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Fitch Rates Bethesda Health Group's (MO) Series 2015 Rev Bonds 'BBB+'; Outlook StableFitch Ratings has assigned a 'BBB+' rating on $38.8 million of health facilities revenue bonds series 2015, issued by the Health and Educational Facilities Authority of the State of Missouri on behalf of Bethesda Health Group (BHG). The Rating Outlook is Stable. Concurrently, Fitch withdraws the 'A-' implied general revenue bond rating on BHG. BHG has approximately $74.5 million outstanding in series 2013A and 2013B bonds, which Fitch does not rate but incorporates into the analysis. The series 2015 bonds are expected to be issued as fixed-rate. Bond proceeds will be used to pay for $25.6 million of capital expenditures, refinance a $10 million line of credit, fund capitalized interest and debt service reserve accounts, and pay for costs of issuance. The sale is expected via negotiation the week of October 12. SECURITY The series 2015 bonds are expected to be secured by a pledge of unrestricted receivables, first mortgage lien on principal facilities, and a six-month debt service reserve fund. KEY RATING DRIVERS MAJOR CONSTRUCTION PROJECT: BHG is in the process of updating and expanding its Bethesda Dilworth campus. The skilled nursing facility (SNF) renovation was completed in 2015, and additional independent living units (ILUs) and assisted living units (ALUs) are planned for 2016 and 2017. While funding the construction projects will pressure the financial profile in the near term, Fitch believes the projects will be accretive to Bethesda in the long-term, given changing demand for SNF and current capacity constraints for ILUs and ALUs. WEAKER FISCAL 2015: While core operating performance was mostly stable, fiscal 2015 (June 30 year-end) financial results were affected by some one time expenditures, unexpectedly high food costs, and low entrance fee receipts as the level of inventory declined with increase in occupancy. However, material revenue growth was achieved for the first time in several years, and numerous growth initiatives should add to further revenue growth going forward, which is viewed positively. SIGNIFICANT ADDITIONAL DEBT: Construction projects on the Dilworth campus will be funded by the series 2015 bond issue. Total long-term debt and maximum annual debt service (MADS) are expected to increase over 50%. However, given current strength of the balance sheet, pro forma debt metrics are projected to remain consistent with 'BBB' rating category medians. SOUND LIQUIDITY: Unrestricted cash and investments totaling $79.5 million at FYE 2015 produced pro forma liquidity metrics that support the 'BBB+' rating and provides ample financial cushion to mitigate construction and fill up risk. RATING SENSITIVITIES PROJECT EXECUTION: Fitch expects BHG to execute its construction projects on time and on budget and meet projected financial results. BHG's size and diversity of its communities provide some cushion in operating variability. While not expected, a material weakening of core operations and/or significant cost overruns could lead to negative rating pressure. CREDIT PROFILE BHG owns and operates five independent living facilities, one assisted living facility, three SNFs, and provides home health, outpatient, private duty, and hospice services to the senior community in the St. Louis, MO area. Additionally, BHG operates Village North Retirement Community (IL & SNF; 50% ownership) and Eunice Smith Home (SNF) under management agreements with BJC HealthCare (effective Jan. 1, 2015). Combined, BHG owns and/or operates 709 ILUs, 18 ALUs, and 796 SNF beds. Total revenues (adjusted to exclude realized investment gains and contributions) in the fiscal year ended June 30, 2015 were $71 million, which includes six-months of revenues and expenses related to operating Village North and Eunice Smith. Large Capital Plans In 2015, BHG completed renovations at Dilworth SNF at a total cost of $7 million, funded by a line of credit draw that will be refinanced as part of the 2015 transaction. The project involved renovating the main floor and lobby entrance, the ground floor, and the third floor of the Bethesda Dilworth tower. Some SNF Beds were taken out of service in 2012, and renovations were completed in 2015. The third floor now consists of 30 premium private rooms, and full occupancy is expected in fiscal 2016, at which point over $3 million of incremental revenues are expected. The series 2015 bonds are expected to fund $25.6 million in IL and AL expansion projects on the Bethesda Dilworth campus. Approximately $18.1 million is budgeted to construct 60 new ALUs, slated to open late 2016. BHG's service area has historically lacked AL supply, and BHG has lost some residents due to lack of AL capacity. Given that nearly all area ALs currently operate at full capacity, Fitch believes there is sufficient demand and rationale for the expansion project. Incremental revenues are expected to be realized beginning in 2017. The transaction will also fund the construction of 18 ILUs at The Oaks (on Dilworth campus). Construction is planned to begin late 2015 and complete early 2017. Given historical occupancy rates at the Oaks (nearly or completely full over the last three years), Fitch believes fill risk is manageable and that the new units will be accretive to BHG in the medium to long term. In addition to aforementioned construction projects, routine capital is budgeted at $5.1 million for 2016. Mostly Stable 2015 Operating Performance with Mixed Financial Results Following several years of stagnant revenues, BHG generated a 10% increase in operating revenues in fiscal 2015. Solid growth was driven primarily by increase