TEXT - Fitch affirms Wesley Homes, Wash. Bonds
Dec 10 - Fitch Ratings has affirmed the 'BBB-' rating on the following revenue bonds issued on behalf of Wesley Homes (Wesley): --$45.9 million Washington State Housing Finance Commission refunding and revenue bonds, series 2007A (Wesley Homes Project). The Rating Outlook is Stable. SECURITY Debt payments are secured by a pledge of the gross revenues of the obligated group. A first mortgage and a fully funded debt service provide additional security for the bonds. KEY RATING DRIVERS STRONG, CONSISTENT OPERATING PROFITABILITY: In each of the last four years, Wesley has generated net operating margins (NOM) between 12.6% and 14.1% and operating ratios ranging between 91.2% and 94.0% which compare favorably to the respective 'BBB' medians of 9.5% and 97.2%. Through the nine months ended Sept. 30, 2012, Wesley reported NOM of 11.0% and an operating ratio of 93.7%. GOOD DEBT SERVICE COVERAGE: Wesley's low leverage and strong profitability have combined to produce good revenue-only debt service coverage of 1.4x and 1.6x in 2010 and 2011, respectively, which exceeds the 'BBB' category median of 1.0x. Through the nine months ended Sept. 30, Wesley generated revenue only coverage of 1.5x and turnover entrance fee coverage of 2.1x. LOW LIQUIDITY: Fitch's primary credit concern continues to be Wesley's liquidity position and metrics, which are weak relative to 'BBB' category medians. At Sept. 30, Wesley had $18.6 million in unrestricted cash and investments which equate to 206.5 days cash on hand, a 5.2x cushion ratio and 35.6% cash to debt. STABLE OCCUPANCY RATES: Occupancy in the independent living units (ILU) and skilled nursing facilities (SNF) has been stable over the last 12 months. Through Sept. 30, occupancy in the ILUs was 88.4% compared to 90.5% in prior year period, while occupancy in the SNF improved to 94.2% compared to 90.0% in the prior year period. LONG-TERM CAPITAL NEEDS: Management continues to review various capital plans at its Lea Hill and Des Moines campuses. Fitch does not expect Wesley to incur any additional debt over the next 12 months. CREDIT PROFILE Wesley Homes consists of two retirement communities, Wesley Homes Des Moines (WHDM) and Wesley Homes Lea Hill (WHLH), the Wesley Homes Foundation, and Wesley Homes Community Health Services. WHDM is located in Des Moines, WA (approximately 20 miles south of Seattle) and WHLH is located in Auburn, WA (approximately 10 miles southeast of WHDM). In aggregate, Wesley Homes consists of 480 ILUs, 39 assisted living units (ALUs), 16 memory care beds, and 148 skilled nursing beds. In 2011, total revenues were $36.8 million. Strong Profitability Wesley's financial results in 2011 and through the nine months ended Sept. 30, 2012 (interim period) reflect the benefits from continued cost control measures, solid rate increases and improved entrance fee receipts. However, profitability through the nine-month interim period has eroded slightly as a result of investments in IT, home health care, and initiatives in sales, marketing and outreach.
In FY 2011, Wesley Homes posted an improved 91.2% operating ratio compared to the 92.5% operating ratio generated in 2010. Similarly, Wesley's NOM improved in 2011 to 14.1% from 13.2% in the prior year, while NOM-adjusted strengthened to 17.3% in 2010 from 15.2% in 2010. Through the nine months ended Sept 30, operating ratio, NOM and NOM-adjusted were 93.7%, 11.0% and 16.6%, respectively. Low Leverage Position Wesley's low debt burden and strong profitability result in good historical debt service coverage. Wesley's maximum annual debt service (MADS) equates to a modest 9.7% of 2011 total revenues, which is lighter than the 'BBB' category median of 12.9%. Historical coverage of MADS on a revenue-only basis has been solid at 1.4x in 2010 and 1.6x in 2011 and exceeds the 'BBB' category median of 1.0x. Similarly, coverage of MADS including turnover entrance fees has been good at 1.6x and 2.0x in fiscal 2010 and 2011, respectively. Through the nine months ended Sept. 30, Wesley generated revenue-only coverage of 1.5x and coverage with turnover entrance fees of 2.1x. Low Liquidity Fitch's primary credit concern continues to be Wesley's liquidity position and metrics which are weak relative to 'BBB' category medians. At Sept. 30, Wesley had $18.3 million in unrestricted cash and investments which equate to 206.5 days cash on hand, a 5.2x cushion ratio and 35.6% cash to debt; all of which are below Fitch's respective 'BBB' medians of 369, 6.6x, and 50.9%. Of added concern is Wesley Homes' relatively aggressive investment policy with an asset allocation target of 60% equities (diversified amongst large-, mid- and small-cap funds, as well as international), 30% fixed income investments, and 10% cash and cash equivalents. When compared to other credits in Fitch's portfolio, Fitch believes these targets are aggressive given Wesley Homes' current rating and weak balance sheet metrics. Stable Occupancy Occupancy in the ILUs and SNF has been stable over the last 12 months. Through Sept. 30, occupancy in the ILUs was 88.4% compared to 90.5% in the prior year period while occupancy in the SNF improved to 94.2% compared 90.0% in the prior year period. During 2012, management replaced certain personnel in sales and marketing and implemented initiatives to improve outreach to area hospitals which should improve overall occupancy in 2013. Long-term Capital Needs Wesley Homes' estimated capital budget for 2013-2015 includes roughly $2.5 million for routine facilities needs and investments in technology which are expected to funded through cash flow. Management is considering adding SNF beds at the Lea Hill facility and repositioning certain of the existing SNF beds at the Des Moines campus in 2014. Costs are estimated at roughly $6 million, which would be funded from philanthropy ($2 million) and bank debt ($4 million). Further, development of additional campuses is not expected before 2015. Fitch believes Wesley's debt capacity is limited at the current rating level. Rating Outlook The Stable Rating Outlook reflects Fitch's belief that Wesley Homes will maintain its solid profitability and debt service coverage ratios. Upward movement in the rating is precluded by low liquidity and long-term capital plans. Disclosure Wesley Homes covenants to provide through the Municipal Securities Rulemaking Board's EMMA system audited financial statements within 120 days of each year end and quarterly unaudited financial statements within 45 days of each quarter end.
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