TEXT-Fitch affirms John Knox Village, Mo. revs at 'BBB-'
Oct 1 - Fitch Ratings has affirmed the 'BBB-' on the following bonds issued on behalf of John Knox Village (JKV): --$55.4 million Lee's Summit (MO) Industrial Development Authority revenue refunding bonds, series 2007 (John Knox Village). The Rating Outlook is Stable. SECURITY Security interest in unrestricted gross receivables and a first mortgage lien on an 11.6 acre parcel which includes the care center. KEY RATING DRIVERS STABLE FINANCIAL PERFORMANCE: Solid entrance fee receipts offset slightly weaker operating performance in fiscal 2012 resulting relatively stable year over year performance with little change in financial profile. Operating performance through the five month interim period ended Aug. 31st is ahead of prior year results. LOW LEVERAGE POSITION: JKV benefits from a low leverage position which helps to mitigate historically weak operating profitability. With maximum annual debt service (MADS) equating to a light 8.4% of fiscal 2012 total revenues, JKV posted solid coverage of MADS including entrance fee receipts of 1.9x in both fiscal 2011 and 2012. MIXED LIQUIDITY INDICATORS: JKV's unrestricted cash and investments totaled $35.5 million as of Aug 31, 2012, which equates to 212.6 days cash on hand (DCOH), a 6.4 times(x) cushion ratio and 61.4% of long term debt as compared to the respective 'BBB' medians of 369, 6.6x and 50.9%. FOCUS ON SALES AND OCCUPANCY: Entrance fee sales dipped to 40 in fiscal 2012 from 47 in the prior year but well ahead of 2010 and 2009 levels. Furthermore, occupancy in the skilled nursing beds has improved in fiscal 2012 and through the 5 month interim period. CREDIT PROFILE The affirmation of the 'BBB-' rating reflects JKV's stable financial performance which is characterized by low leverage, solid debt service coverage and weak profitability indicators. Management's focus on sales has resulted in an improved level of net entrance fee receipts of $5.6 million and $5.8 million in fiscal 2011 and 2012, respectively. The improvement in entrance fee receipts combined with JKV's low leverage position results in solid coverage of maximum annual debt service (MADS) of 1.9x in both fiscal 2011 and 2012. Relative to Fitch's 'BBB' category medians, JKV's operating profitability metric are weak, reflecting the challenge of maintaining occupancy on over 1,400 units in the current operating environment. Over the last four fiscal years (2009 -2012) net operating margin has ranged between 4.0% and 6.6% annually (compared to the 'BBB' median of 9.5%) while net operating margin-adjusted has ranged between 8.0% to 13.5% over the same period (compared to the 'BBB' median of 20.0%). Management is targeting $1.5 million in operating costs reductions in fiscal 2013 in an effort to improve core operations and provide funds for increased level of capital investment. Fitch's credit concerns remain the challenge of maintaining occupancy of JKV's large number of units (over 1,400 total units) in the current operating environment. Management continues to pursue a long term repositioning of the campus by removing certain units from inventory and/or converting to high demand dementia units. However, Fitch remains concerned as the number of occupied independent living units further eroded in 2012 to approximately 884 units from 926 in 2011 and 962 in fiscal 2010. Occupancy in JKV's 151 assisted living (AL) and 347 skilled nursing (SNF) has improved since FYE 2011 and as of Aug. 31st was 97.4% and 83.9%, respectively. The Stable Outlook reflects Fitch's belief that JKV will generate liquidity, operating and debt metrics consistent with results generated in fiscal 2011 and 2012. With the development of AL and SNF dementia care services, JKV now offers a complete continuum of long term care services on a single campus. John Knox Village is a type-B/ C continuing care retirement community located in Lee's Summit, MO, with 944 'available' ILUs, 151 assisted living units (ALUs) and 347 skilled nursing beds. In fiscal 2012, JKV had total revenues of $66.0 million. JKV provides audited and quarterly information through the MSRB's EMMA, with cash flows, occupancy figures, and a small MD&A section. Fitch views the level of detail on the disclosure favorably. 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. Applicable Criteria and(New York Ratings Team)
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