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).
The Rating Outlook is Stable.
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
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
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
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.
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.
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
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.
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
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.
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
Rating Guidelines for Nonprofit Continuing Care Retirement Communities
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Rating: 4 out of 5