Nov 14 - Fitch Ratings has upgraded to 'BBB' from 'BBB-' the rating on the
following bonds issued on behalf of the Philadelphia Presbytery Homes, Inc.
(PPHI) obligated group (OG).
--$40,320,000 Montgomery County Industrial Development Authority revenue bonds
(Philadelphia Presbytery Homes, Inc. Project) series 2010A.
The Rating Outlook is revised to Stable from Positive.
The bonds are secured by a pledge of gross revenues, first lien mortgage and
security interest in OG facilities and property, and a debt service reserve
KEY RATING DRIVERS
FINANCIAL PROFILE SUPPORTS UPGRADE: PPHI's liquidity, operating, and capital
metrics have remained steady since a 2010 debt issuance, and coupled with its
size and revenue diversity, reflect a credit profile that is more consistent
with the middle of the 'BBB' category. Additionally, PPHI stopped its
development of Makemie at Whiteland (Makemie), a start-up project outside the
OG, eliminating a credit concern that had also been restricting positive
momentum on the rating.
LIQUIDITY COMMENSURATE WITH RATING LEVEL: At Sept. 30, 2012, PPHI had 360.4 days
cash on hand (DCOH), a 8.3 times (x) cushion ratio, and cash-to-debt of 53.4%,
all of which compare well to category medians and are improved year over year.
RISE IN IL TURNOVER: Through the nine months ended Sept. 30, 2012 (interim
period), PPHI had an 86% increase in independent living (IL) unit turnover (41
in fiscal 2012 and 22 in fiscal 2011). While PPHI has had strong move-ins year
to date and anticipates an additional 15 move-ins by year's end, the increase in
turnover has suppressed IL occupancy and softened financial performance.
However, Fitch anticipates improvement in the fourth quarter as turnover eases
and the strong IL sales continue.
SOLID DEBT SERVICE COVERAGE: Debt service coverage in the nine-month interim
period was solid at 2.8x, in spite of the softer operating performance. Revenue
only coverage remained strong as well at 1.2x. However, PPHI has temporary
financing in place (construction loan) for its current capital projects and
expects to refinance with permanent fixed rate debt within the next four years.
Utilizing a maximum annual debt service (MADS) figure of $6.8 million, which
assumes 100% fixed rate debt, lowers coverage to 1.6x for the interim period.
RYDAL PARK PROJECT PROGRESSES: PPHI has opened the new skilled nursing and
personal care centers at Rydal Park, its main campus, and is moving forward on
an 18-unit IL expansion as part as of phase III of the project. Bond proceeds
from 2010 are funding the expansion and PPHI expects to pay down a portion of
its long-term debt, currently at $105 million, with proceeds from the new
entrance fees and $5 million in philanthropy (currently $4.8 million has been
MAKEMIE NO LONGER A CONCERN: Early in 2012, PPHI made the decision not to pursue
the Makemie project, a start-up continuing care retirement community (CCRC)
being developed outside the OG, due to slower than budgeted pre-sales and higher
attrition of depositors. The decision to stop the development removes a credit
concern related to the potential financial drain of Makemie on the OG during the
construction and fill-up of the project.
SOLID MARKET POSITION: PPHI benefits from Rydal Park's location in a mature and
relatively affluent northern suburb of Philadelphia, as well as the diversity
and size of its revenues helped by PPHI's three other facilities located
throughout the greater Philadelphia service area.
The upgrade to 'BBB' from 'BBB-' is supported by PPHI's overall financial
profile which is characterized by operating performance, MADS coverage, and
liquidity that is more consistent with the middle of the 'BBB' category.
Occupancy across the three levels of care (independent living, personal care
units, and skilled nursing) is good at approximately 87% as of Sept. 30, 2012.
Over the past three audited years, PPHI's operating ratio has averaged 93.6% a
year, better than Fitch's 'BBB' category median of 97.2%. Operating performance
has weakened in the interim period due to a combination of higher turnover and
an above budget percentage of skilled nursing revenue from life care residents,
with the operating ratio rising to 102.3%. Fitch expects PPHI's operating
results to improve in the fourth quarter. PPHI reported approximately $900,000
in entrance fee receipts in October 2012, much higher than the monthly average
to date, and PPHI expects an additional 15 move-ins by year end.
