The U.S. not-for-profit rated senior-living sector demonstrated continued stability in 2017, highlighted in part by ongoing strength in macro-level factors related to the economy and housing sector, as well as by sector-specific trends related to strong demand and growing liquidity and financial flexibility, particularly relative to operations. Generally favorable equity market performance and fill-up of new and turnover units have boosted cash flow and liquidity levels for many, while a still relatively low interest rate environment has enabled some organizations to access the capital markets without compromising their ability to service their debt. Overall, the benefits of high occupancy, growing demand, and a favorable economic environment support a stable U.S. not-for-profit rated senior-living sector.
S&P Global Ratings rates the debt of 28 not-for-profit senior-living obligors, including two confidential ratings. Both rating actions and outlook movement have been infrequent recently, suggesting continued consistency in the rated entities' credit profiles and a stable sector overview.
Overall, Key Credit Factors Were Stable Or Improved
Nonoperating income
In our view, improved excess margins in the sector have helped sustain and boost overall liquidity. However, the reliance on nonoperating revenue sources such as investment income remains high, suggesting that liquidity and financial flexibility, as measured by days' cash on hand, have improved due primarily to realized and unrealized gains from investment markets, rather than to improved operating performance. In light of the continued importance of excess income in the sector, we believe management must stay focused on investment portfolios and asset allocation while remembering the benefit of contributions and donations.
Over the past year, the investments markets have exhibited signs of volatility, with some sizable one-day or weekly pullback in key indices, followed by a rebound. While we tend to look past the near-term highs and lows of the investment markets and expect the market will provide consistent returns over a longer time horizon, these short-term fluctuations still highlight the risks to those organizations that remain overly dependent on nonoperating revenue, particularly investment income, to mask persistent operating deficits. We recognize the value of nonoperating income in the overall financial profile of a senior-living organization, though operational results excluding investment income still need to be management's main focus. As a result, sound cost management will clearly be a significant generator of solid operating performance.
Balance sheet metrics
While most balance sheet metrics for the U.S. not-for-profit senior-living obligors rated by S&P Global Ratings were stable or improved, average age of plant increased modestly in 2017 compared to 2016. This could indicate that capital spending leveled off a bit as providers shifted toward expanding services to better position themselves for the evolution in consumer preferences and care delivery models (for example, home health services, remote monitoring and other technological advances, or more homelike/personalized care settings for assisted living and skilled nursing). However, given that demand is partly due to curbside appeal, amenities offered, and preferred models of care, we believe the need for capital will continue at or above current levels over the next several years and therefore expect average age of plant to remain fairly stable or improve slightly.
Two caveats to future levels of capital spending are the cost of capital and access to it. As interest rates rise, affordability could become an issue and some continuing care retirement communities (CCRCs) could scale back or delay development and expansion plans. This would disproportionately affect lower-rated credits, whose financial profiles are weaker, on average, compared to the higher-rated spectrum, which typically have stronger cash flow and greater liquidity and financial flexibility.
Occupancy and related cost challenges
Occupancy, which is the main factor in operating revenue growth for CCRCs, remained relatively stable in 2017 and comparable to 2016 occupancy levels on average, although as of this writing, fewer than half of our credits have reported on occupancy levels for 2017 (see chart 1). S&P Global Ratings believes occupancy levels as reflected in 2016 are needed to achieve meaningful revenue growth (in combination with adequate rate increases) to cover operating expenses and provide adequate cash flow to support capital needs.
Chart 1
In the near term, we expect occupancy rates to remain strong and in line with 2016 levels. We anticipate that providers will leverage robust demand to continue striving for stronger revenue growth, reflecting the benefits of capital expansions supported by the retiring baby boomer population and the growing senior citizen population. We view growth in this demographic as a key factor in creating demand for the senior-living sector. We also expect providers to continue to benefit from the improving U.S. economy and housing sectors as they cater to the demands of an aging population and look to capitalize on the future growth trends.
The generally positive trends notwithstanding, challenges still exist, including reimbursement risk, particularly as it pertains to skilled nursing (due in part to reductions in federal and state reimbursements for skilled nursing), as well as continued cost pressures such as employee benefit costs, supplies, and staffing. The latter is particularly acute with respect to nursing, with a re-emergence of nursing shortages and the added expense of contract labor. Furthermore, with unemployment rates at historical lows, many providers are indicating difficulty finding appropriate staff to fill positions, which could lead to increasing staffing costs over the near term. Long-term challenges concerning capital investment are and will always be a key rating factor, as facilities must invest in their plant either to remain viable and attractive or to add capacity. While both investments can yield an improved census, the latter is more positive from a credit perspective as additional units generate incremental revenue growth.
