The series 2016A bonds are expected to be issued as fixed-rate bonds. Bond proceeds will be used to finance various capital projects including the Meadows independent living unit (ILU) project, reimburse for prior capital expenditures, fund a debt service reserve fund, fund capitalized interest and pay costs of issuance. Pro forma maximum annual debt service (MADS) is expected to increase to approximately
The Rating Outlook has been revised to Stable from Negative.
Debt payments are secured by a pledge of the unrestricted gross revenues of the obligated group, a first mortgage lien on all the real property constituting JKV's core campus, and a debt service reserve fund for the series 2016A bonds.
KEY RATING DRIVERS
INCREASED DEBT BURDEN: The downgrade reflects JKV's increased pro forma debt burden with MADS increasing 36.4% and MADS as a percent of fiscal 2016 revenue increasing to 12.6% from 9.2%. Pro forma MADS coverage equaled a light 1.1x in fiscal 2016 and 1.4x in the three-month interim period ending
REBOUNDING PROFITABILITY: Net operating margin adjusted (NOMA) decreased to 10.6% in fiscal 2016 from 13.2% in fiscal 2015 before rebounding to 17.3% in the interim period. The decline in fiscal 2016 was due to increased labor pressure and elevated benefits costs due to a few high healthcare claims. The increased expenses were partially mitigated by increased net entrance fee generation.
MAJOR CAPITAL PROJECTS: Capital plans are significant reflecting JKV's continued campus transformation project and include the construction of a new ILU building, the
LIGHT LIQUIDITY: Liquidity metrics remain light with 213 days cash on hand, 31.2% cash to pro forma debt and 4.5x cushion ratio at
CONTINUED PROFITABILITY IMPROVEMENT: Fitch expects
EXECUTION OF CAPITAL PROJECTS: Fitch expects
Fitch's analysis and all figures and ratios cited in this press release are based on JKV's consolidated financial statements from its sole member, PremierLife. The retirement community and the foundation are currently members of the obligated group (OG). JKV is planning to remove the foundation from the OG. The foundation accounted for 2.1% of the OG's total assets and 0.3% of total revenue. Without the foundation, the OG would have accounted for 97.4% of consolidated total assets and 99.4% of consolidated operating revenues in fiscal 2016. Total consolidated operating revenue for PremierLife and Affiliates equaled
INCREASED DEBT BURDEN
The community's pro forma debt burden increased materially, with pro forma MADS increasing from a light 9.2% of fiscal 2016 revenue to 12.6%. Pro forma MADS coverage decreased to 1.1x in fiscal 2016, reflecting the compressed profitability and increased pro forma debt burden, but rebounded to 1.4x in the interim period, consistent with Fitch's below investment-grade category median of 1.5x. Revenue-only MADS coverage decreased to 0.1x in fiscal 2016 and 0.2x in the interim period, comparing unfavorably with Fitch's below investment-grade category median of 0.8x. The increased debt burden is partially mitigated in the near term by a 15-month capitalized interest fund. Per JKV's master trust indenture (MTI), expenses and revenues associated with the Courtyard and Meadows projects will be excluded from covenant calculations until each project achieves stabilization. Per the MTI calculation, MADS coverage equaled approximately 1.1x. However, the difference will become greater as project-related expenses and revenues increase.
Operating profitability compressed in fiscal 2016 with net operating margin (NOM) and NOMA decreasing from 3.4% and 13.2% in fiscal 2015 to negative 1.3% and positive 10.6% in fiscal 2016, respectively. Management had budgeted for NOMA to increase to 15.9% in fiscal 2016. The decrease was primarily due to increased salaries expense related to improving labor markets, increased benefits expense due to greater than expected healthcare insurance claims and pressured revenue in JKV's home health division. The increased benefit cost was due to a few large claims and is not likely to be recurring. Management is budgeting profitability to rebound in fiscal 2017 with NOM and NOMA increasing to 4.6% and 16.5%, respectively. NOM and NOMA increased to 3.3% and 17.3% in the interim period.
Management has been working on several initiatives, including the campus consolidation project described below, to strengthen profitability. JKV has continued to consolidate smaller units into larger units and introduced new modified type B entrance fee contracts in fiscal 2015 to increase the community's marketability and value proposition. Additionally, JKV's health services are experiencing faster growth in ALU and home health programs than skilled nursing, which should increase the care center's profitability.
MAJOR CAPITAL PROJECTS
Capital spending increased to
Two main components of the redevelopment plan include the Courtyard and Meadows projects. Both projects included the demolition of existing ILU buildings and cottages. The Courtyard project included the construction of a new 52-unit ILU building, additional parking, new common space and renovations to existing common spaces. The project was completed on time and on budget (
The Meadows project consists of the construction of a new 112-unit ILU building, including underground parking, a new restaurant and new wellness facilities, including a pool. The project is expected to cost
Fitch views the campus repositioning strategy favorably as larger ILUs are typically in higher demand and more profitable than smaller units. While the two expansion projects increased JKV's leverage, Fitch expects that the expansion projects will be successfully executed and that the revenue and entrance fees generated by the additional ILUs will allow JKV to grow into the increased debt burden. Additionally, the new larger ILUs are expected to be accretive to profitability, thereby strengthening MADS coverage from historical levels.
Unrestricted cash and investments decreased
JKV has spent approximately
Subsequent to the series 2016A bond issuance, JKV will have approximately
JKV covenants to provide audited financial statements within 180 days of each fiscal year-end and quarterly interim statements within 60 days of each quarter-end. Disclosure is provided through the
Additional information is available at 'www.fitchratings.com'.
Not-for-Profit Continuing Care Retirement Communities Rating Criteria (pub.
Revenue-Supported Rating Criteria (pub.
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Source: Fitch Ratings