Fitch Ratings has affirmed the 'BBB-' rating on the following bonds issued on behalf of Franciscan Communities, Inc.:
--$100.3 million Illinois Finance Authority (IL) (Franciscan Communities, Inc.) revenue bonds, series 2013A;
--$40.1 million Illinois Finance Authority (IL) (Franciscan Communities, Inc.) revenue refunding bonds, series 2007A;
--$3.0 million Illinois Finance Authority (IL) (Franciscan Communities, Inc.) revenue bonds (EXTRAS), series 2004B;
--$5.2 million Cuyahoga County (OH) (Franciscan Communities, Inc. - Mount Alverna Project) health care facilities revenue bonds, series 2004C;
--$2.7 million Cuyahoga County (OH) (Franciscan Communities, Inc. - Mount Alverna Project) health care facilities revenue bonds (EXTRAS), series 2004D.
The Rating Outlook is Stable.
SECURITY:
Bonds are secured by the Franciscan Communities, Inc. Obligated Group's (FCOG) pledge of gross revenues, a mortgage interest in owned and leased property of FCOG and certain debt service reserve funds.
KEY RATING DRIVERS
CONSISTENT OPERATING PERFORMANCE: FCOG's financial performance has been very steady over the last four audited years, with FCOG averaging an operating ratio of 94% and a net operating margin of 11.8% over this time, both better than Fitch's 'BBB' category medians.
LARGE, DIVERSE REVENUE BASE: FCOG's stable financial performance size is supported by its size with approximately $120 million in operating revenue in fiscal 2014 (June. 30 year end) and over 1,900 units in service. FCOG's stability is also supported by its moderate geographic diversity with eight campuses in three different states.
CONSISTENTLY STRONG REVENUE ONLY COVERAGE: FCOG's revenue only coverage was 1.5x in fiscal 2014 and has averaged 1.4x over the last four audited years, relative to Fitch's 'BBB' median of 0.9x. FCOG's debt burden is manageable as indicated by maximum annual debt service as a percent of revenue of 9.6% at Sept. 30, 2014, which is also better than Fitch's 'BBB' median of 12.3%.
ADEQUATE LIQUIDITY: FCOG's liquidity metrics all trail the category medians but remain adequate for the rating level. At Sept. 30, 2014, FCOG had 221 days cash on hand, a 5.5x cushion ratio, and 37.6% cash to debt.
IMPROVED CAPITAL SPENDING: Over the last two years, FCOG has materially increased its capital spending (capital spending in fiscal 2014 was approximately 106.6% of depreciation). An IL renovation project at Franciscan Village has been completed, which has already had a positive impact on occupancy and financial results.
RATING SENSITIVITIES
CLARITY ON LONGER-TERM STRATEGIC PLAN: FCOG is in the process of creating a longer-term strategic plan, which Fitch expects to be completed by the next review. The scope, cost, timing, and funding of this plan will be key rating drivers for FCOG. FCOG's overall operating performance has been steady, with a number of ratios comparing favorably to the 'BBB' medians. However, positive rating momentum will depend on clarity on the longer term plans, including, capital spending, and growth in liquidity.
CREDIT PROFILE:
FCOG is composed of eight senior living communities located in Illinois, Indiana and Ohio, with a total of 749 ILUs, 387 assisted living sheltered care units and 776 SNFs. In fiscal 2014, FCOG had operating revenue of $119.7 million.
Stable Financial Profile
FCOG has very consistent operating profile with most of its financial ratios fairly stable over the four year historical period. FCOG's operating ratio has ranged from 93.1% to 95.4% over this time, all better than the category median, and MADS debt service coverage including entrance fees was 1.7x in fiscal 2014, consistent with the prior three years and relative to a median of 2x.