Medium- And Low-Investment-Grade Rating Categories Remain Equal In The Distribution
S&P Global Ratings rates the debt of 28 not-for-profit senior-living obligors, including two confidential ratings (see table 1). The rating distribution has remained stable over the past several years with a roughly even distribution between medium- and low-investment-grade credits (see table 2). Of the 26 providers (excluding two confidential ratings) with long-term ratings or underlying ratings, we rate 46% in the 'A' category and 46% in the 'BBB' category, with one credit each in the 'AA' and speculative-grade categories (see chart 2). Both low- and medium-investment-grade credits continue to confront similar pressures, but we've observed that during economic downturns and weak business cycles, lower-rated obligors tend to deteriorate at a faster pace than their higher-rated counterparts. This is because the former often lack the liquidity to cushion themselves against increased operating stress. They also may not benefit from the strong business positions, revenue and geographic diversity, or favorable locations that higher-rated obligors have. Similarly, the lower-rated obligors appear to recover at a faster pace than their higher-rated counterparts as the economy improves.
Table 1
| Three-Year Comparison of Senior-Living Overall Medians | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2017 | 2016 | 2015 | ||||||
| Sample size* | 28 | 28 | 28 | |||||
| Total operating revenues ($000) | 36,586 | 36,709 | 35,609 | |||||
| Operating margin (%) | (0.6) | 2.0 | 0.4 | |||||
| Excess margin (%) | 5.3 | 3.4 | 5.9 | |||||
| Operating ratio (%) | 91.8 | 92.2 | 91.7 | |||||
| MADS coverage (x) | 1.4 | 1.1 | 1.3 | |||||
| Adjusted MADS coverage (x) | 3.0 | 2.4 | 2.5 | |||||
| Debt burden (%) | 9.7 | 10.3 | 10.7 | |||||
| Deferred revenue | 48,648 | 42,092 | 39,111 | |||||
| Days' cash on hand | 661.0 | 614.0 | 642.5 | |||||
| Long-term debt/capitalization (%) | 53.9 | 55.6 | 56.7 | |||||
| Adjusted long-term liabilities /capitalization (%) | 33.3 | 34.9 | 38.6 | |||||
| Cushion ratio | 14.5 | 13.3 | 12.2 | |||||
| Unrestricted reserves/long-term debt (%) | 138.6 | 131.5 | 108.5 | |||||
| Average age net fixed assets (years) | 13.2 | 12.3 | 12.1 | |||||
| MADS--Maximum annual debt service. *Includes two confidential ratings in 2017. | ||||||||
Table 2
| Senior-Living Medians by Rating Level -- 2017 Versus 2016 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2017 | 2016 | |||||||||
| AA/A* | BBB§ | AA/A* | BBB§ | |||||||
| Sample size† | 14 | 13 | 14 | 13 | ||||||
| Total operating revenues ($000) | 38,362 | 32,931 | 38,100 | 33,982 | ||||||
| Operating margin (%) | (1.6) | (1.3) | 1.5 | 2.7 | ||||||
| Excess margin (%) | 7.3 | 3.6 | 4.0 | 3.2 | ||||||
| Operating ratio (%) | 92.8 | 91.5 | 89.8 | 92.8 | ||||||
| MADS coverage (x) | 1.4 | 1.1 | 1.3 | 1.0 | ||||||
| Adjusted MADS coverage (x) | 3.0 | 2.5 | 2.5 | 2.3 | ||||||
| Debt burden (%) | 9.1 | 10.3 | 9.6 | 11.4 | ||||||
| Deferred revenue | 45,307 | 53,017 | 40,440 | 51,696 | ||||||
| Days' cash on hand | 969.0 | 454.4 | 889.5 | 397.8 | ||||||
| Long-term debt/capitalization (%) | 43.9 | 73.0 | 37.6 | 77.9 | ||||||
| Adjusted long-term liabilities /capitalization (%) | 28.6 | 48.7 | 27.1 | 43.8 | ||||||
| Cushion ratio | 19.0 | 7.7 | 18.9 | 7.9 | ||||||
| Unrestricted reserves/long-term debt (%) | 174.3 | 63.0 | 209.4 | 58.1 | ||||||
| Average age net fixed assets (years) | 13.7 | 11.5 | 12.5 | 11.7 | ||||||
| MADS--Maximum annual debt service. Ratings as of June 8, 2018. *Includes one 'AA' and one 'AA-' credit. §Only one credit in speculative grade, which has been excluded. †Includes two confidential ratings. | ||||||||||
Chart 2
Rating Momentum And Outlook Trends
Rating actions remain infrequent, with four upgrades and one downgrade since our last median report (see table 3). For additional details on the ratings actions, please reference the summary of rated obligors containing a summary of key credit factors from our latest published reports for each rated senior-living credit (see table 4). Movement in our outlook distribution within the most recent review cycle was also minimal, with two outlook revisions to positive from stable. Both revisions reflected consistently positive operating performance and an improving financial profile characterized by a strong balance sheet highlighted by favorable liquidity and financial flexibility. Our outlooks are indicators of the credit quality we expect over a 12– to 24-month horizon. As has been the trend for several years, the majority (all but two) of our rated organizations have a stable outlook, suggesting that there will be consistency in the credit profiles or the ratings on senior-living providers in the next two years (see chart 3).
