Landis Homes Retirement Community in Lititz received an investment-grade rating for a major refinancing in August 2015, as it prepared for a multi-year overhaul of its campus.
Fitch Ratings assigned a “BBB-” rating to $50.7 million in Series 2015 fixed-rate bonds to be issued by the Lancaster County Hospital Authority on behalf of Landis Homes. The outlook was stable. BB&T Capital Markets was scheduled to sell the bonds through a negotiated sale the week of Aug. 31, 2015.
What the money was for
Bond proceeds were expected to refund all of Landis Homes’ existing debt, fund a debt service reserve and pay issuance costs. The bonds were secured by a mortgage lien on the property, a security interest in revenues, entrance fees and accounts receivable, and the reserve fund.
Why Fitch rated it investment grade
Fitch pointed to several strengths:
- Strong occupancy. From fiscal 2012 through fiscal 2015, independent living, assisted living and skilled nursing occupancy averaged 91, 97 and 98 percent. Landis also filled more than 100 new independent living units in that period, and 25 that opened in June 2015 were expected to be full by September.
- Solid cash flow. The adjusted net operating margin averaged 14.7 percent from fiscal 2011 through 2014 and topped 17 percent in each of the two most recent audited years. Debt service coverage was 3.0 times in 2013 and 2.5 times in 2014.
- Reputation and demand. Fitch cited the community’s long history, reputation for quality, attractive campus and church-related founding. About 85 percent of residents came from Lancaster County.
Areas to watch
Fitch also flagged risks. Liquidity was below the median for its BBB category: at June 30, 2015, unrestricted cash and investments of about $23 million equaled 294 days of operating expenses. Fitch said non-refundable fee-for-service contracts eased that concern.
Cash flow had softened in fiscal 2015 because of rising employee health benefit costs, smaller rate increases and planned vacancies. And debt was set to rise.
A big campus plan
Landis Homes was beginning a three-phase master facilities plan to modernize its campus. Plans included demolishing several older cottages, building and renovating independent living units, updating skilled nursing beds and adding a learning and wellness center with a new main entrance.
Phase I, starting in November 2015, included seven new cottage homes, renovations to 25 health care beds and the possible combination of 44 older apartments into 22 larger units. Phase II, set to begin April 1, 2016 and last about 17 months, called for a community and wellness center with 22 new apartments replacing 19 outdated ones.
The first two phases were to be funded by a bank loan of nearly $37 million. Including the bonds, long-term debt was expected to reach about $83 million, or 63 percent of adjusted capitalization. Maximum annual debt service of $5.2 million was described as a manageable 14.6 percent of fiscal 2015 revenue.
Fitch said construction risks, such as cost overruns or slow re-occupancy of renovated units, could put pressure on the rating.
What a BBB- rating means
Fitch’s BBB- is the lowest rung of investment grade. For a nonprofit retirement community, holding an investment-grade rating usually means lower borrowing costs than a non-rated or below-investment-grade issue, which matters when the savings can be put toward resident services and campus improvements.
About Landis
Landis Homes sits on 114 acres surrounded by farmland in Lititz, about 8 miles north of Lancaster. In 2015 it had 484 independent living units, 97 assisted living units and 103 skilled nursing beds. Its parent, Landis Communities, operates senior living and home-based services through several Lancaster County affiliates. Obligated group revenue in fiscal 2015 was $34.7 million.
This story was originally published on LititzDailyNews.com in August 2015 and has been updated for our archive.