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.
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.
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.
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
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.
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.
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.
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
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