TEXT - Fitch affirms Lutheran Social Ministries at Crane Mill, NJ
Nov 21 - Fitch Ratings has affirmed the 'BBB-' rating on the following New Jersey Economic Development Authority (Lutheran Social Ministries at Crane's Mill) ratings: --Approximately $16 million fixed-rate revenue bonds, series 2008A; --Approximately $4.5 million variable-rate revenue bonds, series 2008B*; --Approximately $12.3 million fixed-rate revenue refunding bonds, series 2005A; --Approximately $11.9 million variable-rate revenue refunding bonds, series 2005B*. * Variable-rate demand bonds (VRDBs) are backed by letters of credit (LOCs) from TD Bank, which Fitch was not asked to rate. The Rating Outlook remains Negative SECURITY Debt payments are secured by a pledge of the gross revenues, a mortgage on the property and debt service reserve fund for the fixed-rate bonds. KEY RATING DRIVERS DECLINING LIQUIDITY METRICS: The Negative Outlook reflects a decline in Crane's Mill's liquidity position over the last four years and was exacerbated by the transfer of over $6 million of cash to the parent organization for the development of certain mission-driven programs in New Jersey. Fitch views this negatively and the transfers were unexpected. A further decline in liquidity would likely result in downward rating pressure. HIGH DEBT BURDEN: Crane's Mill's debt burden is high with maximum annual debt service (MADS) of 16.2% of total 2011 revenue compared to the 'BBB' category of 12.9% due to the issuance of its series 2008 bonds for a facility expansion. Debt service coverage (actual) was adequate at 1.7x through the nine months ended Sept. 30, 2012 despite continued slow fill up of the new units. SLOW FILL-UP OF NEW UNITS CONTINUES: Of its additional 75 units that were added in 2010, only 41 have been sold and the progress in selling the units has been slow with missed sales targets over the last two years. Although this remains a concern, Fitch believes Crane's Mill has some flexibility in reaching stabilized occupancy as MADS doesn't occur until 2027 and its temporary debt ($4.4 million remaining to be paid from initial entrance fees) does not need to be repaid until 2018. SOLID PROFITABILITY: Crane's Mill's profitability metrics are good with net operating margins of 11.4% for the nine months ended Sept. 30, 2012 and 10.6% in fiscal 2011 compared to the 'BBB' category median of 9.5%. MANAGEMENT TURNOVER: The executive director of Crane's Mill recently departed and the CFO of the parent organization is departing before year-end. Fitch expects the new leadership will be beneficial for the organization. WHAT COULD TRIGGER A RATING ACTION CONTINUED DECLINE IN LIQUIDITY POSITION: Fitch expects Crane's Mill's liquidity position to remain in line with the 'BBB' category medians. Continued deterioration to the balance sheet would likely result in negative rating pressure. FAILURE TO RENEW LOC IN 2013: Crane's Mill has a letter of credit (LOC) that supports about $16.4 million of variable rate demand bonds. The LOC expires in July 2013 and the failure to renew or replace the LOC would stress an already weakened liquidity position. CREDIT PROFILE Crane's Mill completed its expansion project (66 ILUs, 10 cottages, six new ALUs and the renovation of 12 existing ALUs) with the new units available for occupancy in March 2010. Fitch views the project favorably, which include improvements to Crane's Mill's existing campus and services, increased monthly revenues with limited incremental expenses, and a better balance between the number ILUs and health center beds. However, due to the recession, Crane's Mill suffered a sizable number of pre-sale cancellations and fill-up remains below expectations. As of November 16, 2012, 41 of the 75 new units (55%) were occupied. Only 5 new units were sold in fiscal 2012 and management has budgeted for 15 new unit sales in 2013, which Fitch believes is aggressive considering the current pace of sales. Turnover in its existing units in 2012 has returned to normal from the above-average move-outs in 2011 and net turnover entrance fees of $1.4 million at September 30, 2012 are an improvement from the negative $18,000 in fiscal 2011. Crane's Mill has been converting its residency contracts from a predominantly type A contract to a predominantly type B contract as units turnover, which Fitch views as beneficial since it