Fitch Rates Landis Homes Revenue Bonds ‘BBB-‘
Outlook ‘Stable’ on $50.7 million Series 2015 fixed-rate bonds
Fitch Ratings has assigned a ‘BBB-‘ rating for the following bonds to be issued by Lancaster County Hospital Authority on behalf of Landis Homes Retirement Community (Landis or LHRC): $50.7 million series 2015 fixed-rate bonds.
Bond proceeds are expected to be used to refund all of LHRC’s existing debt, provide monies for a debt service reserve fund, and pay for costs of issuance. The bonds are expected to be sold via negotiated sale by BB&T Capital Markets during the week of Aug. 31, 2015.
The Rating Outlook is Stable.
The bonds are secured by a mortgage lien on LHRC’s property, a security interest in revenues, entrance fees and accounts receivable, and a debt service reserve fund.
KEY RATING DRIVERS
STRONG OCCUPANCY TRENDS: Given its long operating history, notable reputation for quality services and attractive campus, Landis enjoys strong demand in all levels of care. Independent living unit (ILU), personal care unit/assisted living unit (ALU), and skilled nursing facility (SNF) occupancies averaged, 91%, 97% and 98%, respectively, from fiscal year 2012 through fiscal year 2015. Additionally during this period, Landis successfully filled over 100 new ILUs.
ADEQUATE HISTORICAL CASH FLOW: Cash flow generation has been solid reflecting satisfactory operating earnings, good investment returns and fundraising, and consistent net entrance fee receipts from turnover ILUs. The net operating margin-adjusted averaged 14.7% from fiscal year 2011 – 2014 and was above 17% in each of the past two audited fiscal years. As a result, coverage of actual annual debt service has been very good at 3.0x and 2.5x, respectively, in fiscal years 2013 and 2014. Cash flow softened during the current fiscal year due to rising employee medical benefit expenses, rate increases below historical levels, and lower net entrance fee receipts from planned ILU vacancies.
SATISFACTORY LIQUIDITY INDICATORS: At June 30, 2015, Landis’ $23 million of unrestricted cash and investments amounts to 294 days operating expenses, 4.5x pro forma cushion ratio, and 28.4% of pro forma long-term debt. While the liquidity metrics are below ‘BBB’ category medians, LHRC’s non-refundable fee-for-service residency contracts temper Fitch’s concern.
EXPANSIVE CAPITAL PLANS: Landis is embarking on master facilities plan to upgrade and reconfigure the campus. The three phase plan requires the demolition of several older cottages, renovation and construction of new ILUs, conversion and renovation of SNF beds, and a new learning and wellness center for the entire community. The first two project phases, which are expected to be funded with a bank loan during the fall of 2015 and spring of 2016, will increase debt by nearly $37 million.
INCREASING DEBT POSITION: Including the issuance of the series 2015 bonds and the full drawdown of a bank loan, long-term debt is expected to increase to about $83 million or a moderately high 63% of pro forma adjusted capitalization. Of this total, $36.6 million will represent directly placed floating rate bank debt. In addition to counterparty and interest rate risk, the bank loan may be subject to redemption prior to maturity in the event of covenant violations. Pro forma maximum annual debt service (MADS) of $5.2 million is a manageable 14.6% of fiscal 2015 revenues.
CAPITAL PROJECT MANAGEMENT: Construction and project management risks from Landis Homes Retirement Community’s master facilities plan could potentially cause negative rating pressure due to cost overruns, service disruptions, and re-occupancy of demolished and renovated units that lag projections.
OPERATING PROFILE MAINTENANCE: The ‘BBB-‘ rating assumes that Landis Homes Retirement Community’s current operating profile, characterized by high occupancy rates across all levels of care, satisfactory cash flow, and solid liquidity balances, remains stable. Should any of these weaken during the construction and re-occupancy period, there could be negative rating pressure.