Table 3
| U.S. Not-For-Profit Senior-Living Sector Rating Actions* | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Obligor | State | Outlook | To | From | ||||||
| Upgrades | ||||||||||
| Concordia Lutheran Ministries | PA | Stable | AA- | A+ | ||||||
| Front Porch and Affiliates | CA | Stable | A- | BBB+ | ||||||
| Loomis Communities | MA | Stable | BBB | BBB- | ||||||
| Shell Point | FL | Stable | BBB+ | BBB- | ||||||
| Downgrades | ||||||||||
| Evangelical Lutheran Good Samaritan Society | SD | Stable | BBB | BBB+ | ||||||
| *Rating actions from Sept. 1, 2015, through June 8, 2018. | ||||||||||
Chart 3
Ratio Analysis
While we view ratio analysis as an important tool in our assessment of the credit quality of not-for-profit senior-living providers, it is only one of several factors that we take into consideration. Our analysis of the enterprise profile is as important. However, median ratios offer a snapshot of the financial position of our rated CCRCs and help in the comparison of credits across rating categories. In addition, we believe tracking median ratios over time allows for a clearer understanding of industrywide trends and provides a tool to better assess the sector's future credit quality. Because of the intertwining of mission and operations among all members of an organization, the financial statements we generally use for the medians and our analyses are the systemwide results, which include results for obligated and nonobligated group members.
Sector Outlook
S&P Global Ratings believes that the senior-living sector demonstrates general credit stability, which is why it has affirmed the vast majority of sector ratings. Although we expect that there will always be pockets of operating stress across the rating spectrum, demand appears to be stable and will likely be sustained, in our view, as baby boomers age and providers introduce new care delivery models and technologies that can provide higher-quality care at a reduced cost. While we consider the growing ranks of senior citizens a long-term positive credit factor for the sector (the U.S. Census Bureau projects about 60 million senior citizens by 2030, compared with 48 million today), we anticipate that the trend will likely result in higher capital spending over the longer term and an increasing debt burden for many providers as the sector expands to service the growing population.
This expanding demographic gives rise to greater competition or consolidation among providers in some markets. While consolidation is not as prevalent in this sector as it is in the acute care hospital space, we have seen some acquisitions and affiliation activity over the past several years. We expect the stronger CCRCs to be opportunistic in their approach to mergers and acquisitions, and we believe strategic affiliations will likely continue at a modest pace so that providers remain competitive over the long term. However, organizations with older facilities, whose product offerings do not meet current market expectations, or that are based in particularly competitive markets could experience credit stress. Those that pursue strategic growth may also see some credit pressure, although historical trends suggest that if a project is well conceived and well implemented, credit pressure tends to be short-lived. Furthermore, CCRCs are increasingly collaborating with accountable care organizations to provide more effective and coordinated care at lower costs.
Many of our rated senior-living providers have experienced management teams and are in markets with strong demand and historically limited direct competition. However, we recognize that key macro-level factors, such as the strength of the U.S. economy and the investment markets, also weigh heavily in maintaining credit stability. While these factors are not directly within management control, the ability to recognize adverse business conditions and effectively take corrective action can help preserve credit quality during periods of operating stress.
Economic Outlook
We view the senior-living sector as moderately to highly influenced by macroeconomic trends. U.S. economic momentum remains strong, likely having a positive influence on the senior-living segment, although GDP growth over the longer term could be depressed by the possibility of negative economic fall-out from broad tariffs on imports combined with immigration reform that aggravates labor pressures. We expect the U.S. Federal Reserve to follow its current trajectory, hiking its benchmark interest rate further in 2018 and 2019. While rising interest rates might not bode well for the housing market in terms of affordability, single-family and nonresidential construction shows strength, as does the more volatile home-improvement sector.
S&P Global Ratings expects faster economic growth in 2018 compared to 2017 and revised its forecast to reflect the inclusion of approximately $1.5 trillion worth of tax cuts over the next 10 years as passed by the U.S. Congress. We now expect real GDP to grow above trend this year and next at 3.0% in 2018 and 2.5% in 2019, with longer-term growth slowing to an estimated 1.8%. Growth is buoyed in part by tax cuts, the strong labor market, bullish consumer confidence, and a favorable manufacturing sentiment. S&P Global Ratings continues to see a 10%-15% risk of recession in the U.S. economy over the next 12 months, which is low, in our view. For more information, please see the report "For The U.S. Economy, Will An Endless Summer Lead To Sunburn?" published June 28, 2018, on RatingsDirect.
