Lancaster County Hospital Authority, Pennsylvania Masonic Villages of the Grand Lodge of Pennsylvania; Long Term Care

Transcription

1 Lancaster County Hospital Authority, Pennsylvania Masonic Villages of the Grand Lodge of Pennsylvania; Long Primary Credit Analyst: Jennifer J Soule, Boston (1) ; jennifer.soule@standardandpoors.com Secondary Contact: Jessica H Goldman, New York (1) ; jessica.goldman@standardandpoors.com Table Of Contents Rationale Outlook Enterprise Profile Financial Profile Related Criteria And Research JANUARY 13,

2 Lancaster County Hospital Authority, Pennsylvania Masonic Villages of the Grand Lodge of Pennsylvania; Long Credit Profile US$44.5 mil hlth ctr rev bnds ser 2015 due 01/12/2044 Long Term Rating A/Stable New Lancaster Cnty Hosp Auth, Pennsylvania Masonic Villages of the Grand Lodge of Pennsylvania, Pennsylvania Series 2006 Long Term Rating A/Stable Affirmed Rationale Standard & Poor's Ratings Services assigned its 'A' rating to Lancaster County Hospital Authority, Pa.'s $44.5 million series 2015 health center revenue bonds, issued for Masonic Villages of the Grand Lodge of Pennsylvania. At the same time, Standard & Poor's affirmed its 'A' rating on the authority's series 2006 health center revenue bonds ($33.3 million as of Dec. 31, 2014). The outlook is stable. The 2015 bond proceeds, in the form of traditional fixed-rate debt, will be used to advance refund Masonic Villages' remaining 2006 bonds, support a partial refunding of its 2008 bonds (which we do not rate), and pay swap termination costs on one of its swaps outstanding. We will remove our rating on the 2006 bonds when the debt is fully refunded. The 'A' rating reflects our assessment of high demand for Masonic Villages' senior living services, its strong balance sheet with ample liquidity and moderate debt leverage, and a well-tenured management team. Somewhat mitigating the preceding credit strengths, in our view, are Masonic Villages' heavy operating losses. We understand management has no plans to issue additional debt for the foreseeable future, and that capital plans will be funded through annual cash flow and donations. We expect Masonic Villages to maintain its strong business position, work to reduce operating losses in the future, and sustain its healthy balance of liquidity and limited debt. Without a continued strong cushion of unrestricted reserves to offset the system's large operating losses, we believe Masonic Villages' overall credit risks are more indicative of a lower rating. The 'A' rating also reflects our view of Masonic Villages': Senior-living services experiencing high demand; and Strong balance sheet, with ample liquidity and low debt leverage. Partially offsetting credit factors, in our view, include Masonic Villages': JANUARY 13,

3 Persistent operating losses, although management indicates its mission and payor mix drive these results; Membership base primarily of Masons, a population we understand is declining (which could suggest softer demand in the future); and Pro forma debt profile that comprises a 75% contingent liability, including a combination of direct-purchase bank loans and a letter of credit (LOC). With the new debt issuance, the organization will refund a portion of its LOC debt and convert it to the 2015 fixed-rate bonds, resulting in 25% of its total debt profile being held in the fixed-rate mode. Masonic Villages, headquartered in the south-central Pennsylvania town of Elizabethtown (Lancaster County), owns and operates five senior-living facilities throughout the state. On Jan. 1, 2013, Masonic Homes of Pennsylvania transferred all of its operations, assets, and liabilities to a separate not-for-profit corporation, the Masonic Villages of the Grand Lodge of Pennsylvania (Masonic Villages). The obligated group on the bonds is Masonic Villages, which will continue to operate the organization's five senior living facilities. The Grand Lodge of Free and Accepted Masons of Pennsylvania is the sole member of Masonic Villages. Our rating is based on our view of Masonic Villages' group credit profile and the obligated group's "core" status. Accordingly, the long-term rating is at the same level as the group credit profile. We will refer to "Masonic Villages" throughout the remainder of this article. Outlook The stable outlook reflects our view of Masonic Villages experiencing high demand and its strong balance sheet characteristics through the two-year outlook period. We believe its ample balance of unrestricted reserves provides a cushion for the organization's heavy operating losses. While not expected within the outlook period, we could consider a higher rating over time if Masonic Villages' financial operating performance improves materially, excluding investment income and contributions, along with continued growth in unrestricted reserves, maintenance of debt service coverage (DSC) greater than 3.5x (adjusted to include entrance fees), and a limited use of new debt. Though also not expected in the outlook period, we could consider a lower rating if Masonic Villages' liquidity or debt position changes dramatically, or if its operating margins and DSC drop significantly. Enterprise Profile Demand Masonic Villages reports high occupancy levels at its locations, and near full occupancy across its nursing, personal care, and retirement living facilities. The only exception is its newest campus in Dallas, not far from the towns of Wilkes-Barre and Scranton in northeastern Pennsylvania. The Dallas location, which opened its first of 83 new cottages in 2007, reports 83% occupancy through the 2014 interim nine-month period (ended September 2014). Notwithstanding the slower-than-expected occupancy ramp-up at this campus, we recognize that overall occupancy at Masonic Villages' facilities has improved considerably in recent years. There are also a number of reserved units for which occupancy is pending, according to management. JANUARY 13,

