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Fitch Rates The Moorings, Inc.'s (FL) 2018A Revs 'A'; Downgrades Outstanding to 'A'.

New York: Fitch Ratings has assigned an 'A' rating to the following Collier County Health Facilities Authority Residential Care Facility bonds issued on behalf of The Moorings Incorporated (Moorings):

--$32,365,000 Revenue Bonds (The Moorings, Incorporated) series 2018A.

Fitch has also downgraded to 'A' from 'A+' the following bonds also issued on behalf of the Moorings:

--$62,000,000 Collier County Health Facilities Authority Residential Care facility revenue bonds (The Moorings, Incorporated) series 2015A.

The 2018A bonds will be issued as fixed rate. The Moorings will also be issuing $40 million of series 2018B bonds that will be variable rate and privately placed with BB&T. The covenants of the bank debt will be the same as the Master Trust Indenture and the term of the placement will be 20 years.

Proceeds from both series of 2018 bonds will reimburse the Moorings for prior capital expenditures, including the renovation and upgrade to its clubhouses and for an independent living (IL) expansion, fund the exterior replacement of two buildings, and pay for the cost of issuance. Maximum annual debt service (MADS) will rise to approximately $12.6 million from $8 million. Bonds are expected to sell via negotiation the week of June 25.

The Rating Outlook is Stable.

SECURITY

The bonds will be secured by a gross revenue of the obligated group (OG). The OG consists of two senior living campuses. In 2017, the OG comprised 60% of total net system assets and 90% of its operating revenue.

KEY RATING DRIVERS

ELEVATED LONG TERM LIABILITIES: The downgrade to 'A' reflects the increase in the Moorings' leverage position with the issuance of the 2018 debt. A pro forma analysis for the year end 2017 period shows MADS as a percent of revenue increasing to 13.7% from 8%, compared to a Fitch 'A' category median of 8.6%. Pro forma debt to net available (backing out $8.4 million in one-time hurricane expenses in 2017) shows MADS at 9.5x relative to Fitch's 'A' median of 4.3x.

STRONG DEMAND FOR SERVICES: IL occupancy has been above 95% over the four year historical period, even as the Moorings added over 100 new IL units over this time. Skilled nursing occupancy has been steady at approximately 93% and assisted living (AL) was slightly more volatile ranging from 86% to 100% (the 70% AL occupancy in 2017 reflects the impact of the temporary closing of the AL building due to Hurricane Irma). Fitch views the Moorings' strong demand for services as a credit strength and a positive indicator as the Moorings seeks to expand to a third campus.

STEADY OPERATING PERFORMANCE: Moorings operational performance reflects its Type 'A' contract, with operation ratios at around 100% and net operating margin, adjusted (NOMA) in the 20% to 30% range, supported by strong net entrance fee receipts. The Moorings' 2017 performance was affected by one-time costs related to Hurricane Irma. Normalizing those costs shows the Moorings' underlying performance remaining steady.

GOOD MARKET POSITION: Fitch views The Moorings' nearly 40 year-long operating history, location in an affluent part of Naples, FL, strong capital spending and attractive campus, as key marketing strengths that support the high occupancy and steady financial performance, drawing in residents from beyond the local area.

CONITNUED CAPITAL INVESTMENT: The Moorings' capital spending has averaged 394.2% of depreciation over the last four years, with the Moorings expanding onto a second campus, Moorings Park at Grey Oaks (MPGO), over this time. With this debt issuance, the Moorings will continue to invest in keeping up its original campus, as the exterior of two buildings will be replaced.

THIRD CAMPUS EXPANSION: The Moorings is in the pre-sale phase of an expansion onto a third campus, Moorings Park Grande Lake (MPGL). The campus is being built by a third party developer over six phases. The Moorings will use entrance fees to purchase the units from the developer once a phase is completed. The Moorings has committed to building a clubhouse and an assisted living center and undertaking a small IL expansion at MPGL as one of the phases.

RATING SENSITIVITIES

CONTINUED STEADY PERFORMANCE: Fitch expects The Moorings, Incorporated (Moorings) operating performance to remain consistent with historical levels. A fall off in performance could lead to negative rating pressure. A ratings upgrade would require liquidity growth coupled with a moderation in the Moorings' leverage position.

MOORINGS PARK GRANDE LAKE PROJECT: Fitch will factor the Moorings capital commitment for the Moorings Park Grande Lake into the rating as the project advances and more details become available. The final timing, cost, financing, and construction of this phase could affect the rating. However, the Moorings strong track record of building and filling Moorings Park at Grey Oaks, the limited construction risk in the project design, and some debt capacity at the current rating level mitigate credit concerns.

CREDIT PROFILE

The Moorings, Inc. was organized in 1977 as a not-for-profit corporation in the state of Florida for the purpose of acquiring, constructing and operating a continuing care retirement community in Naples, Florida. The original campus called Moorings Park (or the original campus) opened in 1981, offers a Type 'A' lifecare contract, and provides IL, AL and skilled nursing services.

In 2016, the Moorings opened a second campus, Moorings Park at Grey Oaks, which offers a Type 'B' contract and provides IL and AL services. On both campuses, the Moorings offers a traditional contract and a 50% refundable contract. Approximately 90% of residents choose the traditional contract. In aggregate, the Moorings has 511 IL units, 114 AL units, and 106 skilled nursing beds. In 2017, the Moorings had total operating revenue of approximately $84 million.