Issuer Review
Table 4
| Obligor/Rating/Comments | Type* | Last Rated§ |
|---|---|---|
| Army Retirement Residence Foundation (dba Army Residence Community [ARC]), Texas(BBB/Stable) | ||
| ARC enjoys consistently solid demand for its independent-living units (ILUs) and assisted-living units (ALUs), with high occupancy in both areas, and with very little competition nationally for its service niche. We view its financial profile as weak overall, with losses budgeted through fiscal year 2018, although we recognize that the organization continues to execute an operational turnaround advancing toward profitability in the near term. ARC recently successfully completed a significant expansion effort that began in 2011 and that it deemed necessary to meet the demands of its service niche and to secure its future financial viability. With all new units now complete and occupied, the ARC is focused on stabilizing its financial performance and has a fiscal 2018 budget that advances that goal. After the ARC met budget expectations in fiscal 2016 and outperformed its budget in fiscal 2017, we expect it will continue to make steady progress toward profitability. As financial operating performance and cash flow improve, we expect the ARC's balance of unrestricted reserves will also grow, leading to healthier balance sheet ratios. Management reports that it has no additional debt plans at this time. Future capital spending plans within the two-year outlook period are expected to be more modest and in line with depreciation. | A | 12/20/2017 |
| Brethren Home Community dba Cross Keys Village (CKV), Pennsylvania(A-/Stable) | ||
| CKV has a solid balance sheet with good liquidity, particularly since it is a type C facility. The unrestricted reserve levels provide a cushion and flexibility for CKV to offset break-even to small operating loss performance. Recently, CKV improved occupancy levels to be more in line with the rating, which should enable the organization to minimize operating losses. Adjusted debt service coverage (DSC) was solid at 2.5x to 3.0x over the past few years as net entrance fees from new units remained robust. Over the past year, CKV has had a number of key projects, including the construction of a new memory care unit and the expansion of ILUs, with 32 built over the last year. We expect CKV to continue expanding ILUs, at a rate of about 16 per year, to accommodate demand. We believe it can manage this growth as long as it follows its pattern of 70% presale and continues to generate cash flow to cover the remaining cost of construction. We anticipate a slightly more aggressive debt structure with all of CKV's debt considered contingent. | C | 4/1/2017 |
| Care Initiatives, Iowa(BB+/Stable issuer credit rating) | ||
| Care has a good enterprise profile as the largest single operator of nursing homes in Iowa. It has had consistent operating surpluses since fiscal 2009, modest maximum annual debt service (MADS) coverage, and limited, but improving, liquidity and financial flexibility. It has a highly leveraged balance sheet, and historically limited liquidity. The recent decline in operational performance in interim 2017, exemplified by a 0.5% operating margin, is largely attributed to a slight decline in occupancy, staffing issues, increases in expenses related to its IT platform, and expenses related to improving compliance in its hospice line of business. We anticipate fiscal 2017 to close with positive operating results and improved performance in fiscal 2018, as management is in the process of stabilizing its hospice division and has recently implemented an overhead cost reduction strategy. Care has benefited from a generally favorable funding environment in the state, with a roughly 2% increase in Medicaid and Medicare rates annually. It has generally stable, but occasionally sporadic, utilization rates in various facilities in the organization, including some of its largest facilities (however, systemwide utilization averaged roughly 75% in fiscal 2016 and 69% as of Aug. 31, 2017). Care's unrestricted reserves at Aug. 31, 2017, are only 60% of the pro forma contingent liability debt, which we view as a credit risk. Care has no plans to issue additional debt and has no large-scale capital projects in the near term. | N/A | 11/8/2017 |
| Carleton Willard Village (CWV), Massachusetts(A-/Stable) | ||
| The rating reflects the organization's healthy business position in its local market, as reflected by its historically high occupancy (though softer most recently), strong demand for services, and balance sheet strengths that we believe somewhat offset its history of operating losses. We expect CWV's enterprise profile and balance sheet will remain intact over the next several years. CWV also is pursuing the construction of 12 ILUs on its Arlington Court campus. Management indicates it will not need permanent debt to fund this project. It instead plans a short-term use of investments, which will be repaid through entrance fees collected. | B | 6/18/2018 |
| Carol Woods Retirement Community (CWRC), North Carolina(A/Stable) | ||
| CWRC's key credit factors were stable in 2016, and include its considerable unrestricted reserves, consistent cash flow and MADS coverage, and excellent demand for independent and assisted living. Year-to-date results through the first five months show improved operational performance with CWRC generating a small operating gain. However, Carol Woods is experiencing a downturn in demand for skilled nursing due to higher-than-expected turnover. While management has responded to the lower occupancy by increasing its skilled-nursing facility (SNF) referrals from outside the community, occupancy remains lower than usual. We understand that management has offset the downturn by increasing the number of residents in its early acceptance program. Management's efforts have helped keep results relatively stable, and given CWRC's strong coverage and robust liquidity, it has some flexibility to manage through the pressure on the SNF side. However, if census trends persist and operational performance deteriorates consistently, the rating could be pressured. Carol Woods also had high average age of 11.9 years of net fixed assets in 2016 (though this metric is down slightly). This suggests capital needs might be necessary, particularly in a market that continues to attract new senior-living facilities and product offerings, but no major plans yet. | A | 7/19/2017 |
