Fitch Assigns 'BBB-' Underlying Rating on Wesley Enhanced Living Obligated Group (Pennsylvania); Stable Outlook.
The series 2005 bonds are expected to be issued as daily variable-rate demand bonds. The bonds will be insured by Radian Asset Assurance, whose insurer financial strength is rated 'AA' with a Negative Outlook by Fitch. Liquidity will be provided by a standby bond purchase agreement issued by Citizens Bank of Pennsylvania. Fitch has not been requested to provide ratings on the series 2005 bonds. Bond proceeds will be used to fund $16.8 million in various capital projects, refund a total of $16.0 million of outstanding indebtedness, fund a debt service reserve fund, and fund associated costs of issuance. The bonds are expected to sell the week of Aug. 29, 2005 through negotiation by Goldman Sachs.
The 'BBB-' rating is supported by Wesley Enhanced Living Obligated Group's (WEL) historically strong demand for services, solid liquidity relative to expenses, improved profitability, and moderate competition at WEL's price point. WEL consists of 38 cottages, 304 independent living apartments, 32 assisted living units, and 60 skilled nursing units at two locations. As of April 30, 2005, occupancy in the cottages and apartments was 98%, while the assisted living and skilled nursing units were 85% and 93% occupied, respectively. Since 2002, occupancy in the residential units and the skilled nursing beds has been in excess of 93%. Bond proceeds will fund the addition of 38 additional independent living apartments at the Maple Village campus, which are 100% presold. WEL's cash and investments relative to expenses totaled 266 days at the end of fiscal 2004, which compares favorably to Fitch's 'BBB' of 262. Fitch views positively the history of support provided by the Wesley Enhanced Living Foundation to WEL facilities. The Foundation holds over $5.5 million in assets that would increase WEL's liquidity indicators to approximately 412 days cash on hand and pro forma cash to debt of about 41%. However, the foundation is not obligated on WEL's outstanding debt and Fitch did not consider the Foundation's assets in its analysis. WEL's profitability jumped in 2004 as entrance fee receipts rebounded from depressed levels in 2003. Pro forma debt service coverage in 2004 was 2.1 times (x) versus 0.8x in fiscal 2003. WEL's market is highly competitive with approximately 17 facilities that offer vary levels of care. In aggregate, the facilities in the market enjoy robust occupancies above 90% on residential units. WEL's entrance fees range between $40,000-$114,000, while many of the competitors charge entrance fees between $75,000-$200,000. Fitch believes this price advantage provides WEL a competitive edge with the flexibility to raise fees in the future.
The primary credit concerns for WEL are the substantial increase in debt, the risks associated with construction projects, and a lack of historical audited financial statements. Upon issuance of the series 2005 bonds, WEL's long-term debt will increase by 180% from $13.5 million to $38 million. Pro forma cash to debt at fiscal year-end 2004 equals 26.5%, which is significantly below Fitch's 'BBB' median of 61%. Pro forma maximum annual debt services (MADS) as a percentage of total revenues in 2004 is 13.7%, which is moderately weaker than Fitch's 'BBB' median of 9.3%. Fitch notes that new entrance fees and the monthly service fees generated from 38 new units will help to moderate WEL's increased leverage position. WEL is subject to the risks of construction delays, cost overruns, and reduced turnover due to construction work. WEL has attempted to limit risk by executing guaranteed maximum price contracts with contractors and will move residents out of affected units during construction, if possible. Fitch's analysis is based on two years of audited financial statements of the obligated group; Fitch prefers at least three years of audited results in the rating process. For prior years, Fitch relied on the audited consolidated and consolidating statements, which include all the entities of Wesley Enhanced Living.
The Stable Outlook reflects Fitch's expectation that additional entrance fees generated by new independent living units will help to moderate WEL's cash to debt ratio. Moreover, the common area improvements and reconfiguration should allow for improved resident service revenue generation.
Currently, WEL is not party to any swap obligations. WEL expects to enter into a $23 million floating- to fixed-rate swap to synthetically create a fixed-rate obligation on the series 2005 A bonds. Swap payments are on parity with the series 2005 bonds, and WEL's obligations under the swap agreement (excluding early termination payments) will be insured by Radian Asset Assurance. Fitch plans to review all swap documents when completed.
Wesley Enhance Living Obligated Group consists of two type-C senior living facilities located in Doylestown, PA and Hatboro, PA. In aggregate, the facilities operate 38 cottages, 304 independent living apartments, 32 assisted living apartments, and 60 skilled nursing beds. Total operating revenue in 2004 was $16.3 million. WEL has covenanted to provide to the master trustee and each requesting bondholder annual audited financial statements within 120 day of each fiscal year-end and quarterly unaudited financial statements within 45 days of each fiscal quarter end, which is viewed positively by Fitch.
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|Date:||Aug 5, 2005|
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