4 Payor mix Masonic Villages serves approximately 108,000 Pennsylvania Masons and their families, regardless of their ability to pay. We understand that while all Masonic facilities are open to non-masons, the Masons and their families receive priority admission. This mission results in fairly significant annual operating losses at Masonic Villages, although the losses have generally been offset by investment earnings, resulting in good DSC and excess margins. Masonic Villages reports that, through Sept. 30, 2014, Medicaid paid for approximately 56% of services provided to its nursing home residents, with 52% of personal care residents receiving charity-care assistance. We believe this payor mix is a credit risk and a significant factor behind the organization's operating losses. Financial Profile Income statement Masonic Villages has reported negative operating margins, ranging between 17% and 21%, for the past five fiscal years, including the interim fiscal 2014 period ending Sept. 30, Its operating margin was negative 18.3% during the interim period, excluding investment income and contributions. The full fiscal year budget includes a $28.2 million operating loss by our calculation, with a negative operating margin of approximately 20%. Management expects its fiscal 2015 operating loss to be in line with these results. Masonic Villages reported excess revenues over expenses for fiscal 2013 of $18.1 million, resulting in historic pro forma DSC (adjusted to include entrance fees) of what we consider a moderate-to-strong 3.5x. Strengthening the organization's pro forma DSC in fiscal 2013 was the organization's investment restructuring coupled with significant gains on the sale of assets. Through the fiscal 2014 interim period, pro forma adjusted DSC was lighter and what we consider more moderate for the rating at 2.8x. These measures all exceed the 1.1x DSC rate covenant requirement in Masonic Villages' bond documents and bank loan agreements. Balance sheet Masonic Villages reported a $379 million balance in unrestricted cash reserves through the fiscal 2014 interim period, or what we consider a solid 931 days' cash on hand, well in excess of the 60 days' cash requirement in the debt agreements. Management indicates these assets, along with approximately $300 million in restricted funds, are managed professionally, with stringent oversight by the Masonic board of directors. Masonic Villages' board has established a spending policy for the organization's unrestricted and restricted reserves of 5% (based on a three-year average). We view this policy as important because Masonic Villages relies on it to balance its fiscal health and operating needs with its charitable service mission. Masonic Villages reports minimal exposure to alternative investments, with the majority of its unrestricted reserves able to be liquidated within one week. We believe Masonic Villages' liquidity remains sufficient to cover its exposure to payment acceleration on its contingent liabilities, including LOCs and direct-placement bank debt. We calculate an adequate 2.5x unrestricted reserves-to-debt ratio on Masonic Villages' contingent debt alone, and an adequate overall cash-to-debt ratio of 199%. Masonic Villages launched the quiet phase of a five-year, $50 million endowment capital campaign in January 2015, to raise funds to support its Masonic charities. Based on a history of successful fundraising, we expect donors to meet the campaign favorably, and that Masonic Village's targets will be achieved. JANUARY 13,