| Concordia Lutheran Ministries (CLM), Pennsylvania(AA-/Stable) | ||
| CLM has had solid and consistent operating performance, a robust balance sheet, very strong demand, and high occupancy rates across the continuum. The rating also reflects our view of its strong governance and management. However, its debt is all variable rate, which we consider a risk. CLM has adopted a recent strategy to acquire struggling facilities, although CLM's demonstrated ability to turn operations around at some recently acquired facilities somewhat tempers this risk. CLM issued approximately $54 million of direct placement debt in December 2016. We, however, do not view this issuance negatively, given that CLM's current ratios are much higher than the minimum requirements and its unrestricted reserves are well in excess of the direct placement debt outstanding. | C | 5/1/2017 |
| El Castillo Retirement Residences (ECRR), New Mexico(BBB-/Stable) | ||
| ECRR enjoys firm occupancy, a favorable business position with limited competition, strong financial performance in recent years, ample liquidity, and stable governance and management. These strengths are partly offset by its modest operating revenue base, especially given its role as a single-site and smaller life-care-based CCRC, and high adjusted debt leverage. ECRR's recently improved profitability can be traced to recent expansion and renovation projects. While management continues to evaluate the purchase of land in or near Santa Fe to enable expansion of services, we understand no plans are confirmed at this time, and discussions have progressed little since our last review in June 2016. | A | 7/5/2017 |
| Eskaton and Subsidiaries, California(BBB/Stable) | ||
| Eskaton has a healthy business position with multiple locations in its local market, as reflected by its high occupancy across most of its facilities. Furthermore, Eskaton continues to diversify its business position through multiple types of offerings related to senior living, which we view favorably. We believe that Eskaton has an adequate balance sheet highlighted by good days' cash on hand as it has consistently been working to improve its balance sheet position. However, Eskaton's high debt load, contingent liability exposure, and leverage remain limiting rating factors. Financial performance declined in fiscal 2016 but improved through interim fiscal 2017. MADS coverage is weak for the rating. The balance sheet is adequate, with high leverage offsetting solid days' cash on hand and unrestricted reserves. | Rental | 3/18/2018 |
| Evangelical Lutheran Good Samaritan Society, South Dakota(BBB/Stable) | ||
| The rating action reflects the Society's continued weak financial performance, with several years of deficit operations continuing through the six-month interim period ended May 31, 2017, coupled with relatively light liquidity. Because the Society maintains a fairly light liquidity position, there is limited financial cushion available to absorb continued stress to the income statement and we believe that projected improvement in financial performance would be a key factor to maintaining the rating. The Society is the nation's largest not-for-profit owner and operator of nursing homes and residential facilities for the elderly, recently adding home- and community-based services, and has considerable revenue and geographic diversity, with operations in 24 states and more than 224 locations. Skilled nursing still constitutes a significant 65% of total revenues, leading to considerable revenue derived from governmental funding sources. The Society is trying to shift its service mix toward fewer skilled nursing units and growth in rehabilitation units and home- and community-based services. This has led to skilled nursing occupancy coming under some pressure. Management attributes some of the reduction to basic supply and demand trends, as well as to changes in delivery of care and referrals due to health reform, as some hospitals are keeping patients longer and then discharging to home health instead of to an SNF. Residential occupancy has improved due to stronger demand as the economy and housing market rebound, older residential facilities are renovated, and new units that are larger and meet market expectations are constructed. | Mostly C | 8/1/2017 |
| Foulkeways at Gwynedd, Pennsylvania(BBB/Stable) | ||
| Foulkeways has strong unrestricted reserves after the reimbursement of cash used for capital expenditures, continued solid demand and high occupancy, and an experienced management team that has successfully completed expansion projects in the past. These strengths are partially offset by continued operating losses over the past few years, capital plans that put some stress on MADS, and competition from numerous other long-term care providers in the greater Philadelphia market. Foulkeways is expanding the personal care building (ALUs) known as Abington House. A new therapy suite for physical, occupational, and speech therapy has also been built. | A | 8/30/2017 |
| Front Porch Communities and Services, California(A-/Stable) | ||
