Feb 1 - Fitch Ratings has affirmed the 'BB' rating on the following St.
Louis County Industrial Development Authority (MO) bonds, issued on behalf of
Nazareth Living Center (NLC):
--$7.8 million series 1999 refunding revenue bonds.
The Rating Outlook is Stable.
NLC has an additional $8 million in series 2012 fixed rate bonds which Fitch
does not rate.
The bonds are supported by a pledge of revenues, mortgage, and debt service
SIGNIFICANT DEBT BURDEN: The 'BB' rating reflects NLC's sizeable debt burden,
which increased in 2012 as anticipated to finance a campus expansion. Total
long-term debt was $15.4 million at Dec. 31, 2012, equaling a high 11.9x debt to
net available and 69% debt to capitalization.
ILU PROJECT UNDERWAY: The rating also incorporates the risk associated with the
construction, presale, and fill-up of NLC's independent living unit (ILU)
expansion. This risk is moderated by the co-member Sisters of St. Joseph of
Carondolet's (CSJ) agreement to purchase and occupy 30 of the 50 new ILUs for a
minimum of 10 years upon their open in July 2013. Fitch believes the project is
needed to bolster NLC's position in a competitive continuing care retirement
community (CCRC) market, as well as diversify and grow its revenue base.
WEAK BALANCE SHEET: NLC's liquidity remains very light, providing only limited
cushion against operating risk. Unrestricted cash and investments equaled $3.2
million at Dec. 31, 2012, equating to 79.3 days of cash on hand (DCOH) and 21%
cash to debt. Capital spending is expected to limit meaningful liquidity growth
in the near term.
OCCUPANCY REMAINS MIXED: Total assisted living unit (ALU) occupancy continues to
suffer; slipping to 54.6% through the six-month interim period ended Dec. 31,
2012 from 73.4% in fiscal 2010. Skilled nursing occupancy remained steady at
89.5%, and the 14-bed dementia unit has been very well utilized at over 95%.
However, any drop in total occupancy to a level which significantly impacts
NLC's operating cash flow could negatively pressure the rating.
ADEQUATE OPERATING PERFORMANCE: NLC continues to produce sufficient operating
cash flow to provide 1.0x coverage of maximum annual debt service (MADS; $1.3
million) in the six-month interim period, and 1.7x coverage of actual annual
debt service. Once NLC completes its ILU project and starts collecting entrance
fees in fiscal 2014, coverage of MADS is expected to improve accordingly.
The rating affirmation at 'BB' reflects NLC's significant debt burden, which
increased in 2012 to finance a 50-unit ILU expansion adjacent to its current
campus. The total project cost is estimated at $16 million, funded with 10.1
million in debt, $4.9 million in entrance fees, and $1 million in equity. NLC's
total debt includes a $1.9 million subordinate fixed rate loan from CSJ, which
matures June 30, 2016. NLC expects to repay this loan with entrance fee receipts
The 'BB' rating is contingent upon NLC's successful execution of the ILU
expansion. The project presents some risk, namely construction, presale, and
fill-up. These risks are mitigated by CSJ's agreement to purchase and occupy 30
of the 50 units, and pay monthly service fees (regardless of occupancy) for no
less than 10 years following initial occupancy. As of Jan. 14, 2013, NLC had
collected deposits on 42/50 units, including the 30 reserved by CSJ.
Of some concern is the competitive landscape for CCRC's in the greater St. Louis
market, which has impacted NLC's ALU occupancy in recent years. The open of
newer units within an expanded market coupled with higher turnover to skilled
nursing facilities (SNF) continues to pressure ALU occupancy, which has remained
below 60% since 2011. Still, the ILU project should help preserve its
competitive position within the area, and it will be the only type C
fee-for-service model within its primary target market.
Of ongoing concern is NLC's reliance on CSJ reimbursement for services rendered,
which equaled over 30% of fiscal 2012 revenues and whose members represent 40%
of occupied units. However, Fitch believes that NLC is taking steps to
adequately market itself to external residents, while still maintaining its
mission as a Catholic-based institution.
The Stable Outlook is supported by Fitch's expectation that NLC will continue
producing steady operating profitability through construction and occupancy of
its ILUs, scheduled to open July 2013 and stabilize at 95% occupancy in June
Located in St. Louis, MO, NLC operates 150 ALUs and 140 SNF beds, generating
$15.6 million in total revenue in fiscal 2012. Benedictine Health System (BHS)
and the Sisters of St. Joseph of Carondolet (CSJ) are joint members of NLC.
NLC is required to disclose only annual financial statements, disseminated via
the Municipal Securities Rulemaking Board's EMMA system. However, Fitch views
favorably NLC's consistent voluntary distribution of interim financials and
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', dated 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