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Fitch Affirms Milwaukee Catholic Home (WI) Revs at ‘A-‘; Outlook Stable

NEW YORK–(BUSINESS WIRE)–Fitch Ratings has affirmed its ‘A-‘ rating on the $11,995,000 in fixed

rate bonds, series 2006, issued by the Wisconsin Health and Educational

Facilities Authority on behalf of Milwaukee Catholic Home (MCH).

http://qik.com/video/53336177

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a pledge of gross revenues, a mortgage interest

in property, and a debt service reserve fund.

KEY RATING DRIVERS

SOLID PROFITABILITY: Operating ratio and net operating margin have been

consistently good, albeit the bottom line has seen volatility due to

fluctuations in investment returns. Profitability metrics should further

strengthen in 2013 given recovery in occupancy rates across the

continuum of care. At May 30, 2013, occupancy rates were above budgeted

levels.

STRONG REVENUE-ONLY COVERAGE: Supported by solid profitability,

revenue-only coverage of maximum annual debt service (MADS) was robust

at 1.6x in the fiscal year ended Dec. 31, 2012 and 2.5x in the

five-month interim period ended May 30, 2013 compared to the median of

1.1x. The strength reflects MCH’s effective management of its skilled

nursing facility (SNF), supported by a close relationship with a nearby

hospital.

SOUND LIQUIDITY: MCH benefits from its stable liquidity position, with

unrestricted cash and investments of $21.5 million as of May 30, 2013

producing liquidity metrics that are at or above Fitch’s ‘A’ category

medians.

INCREASED DEBT BURDEN: In 2012, MCH issued $5.3 million of series 2012

direct purchase bonds to fund construction projects, and the full amount

will be drawn by November 2013. The significant increase in debt burden

is supported by a solid balance sheet and revenue-only MADS coverage.

EXPECTED INCREASE IN COMPETITION: In 2012, Life Care Services (LCS)

began managing two communities previously sponsored by Milwaukee

Protestant Home. As LCS ramps up its marketing and management efforts at

the two communities, competitive pressure will likely grow. MCH is

actively planning to update its facilities and improve service offerings.

RATING SENSITIVITIES

STABLE FINANCIAL PERFORMANCE EXPECTED: Given MCH’s limited reliance on

entrance fees and increased debt burden, strong operating ratios and

revenue-only MADS coverage in excess of the median are essential.

NO ADDITIONAL DEBT: Fitch believes there is little capacity for

additional debt at the current rating level. MCH does not have any new

debt plans for the next three years.

CREDIT PROFILE

MCH is a type-C continuing care retirement community (CCRC) facility

located just north of downtown Milwaukee, WI. The community includes 119

ILUs, 24 assisted living units (ALUs), and a 119 bed SNF. In fiscal

2012, MCH generated $16.8 million in total operating revenue.

Solid Profitability and Improving Occupancy

MCH’s historical operating profitability is consistent with an ‘A’

category rating. MCH’s operating ratios over the last three fiscal years

averaged 91.8%, which are stronger than the ‘A’ category median of 95.2%

and indicates a limited dependence on entrance fee turnovers. Net

operating margin was 7% in 2012 and 9.3% in 2011, compared to the median

of 7.6%. Good profitability was supported by effective expense controls

during periods of low occupancy, as well as efficient management of SNF

operations, which accounts for over 60% of MCH’s revenues. MCH’s

excellent care scores and location adjacent to Columbia-St. Mary’s

Hospital (part of Ascension Health, revenue bonds rated ‘AA+’ by Fitch)

has generated steady referral volume of Medicare residents for its SNF.

Improvement in profitability in 2013 is driven by a recovery in

occupancy rates, which management attributes to the rebounding real

estate market and rebranding efforts by MCH. Occupancy at May 30, 2013

was 88.1% in ILUs, 82.5% in ALUs, and 90.6% in SNF compared to 80.8%,

63.1%, and 87.7% in fiscal 2012. Management indicated as of early July

2013, 110 ILUs were occupied (92.4% occupancy rate) with more move-ins

pending.

Increased But Manageable Debt Burden

In August 2012, MCH issued $5.3 million series 2012 direct purchase

bonds placed with Town Bank to fund renovation projects in its ILUs,

SNF, and common spaces. MCH is drawing on the funds as construction

progresses, and had $3 million drawn as of May 30, 2013. Management

expects to draw the full amount by November 2013. The bonds have an

initial rate period of 10 years, with level debt service amortizing over

a 20 year period. Interest rate is at a variable rate plus a spread, and

MCH’s has entered into a swap with SMBC Capital Markets, Inc. to cap the

maximum interest rate at 2.85% at current liquidity levels.

As of May 30, 2013, MCH had $15 million of total debt outstanding,

consisting of $12 million of series 2006 fixed rate bonds and $3 million

of series 2012 direct purchase bonds. Assuming a full draw on the 2012

bonds, MADS increases to $1.6 million from $1.3 million, but debt

metrics remains overall consistent with the ‘A’ category medians. MADS

coverage – revenue only is very strong at 1.6x at fiscal 2012 and 2.5x

through the five-month interim period compared to the median of 1.1x.

While MADS coverage – turnover entrance fees through the interim period

is also good at 3.3x compared to the ‘A’ median of 2.7x, it has

historically been lower at an average of 1.8x over the last three fiscal

years, reflecting MCH’s 95% refundable entrance fee structure. Debt

burden is moderate with MADS as a percentage of revenues of 9% in fiscal

2012 and 8.5% in the interim period against the median of 8.7%. Given

recent positive occupancy trends and no plans for additional debt,

capital metrics should improve in the next few years.

Sound Liquidity

At May 30, 2013, unrestricted cash and investments totaled $21.5

million, producing 511 days cash on hand and 142% cash to debt compared

to Fitch’s ‘A’ medians of 495 days and 120%. Cash to debt declines to

123% assuming a full draw on the series 2012 bonds, which remains in

line with the rating category median. Cushion ratio of 13.4x based on a

MADS of $1.6 million also is consistent with the respective median of

14.4x. While liquidity levels have been relatively flat over the last

three fiscal years, it should improve going forward given good cash flow

generation and limited capital needs beyond what is funded by the 2012

bonds.

Expected Increase in Competitive Pressures

In late 2012, LCS began providing management services to two communities

formerly sponsored by Milwaukee Protestant Home, Newcastle Place and

Eastcastle Place. While MCH’s affordable pricing and good service

offerings relative to its competition have provided a competitive

advantage, the introduction of LCS expertise in the market poses some

concerns. Management noted there has not been any negative impact to MCH

yet, but will closely monitor any change in market dynamics as LCS kicks

off its marketing and sales efforts. In order to manage the impending

increase in competition, MCH is focusing on updating its facilities,

improving services, and managing relationships with acute care providers.

Disclosure

Under its Continuing Disclosure Agreement, MCH covenants to provide

audited financial statements and utilization statistics direct to the

EMMA and requesting bondholders within 150 days of each fiscal year-end

and quarterly interim financial statements and utilizations within 45

days of each fiscal quarter-end.

Additional information is available at ‘www.fitchratings.com‘.

Applicable Criteria and Related Research:

–‘Revenue-Supported Rating Criteria’ (dated June 3, 2013);

–‘Rating Guidelines for Nonprofit Continuing Care Retirement

Communities’ (dated July 12, 2012).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499

Rating Guidelines for Nonprofit Continuing Care Retirement Communities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=40171

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=796228

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.

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