CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB-' rating on the following bonds issued by the Lee's Summit (MO) Industrial Development Authority on behalf of John Knox Village (JKV):
--$48,100,000 senior living facilities revenue bonds, series 2007A; and
--$21,000,000 senior living facilities revenue bonds, series 2014A.
The Rating Outlook is Stable.
SECURITY
Debt payments are secured by a pledge of the unrestricted gross revenues of the obligated group and a first mortgage lien on certain properties including the care center.
KEY RATING DRIVERS
LIGHT OPERATING PROFITABILITY: Despite a slow start to fiscal 2015, year-end operating profitability remained relatively stable with fiscal 2014 results. Net operating margin adjusted equaled 14.5% in fiscal 2015, but profitability remains light relative to Fitch's 'BBB' category median of 20.4%.
MAJOR CAPITAL PROJECTS: JKV's continued capital plans are significant and include the expected completion of a new independent living unit (ILU) building and commencing construction of another new ILU building in December 2015. Funding sources are expected to include the issuance of additional debt in December 2015.
LOW DEBT BURDEN: JKV's low debt burden helps to mitigate its light operating profitability and provides capacity at the current rating level to absorb the expected new debt. MADS equals a light 9.1% of fiscal 2015 revenue relative to Fitch's 'BBB' category median of 12.3%. Fitch will assess the credit impact of the planned debt issuance balanced against expected project benefits as financing details become more certain.
MIXED LIQUIDITY INDICATORS: Liquidity remains solid relative to JKV's light debt burden with 56% cash to debt and a 6.8x cushion ratio but remains light relative to operating expenses with 241 days cash on hand at March 31, 2015.
RATING SENSITIVITIES
EXECUTION OF CAPITAL PROJECTS: Fitch believes John Knox Village (JKV) has some capacity at the current rating level to absorb the additional debt necessary to fund its capital program, provided that JKV sustains its improved cash flow and successfully constructs and fills the two new independent living unit (ILU) buildings. However, future rating actions will be determined by the final size, structure, and scope of the project and the financing at the time of issuance which is expected to happen near the end of calendar year 2015. Failure to maintain improved cash flow levels or to successfully execute upon capital plans could result in negative rating pressure.
CREDIT PROFILE
John Knox Village is a continuing care retirement community located in Lee's Summit, MO, with 877 available ILUs, 183 assisted living units (ALUs) and a 430 licensed bed (330 available beds) skilled nursing facility (SNF). Total operating revenue equaled $69.9 million in fiscal 2015.
LIGHT OPERATING PROFITABILITY
Despite a slow start to fiscal 2015, operating profitability remained consistent with the improved levels achieved in fiscal 2014 due to continued operating improvements throughout the year culminating in a strong fourth quarter. The slow start was primarily due to low SNF occupancy while the continued improvements reflected strengthening SNF and ALU occupancy rates. Excluding $4 million in non-cash, non-recurring charges, net operating margin and net operating margin adjusted equaled 5% and 14.5%, respectively, and are light relative to Fitch's 'BBB' category medians of 9.2% and 20.4%. Management expects the momentum achieved in the fourth quarter to continue into fiscal 2016 with net operating margin adjusted budgeted to increase to 15.9%.
MAJOR CAPITAL PROJECTS
Capital spending is projected to increase in fiscal years 2016 and 2017 as JKV continues to pursue its campus redevelopment plan. A primary goal of the repositioning effort is to increase the number of entrance fee contracts. Over the past 10 years, management has removed smaller ILUs from inventory and converted them to either larger square foot units or to high demand ALUs and dementia units.
The community is the process of constructing its Courtyard Project which included the demolition of an existing ILU building and the construction of a new 52 unit ILU building, additional parking and new common space and renovations to existing common spaces. The total cost increased to $19 million due to the expanded scope of the project and is funded by $8.3 million from the series 2014A bond issuance, a cash contribution and a $10.3 million bank loan, of which $5 million is expected to be permanent debt. The Courtyard building is expected to be completed in December 2015 and is expected to generate approximately $7.3 million in entrance fee proceeds.
Additionally, JKV expects to break ground on its Meadows Project in December 2015. The Meadows Project includes the demolition of smaller ILUs and construction of 112 new larger ILUs, underground parking, a new restaurant and new wellness facilities, including a pool. The project is expected to cost $55 million and funded by a construction line of credit and a $34 million bond issuance. Only the $34 million bond issuance is expected to be permanent debt. Management states that the bond financing is subject to a pre-sale requirement, and is expected to occur in December 2015. The project is expected to be completed in fiscal 2017 with stabilization in 2020.
Fitch views the campus repositioning strategy favorably as larger ILUs are typically in higher demand and more profitable than smaller units. While the two expansion projects are expected to increase permanent debt by $39 million, Fitch expects that the expansion projects will be successfully executed and that the revenue generated by the additional ILUs will allow JKV to grow into the increased debt burden. Additionally, the new larger ILUs are expected to be accretive to profitability, thereby strengthening MADS coverage from current levels. However, Fitch will assess the impact on JKV's credit profile of the additional debt as financing plans are finalized.
LOW DEBT BURDEN
Relatively light profitability is currently mitigated by JKV's low debt burden. MADS equaled 9.1% of revenue in fiscal 2015 and is light relative to Fitch's 'BBB' category median of 12.3%. The light debt burden allowed for solid MADS coverage of 1.9x and 'revenue only' MADS coverage of 0.7x in fiscal 2015 relative to Fitch's 'BBB' category medians of 2.0x and 0.9x. Additionally, the low debt burden allows for some capacity at the current rating level for the planned issuance of new debt. However, Fitch will assess the overall credit impact as financing details become finalized.
MIXED LIQUIDITY INDICATORS
Unrestricted cash and investments increased 13.2% since fiscal 2013 to $42.9 million at March 31, 2015. The improvement reflects positive cash flows, improved entrance fee generation, reimbursement proceeds and investment returns. Liquidity growth slowed slightly in fiscal 2015 due to increased capital spending on the Meadows project, including a $2.3 million cash contribution. Liquidity metrics remain solid relative to JKV's debt burden but light relative to operating expenses. Cushion ratio and cash to debt of 6.8x and 56% remain solid relative to Fitch's 'BBB' category medians of 6.9x and 60.2%. However, JKV's 241 days cash on hand is light relative to Fitch's 'BBB' category median of 408 days. Capital projects are not expected to adversely impact absolute unrestricted liquidity levels.
DEBT PROFILE
JKV had approximately $76.6 million of total debt outstanding at March 31, 2015, composed of 100% fixed rate bonds, a bank term loan and a bank line of credit. The community is not counterparty to any swap agreements. JKV closed on a $26.7 million construction line of credit in May 2015 to be drawn down as needed for construction of the Meadows and Courtyard projects. No draws have been made to date. Of the entire loan, only $5 million is expected to be permanent debt with the remainder to be repaid by entrance fees.
DISCLOSURE
JKV covenants to provide audited financial statements within 180 days of each fiscal year-end and quarterly interim statements within 45 days of each quarter-end. Disclosure is provided through the Municipal Securities Rulemaking Board's EMMA system.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Not-for-Profit Continuing Care Retirement Communities Rating Criteria
(pub. 24 Jul 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752470
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=987391
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=987391
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.