Even with the weaker operating performance PPHI maintained solid debt service
coverage. Actual annual debt service is currently approximately $4 million a
year. Coverage (including turnover and new unit entrance fees) was strong at
2.8x for the interim period compared to 3.6x in fiscal 2011, 3.9x in fiscal
2010, and the 'BBB' median of 2x. Based on pro forma MADS of $6.8 million, which
was provided by the underwriter and assumes the refinancing of a $40.5 million
construction loan to fixed rated bonds, coverage was 1.6x in the interim period
compared to 2.1x in fiscal 2011 and 2.2x in fiscal 2010.
Total long-term debt for PPHI is $105 million and reflects the maximum to be
drawn under the construction loan ($49 million). Fitch expects the total debt
figure to decline as new entrance fees from the 18-unit Hillside expansion,
which are currently under construction, are used to pay a portion of it down. Of
the $105 million in debt, the $39 million of 2010 bonds are fixed rate (37%),
with the rest variable rate (63%) composed of a $49 million construction loan
and two loans totaling $16.5 million from PPHI's non-obligated affiliate, the
Bala Foundation. The construction loans (which mature in 2016) represent the
largest concern but mitigating this concern is that PPHI has more than 1x
unrestricted cash and investments to this debt.
Fitch views PPHI's liquidity as a credit strength as it has grown each year
since Fitch's initial rating in 2010. Unrestricted cash and investments as of
Sept. 30, 2012 totaled $56.2 million, which equated to 360.4 DCOH, an 8.3x pro
forma cushion ratio, and cash-to-debt of 53.4%. All these compare well to
Fitch's 'BBB' category medians.
IL occupancy remains a concern. This concern is mitigated by the strength shown
by the strong demand for IL units in 2012 (40 move-ins as of Oct. 31, 2012) and
PPHI's unit mix with the number of skilled nursing and personal care units about
equal to its IL units. Skilled nursing and personal care units remain a solid
driver of revenue as indicated by the above median revenue only debt service
coverage. PPHI has continued to make steady progress on filling Parkside, its
major 45 unit expansion at Rydal Park. As of Sept. 30, 2012, 32 Parkside units
have been filled, up from 26 as of Sept. 30, 2011.
Further support of the upgrade is PPHI's decision not to develop Makemie, PPHI's
startup CCRC in Chester County, and the potential financial support from the OG
the project might have needed, including a potential $5 million of committed
liquidity support. PPHI's board of directors terminated the project as the
velocity of pre-sales was falling behind budget. While this leaves an $8 million
Bala Foundation loan still to be paid (which is already factored into the
long-term debt), it removes a longer term credit risk to the OG.
The Stable Outlook reflects Fitch's belief that over the next year PPHI's
financial profile will remain stable, with debt service metrics closer to
historical levels as PPHI moves forward on phase III of its Rydal Park project.
The parent of PPHI is Presby's Inspired Life, a senior living organization
headquartered in Lafayette Hills, PA, with facilities located in and around the
greater Philadelphia region. The obligated group, on which Fitch's analysis is
based, has 474 ILUs, 214 personal care units, and 260 skilled nursing beds as of
Sept. 30, 2012. The four communities that comprise the OG are Rydal Park,
Rosemont Presbyterian Village, Broomall Presbyterian Village, and Spring Mill
Presbyterian Village, and the OG also includes a management services group. The
OG had operating revenues of approximately $61.4 million in 2011.
Entities outside the obligated group include a large affordable housing
portfolio (comprised mostly of HUD housing) and the Bala Foundation, which has
approximately $26 million in cash and investments and provides approximately $1
million in support to the OG a year. PPHI's historical support of the other
non-obligated group entities has been minimal and is not a credit concern.
PPHI covenants to submit annual audited information within 120 days of the
fiscal year end to the EMMA system, and the first three quarters of unaudited
data within 45 days of the quarter end, and the fourth quarter of unaudited data
within 60 days of the quarter end to EMMA.
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 Related Research:
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'Rating Guidelines for Nonprofit Continuing Care Retirement Communities' (July
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Rating Guidelines for Nonprofit Continuing Care Retirement Communities