Fitch Affirms Lifespace Communities, Inc.'s (IA) Revs at 'A'; Outlook Stable
Fitch Ratings has affirmed the 'A' rating on approximately $102.2 million of revenue bonds issued through various issuing authorities issued on behalf of Lifespace Communities, Inc. (Lifespace). A complete list of ratings is provided at the end of this release.
The Rating Outlook is Stable.
The bonds are secured by a pledge of unrestricted receivables and a mortgage interest in certain property of the obligated group.
KEY RATING DRIVERS
BENEFIT OF DIVERSE REVENUE BASE: The obligated group's revenue and profitability are well diversified across 10 communities located in six states with no individual community accounting for more than 14.1% of fiscal 2011 (Dec. 31 year end) total revenues.
STRONG COVERAGE: A light debt burden and consistent entrance fee receipts generates strong historical coverage of maximum annual debt service (MADS) equal to 3.8 times (x) in fiscal 2011 relative to Fitch's 'A' category median of 2.7x.
STABLE OCCUPANCY: Occupancy has remained consistently solid across all levels of care with independent living units (ILUs), assisted living units (ALUs) and skilled nursing beds (SNF) occupancy equal to 92%, 92.2% and 89.4%, respectively, at June 30, 2012.
SUSTAINED STRONG INVESTMENT IN FACILITIES: Capital reinvestment has been strong over the last four years resulting in well maintained facilities and a low average age of plant of 9.6 years at June 30, 2012 relative to Fitch's 'A' category median of 10.5 years. A portion of future capital expenditures may be funded by additional debt.
The affirmation of the 'A' rating is supported by the diversity of Lifespace's community locations and revenue generation, light debt burden, strong debt service coverage, solid occupancy, and strong capital spending.
With 10 communities located in six states, Fitch believes bondholders benefit from the obligated groups' geographic diversity which reduces overall operating risk relative to a single-site borrower. Moreover, revenue generation and profitability are well balanced, with no individual facility accounting for more than 14.1% of fiscal 2011 total revenue. However, with five communities located in Florida, 56% of Lifespace's fiscal 2011 revenue was generated in Florida resulting in high exposure to the state's troubled housing markets and risk related to hurricanes.
Operating profitability continued to improve in fiscal 2011 primarily due to continued expense management efforts. Operating ratio decreased to 93.1% in fiscal 2011 from 94.6% in fiscal 2010 while net operating margin increased to 7.6% from 6.8%. Net entrance fee generation has been consistently strong averaging $26.7 million per year since fiscal 2009. The strong entrance fee generation is reflected in solid net operating margin adjusted of 22.5% in fiscal 2011 and 23.5% through the six month interim period ended June 30, 2012 (the interim period).
Lifespace's debt burden is light as evidenced by adjusted debt to capitalization of 25% and MADS equal to 6.6% of fiscal 2011 revenues relative to Fitch's 'A' category medians of 45% and 8.7%, respectively. The low debt burden, solid operating profitability and strong entrance fee generation provides for strong coverage of debt service. MADS coverage by CCRC net available equaled 3.7x in fiscal 2011 and 4.0x through the interim period.
Occupancy has remained consistently strong reflecting Lifespace's solid management and marketing practices in addition to the competitive position of each community in the obligated group. Occupancy has remained firm across all levels of care with ILU, ALU and SNF occupancy equal to 92%, 92.2% and 89.4%, respectively, at June 30, 2012. Management reviews occupancy levels at each community on a weekly basis to ensure that occupancy remains strong.
Capital spending has been solid averaging 121.8% of depreciation expense since fiscal 2009. A new master facility plan and capital budget is being developed, but management expects capital spending to equal between 75% and 130% of depreciation for the next three to five years. Capital spending is expected to concentrate on remodeling the existing health centers to provide more private rooms, additional alternative dining venues and physical plant investments related to Lifespace's wellness programs.
Management expects to issue approximately $30 million of additional debt in early fiscal 2013 and approximately $10 million in fiscal 2014 to fund its capital needs. However, plans have not yet been approved by the board of directors. Fitch believes Lifespace has some additional debt capacity at its current rating level given its light debt load and the rapid amortization structure of its outstanding debt.
Unrestricted cash and investments increased 13.7% since fiscal 2010 to $150.8 million at June 30, 2012. Liquidity metrics are consistent with Fitch's 'A' category medians with a 13.1x cushion ratio and 130.4% cash-to-debt compared to the respective 'A' category medians of 14.4x and 120.2%.
Fitch's credit concerns include Lifespace's high concentration of revenue derived from Florida. The continuing impact of the recession and Florida's weak housing markets make those communities more vulnerable to weakening demand. Similarly, the concentration of Florida operations subjects the obligated group to heightened hurricane risk.
The Stable Rating Outlook reflects Fitch's expectation that Lifespace will maintain solid occupancy resulting in continued operating performance and robust coverage.
Headquartered in Des Moines, Iowa, Lifespace operates 12 CCRCs in seven states of which 10 are in the obligated group. Of the 10 communities in the obligated group, five are located in Florida with the remaining communities located in Illinois, Kansas, Minnesota, Pennsylvania and Nebraska. Total operating revenues equaled $174.3 million in fiscal 2011. The obligated group accounted for 90.7% of consolidated revenues in fiscal 2011. Lifespace covenants to provide annual disclosure within 150 days of the fiscal year end and quarterly disclosure within 45 days of the quarter end. Disclosure is provided through the Municipal Securities Rulemaking Board's EMMA system.
Fitch affirms the 'A' rating on the following bonds issued on behalf of Lifespace:
--$5 million Illinois Health Facilities Authority, Beacon Hill, revenue bonds series 1999A;
--$7.2 million, Palm Beach County Health Facilities Authority, Abbey Delray, revenue bonds series 2001 A and B;
--$6.8 million Prairie Village, Kansas, Claridge Court, revenue refunding bonds, series 2003 (underlying);
--$6.3 million Palm Beach County Health Facilities Authority (FL), Abbey Delray South, revenue refunding bonds series 2003;
--$6.6 million Chartiers Valley Industrial & Commercial Development Authority (PA), Friendship Village of South Hills, revenue refunding bonds, series 2003A;
--$4.7 million Palm Beach County Health Facilities Authority, Harbour's Edge, revenue bonds, series 2004 A and B;
--$8.8 million Illinois Finance Authority, Beacon Hill, revenue refunding bonds series 2005 A and B;
--$26.4 million Palm Beach County Health Facilities Authority (FL), The Waterford, revenue bonds series 2007;
--$4.7 million Lifespace Communities, Inc. (taxable) rev bonds ser 2010T
--$25.7 million Kansas Dev Fin Auth (KS) (Lifespace Communities, Inc.) rev bonds ser 2010S.
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.
--'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
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