Fitch Affirms Nazareth Living Center's (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):

--$7.8 million series 1999 refunding revenue bonds.

The Rating Outlook is Stable.

NLC has an additional $8 million in series 2012 fixed rate bonds which Fitch does not rate.

SECURITY

The bonds are supported by a pledge of revenues, mortgage, and debt service reserve.

SENSITIVITY/RATING DRIVERS

SIGNIFICANT DEBT BURDEN: The 'BB' rating reflects NLC's sizeable debt burden, which increased in 2012 as anticipated to finance a campus expansion. Total long-term debt was $15.4 million at Dec. 31, 2012, equaling a high 11.9x debt to net available and 69% debt to capitalization.

ILU PROJECT UNDERWAY: The rating also incorporates the risk associated with the construction, presale, and fill-up of NLC's independent living unit (ILU) expansion. This risk is moderated by the co-member Sisters of St. Joseph of Carondolet's (CSJ) agreement to purchase and occupy 30 of the 50 new ILUs for a minimum of 10 years upon their open in July 2013. Fitch believes the project is needed to bolster NLC's position in a competitive continuing care retirement community (CCRC) market, as well as diversify and grow its revenue base.

WEAK BALANCE SHEET: NLC's liquidity remains very light, providing only limited cushion against operating risk. Unrestricted cash and investments equaled $3.2 million at Dec. 31, 2012, equating to 79.3 days of cash on hand (DCOH) and 21% cash to debt. Capital spending is expected to limit meaningful liquidity growth in the near term.

OCCUPANCY REMAINS MIXED: Total assisted living unit (ALU) occupancy continues to suffer; slipping to 54.6% through the six-month interim period ended Dec. 31, 2012 from 73.4% in fiscal 2010. Skilled nursing occupancy remained steady at 89.5%, and the 14-bed dementia unit has been very well utilized at over 95%. However, any drop in total occupancy to a level which significantly impacts NLC's operating cash flow could negatively pressure the rating.

ADEQUATE OPERATING PERFORMANCE: NLC continues to produce sufficient operating cash flow to provide 1.0x coverage of maximum annual debt service (MADS; $1.3 million) in the six-month interim period, and 1.7x coverage of actual annual debt service. Once NLC completes its ILU project and starts collecting entrance fees in fiscal 2014, coverage of MADS is expected to improve accordingly.

CREDIT PROFILE

The rating affirmation at 'BB' reflects NLC's significant debt burden, which increased in 2012 to finance a 50-unit ILU expansion adjacent to its current campus. The total project cost is estimated at $16 million, funded with 10.1 million in debt, $4.9 million in entrance fees, and $1 million in equity. NLC's total debt includes a $1.9 million subordinate fixed rate loan from CSJ, which matures June 30, 2016. NLC expects to repay this loan with entrance fee receipts in 2014.

The 'BB' rating is contingent upon NLC's successful execution of the ILU expansion. The project presents some risk, namely construction, presale, and fill-up. These risks are mitigated by CSJ's agreement to purchase and occupy 30 of the 50 units, and pay monthly service fees (regardless of occupancy) for no less than 10 years following initial occupancy. As of Jan. 14, 2013, NLC had collected deposits on 42/50 units, including the 30 reserved by CSJ.

Of some concern is the competitive landscape for CCRC's in the greater St. Louis market, which has impacted NLC's ALU occupancy in recent years. The open of newer units within an expanded market coupled with higher turnover to skilled nursing facilities (SNF) continues to pressure ALU occupancy, which has remained below 60% since 2011. Still, the ILU project should help preserve its competitive position within the area, and it will be the only type C fee-for-service model within its primary target market.

Of ongoing concern is NLC's reliance on CSJ reimbursement for services rendered, which equaled over 30% of fiscal 2012 revenues and whose members represent 40% of occupied units. However, Fitch believes that NLC is taking steps to adequately market itself to external residents, while still maintaining its mission as a Catholic-based institution.

The Stable Outlook is supported by Fitch's expectation that NLC will continue producing steady operating profitability through construction and occupancy of its ILUs, scheduled to open July 2013 and stabilize at 95% occupancy in June 2014.

Located in St. Louis, MO, NLC operates 150 ALUs and 140 SNF beds, generating $15.6 million in total revenue in fiscal 2012. Benedictine Health System (BHS) and the Sisters of St. Joseph of Carondolet (CSJ) are joint members of NLC.

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

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria', dated June 12, 2012;

--'Rating Guidelines for Nonprofit Continuing Care Retirement Communities' July 12, 2012.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015

Rating Guidelines for Nonprofit Continuing Care Retirement Communities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=40171

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Contacts:

Fitch Ratings
Primary Analyst
Emily E. Wadhwani
Associate Director
+1-312-368-3347
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Gary Sokolow
Director
+1-212-908-9186
or
Committee Chairperson
James LeBuhn
Senior Director
+1-312-368-2059
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com
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