CHICAGO--()--Fitch Ratings has affirmed the underlying 'BBB' rating on the following revenue bonds issued on behalf of Peninsula United Methodist Homes, Inc.:
--$47.675 million Delaware Economic Development Authority variable rate demand revenue bonds, series 2007A*
*The bonds are supported by an irrevocable direct pay letter of credit issued by PNC Bank, N.A. Fitch was not asked to provide long-term and short-term ratings based on the letter of credit (LOC).
The Rating Outlook is revised to Positive from Stable.
KEY RATING DRIVERS
BENEFITS FROM AFFILIATION WITH ACTS: Peninsula United Methodist Homes (PUMH) has realized operational, managerial and scale benefits from its affiliation with ACTS Retirement-Life Communities, Inc. in 2010 (ACTS, revenue bonds rated 'A-' ) which has resulted in significantly improved financial performance since that time.
STRONG PROFITABILITY AND COVERAGE: PUMH's improved operating profitability, with a net operating margin of 9.9% in the nine month interim period ending Sept. 30, 2012 (the interim period) and entrance fee receipts combined with a modest debt burden has generated strong MADS coverage of 3.3x in the interim period, exceeding Fitch's 'BBB' category median of 1.8x.
IMPROVED BUT STILL LIGHT LIQUIDITY: Although PUMH's liquidity metrics have improved markedly and are now consistent with Fitch's 'BBB' category medians relative to debt, liquidity still remains light relative to expenses as well as for its contract type (Type A) and aggressive debt profile.
AGGRESSIVE DEBT PORTFOLIO: Fitch's main credit concern is PUMH's aggressive capital structure, which is 100% underlying variable rate and 76% are LOC supported variable rate demand bonds that are subject to renewal, remarketing and put risk. Unrestricted cash and investments available to cover a potential draw on the LOC are light with cash to putable debt of 62.6% and the term out provision under the LOC is 367 days.
WHAT COULD TRIGGER A RATING ACTION
SUSTAINED STRONG CASH FLOW: Positive rating movement may occur if PUMH continues its strong operations and cash flow, further strengthening its liquidity metrics and mitigating the risk associated with its aggressive debt portfolio.
Bonds are secured by a pledge of the obligated group's gross revenues.
The affirmation of the 'BBB' rating reflects the benefits realized from PUMH's affiliation with ACTS, improved profitability, strong debt service coverage and an improved liquidity position which is now largely consistent with the rating category. Fitch's primary credit concern is PUMH's aggressive capital structure which is composed of 100% underlying variable rate debt.
Operating performance has improved markedly since ACTS became the sole corporate member of PUMH in May 2010. ACTS assumed operations of all three PUMH campuses through management and marketing agreements. The continued improvement in operating performance reflects initiation of a new marketing strategy by ACTS to increase occupancy and expense reductions primarily due to the consolidation of corporate services and supply savings related to economies of scale. ACTS' marketing strategy has contributed to improved ILU occupancy from 86.4% at April 30, 2010 to 90.0% at Sept. 30, 2012.
Prior to the affiliation with ACTS, operating ratio averaged 106.4% between the fiscal years ending April 30 2008 and 2010. During the first eight months of the affiliation, operating ratio improved to 97.4% in the audited period ending Dec. 31, 2010. Operating ratio continued to improve to 96.8% in fiscal 2011 and 94.5% in the interim period. Similarly, net operating margin and net operating margin - adjusted improved to 7.1% and 29.2% in the interim period and are strong relative to Fitch's 'BBB' category medians of 6.2% and 20.3%.
PUMH's moderate debt burden and improved operating performance has strengthened debt service coverage. PUMH's debt burden is moderate with MADS equal to 9.6% of revenues relative to Fitch's 'BBB' category median of 12.9%. MADS coverage was strong at 3.7x in fiscal 2011 and 3.3x in the interim period and exceed Fitch's 'BBB' category median of 1.8x.
Unrestricted cash and investments increased 24% since Sept. 30, 2011 to $29.8 million at Sept. 30, 2012 reflecting PUMH's improved operations and cash flow. Cushion ratio and cash to debt strengthened to 49.0% and 6.5x at Sept. 30, 2012 and are now consistent with Fitch's 'BBB' category medians of 50.9% and 6.6x. However, days cash on hand remains light for the rating category at 287.2 days.
Fitch's primary credit concern is PUMH's aggressive capital structure which is composed of 100% underlying variable rate debt. Including its fixed payor swaps, PUMH's debt profile is approximately 63% fixed rate and 37% variable rate. PUMH refinanced approximately $15 million of its bonds with a five-year direct placement with PNC Bank, which reduces some risk in its debt profile over the near term. Despite this, PUMH's capital structure remains very aggressive for its rating level and cash to putable debt is less than 1x. The current letter of credit (LOC) expires in April 2015 and any draw on the LOC would need to be repaid within 367 days.
The Positive Outlook reflects the continued strengthening of PUMH's overall credit profile as PUMH realizes the benefits associated with its acquisition by ACTS. Continuation of the current operating performance and further strengthening of liquidity metrics will continue to mitigate the risks associated with PUMH's debt portfolio, and could result in positive rating movement.
PUMH operates three Type A CCRC campuses in Delaware, including Cokesbury Village located in Hockessin, Methodist Country House located in Wilmington and Methodist Manor House located in Seaford. On an aggregate basis, PUMH has a total of 482 ILUs, 147 ALUs and 151 SNF beds. Total operating revenue in fiscal 2011 was $47.2 million. While not required to provide annual disclosure under the series 2007 bond documents, PUMH (through ACTS) provides quarterly and annual disclosure which includes a balance sheet, income statement and statement of cash flows as well as utilization statistics and various ratio calculation through the Municipal Rule Making Board's EMMA system.
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.
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 12, 2012)
--'Not-for-profit Continuing Care Retirement Communities Rating Criteria' (July 12, 2012).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Not-for-Profit Continuing Care Retirement Communities Rating Criteria