In the course of regular surveillance, Fitch Ratings has affirmed the 'BBB-' rating on the following bonds issued on behalf of the Philadelphia Presbytery Homes, Inc. (PPHI) obligated group (OG):
--$40,320,000 Montgomery County Industrial Development Authority Revenue Bonds (Philadelphia Presbytery Homes, Inc. Project) Series 2010A.
The Rating Outlook has been revised to Positive from Stable.
SECURITY
The bonds are secured by a pledge of gross revenues, first lien mortgage and security interest in OG facilities and property, and a debt service reserve fund.
KEY RATING DRIVERS
POSITIVE OUTLOOK: The Positive Outlook reflects the progress of and diminished risk on two projects- the campus repositioning at Rydal Park (Rydal) and the non-OG start-up continuing care retirement community (CCRC) Makemie - and Fitch's belief that they will continue to progress positively over the next year, coupled with the strength of PPHI's overall financial profile.
SOLID OPERATING PERFORMANCE: PPHI operating performance remains solid for the rating level. Nine-month interim results (Dec. 31 year end) show a 96.2% operating ratio, better than Fitch's 2011 'BBB' category median of 97.4%
GOOD LIQUIDITY: PPHI had 322.9 days cash on hand (DCOH), a 7 times (x) pro forma cushion ratio, and cash-to-debt of 51.3% at Sept 30, 2011, all of which compare well to category medians.
IL OCCUPANCY CHALLENGES: Independent living unit (ILU) occupancy continues to be low at 82% (including the fill-up on 45 units opened at Rydal in late 2008), but overall occupancy is stronger at approximately 86% through September 2011.
STRONG DEBT SERVICE COVERAGE: Maximum annual debt service (MADS) coverage (including net entrance fee receipts) was 2.1x in the nine-month interim period. Fitch's MADS figure of $6.8 million assumes the refinancing of a LIBOR-based construction loan to fixed rate, which is expected to occur in 2015. Actual debt service was higher at 3.7x on debt service of approximately $4 million.
STABLE OPERATING PROFILE: Fitch believes PPHI benefits from Rydal Park's location in a mature and relatively affluent northern suburb of Philadelphia, as well as the diversity of revenues provided by PPHI's three other facilities located throughout the greater Philadelphia service area.
WHAT COULD TRIGGER AN UPGRADE
Over the next year, Fitch expects the execution risk surrounding PPHI's Rydal repositioning project to diminish materially and greater clarity on the permanent financing for Makemie. Should these occur and PPHI sustain current levels of operating performance (which are currently closer to the middle of the 'BBB' category) an upgrade may be warranted.
CREDIT PROFILE
The 'BBB-' rating is supported by PPHI's overall financial profile which is characterized by operating performance, MADS coverage, and liquidity that is solid for the rating level. Occupancy across the three levels of care (ILs personal care units, and skilled nursing) is adequate in the high 80% range, with lower IL occupancy (82% including the fill-up on 45 units at Rydal as of Sept. 30, 2011) a credit concern. Other credit concerns include the ongoing risks associated with PPHI's repositioning project and funding of Makemie, a non-OG start-up CCRC.
Over the past three audited years, PPHI's operating ratio has averaged 92.6% a year, better than Fitch's 2011 'BBB' category median of 97.4%, and this operating strength has continued through the nine-month interim period with an operating ratio of 96.2%. PPHI's operating margin adjusted (includes net entrance fee receipts) was a strong 19.4% on 2010 and 18.7% in the interim period, slightly better than the category median o 17.6%.
This operating performance has supported solid pro forma MADS coverage (inclusive of net entrance fees on turnover and new units) in the interim period of 2.1x, compared to a 'BBB' median of 2x. Revenue-only MADS coverage was weaker at 0.6x below the category median of 0.8x. However, actual debt service coverage was stronger. MADS of $6.8 million was provided by the underwriter and assumes the refinancing of a $40.5 million construction loan to fixed-rate bonds. Actual annual debt service was stronger due to a lower current MADS of approximately $4 million.
Liquidity is good. PPHI had 322.9 DCOH, a 7x pro forma cushion ratio, and cash-to-debt of 51.3% through the nine-month interim period. All these compare well to Fitch's 'BBB' category medians.
IL occupancy remains a concern, but has yet to materially affect PPHI's operating performance. The vast majority of PPHI's ILUs are at Rydal. IL occupancy there has been challenged by the fill-up of 45 new units opened in 2008, as well as to the ongoing construction on campus, including renovations of the front entrance and the remarketing of ILUs that directly overlook the construction. With the completion of the new health center (patients are expected to move in this week) and the finishing of the front entrance, some of the disruption is expected to ease, which should help ILU marketing at Rydal. Management reports 31 of the 45 new units at Rydal occupied at the end of October, which is very positive, as occupancy in the new units had been stalled in the mid-20s for a while.