should lower Crane's Mill's overall risk profile. Currently, Crane's Mill has about 55% type B contracts and 45% type A contracts. Liquidity is currently adequate for the rating category. Total unrestricted cash at Sept. 30, 2012 (nine-month interim) was $20.1 million, which equals 311.4 days cash on hand (DCOH), 43.5% cash to debt and 4.2x cushion ratio, compared to the respective 'BBB' category medians of 369 days, 50.9% and 6.6x. Liquidity metrics reflect the significant debt issuance in 2008 and also the cash contribution to Lutheran Social Ministries of New Jersey, Inc., the sole member of Crane's Mill. In fiscal 2011 Crane's Mill transferred $3.1 million to Lutheran Social Ministries and another $3.4 million in 2012 in order to further the mission of the organization. The distribution of cash to the parent is really only limited by Crane's Mill's bond covenant compliance of maintaining 240 days cash on hand. Fitch views these transfers negatively and further support leading to deterioration to its balance sheet would likely result in negative rating action. Management stated that it does not expect to transfer any funds in fiscal 2013. Despite continued slow fill-up of Crane's Mill's expansion project that was completed in 2010, management continues to effectively control expenses and Crane's Mill's operating profile remains in line with 'BBB' category medians. In fiscal 2011, Crane's Mill posted a net operating margin of 10.8%, compared with the 'BBB' category median of 6.8%. Operating ratio of 96.6% in fiscal 2011 and 95.8% through the nine-month interim is favorable compared to the 'BBB' category median of 97.2%. Adjusted net operating margin in fiscal 2011 was 10.5%, below the median of 20.3%, reflecting the significant refunds in fiscal 2011. At September 30, 2012 adjusted net operating margin was improved at 18.2%, which is more in line with the 'BBB' category median. Crane's Mill has approximately $49 million of debt outstanding, which is 43% variable-rate and 59% fixed-rate. In 2008, Crane's Mill issued $22.4 million of series 2008B bonds (temporary debt), which is to be redeemed from initial entrance fee receipts from the new units. To date, Crane's Mill has paid down approximately $18 million of the debt with initial entrance fees, and management expects to pay down an additional $1.3 million before fiscal year end 2012 and then the remaining $3.2 million in fiscal 2013. This temporary debt matures in July 2018. After the repayment of its temporary debt, Crane's Mill's exposure to letter of credit (LOC)-backed variable-rate demand bonds will be about $11.9 million. The LOC is with TD Bank and expires in July 2013. Crane's Mill's debt burden remains high with MADS equating to 16.2% of total 2011 revenue compared to the 'BBB' category median of 12.9% but an improvement from 18% in fiscal 2010. Maximum annual debt service (MADS) of $4.5 million occurs in 2027. Current actual debt service is $3.3 million. Actual debt service coverage by turnover entrance fees was 1.7x through the nine months ended Sept. 30, 2012 compared to 1.4x in 2011 and 1.5x in 2010. MADS coverage is weaker due to suppressed cash flow and revenue generation due to slow fill up of the new units. MADS coverage by turnover entrance fees was 1.3x through the nine months ended September 30, 2012 compared to 0.9x in fiscal 2011 and 1.0x in fiscal 2010. There is no occupancy covenant on the new units as long as Crane's Mill maintains a debt service coverage ratio of at least 1.25x for the previous two quarters, calculated on a rolling two-quarters basis, which Crane's Mill has achieved to-date. The Negative Outlook reflects the deterioration in Crane's Mill's balance sheet and the limited flexibility it provides as it continues to be challenged with filling its new units. A deterioration in Crane's Mill's financial performance would likely result in negative rating pressure. Located on a 48-acre site in West Caldwell, NJ, Crane's Mill is a type A and type B continuing care retirement community (CCRC) consisting of 282 ILUs, 48 ALUs, 66 nursing beds, and 18 memory support beds. In fiscal 2011, Crane's Mill had total revenues of $26.5 million. Crane's Mill has covenanted to provide annual audited financial statements within 120 days of its fiscal year end and un-audited financial statements within 45 days of each fiscal quarter.