Fitch Ratings has affirmed the Industrial Development Authority of the County of St. Louis, Missouri's outstanding $8.37 million revenue bonds (issued on behalf of Nazareth Living Center) at 'BB+' as follows:
Industrial Development Authority of the County of St. Louis, Missouri
--$8,569,000 health care facilities refunding revenue bonds, series 1999.
The Rating Outlook is Stable.
Rating rationale and primary drivers behind the rating affirmation and Stable Outlook are based on Nazareth Living Center's (NLC) continued operating stability and strong debt service coverage. NLC posted an operating margin of 8% on revenue of $13.6 million in fiscal-year 2007 (FY'07) , continuing a four-year trend of positive results since posting an operating loss in 2003. Furthermore, debt service coverage remains strong at 3.3 times (x) as of June 30, 2008, continuing a trend of coverage in excess of 3.0x since 2006; again much improved from 1.6x in 2003 and well above rate covenants that were tripped in 2000 and 2001. Although the positive operating performance has improved the overall credit profile of NLC, upward movement in the rating is precluded at this time in large part due to NLC's declining census in both ALU and SNF (76.2% and 93.1%, respectively) and its high average age of plant (11.7 years as of June 30, 2008). Furthermore, NLC's small revenue size ($13.6 million in 2007) and the inherent risks associated with its delivery model (mix of SNF and ALU) limits its ability to quickly adjust to major shifts in reimbursement, competitive pressures, and/or major expense drivers such as increases in labor and supply costs that outpace inflation.
Fitch has previously noted its concern regarding declining utilization, specifically as it relates to the activity of the Sisters of St. Joseph of Carondelet (Sisters). NLC is sponsored by the Sisters and has a contract with the order that was updated in 2005 to ensure more appropriate reimbursement. NLC relies heavily on the payment contract with the Sisters, which comprise roughly 39% of total facility utilization and is the largest payor contract. As the Sisters' occupancy declines commensurate with the declining number of Sisters in the order, Fitch believes NLC will be challenged to replace that activity with private pay patients at rates similar to the Sisters' contract especially given the very competitive nature of NLC's core market area. NLC's marketplace is very competitive with several competitors having relatively new assisted living units. Meramec Bluffs, sponsored by Lutheran Senior Services (rated 'A-' by Fitch) and Friendship Village of South County (rated 'A-') have recently added new units to their campuses. Management reported that Erickson Retirement Communities is entering the market and has opened a sales office six miles from NLC. Finally, Presbyterian Manors of Mid-America, Inc. is planning to build a continuing care retirement community on the campus of the former SSM St. Joseph hospital campus in Kirkwood, approximately eight miles from NLC.
The Stable Outlook is based on Fitch's belief that management can maintain NLC's current profitability and liquidity profile. Fitch believes that management's recent initiatives to increase Medicare revenues will allow NLC to remain profitable and allow for investments in core facilities without materially weakening NLC's current balance sheet. Furthermore, NLC's entered into a management services relationship with Benedictine Health Services (BHS, formerly an affiliate of Essentia Health - Essentia Health is rated 'A-') on Jan. 1, 2008, which is viewed positively by Fitch. The common religious mission and senior living specialization of the two entities is expected to produce synergies through shared strategies and management best practices that should lead to continued operating stability for NLC.
Located in St. Louis, Missouri, Nazareth Living Center operates 134 assisted living units and 140 skilled nursing beds. Under the series 1999 bond documents, NLC is required to disclose only annual financial statements to the trustee for the benefit of bondholders. However, Fitch views favorably NLC's distribution of interim financials and utilization statistics directly to requesting bondholders.
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