NEW YORK--()--Fitch Ratings has upgraded to 'BBB' from 'BBB-' the 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 is revised to Stable from Positive.
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
FINANCIAL PROFILE SUPPORTS UPGRADE: PPHI's liquidity, operating, and capital metrics have remained steady since a 2010 debt issuance, and coupled with its size and revenue diversity, reflect a credit profile that is more consistent with the middle of the 'BBB' category. Additionally, PPHI stopped its development of Makemie at Whiteland (Makemie), a start-up project outside the OG, eliminating a credit concern that had also been restricting positive momentum on the rating.
LIQUIDITY COMMENSURATE WITH RATING LEVEL: At Sept. 30, 2012, PPHI had 360.4 days cash on hand (DCOH), a 8.3 times (x) cushion ratio, and cash-to-debt of 53.4%, all of which compare well to category medians and are improved year over year.
RISE IN IL TURNOVER: Through the nine months ended Sept. 30, 2012 (interim period), PPHI had an 86% increase in independent living (IL) unit turnover (41 in fiscal 2012 and 22 in fiscal 2011). While PPHI has had strong move-ins year to date and anticipates an additional 15 move-ins by year's end, the increase in turnover has suppressed IL occupancy and softened financial performance. However, Fitch anticipates improvement in the fourth quarter as turnover eases and the strong IL sales continue.
SOLID DEBT SERVICE COVERAGE: Debt service coverage in the nine-month interim period was solid at 2.8x, in spite of the softer operating performance. Revenue only coverage remained strong as well at 1.2x. However, PPHI has temporary financing in place (construction loan) for its current capital projects and expects to refinance with permanent fixed rate debt within the next four years. Utilizing a maximum annual debt service (MADS) figure of $6.8 million, which assumes 100% fixed rate debt, lowers coverage to 1.6x for the interim period.
RYDAL PARK PROJECT PROGRESSES: PPHI has opened the new skilled nursing and personal care centers at Rydal Park, its main campus, and is moving forward on an 18-unit IL expansion as part as of phase III of the project. Bond proceeds from 2010 are funding the expansion and PPHI expects to pay down a portion of its long-term debt, currently at $105 million, with proceeds from the new entrance fees and $5 million in philanthropy (currently $4.8 million has been pledged).
MAKEMIE NO LONGER A CONCERN: Early in 2012, PPHI made the decision not to pursue the Makemie project, a start-up continuing care retirement community (CCRC) being developed outside the OG, due to slower than budgeted pre-sales and higher attrition of depositors. The decision to stop the development removes a credit concern related to the potential financial drain of Makemie on the OG during the construction and fill-up of the project.
SOLID MARKET POSITION: PPHI benefits from Rydal Park's location in a mature and relatively affluent northern suburb of Philadelphia, as well as the diversity and size of its revenues helped by PPHI's three other facilities located throughout the greater Philadelphia service area.
The upgrade to 'BBB' from 'BBB-' is supported by PPHI's overall financial profile which is characterized by operating performance, MADS coverage, and liquidity that is more consistent with the middle of the 'BBB' category. Occupancy across the three levels of care (independent living, personal care units, and skilled nursing) is good at approximately 87% as of Sept. 30, 2012.
Over the past three audited years, PPHI's operating ratio has averaged 93.6% a year, better than Fitch's 'BBB' category median of 97.2%. Operating performance has weakened in the interim period due to a combination of higher turnover and an above budget percentage of skilled nursing revenue from life care residents, with the operating ratio rising to 102.3%. Fitch expects PPHI's operating results to improve in the fourth quarter. PPHI reported approximately $900,000 in entrance fee receipts in October 2012, much higher than the monthly average to date, and PPHI expects an additional 15 move-ins by year end.
Even with the weaker operating performance PPHI maintained solid debt service coverage. Actual annual debt service is currently approximately $4 million a year. Coverage (including turnover and new unit entrance fees) was strong at 2.8x for the interim period compared to 3.6x in fiscal 2011, 3.9x in fiscal 2010, and the 'BBB' median of 2x. Based on pro forma MADS of $6.8 million, which was provided by the underwriter and assumes the refinancing of a $40.5 million construction loan to fixed rated bonds, coverage was 1.6x in the interim period compared to 2.1x in fiscal 2011 and 2.2x in fiscal 2010.
Total long-term debt for PPHI is $105 million and reflects the maximum to be drawn under the construction loan ($49 million). Fitch expects the total debt figure to decline as new entrance fees from the 18-unit Hillside expansion, which are currently under construction, are used to pay a portion of it down. Of the $105 million in debt, the $39 million of 2010 bonds are fixed rate (37%), with the rest variable rate (63%) composed of a $49 million construction loan and two loans totaling $16.5 million from PPHI's non-obligated affiliate, the Bala Foundation. The construction loans (which mature in 2016) represent the largest concern but mitigating this concern is that PPHI has more than 1x unrestricted cash and investments to this debt.
Fitch views PPHI's liquidity as a credit strength as it has grown each year since Fitch's initial rating in 2010. Unrestricted cash and investments as of Sept. 30, 2012 totaled $56.2 million, which equated to 360.4 DCOH, an 8.3x pro forma cushion ratio, and cash-to-debt of 53.4%. All these compare well to Fitch's 'BBB' category medians.
IL occupancy remains a concern. This concern is mitigated by the strength shown by the strong demand for IL units in 2012 (40 move-ins as of Oct. 31, 2012) and PPHI's unit mix with the number of skilled nursing and personal care units about equal to its IL units. Skilled nursing and personal care units remain a solid driver of revenue as indicated by the above median revenue only debt service coverage. PPHI has continued to make steady progress on filling Parkside, its major 45 unit expansion at Rydal Park. As of Sept. 30, 2012, 32 Parkside units have been filled, up from 26 as of Sept. 30, 2011.
Further support of the upgrade is PPHI's decision not to develop Makemie, PPHI's startup CCRC in Chester County, and the potential financial support from the OG the project might have needed, including a potential $5 million of committed liquidity support. PPHI's board of directors terminated the project as the velocity of pre-sales was falling behind budget. While this leaves an $8 million Bala Foundation loan still to be paid (which is already factored into the long-term debt), it removes a longer term credit risk to the OG.
The Stable Outlook reflects Fitch's belief that over the next year PPHI's financial profile will remain stable, with debt service metrics closer to historical levels as PPHI moves forward on phase III of its Rydal Park project.
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 474 ILUs, 214 personal care units, and 260 skilled nursing beds as of Sept. 30, 2012. The four communities that comprise the OG are Rydal Park, Rosemont Presbyterian Village, Broomall Presbyterian Village, and Spring Mill Presbyterian Village, and the OG also includes a management services group. The OG had operating revenues of approximately $61.4 million in 2011.
Entities outside the obligated group include a large affordable housing portfolio (comprised mostly of HUD housing) and the Bala Foundation, which has approximately $26 million in cash and investments and provides approximately $1 million in support to the OG a year. 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 12, 2012);
--'Rating Guidelines for Nonprofit Continuing Care Retirement Communities' (July 23, 2012).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Rating Guidelines for Nonprofit Continuing Care Retirement Communities