ELEVATED LONG TERM LIABILITIES

The downgrade reflects a long-term liability position that is currently more consistent with the middle of the 'A' category than at the higher end. After the 2018 debt issuance, the Moorings long-term debt will have more than doubled since 2014, increasing to $208 million from $93 million over this time. The increase in debt has led to the elevation of the Moorings' debt metrics. In 2014, the Moorings cash to debt was 187%, its debt to net available was 3.3x, and adjusted debt-to-cap was 24.6%. A pro forma analysis at Dec. 31, 2017 showed cash to debt at 108%, debt to net available of 9.5x, and adjusted debt-to-cap of 41.3%. These figure are relative to Fitch's 'A' category medians of 125.2%, 4.3x, and 45.3%, respectively. A pro forma analysis of MADS coverage show it dropping below 3x, after holding at around 4x through the historical period. Moving forward, Fitch expects the Moorings coverage to stay in the 2.5x to 3x coverage range. Fitch's 'A' category MADS coverage is 3x.

During this time, the Moorings' investment in its plant has been very strong, averaging 394.2% of depreciation. The Moorings' age of plant of 7.9 years also reflects the good investment in capital relative to a median of 11.2 years. The Moorings is a high end facility with attractive campuses, a variety of deluxe services, including a wellness center with a spa and variety of dining venues. The continued investment in its campuses and in its services has kept the demand strong for the Moorings' IL units.

The Moorings completed an expansion on to a second campus in 2017, MPGO. MPGO consists of 109 IL units, 14 AL units and 24 memory support units, a clubhouse, and other various amenities and was built in four separate phases. The development and construction costs were funded by a local real estate developer and the Moorings acquired the units upon the completion and fill-up of each phase, with a portion of the series 2015 financing used to pay for acquisition costs. MPGO is filled and the occupancy is stabilized.

Steady Financial Performance

The Moorings operational performance reflects its largely Type 'A' contract and its limited refund liability as most residents are on a fully amortizing contract. As a result, operating ratios are around 100% and NOMA's in the 20% to 30% range, supported by strong net entrance fee receipts.

The Moorings' 2017 performance was affected by Hurricane Irma. The campuses remained opened and made it through the storm with limited damage. However, the AL building on the Moorings original campus had water penetration issues and evacuated after the storm to complete repairs and minimize resident disruption. Many residents were relocated to the Grey Oaks AL center, which was not full, as it had recently opened. The storm led to one-time costs of $8.4 million in FY17. Backing those costs out shows the Moorings' underlying performance remaining steady.

Overall, the Moorings' steady performance has been supported by good demand for services. IL occupancy has been above 95% over the four year historical period, even as the Moorings added over 100 new IL units over this time. Skilled nursing occupancy has been steady at approximately 93% and assisted living (AL) was slightly more volatile ranging from 86% to 100% (the 70% AL occupancy in 2017 reflects the impact of the temporary closing of the AL building due to Hurricane Irma).

Third Campus Expansion

The Moorings is in the pre-sales phase of a third campus expansion, MPGL, to be located on an approximately 55-acre site, 4.8 miles southeast of the original campus. The plan for MPGL is for 259 IL residences that a local developer will build in six phases and which the Moorings will acquire from the developer upon the completion of each phase using entrance fees. The financing structure is the similar to the one used to build MPGO and limits the Moorings construction risk. The phased approach also allows for the project to stop should the fill-up or pre-sales not meet expectations at any phase.

The Moorings has committed to construct 16 IL residences, a clubhouse with related amenities, and 24 assisted living/memory care suites at MPGL. A portion of the Moorings' construction is expected to be funded through the issuance of tax-exempt bonds. Fitch has not factored the debt into the current rating and will wait until the phases are further along to incorporate. The Moorings phase of construction expected to occur in the middle part of the overall project.

Fitch views positively the Moorings' track record of successfully executing similar expansion projects, the current project's design, and the pre-sales deposit policy. The Mooring has both built and filled IL expansions on its original campus and expanded to a new campus with MPGO. The project design of MPGL, similar to that of the MPGO's, limits construction risk with the third party developer and keeps the fill-up and financial risk manageable with the phased approach to construction.

While the initial deposit to get on the MPGL pre-sales list is 10%, the Moorings requires that an additional 40% be put down when construction of a phase commences. Fitch views this positively, believing the level of financial commitment, 50% of the entrance fee at the time of construction, indicates a stronger likelihood of move-in relative to projects where the remaining 90% of the entrance fee is paid at the end upon project occupancy. As of March 31, 2018, a total of 24 residences for phase I have been reserved with a 10% deposit.

Debt Profile

With the issuance of the series 2018A and B bonds total outstanding long term debt increases to approximately $208 million from $132 million as of Dec. 31, 2017. Approximately 48% of the debt is fixed rate and approximately 52% is variable rate bonds placed privately with two separate banks. The Moorings' current debt profile is slightly aggressive but the Moorings maintains strong unrestricted liquidity relative to the level of bank debt.

The Moorings has one floating to fixed rate swap, with a notional amount of $19.8 million and a negative mark to market of $1.4 million as of Dec. 31, 2017.
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Publication:Daily the Pak Banker (Lahore, Pakistan)
Date:Sep 6, 2018
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