TEXT - Fitch rates Pennsylvania's Morning Senior Living
Nov 29 - Fitch Ratings has assigned a 'BBB-' rating to the following Northampton County Industrial Authority bonds, issued on behalf of Morningstar Senior Living (MSL): --$30 million revenue bonds, series 2012. The bonds are expected to price the week of December 10 via negotiation, and will be used to refund existing indebtedness, fund various capital projects, fund a debt service reserve, and pay costs of issuance. The Rating Outlook is Stable. SECURITY The bonds will be secured by a pledge of gross revenues, a first mortgage lien, and a debt service reserve fund. KEY RATING DRIVERS MANAGEABLE DEBT BURDEN: Post issuance, the series 2012 issuance will comprise MSL's debt burden, with related metrics which are in line with Fitch's 'BBB' category medians. Pro forma maximum annual debt service (MADS) will equal nearly $2.2 million, or 11.2% of fiscal 2012 revenues. MSL covered pro forma MADS at 2.1x including turnover entrance fees, and 1.0x by revenue only in fiscal 2012. STEADY PROFITABILITY: Since 2008, MSL has averaged a 20% adjusted net operating margin and a 96.1 operating ratio; both comparable to Fitch's 'BBB' category medians of 20.3% and 97.2, respectively. This is particularly healthy for a type A contract facility, indicating efficient operations and less reliance on entrance fees to meet debt service requirements. CONSISTENT OCCUPANCY: Occupancy across all MSL's units has averaged 93% from 2008-2012, despite increasing independent living unit (ILU) turnover and the impact from the recession and weakened housing market. STABLE COMPETITIVE POSITION: While competitive, service area characteristics are generally favorable, including a stabilized housing market, higher than average income levels, and lower than average poverty rates. Further, MSL's reputation for high-quality nursing care and competitive fees has bolstered its market position. MODEST LIQUIDITY: MSL has adequate balance sheet metrics for the rating category. At fiscal year end June 30, 2012 MSL had $14.1 million in unrestricted cash and investments, equal to 303.1 days of cash on hand (DCOH), and a 6.5x pro forma cushion ratio. CREDIT PROFILE The 'BBB-' rating action is supported by MSL's manageable debt burden and steady coverage. Following the series 2012 issuance, MSL will have a total $30 million in long-term fixed-rate debt. Approximately $23.5 million in existing debt will be refunded, and MSL will borrow $6 million in new money for future capital plans. Despite an increased par amount, pro forma MADS will not increase from current levels. Capital plans include the renovation of existing personal care units, as some of them lack private baths and kitchen space and are not in line with contemporary demands. This renovation is expected to take place in 2014, and Fitch expects some volatility in occupancy as units are taken off-line for renovation/conversion. Fitch notes that MLS is contemplating an ILU expansion sometime in 2014-2015, as its current campus has limited capacity for growth. The overall service area is competitive, with 10 continuing care retirement communities (CCRCs) within a 25 mile radius, four of which MSL identifies as its primary competitors. Still, MSL has demonstrated an ability to keep its fees and amenities at a competitive level to maintain occupancy. Fitch believes MSL's consistent occupancy is a credit strength, reflecting its stable position as a high-value provider for CCRC services. Fitch believes MSL's liquidity is merely adequate for a type A community in the 'BBB' rating category; however, this is offset by a 100% fixed-rate capital structure with no put risk. Further, at Sept. 30, 2012 cash to pro forma debt of 47.6% and pro forma cushion ratio of 6.5x remain in line with Fitch's 'BBB' category medians of 50.9% and 6.6x, respectively. Further, its most recent actuarial study dated June 30, 2011 indicated a 136.6% funded status ahead of the 110% target threshold, mitigating any concern for future service obligations. The Stable Outlook is supported by Fitch's expectation that MSL will maintain its liquidity and debt service coverage at levels commensurate to the rating. Morningstar Senior Living (MSL) is located in Nazareth, PA, within the Lehigh Valley area, approximately 70 miles north of Philadelphia. It sits on 16 acres, and includes 129 independent living apartments, 61 personal care units, 25 dementia care beds (licensed as personal care), and 61 licensed nursing care beds. In fiscal 2012 (June 30 year-end), MSL reported total revenues of approximately $19.2 million. MSL will provide quarterly (within 45 days) and annual (within 120 days) disclosure via the Municipal Securities Rulemaking Board's EMMA System.