7x. There is potential for negative rating
pressure over the next three to five years should coverage fall to 1.5x
or below for two consecutive years.
Diakon Lutheran Social Ministries, headquartered in Allentown, PA, is
composed of 963 skilled nursing beds, 535 personal care beds and 896
ILUs located in Pennsylvania and Maryland. Total operating revenue in FY
2013 was $211.8 million. Fitch's analysis is based on the consolidated
Financial results in 2013 were consistent with Diakon's 2012
performance, but most of the financial ratios remain below category
medians. In 2013, Diakon had a 102.7% operating ratio, a 7.5% net
operating margin - adjusted, and 1.7x debt coverage, relative to Fitch's
respective 'BBB' category medians of 97.2, 21.3, and 1.9. Fitch notes
positively that Diakon's revenue-only coverage has remained strong at
0.9x, consistent with the 'BBB' category median.
Results for 1Q'14 showed a 101.0% operating ratio, a 4.2% net operating
margin - adjusted, and 0.8x debt coverage, all weaker than the prior
year 1Q performance (when excluding one-time items in FY 2012). While
the drop in performance is a credit concern, Fitch notes that it is
driven more by the timing of entrance fees. Diakon's management reported
that net entrance fee receipts have improved through May to $3 million
and that another $4 million is under contract. Overall underlying
operating performance has remained stable, reflected by revenue-only
coverage of 0.8x in the first quarter of 2014.
UPDATE ON INITIATIVES
Diakon undertook a number of revenue-enhancing initiatives in 2013.
Early results show positive returns when comparing March 2014 and March
2013 figures. Overall census showed improvement, climbing to 92% from
approximately 90%. For skilled nursing, Diakon implemented a program to
better facilitate the process of accepting hospital referrals. Skilled
nursing occupancy was a very strong 97.1% at March 31, 2014, up from
93.3% at March 31, 2013. In addition, Medicare increased to 12% from 10%
of skilled nursing revenues in the year-over-year interim period further
reflecting the improvement and the focus on hospital referrals. This
increase in Medicare reflects a revamping of therapy services as well
another component of the initiative. Diakon has also implemented a
program for better coding. Diakon's acuity levels have increased as a
result, and Diakon estimates an approximately $2 million a year positive
impact on revenues moving forward.
In addition, on July 1, Diakon is planning to move most of its social
service programs outside the obligated group. While the short-term
impact on Diakon's financial performance should be neutral, over the
longer term it should improve the obligated group performance and help
position the social service programs to be more financially sustainable,
especially as related to grants and philanthropy. Fitch currently uses
the consolidated results of Diakon for its analysis, as historically the
obligated group has represented the vast majority of the consolidated
revenues and assets. However, moving forward Fitch will likely look at
both obligated group and consolidated group performance to measure the
impact of this change.
Diakon's debt structure is relatively conservative. Its $232.6 million
in long-term debt is approximately 70% fixed and 30% variable. In 2014,
Diakon refinanced much of its letter of credit (LOC) variable-rate debt
with a $41.5 million private placement with PNC Bank that included
approximately $25 million in new funds. The transaction reduces the put
risk of the prior debt, but did increase MADS to $17.5 million from
$16.3 million. All coverage figures in this release reflect the new MADS
number. In addition, Diakon has approximately $29 million in other
variable-rate debt, supported by an LOC from M&T Bank. The LOC expires
To hedge its variable-rate debt, Diakon has two variable- to fixed-rate
swaps, one each with Wells Fargo and PNC Bank, for a total notional
amount of $71.4 million. The mark-to-market valuation as of March 31,
2014 was approximately a negative $10 million. There are no collateral
posting requirements for Diakon.
Diakon covenants to disclose annual audited financial statements and
quarterly disclosures. Diakon holds quarterly investor calls and posts
all of its disclosure via 'zieglerresearch.com', which includes
quarterly financial statements (balance sheet, income statement, and
statement of cash flows), detailed utilization trends, and payor mix
trends. Additionally, Diakon issues a detailed investor presentation in
advance of its quarterly update call.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'Rating Guidelines For Nonprofit Continuing Care Retirement
Communities' (July 10, 2012).
--'Nonprofit Nursing Home Rating Criteria', (July 24, 2013).
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Gary Sokolow, +1 212-908-9186
33 Whitehall St.
New York, NY 10014
Dmitry Feofilaktov, +1 212-908-0345
Eva Thein, +1 212-908-0651
Elizabeth Fogerty, +1 212-908-0526
Source: Fitch Ratings