Further mitigating the IL occupancy concerns are PPHI's strong skilled nursing occupancy and consistent entrance fee receipts. PPHI has a sizable number of skilled nursing beds (266), and Broomall, one of its sites, is solely skilled nursing and has positive operating margins. Skilled nursing revenue has offset the negative impact of the lower IL occupancy. Additionally, entrance fee revenue has remained strong as PPHI has filled up a number of turned-over IL units. In 2010, PPHI had 53 move-ins for approximately $8 million in entrance fee revenues, and through the nine-month interim period PPHI has had 60 move-ins.
Other credit concerns include the continued risks related to two projects - the campus repositioning project at Rydal and Makemie. With the health center complete, PPHI is moving to phase two of the project, the renovation of the old health center. PPHI has revised the last two phases of the project, decreasing the number of ILUs that were to be built by 13 and increasing the number of skilled nursing rooms.
Fitch views the revision of the capital plan positively. The revised project will use $4.5 million in loan proceeds and the revisions reflect both the current challenges in the IL market and the strengths of PPHI's skilled nursing services. PPHI has a solid referral relationship with Abington Memorial Hospital (revenue bonds rate 'A' by Fitch) for short-term post-acute care and the revised capital plan positions PPHI to grow that business. In addition, the project will add dementia units to the campus, a critical component of CCRC service lines, and will provide the flexibility to convert units to dementia units should the demand grow.
The second project with risks is PPHI's financial commitment to Makemie. Makemie is a startup CCRC in Chester County, PA (GO bonds rated 'AAA'). PPHI has an $8.5 million loan from the Bala Foundation that has funded pre-development costs at Makemie. Fitch expects the Bala Foundation loan to be refunded when Makemie receives its permanent financing, which would be non-recourse to the OG. When permanent financing occurs, PPHI then plans to provide liquidity support of up to $5 million for the project. These liquidity funds would only be drawn upon if the project ran into significant fill-up issues upon completion, exhausting other available funds.
PPHI management has indicated that this would be the extent of its financial commitment to Makemie. PPHI will develop and manage the CCRC under an agreement with Makemie and assist with marketing the units. However, through the pre-development phase and until stable occupancy is reached, Fitch considers Makemie a risk that could potentially affect the OG. PPHI continues to pre-sell the units (129 out of 202 units were pre-sold as of Oct. 31, 2011), and, a final purchase agreement on the land to be developed, which PPHI is buying from a bankrupt developer, is expected to be approved by the courts this month. Fitch expects to have greater clarity on Makemie and its financing over the next year.
The Positive Outlook reflects Fitch's belief that PPHI's operating performance will remain stable over the next year, and that the easing of the risks associated with the two projects will continue, which could lead to positive rating pressure on the rating. Secondly, an increase or decline in IL occupancy could also factor into pressure on the rating over the next year.
The parent of PPHI is Presby's Inspired Life, a senior living organization headquartered in Lafayette Hills, PA, with facilities located in and around the greater Philadelphia region. The obligated group, on which Fitch's analysis is based, has 481 ILUs, 228 personal care units, and 266 skilled nursing beds as of Sept. 30, 2011. The four communities that comprise the OG are Rydal, Rosemount, Broomall Presbyterian Village, and Spring Mill Presbyterian Village, and the OG also includes a management services group. The OG had operating revenues of approximately $61.5 million in 2010.
Entities outside the OG include a large affordable housing portfolio (comprised mostly of HUD housing), a low-income nursing home, a start-up CCRC (Makemie), and the Bala Foundation, which has approximately $23.8 million in cash and investments and provides approximately $1 million in support to the OG a year. Beyond Makemie, the start-up CCRC discussed above, PPHI's historical support of the other non-obligated group entities has been minimal and is not a credit concern.
PPHI covenants to submit annual audited information within 120 days of the fiscal year end to the EMMA system, and the first three quarters of unaudited data within 45 days of the quarter end, and the fourth quarter of unaudited data within 60 days of the quarter end to EMMA.
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' (June 26, 2011);
--'Rating Guidelines for Nonprofit Continuing Care Retirement Communities' (July 26,
2011).
Applicable Criteria and Related Research:
Rating Guidelines for Nonprofit Continuing Care Retirement Communities
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=40171
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130
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