| The upgrade to 'A-' reflects Front Porch's favorable financial profile, characterized by consistently positive operating surpluses and good cash flow, which contributes to strong pro forma MADS coverage and strengthens key balance sheet metrics. It also reflects Front Porch's strong enterprise profile. Occupancy and demand levels remain strong, and Front Porch benefits from good revenue and product diversity from its broad range of 12 retirement communities. However, given the current repositioning project underway on one of its campuses (Wesley Palms), margins will likely remain compressed until that project is complete. While the project completion is not expected until April 2019, the approach of phasing in various components has worked well, with less turnover than projected, while system consolidated financial performance remains stronger than budgeted. In our opinion, the risks associated with the remaining repositioning project are factored into the higher rating, as Front Porch maintains ample liquidity to support any unexpected declines in occupancy or operating performance. Furthermore, the diversity provided by the remaining communities allows Front Porch to absorb some softer operating results at Wesley Palms, and still maintain break-even or profitable operations. The recent shift in the Care Center payor mix to more Medicaid-managed care is reducing average reimbursement rates. Management is willing to review nonperforming assets and, if needed, exit a particular market, as we have seen in several instances over the past decade. | Mostly rental and A | 7/18/2017 |
| Garden Spot Village (GSV), Pennsylvania(BBB/Stable) | ||
| GSV has very strong occupancy, positive operations, and improved unrestricted reserves. It recently completed its West Campus expansion and has no additional capital projects, so we expect improved liquidity and solid operating results. A credit concern is its location in a highly competitive market. GSV has a young average age of plant. Because of the strong demand for memory care services in the area, GSV is working to finalize plans for two additional memory care houses. The houses would add 40 units to the campus. Preliminary estimates put the cost at about $7 million to $8 million, which GSV is expected to debt-finance. Management expects that, at best, fill-up of these houses would not occur until the end of 2018. As GSV has a history of strong memory care occupancy, we do not anticipate any fill-up risk with this project. GSV also signed a preliminary letter of intent with a small senior-living organization in the area. Management is exploring whether a business relationship would be viable with the facility and expects that a decision will be made in the first part of 2018. | C | 9/2/2017 |
| Kendal at Ithaca Inc., New York(BBB/Stable) | ||
| Kendal's solid days' cash on hand is a credit strength along with other balance sheet metrics. The organization's enterprise profile, including its location and ties to the Cornell community and to the Kendal organization, also remains a credit strength. The rating also reflects Kendal's stable management team and our expectation that its ongoing marketing campaign to improve occupancy will meet with continued success, supporting and strengthening its financial profile such that it improves over last year and through the two-year outlook period. This expectation is based in part on the successful completion of Kendal's campus building project and the improvement in occupancy since 2015. Although fiscal 2016 operating results were negative, financial performance, while still negative, improved through the first six months of fiscal 2017. We anticipate that operations will continue to improve as more residents move into the new space and that Kendal at Ithaca will achieve close to its break-even budget expectations by year-end. As in fiscal 2015, when the leadership team began a marketing campaign to help alleviate occupancy challenges, we expect that the team will be able to leverage its augmented marketing campaign efforts to fill up legacy ILUs and the few remaining beds available in the skilled nursing units, as the new ILUs associated with the campus building project have been completely filled. | A | 8/18/2017 |
| Kendal at Oberlin, Ohio(A-/Positive) | ||
| The outlook revision reflects our view of Kendal at Oberlin's consistent performance and improving financial profile, including a strong balance sheet, particularly favorable liquidity, and financial flexibility. Kendal has also been able to maintain positive operations, which we view as a credit strength as it reduces the reliance on nonoperating income. The management team recently completed significant renovations and expansions from its master facility plan, and while Kendal will continue to update its facilities on an ongoing basis, we believe it has demonstrated an ability to manage project risk. Furthermore, leadership is now moving forward with implementing a five-year strategic plan focused on service offerings to position Kendal at Oberlin for continued success and meet the future health care needs of its residents. The leadership team is also in the process of rebalancing and optimizing the occupancy of the personal care units and the skilled nursing units. Kendal at Oberlin continues to participate in an accountable care organization, allowing it to stay aligned with the local providers of health care. We view the aforementioned efforts positively, and anticipate that management's forward looking approach will allow it to remain competitive in its market and financially stable. | A | 4/1/2018 |
| Loomis Communities, Massachusetts(BBB/Stable) | ||
| We revised the outlook to positive during December 2016 review based on Loomis' continued improvement in financial performance due to several underlying factors, including favorable ILU occupancy levels of roughly 90% on average across all communities; robust cost containment efforts, with limited expense growth over the past several years; and generally healthy economic trends in the service area. The subsequent upgrade reflects continued progress to break-even performance, along with consistently strong occupancy throughout all facilities and an improved balance sheet. The balance sheet features very strong days' cash on hand and greater than 2x cash-to-debt following the cash infusion from sale of Loomis House. While we understand management might use proceeds from the sale to fund capital plans even when excluding cash on the balance sheet from the sale, liquidity metrics would remain strong due to their incremental improvement over the past two to three years. We expect the organization to continue progressing toward break-even operations through cost containment efforts, and sustain strong occupancy levels throughout the two-year outlook period. | Life-care (5%); B (50%); C (45%) | 4/18/2018 |