The financial stability is supported by a large and geographically diverse revenue base, a sizable core group of assisted living units and skilled nursing beds that are generally 90% occupied, and a moderate debt burden. The large number of skilled nursing units, along with over 200 rental independent living (IL) units, has produced very good revenue only MADS coverage. Coverage of MADS on a 'revenue only' basis was 1.5x in fiscal 2014, which exceeds Fitch's 'BBB' median of 1.0x. The strong revenue coverage offset concerns about FCOG's below median coverage, when including entrance fees. FCOG debt burden is manageable. MADS of $11.9 million equated to a modest 9.7% of revenues.
Further supporting the financial performance has been an improving trend in IL occupancy, which stood at 88% at Sept. 30, 2014, after hovering in the lower 80% range for much of the historical four year period. FCOG finished renovations of the IL units at Franciscan Village, and that has helped its improving IL occupancy trend.
FCOG's liquidity metrics trail Fitch's 'BBB' category medians. At Sept. 30, 2014, FCOG had approximately $66 million of unrestricted cash and investments which equated to 221 days cash on hand, a 5.5x cushion ratio, and 37.6% cash to debt. Fitch believes FCOG's liquidity is adequate for the rating level. Fitch expects FCOG's cash growth to be modest, given FCOG's large number of rental contracts and SNF beds, especially compared to the typical entrance fee community rated by Fitch that can grow cash through entrance fee receipts. A decline in liquidity, not expected, would be a credit a concern.
Governance/Management Update
A credit concern of Fitch at the initial rating for FCOG in 2013 was FCOG's weaker governance structure. Franciscan Sisters of Chicago Service Corporation (FSCSC), FCOG's sole corporate member, had only six board members and very little professional diversity on the board. FCOG had only three members, and these were appointed by and were members of the FSCSC board. Fitch believed the small size of the board and lack of professional diversity were credit concerns, given the challenges of operating such a large and complex organization, including the entities outside the obligated group.
Fitch notes positively that FSCSC has begun to address the issue at the parent level. The FSCSC board has increased to nine from six, and the new members come from diverse professional backgrounds. The board, however, does remain smaller than most organizations of a similar size, and the FCOG board structure has not changed.
Separately, Fitch also notes the strength of the current management team, which was brought together after the organization went through a difficult operational period, including the bankruptcies of three campuses that were not in the obligated group. The current management team has kept the organization's performance steady, consistently making its budgets, has implemented a strategic plan to accomplish this, and begun to address capital needs across the system. Management is currently in the later stages of a larger capital and growth strategy plan, which will continue to move the organization forward.
Capital Needs
Prior to the current management team, FCOG went through a period of deferred capital spending, with FCOG's capital spending averaging a low 24.8% of depreciation for the audited years 2010-2012, materially lower than the 'BBB' category median of 79.7%. Fitch believes continued capital investment is key for a senior living facility to maintain its competiveness over the longer term, and FCOG has a number of older campuses, which increases the ongoing capital needs.
Fitch notes positively the improvement in capital spending over the last two fiscal years. Capital spending as a percentage of depreciation was 42% in fiscal 2013 and 106.6% in fiscal 2014. FCOG plans to spend approximately $25 million (approximately 120% of depreciation) over the next two years on capital. Approximately $19 million of FCOG's bond issuance in 2013 was new money to fund capital projects. Approximately $13 million of that will be for projects at Franciscan Village, including renovation to IL and AL common spaces and a larger renovation project of Franciscan Village's skilled nursing center. As noted above, the IL project was successfully completed and FCOG has begun the skilled nursing and assisted living renovation, which are expected to be completed over the next year.
Disclosure
FCOG releases annual audited financial statements and utilization statistics within 150 days after each fiscal year end and quarterly unaudited financial statements and utilization statistics within 45 days of each quarter end.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating Guidelines for Nonprofit Continuing Care Retirement Communities' (June 30, 2014);
--'Nonprofit Nursing Home Rating Criteria' (Oct. 3, 2014).
Applicable Criteria and Related Research:
Not-for-Profit Continuing Care Retirement Communities Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752470
Nonprofit Nursing Home Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=782388
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=976635
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.