LHRC’s parent corporation, Landis Communities operates senior living and care businesses through several affiliates in Lancaster County, PA. In conjunction with this financing, Landis Communities will no longer be an obligated group member. The parent’s other obligated group member is Landis at Home. LHRC is a retirement community with 484 ILU’s, 97 ALU’s, and 103 SNF beds that is surrounded by farmland and located on 114 acres in Lititz, PA, about 8 miles north of the city of Lancaster, PA. Landis at Home operates home and community based services for seniors. The obligated group represents 96% of total system operating revenues and 95% of total system assets. Other non-obligated affiliates include a small senior living rental community and personal care facility, and an affordable senior housing apartment complex that is operated through joint venture. Total operating revenue for the obligated group in unaudited fiscal year 2015 was $34.7 million.
MASTER FACILITIES PLAN
Landis’ master facilities plan is being driven by the need and desire to update and modernize its older facilities and upgrade amenities with new and renovated common and activity space. The plan requires the demolition of several older cottages, the renovation of existing and construction of new ILUs, and a new learning and wellness center that includes a new main entrance for the entire community. Phase I of the plan includes 7 new cottage homes, renovations and updates to the health care center (25 beds), removal of older residential units, and the potential combination and renovation of 44 existing ILU apartments into larger and updated 22 ILUs. Construction on phase I is estimated to start during November 2015. Phase II entails the construction and equipping of a community and wellness center that includes 22 new ILUs that replace 19 outdated units. Construction on phase II is planned to begin on April 1, 2016 and take about 17 months to complete. The overall effect on the ILU mix is expected to improve the desirability by creating additional larger two bedroom units through consolidating smaller units and slightly increasing the number of ILUs by 13.
DEMAND FOR SERVICES AND OCCUPANCY
LHRC’s primary market area is defined as a region 10 miles surrounding its main campus in Lititz, PA and includes most of Lancaster County. About 85% of residents come from Lancaster County, which has remained constant over recent years. Demand is supported by favorable demographics with a steadily growing number of age and income qualified households.
Given its long operating history, notable reputation for quality services, and attractive campus and product offerings, Landis enjoys strong demand in all levels of care. Another driver of LHRC’s demand is its church-related founding and historical ties to the related support organizations. ILU, ALU, and SNF occupancies averaged, 91%, 97% and 98%, respectively, from fiscal year 2012 through fiscal year 2015. Additionally during this period, Landis successfully filled over 100 new ILUs. The most recent new 25 ILUs that opened in June are filling rapidly and expected to be fully occupied by September 1.
GOOD HISTORICAL FINANCIAL PERFORMANCE AND POSITION
Fiscal 2011 and particularly fiscal 2012 operations were negatively impacted by higher than expected Medicaid census in the health center, lower occupancy in the residential suites due to facility limitations and slower than anticipated fill-up of the new south campus ILUs. Fiscal 2013 and 2014 operations rebounded due to healthier occupancies, quicker new ILU fill-ups, effective expenditure controls primarily from lower employee medical benefit costs, and reduced ancillary expenses in the health care center. As a result, the operating ratios were strong and favorably below Fitch’s ‘BBB’ category medians in fiscal 2013 and 2014 at 93.8% and 94.1%, respectively. Unaudited operating performance for fiscal 2015 is negatively affected by higher ancillary service use in the health center, large unfavorable budget variance for employee medical benefit costs, and some monthly service fee revenue loss due to vacated units. Regardless, the operating ratio remains solid at 96.5% in the current fiscal year.
LHRC’s liquidity position is adequate. For the unaudited period ending June 30, 2015, $23.6 million of unrestricted cash and investments amounts to 294 days operating expenses, 4.5x pro forma cushion ratio, and 28.4% of pro forma long-term debt. Liquidity grew nicely since the end of fiscal year 2012 due to healthy cash flow, initial entrance fee receipts from new ILUs, and debt financed capital spending. While the liquidity metrics are below ‘BBB’ category medians, LHRC’s non-refundable fee-for-service residency contracts temper Fitch’s concern.
LHRC will covenant to disclose audited financial statements within 180 days, and quarterly financial statements within 45 days, to the Municipal Securities Rulemaking Board’s EMMA system.
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