5 Masonic Villages has a defined-benefit pension plan that covers substantially all employees. In September 2010, the plan's administrators opted to freeze benefit accruals as of Dec. 31, Masonic Villages' goal is to fully fund and terminate the defined-benefit plan within the next two years. Masonic Villages will continue to contribute cash to the plan until the plan's assets equal or exceed the projected benefit obligation. When this occurs, the defined-benefit plan will be terminated, and annuity contracts will be purchased from insurance companies to provide the guaranteed level of retirement income for eligible employees. The plan may also be amended, with lump sum payments issued to certain participants. We calculate an entrance fee-adjusted pro forma debt-to-capitalization ratio of 27% (which we consider moderate), based on Masonic Villages' interim fiscal 2014 results and total pro forma bonds outstanding of $191 million. Masonic Villages added $39 million in new debt in late 2013 via a bank loan agreement with PNC Bank N.A. The terms of the agreement are on parity with the organization's other debt outstanding, and all covenants, defaults, and remedies are consistent with its master trust indenture. Management indicates it does not have any imminent long-term debt plans, as many of its most recent capital projects are complete. However, projects are underway at its Elizabethtown and Lafayette Hill locations; these projects are being funded through its 2013 bank debt, with completion expected in Management's preference for any other capital needs for the foreseeable future is to fund capital needs through either operating cash flow or donations. We understand a larger expansion at Masonic Villages' Dallas location has been put on hold. These spending plans and funding sources, in our opinion, are manageable at the current rating level. Masonic Villages of the Grand Lodge of Pennsylvania -- Selected Financial Statistics 2014* Medians for 'A' rated senior living lifecare facilities Total operating revenue ($000s) 105, , ,793 26,526 Net operating income ($000s) (19,334) (27,809) (25,036) MNR Operating margin (%) (18.3) (20.6) (19.4) (4.0) Revenue over expenses ($000s) 10,452 18,120 7,452 MNR Profit margin (%) Net revenue available for debt service ($000s) 21,142 32,630 20,328 MNR Pro forma MADS ($000s) 16,365 16,365 16,365 MNR Pro forma adjusted MADS coverage (x) Pro forma MADS coverage excluding net entrance fees (x) Debt burden (%) Unrestricted cash ($000s) 379, , ,331 MNR Unrestricted cash/long-term debt (%) Days' cash on hand Adjusted long-term liabilities/capitalization (%) Long-term debt/capitalization (%) Average age of plant (years) *Nine-month interim period ending Sept. 30, As of fiscal year-end (Dec. 31). MADS--maximum annual debt service. MNR--median not reported. JANUARY 13,

6 Related Criteria And Research Related Criteria USPF Criteria: Senior Living, June 18, 2007 USPF Criteria: Contingent Liquidity Risks, March 5, 2012 General Criteria: Group Rating Methodology, Nov. 19, 2013 General Criteria: Methodology: Industry Risk, Nov. 20, 2013 Related Research Health Care Providers And Insurers Pursue Value Initiatives Despite Reform Uncertainties, May 9, 2013 Standard & Poor's Assigns Industry Risk Assessments To 38 Nonfinancial Corporate Industries, Nov. 20, 2013 Alternative Financing: Disclosure Is Critical To Credit Analysis In Public Finance, Feb. 18, 2014 Health Care Organizations See Integration And Greater Transparency As Prescriptions For Success, May 19, 2014 U.S. Not-For-Profit Senior-Living Sector Remains Stable Despite Mixed Financial Results, Oct. 6, 2014 U.S. Not-For-Profit Health Care Outlook Remains Negative Despite A Glimmer Of Relief, Dec. 17, JANUARY 13,

7 Copyright 2015 Standard & Poor's Financial Services LLC, a part of McGraw Hill Financial. All rights reserved. No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor's Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an "as is" basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT'S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages. Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P's opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof. S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process. S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, (free of charge), and and (subscription) and (subscription) and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at JANUARY 13,