Fitch Affirms Three Pillars, WI's Rev Bonds at 'A-'; Outlook to Stable
Fitch Ratings has affirmed the following revenue bonds issued by Wisconsin Health and Educational Facilities Authority on behalf of Three Pillars Senior Living Communities:
--Approximately $4.5 million, series 2004A at 'A-';
--Approximately $4.7 million, series 2004B at 'A-';
--Approximately $9.6 million, series 2003 at 'A-'.
The Rating Outlook is revised to Stable from Negative.
Debt payments are secured by a pledge of the gross revenues of the obligated group and a mortgage pledge. In addition, a fully funded debt service fund and a liquidity covenant provide additional security for the series 2004A bond issue.
KEY RATING DRIVERS
IMPROVED OPERATIONS: Because of a focus on strengthening operations and benefits realized from its skilled nursing facilities (SNF) repositioning, Three Pillars has generated improvement in operating performance over the last year. Fitch expects operating profitability to continue to improve going forward.
SOLID LIQUIDITY: Three Pillar's 805.9 days cash on hand (DCOH), 129.6% cash to debt and 14.9x cushion ratio at Aug. 31, 2012 (two month interim) exceed 'A' category medians of 494.8 DCOH, 120.2% and 14.4x, respectively.
BENEFITS OF SKILLED NURSING PROJECT: Three Pillars completed its SNF project in December 2010, adding private beds and an expanded wellness center. The SNF census has stabilized and there has been an increase in private pay and Medicare, which Fitch views positively.
STABILIZED OCCUPANCY: Occupancy has fluctuated over the last few years, but has stabilized and is now at or near 90% across all levels of care.
HIGH DEBT BURDEN: Debt levels are high with maximum annual debt service (MADS) as a percent of fiscal 2012 revenue at 12.2% compared to the 'A' category median of 8.7%. MADS coverage of 2x in fiscal 2012 is improved from 1.3x in fiscal 2011 and in line with budgeted fiscal 2012 MADS coverage of 1.65x but still somewhat below the 'A' category median of 2x. Three Pillars is at capacity for debt at this rating level.
The revision to Stable Outlook from Negative reflects the benefits of investments Three Pillars made to reposition its SNF that have started to pay off and are leading to improved operating profitability in fiscal 2012 and through Aug. 31, 2012 (two month interim). As a result of improve cash flow generation, debt service coverage also improved during the same time period. The 'A-' rating affirmation is supported by Three Pillars' strong liquidity position, which provides some cushion to operating performance fluctuations, its Masonic affiliation and financial support, and improved occupancy.
Fiscal 2012 operating results somewhat rebounded after a weak fiscal 2011. Three Pillars repositioned its skilled nursing facility in 2010 by converting some of the semiprivate rooms to private and expanding its wellness studio to include an aerobics studio and demonstration kitchen for residents, employees and the community. The census in the new rehab unit, part of this repositioning, has leveled out and there has been an increase in private pay and Medicare, which has positively affected profitability. Fitch views this repositioning favorably as it enhanced the community's outreach efforts and improved the facilities. Operating ratio in fiscal 2012 was a solid 89.9% compared to the 'A' category median of 95.2%. Net operating margin in fiscal 2012 was 11.2%, up significantly from 4.4% in fiscal 2011. Through Aug. 31, 2012, adjusted net operating margin was 20.9%, which is nearing the 'A' category median of 21.9%. Excess margin of 2.2% in fiscal 2012 was also improved from negative 3.8% in fiscal 2011 and closer to the 'A' category median of 4.2%. Fitch expects operations to continue to improve and stabilize as Three Pillars continues to achieve operational efficiencies.
Three Pillars' liquidity indicators exceed Fitch's 'A' category medians and are viewed as primary credit strength, mitigating to a certain extent, the corporation's high debt burden. At Aug. 31, 2012, Three Pillars had $31.1 million in unrestricted cash and investments, which equated to a strong 805.9 DCOH, 129.6% cash to debt and 14.9x cushion ratio, which exceed Fitch's respective 'A' category medians of 494.8 DCOH, 120.2% and 14.4x. An additional positive rating factor is Three Pillars' affiliation with and financial support from the Wisconsin Masonic Foundation (WMF), which contributed $703,163 in fiscal 2012 and $774,853 in fiscal 2011 to support operations at Three Pillars.
Occupancy in all three levels of care has fluctuated over the last three years, but is improved in fiscal 2012 and through Aug. 31, 2012. Occupancy in the independent living units (ILU) at Aug. 31, 2012 was 87.7%, up from 85.9% in fiscal 2012, 80.6% in fiscal 2011 and 79.1% in fiscal 2010. A new marketing director was hired in the fall 2011 and has successfully revamped the marketing program, adding educational programs and social events, leading to increased move-ins. Assisted living units (ALU) and SNF occupancy also improved over the last year and at Aug. 31, 2012 was 93.9% and 90.3%, respectively.
Total debt outstanding as of Aug. 31, 2012 was $24 million, which includes a $5.9 million direct placement issued in 2009, not rated by Fitch. The debt burden is high but declining. MADS as a percent of fiscal 2012 revenue was 12.2%, down from 13.7% in fiscal 2011 but still well above the 'A' category median of 8.7%. The elevated debt burden is of concern but somewhat mitigated by Three Pillar's strong liquidity position. Management and the board are reviewing restructuring options for the series 2004B bonds, which are backed by a letter of credit from JP Morgan, which expires in July 2013. MADS coverage (turnover entrance fees only) in fiscal 2012 was 2.0x, which is improved from 1.3x in fiscal 2011 but still below the 'A' category median of 2.7x. At Aug. 31, 2012, MADS coverage by turnover entrance fees only was 2.5x, which is improved and closer to the category median. MADS revenue only coverage of 1.9x during at Aug. 31, 2012 (two month interim) compares favorably to the 'A' category median of 1.1x.
Three Pillars is a type-C CCRC based in Dousman, Wisconsin (about 35 miles west of downtown Milwaukee), with 154 ILUs, 95 ALUs and 84 SNF beds. For most of its ILU units, Three Pillars offers 90% refundable entrance fee contracts. Three Pillars has covenanted to provide Fitch and bondholders annual audits 150 days of the end of the fiscal year and quarterly statements within 45 days of quarter end.
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', dated June 12, 2012;
--'Rating Guidelines for Nonprofit Continuing Care Retirement Communities', July 12, 2012.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Rating Guidelines for Nonprofit Continuing Care Retirement Communities
Dana N. Sodikoff
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