| Masonic Villages of the Grand Lodge of Pennsylvania(A/Stable) | ||
| The affirmation reflects the organization's strong liquidity and moderate debt leverage, offset by heavy historical operating losses. Masonic Villages' strong business position and high demand for senior-living services further support the rating, and we expect the organization will sustain strong occupancy levels as it expands its facilities. Furthermore, we expect that Masonic Villages' balance sheet will remain intact over the next several years, because management indicates it has neither debt plans nor an intention to deplete its unrestricted reserve balance throughout the two-year outlook period. | Rental | 4/18/2018 |
| Mercy Ridge Inc., Maryland(A-/Positive) | ||
| The outlook revision reflects our view of Mercy's consistent performance and improving financial profile, including a strong balance sheet, particularly favorable liquidity, and financial flexibility, which provides ample cushion and is consistent with a higher rating level. In addition, Mercy's strong enterprise profile, characterized by consistently solid occupancy for both the independent living and assisted living service lines and favorable demand in the form of a consistent and growing wait list, further supports the positive outlook. While Mercy's financial performance remains negative (as calculated by S&P Global Ratings), it is due in part to a change in accounting rules pertaining to refundable entrance fees dating back to 2012. Because of the structure of Mercy's contracts, it could no longer treat a portion of the refundable entrance fees as deferred revenue and, therefore, had to make an accounting adjustment. In our opinion, the underlying financial performance at Mercy is generally consistent and the operating trend will likely remain at or near current levels going forward. Future rating action will hinge on Mercy's ability to sustain coverage of MADS at roughly 2.0x or greater while maintaining its exceedingly high unrestricted reserves. | C | 5/18/2018 |
| Moorings Park Institute (MPI), Florida(A+/Stable) | ||
| MPI's demand profile is very strong, characterized by above-average occupancy for all levels of service at Moorings Park, a favorable location with a strong economy, and a management and governance team that we view as capable and experienced. The rating also reflects MPI's very strong financial profile, characterized by exceedingly strong liquidity, with pro forma days' cash on hand exceeding 1,000 and a more modest debt profile, with pro forma adjusted debt-to-capital ratio that increases to 31% from 22% as of March 31, 2018, but remains sufficient for the rating, in our view. Although operating results are negative and are projected to remain negative though the outlook period, cash flow from operations is expected to steadily grow, although MPI will be increasingly reliant on nonoperating investment income. | A | 6/1/2018 |
| Noland Health Services (NHS), Alabama(A/Stable) | ||
| The rating reflects our view of NHS' strong occupancy trends and very healthy balance sheet. The company also has light leverage, robust cash on hand, and very strong unrestricted cash to long-term debt. The rating also incorporates our view of NHS' strong management team and very limited competition in the long-term acute care hospital (LTAC) business as a result of Alabama's certificate-of-need laws, which limit the number of licensed and available LTAC beds by region. Despite a decline in operating margins in 2017 and through interim 2018, we believe that NHS has the balance sheet strength to sustain the depressed margins while the organization works to reposition itself in the market as LTAC reimbursement declines. | Rental | 2/18/2018 |
| Otterbein Homes, Ohio(A/Stable) | ||
| The rating reflects our view of Otterbein's sustained positive operating performance, which we consider a credit strength; acceptable MADS coverage; and sufficient balance sheet metrics supported by overall occupancy rates that remain robust. Leadership is moving forward with implementing a five-year strategic plan to meet the health care needs of its residents and continues to invest in growth opportunities, most recently acquiring Franklin United Methodist Home in central Indiana, expanding Otterbein's footprint beyond Ohio and increasing capacity with additional independent and assisted living units. However, elevated leverage and an only moderate level of unrestricted reserves constrain Otterbein's balance sheet. We expect Otterbein's operating performance to remain healthy in the near term as the additional units become completely filled. With a modest $15 million of new debt being contemplated by management and no expectations to materially draw down on reserves, we expect Otterbein's balance sheet metrics to remain consistent in the near term. | C | 5/26/2017 |
| Pickersgill Inc., Maryland(A/Stable) | ||
| Pickersgill has considerable unrestricted reserves, strong demand, and improved financial performance and cash flow over the past two years, which have led to growth in key metrics. The service area has solid demographics, supported by the strong economy of Baltimore County. Partially offsetting factors are a high debt burden based on a small revenue base; Pickersgill's dependence on nonoperating income to maintain MADS coverage, which resulted in weak year-to-date coverage; and the community's rental model in which residents do not pay entry fees and can terminate with no financial penalty in accordance with their lease terms. Assisted living capacity increased in 2010 to the current 138 units from 109, and Pickersgill renovated all ALUs as part of the expansion project. Occupancy of the new units had been relatively slow due partially to economic conditions that have led more seniors to seek at-home care or delay moving into assisted living facilities. The older average age of new assisted living residents means acuity is higher, average length of stay is shorter, and turnover is greater. This means Pickersgill must backfill the facility to maintain occupancy. However, occupancy has improved recently due to stronger marketing efforts, and management expects continued increases. | C | 12/12/2017 |