in occupancy across the continuum of care and management agreement revenues beginning Jan. 1, 2015. Core operating expense growth was mostly consistent with revenue growth, resulting in an operating ratio of 97.7%, which is slightly higher than the prior year and in line with the 'BBB' median of 97.4%. Profitability metrics were stable despite a few one-time expenditures affecting 2015 results, including roughly $500,000 in transaction and start-up costs related to the BJC agreement, and an increase of $2.4 million in food costs as BHG switched vendors. Management reports that BHG is actively working on managing food expenditures and is making progress. The increase in these particular expenditures was offset by an improvement in other expense items, primarily in labor and benefits. While occupancy rose and core operating profitability remained sound, cash flows were affected by a decline in net entrance fee receipts. Net entrance fee receipts were only $346,000 in 2015 compared to $3.8 million in 2014 and $4.6 million in 2013. However, the decline is not inconsistent with historical fluctuations, as the organization actively utilizes both entrance fee and rental contracts. Fitch notes that 2013 and 2014 were particularly strong years as BHG filled its vacant units as ILU occupancy was only 74% in fiscal 2012 compared to 93% in 2015. Fitch expects BHG to generate further revenue growth in 2016 and beyond. BHG will realize a full year's worth of revenues from the BJC agreement in 2016, and BHG recently renovated its Bethesda Dilworth SNF, opening 30 private SNF units that were taken out of service over the last two years. The incremental revenue from this renovation is projected to be $2.1 million in 2016 and growing thereafter. In the medium term, the new ILUs and ALUs developed with the proceeds of the series 2015 bonds are expected to begin generating revenue in 2017 and ramp up until 2019. Net income from the new units is likely to be breakeven in 2017, and increase thereafter until stabilizing in 2019. The ability to meet targeted projections is critical as the capitalized interest period ends on the series 2015 bonds in 2017 and $6.2 million of debt service payments commence (ramps up to $7.1 million in 2019). Sound Liquidity Unrestricted cash and investments totaled $79.5 million at FYE 2015, down from $85.1 million the prior year due primarily to lower entrance fee receipts, heightened capital spending, weaker investment performance, and one time expenditures related to the BJC agreement. The level of unrestricted cash and investments is expected to remain stable in the near term as bond proceeds will fund the large projects and interest on the new bonds will be capitalized during the construction period. At FYE 2015, liquidity metrics were sound for the 'BBB+' rating with 420 days cash on hand and 96.9% cash to debt compared to the respective medians of 408 days and 60.2%. Pro forma cash to debt declines to 69.6%, but remains above the 'BBB' median. Pro forma cushion ratio of 11.1x is solid for the rating against the median of 6.9x and provides adequate cushion at the current rating. Increase in Debt Burden The 2015 transaction will result in debt metrics that are mostly consistent with the 'BBB' rating category. Pro-forma MADS of $7.1 million equates to 9.4% of 2014 revenues which compares favorably to the 'BBB' median of 12.3%. However, pro-forma debt to capitalization of 70.7% and pro-forma debt to net available of 11.4x are weaker than the respective 'BBB' medians of 59% and 6.3x. Historical coverage of pro forma MADS (including net entrance fee receipts) is somewhat volatile at 1.4x for 2015 and 2x for 2014. However, coverage in 2015 was impacted by some one time or unexpected expenditures as well as weak net entrance fee receipts. Fitch expects coverage levels to improve levels at or above 2x in the near to medium term. Further, historical coverage of pro-forma MADS on a revenue only basis has been solid averaging 1.5x over the last three fiscal years versus the 'BBB' median of 0.9x. DEBT PROFILE At FYE 2015, BHG had outstanding $82 million in long-term debt, which includes the series 2013A&B bonds and $7.5 million line of credit draw. The series 2013A bonds were issued as variable rate direct purchase bonds (due June 2023), and the series 2013B bonds were issued as VRDBs supported by an LOC (expiring June 2018). The existing bonds produce a level debt service of $4.7 million through 2042. While all current debt is variable, short- to medium-term put risk is mitigated by staggered tender dates. BHG has three outstanding fixed-payor swaps with a notional amount of $47.8 million. As of June 30, 2015, the mark-to-market valuation was negative $12.5 million. BHG does not have any collateral posting requirements at the current rating, and would only have to do so if the underlying credit rating dropped below 'BBB-'. Pro forma debt is estimated at $114.1 million, approximately in 35% in traditional fixed rate mode and 65% floating. The majority of floating rate debt is swapped to fixed. Fitch notes that put and interest risk in current and pro forma debt portfolio is significantly improved from prior years, but remains relatively aggressive. DISCLOSURE BHG discloses annual financial statements within 120 days and quarter unaudited financial statements within 60 days through the MSRB EMMA website. Additional information is available at 'www.fitchratings.com'. Applicable Criteria
Not-for-Profit Continuing Care Retirement Communities Rating Criteria
(pub. 04 Aug 2015)
Revenue-Supported Rating Criteria (pub. 16 Jun 2014) Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
Solicitation Status
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