[January 21, 2015]

Fitch Affirms Nazareth Living Center (MO) Revs at 'BB'; Outlook Stable

Fitch Ratings has affirmed the 'BB' rating on the following St. Louis County Industrial Development Authority (MO) bonds, issued on behalf of Nazareth Living Center (NLC):

--$7.3 million series 1999 refunding revenue bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a pledge of gross revenues, a first mortgage lien, and a debt service reserve fund.

KEY RATING DRIVERS

BOOST FROM ILU PROJECT: NLC's financial performance improved in fiscal 2014, in part resulting from successful occupancy and revenue from its 50-ILU expansion completed in 2013. As of fiscal (year end June 30) 2014 NLC's 137 days of cash on hand (DCOH), 39.6% cash to debt and 1.6x coverage of maximum annual debt service (MADS) were all improved from prior fiscal year. NLC received $3.3 million in initial entrance fees, which were used in part to repay a $2 million note.

CAPITAL PLANS IMMINENT: NLC has begun the next phase of its campus project, which will include an $8 million memory care expansion and skilled nursing renovation within the next year. Additional future plans include another ILU expansion. Fitch expects to review plans as they are finalized in the coming months. Routine capital expenditures are near $600,000 annually going forward, light but consistent against planned project expenditures.

OCCUPANCY REMAINS MIXED: While the new ILUs remain filled with a 28-member wait list, through the three-month interim period ended Sept. 30, 2014 assisted living unit (ALU) occupancy remained low at 57%, dementia occupancy was below prior year at 73%, and skilled nursing (SN) occupancy dipped slightly to 87%. Occupancy in AL, dementia and SN remains pressured due in part to the competitive service area, and NLC's lack of private SN beds.

COMPETITIVE LANDSCAPE: The competitive landscape is material credit concern, as there are several competing facilities in the St. Louis metro providing comparable CCRC services. As such, Fitch believes that NLC's campus plan execution will be essential to remaining marketable and competitive against other providers, as well as key to reducing its reliance on providing services to members of Sisters of St. Joseph of Carondolet (CSJ), whose population has been diminishing.

RATING SENSITIVITIES

FUTURE CAPITAL PLANS: Despite better performance in fiscal 2014, NLC's still-limited liquidity and large debt burden in the face of near-term capital projects preclude any upward rating pressure. NLC is expected to execute the memory care and skilled nursing project within the next six to 12 months, which will likely be funded by additional debt. This rating action does not incorporate any financing plans, and Fitch will continue to monitor these over the coming months, and take rating action as necessary.

CREDIT PROFILE

Located in St. Louis, MO, NLC operates 50 ILUs, 150 ALUs and 140 SNF beds, generating $17.3 million in total revenue in fiscal2014. Benedictine Health System (BHS) and the Sisters of St. Joseph of Carondolet (CSJ) are joint members of NLC.

ILU PROJECT BENEFITS

From fiscal 2013 to fiscal 2014, NLC's total operating revenue increased 13%, and its total net available for debt service increased nearly 50% due to solid revenues and net entrance fee cash flow from its successful 50-ILU expansion. Including only turnover entrance fees (approx. $20,400) NLC produced MADS coverage of 1.6x in fiscal 2014. Per its covenant calculation, which is based on actual annual debt service, NLC had produced 2.27x coverage through the Oct. 31, 2014 four-month interim period.

Further, NLC's balance sheet improved, to nearly $6.1 million in unrestricted cash and investments, equal to 137 DCOH and a 4.6x cushion ratio, versus Fitch's below investment grade (BIG) medians of 233 DCOH and 4.9x cushion ratio. NLC is budgeting for steady to slightly better fiscal 2015 results, which is consistent with performance year to date.

FUTURE CAPITAL PLANS

NLC is in the midst of a multiphase campus plan, which will likely include an $8 million memory care building and SNF renovation. The financing for this project will be a mixture of fundraising and debt, which is expected to be clarified over the next three to six months. Additional campus plans include another ILU expansion, which would also likely include debt financing. This rating action does not incorporate these preliminary plans, though Fitch notes that NLC has only limited debt capacity at the current rating level.

NLC has traditionally provided services to the predominately CSJ population and CSJ has the right to occupancy on 30 of the 50 new ILUs for at least 10 years. Total revenue from CSJ was $5.1 million in fiscal 2014 and $4.9 million in fiscal 2013. Plans to diversify and grow NLC's revenue base is viewed positively, though the associated debt will pressure NLCs already leveraged financial profile over the near term. At June 30, 2014 debt to net available was 7.4x, and MADS was 7.6% of revenue. While favorable to Fitch's 'BIG' medians of 7.8x and 11.1%, these ratios are indicative of a slightly elevated debt burden.

DEBT PROFILE

At fiscal 2014 (June 30) NLC had $15 million in total long term debt, which is 100% fixed rate. This includes $8 million in series 2012 bonds which Fitch does not rate. MADS equals $1.3 million, and debt service is level through 2029.

DISCLOSURE

NLC is required to disclose only annual financial statements, disseminated via the Municipal Securities Rulemaking Board's EMMA system. However, Fitch views NLC's consistent voluntary distribution of interim financials and occupancy statistics favorably.

Additional information is available at 'www.fitchratings.com'

Applicable Criteria and Related Research:

--'Rating Guidelines for Nonprofit Continuing Care Retirement Communities' (July 24, 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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=974395

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