| Presbyterian Homes Obligated Group (PHOG), Illinois(BBB+/Stable) | ||
| PHOG has a solid balance sheet with good liquidity, positive operating margins that generally are not achieved in the industry, and generally solid occupancy rates. The system has exited businesses that have not been seen as core business lines. It has completed construction of 14 cottages on the campus, seven of which are occupied. Outside of the PHOG, the system is moving forward with the expansion of The Moorings of Arlington Heights LLC (The Moorings), a nonobligated member of the system. The Moorings is expected to open the 73-bed ALU in December 2017. The new ALU will grow to 73 units from the current 42 units that are on campus. As the residents transition to the new units, PHOG will then demolish the old ALU and construct a new building that will house a 20-bed memory care unit. If the expansion at The Moorings begins to dilute the system's key financial metrics, this could in turn pressure the outlook or the rating. | A | 7/6/2017 |
| Shell Point, Florida(BBB+/Stable) | ||
| The upgrade reflects our view of several years of strong operating performance that continues to outperform budgeted expectations, successful project management with fast fill-up of all projects and turnover in all levels of care, and a solid balance sheet. The upgrade also incorporates our expectation for diluted liquidity as Shell Point completes its renovation and expansion of its assisted living facility. However, given the rate of earnings and balance sheet growth, we believe that there is room at the 'BBB+' rating for some diminution of reserves and that the project will be accretive to the overall financial profile. | A | 3/1/2018 |
| St. Leonard Healthcare Center, Ohio(BBB-/Stable) | ||
| St. Leonard had continued stable operations through fiscal 2017. Operations were slightly negative in fiscal 2017, although this was mainly due to an adjustment of bad-debt reserves and the margins remain strong compared with medians. Despite negative operating margins, DSC and liquidity metrics remain stable. Occupancy levels remain strong for the rating, with all service lines around or above 90% occupancy. The health care center has also implemented cost-saving initiatives and improved the staffing ratio on campus. Some of St. Leonard's savings are the result of group purchasing, as the facility is part of Catholic Health Initiatives. Partly offsetting those strengths are slightly high leverage based on adjusted debt to capital and low unrestricted reserves to debt. Management anticipates no sizable capital expenditures during the next four years, allowing St. Leonard to gradually reduce its leverage. | B/C | 9/27/2017 |
| Westhills Village Retirement Community, South Dakota(A+/Stable) | ||
| Westhills enjoys very strong enterprise profile, with continued robust occupancy trends and favorable demand, and has a healthy financial profile, highlighted by consistently profitable operating results and favorable balance sheet characteristics, including exceedingly high reserves. The series 2017 bond proceeds were used to fund a new assisted living apartment building, which will contain 44 units. Construction began earlier in March 2017 and is expected to be completed in summer of 2018. Management reports that construction is ahead of schedule and on budget. While the series 2017 bonds have stressed some key metrics, including DSC and leverage, we believe the overall financial profile is still consistent with an 'A+' rating. Credit risks include a relatively small revenue base, an average age of plant of 13.5 years, a high debt burden due to the series 2017 bond issue, and weaker MADS coverage. New market entrants have not negatively affected occupancy or demand, but we continue to monitor buildout at a facility roughly 10 miles away that could cause some pressure over time. | A | 11/7/2017 |
| Westminster-Canterbury Corp. dba Westminster Canterbury Richmond (WCR), Virginia (BBB+/Stable) | ||
| WCR has strong occupancy rates, a good balance sheet, and continued positive operating performance, which contributes to good MADS coverage for the rating. In addition, we note that management's focus on expense management has further strengthened performance in the past year or two. WCR is completing capital spending plans over the next year and a half to reposition an existing tower, and we believe that the remaining spending for that project is manageable--especially given the recent stronger cash flow. It enjoys a good position as an upscale provider of retirement services to the Richmond market, which has solid demographics, and has a modern and well-maintained facility that attracts a wealthy clientele. WCR's above-average 11% debt burden and slightly less conservative debt structure with a larger portion of bank placement debt (with one bank) relative to total debt somewhat offset these credit strengths, although we believe it has healthy unrestricted reserves and good liquidity of investments. | A | 6/1/2017 |
| N/A--Not applicable. *For definitions and explanations of the contract types, see our Senior-Living Criteria. §The "Last Rated" column indicates the most recently published rating release and report. Any subsequent credit events and related analysis will be captured in future rationales and media releases. | ||
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This report does not constitute a rating action.
| Primary Credit Analysts: | Stephen Infranco, New York (1) 212-438-2025; stephen.infranco@spglobal.com |
| Wendy A Towber, Centennial (1) 303-721-4230; wendy.towber@spglobal.com | |
| Secondary Contact: | Kenneth T Gacka, San Francisco (1)415-371-5036; kenneth.gacka@spglobal.com |
| Research Contributor: | Prashant Singh, CRISIL Global Analytical Center, an S&P Global Ratings affiliate, Mumbai |
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