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U.S. Not-For-Profit Senior-Living Sector's Stability Is Built On Favorable Demographics, Strong Demand

The U.S. not-for-profit rated senior-living sector remained stable in 2018, highlighted in part by sector-specific trends related to high demand and good fill-up rates for new and turnover units supporting stable operations. Industry wide factors, such as favorable demographic trends and the continuation of a robust residential real estate market in many areas were also key drivers behind the strong demand.

In addition, another year of favorable equity market performance (despite some downward pressure at the Dec. 31, 2018, reporting period) drive strong growth in investment income, boost cash flow, helped maintain good debt service coverage, and kept liquidity and financial flexibility generally stable for the sector as a whole. At the same time, leverage has modestly declined, even as the still relatively low interest rate environment has enabled some organizations to access the capital markets to reposition or expand existing communities. Overall, the benefits of high occupancy continue to support a stable U.S. not-for-profit rated senior-living sector that has not been negatively affected by the modest slowdown in economic growth.

S&P Global Ratings rates the debt of 26 not-for-profit senior-living obligors, including two confidential ratings. One credit is excluded, given it holds all tax-backed debt. Rating actions and outlook movement remain infrequent, suggesting consistency in the rated entities' credit profiles and a stable sector overall.

Overall, Key Credit Factors Remain Stable Or Improved

Dependence on non-operating income could raise risk

While the sector has likely enjoyed higher investment returns in recent years, as indicated by the sector median for excess margin in 2018 compared to 2017, increasing dependence on non-operating income represents a risk to the sector as a whole, in our view, as investment markets can be volatile and short term gains can conceal persistent operating shortcomings. While higher investment returns help credits maintain or strengthen their balance sheets, mitigating weak operating performance, given the continued reliance on and importance of excess income in the sector, we believe it behooves management teams to stay focused on investment portfolios and asset allocation while augmenting non-operating income with contributions and donations. The increased dependency on non-operating income is still greater when considering that operating margins have remained below breakeven, albeit stable.

S&P Global Ratings' economists have raised their probability for a recession to 30%-35% (for more information on our economic outlook, see below). While we tend to look past near-term highs and lows of the investment markets--which can be volatile--and expect the market will provide consistent returns over a longer horizon, short-term fluctuations and increased risk of an economic recession or pullback still highlight the risks to those organizations that remain overly reliant on non-operating revenue, particularly investment income, to mask persistent operating deficits. We recognize the value of non-operating income in the overall financial profile of a senior-living organization, though operational results excluding investment income will always be an important rating factor and should be one of management's core strategies. As a result, sound cost management remains a significant factor for generating solid operating performance.

Balance sheet metrics broadly improve

Balance sheet metrics for the U.S. not-for-profit senior-living obligors rated by S&P Global Ratings were generally stable with broad, albeit modest improvement, to most ratios in 2018 compared to 2017. Continued robust demand helped boost deferred revenue and improve adjusted leverage. As the demand for senior-living facilities is partly due to curbside appeal, amenities offered, and preferred models of care, capital spending in 2018 resulted in a modest improvement in median average age of plant. We expect average age of plant to remain relatively stable or to modestly improve over the next few years, driven in part by the need for ongoing capital investments to remain competitive, or to accommodate demand with new units. Strong liquidity and financial flexibility remains a key rating factor and is important to providers as it can offset the risk of the health care liability of a life-care facility, for example, or earnings volatility related to cost spikes or occupancy pressures. To that end, we observe days' cash on hand and cushion ratio medians for the sector as a whole extending a trend of stability in 2018 suggesting that management teams are focused on maintaining liquidity to better respond to adverse business conditions and unexpected industry challenges. However, we note that when broken out by rating category, both the 'AA', 'A', and 'BBB' rating categories show a decline in days' cash on hand, but not cash to debt, suggesting that reserves are stable but not growing at the same rate as the expense base. The days' cash on hand variance between the entire sample showing stability (see table 1) and the rating categories showing a decline (see table 2) is due to the nature of a median calculation. Further, 13 of the 26 rated credits have a Dec. 31 fiscal year-end and were likely affected by the volatile investment market, given that the fourth quarter of 2018 eradicated returns, resulting in an overall loss in the S&P 500 of 4.4% for 2018.

Occupancy remains strong and is boosted by robust demand

Occupancy, which is the predominant factor in operating revenue growth for continuing care retirement communities (CCRCs), remained relatively stable in 2018 and comparable to 2017 occupancy levels on average, although, as of this writing only 70% of our credits have reported occupancy levels for 2018 (see chart 1). S&P Global Ratings believes occupancy levels as reflected in 2018 are needed to achieve meaningful revenue growth (in combination with adequate rate increases) to cover operating expenses and provide adequate cash flow to support capital needs. As fluctuations in assisted living and skilled nursing occupancy rates depend on the timing of transitions by residents from one level of care to another, we typically view a certain amount of short-term variances as routine to business operations and focus more on longer-term occupancy trends. We also recognize developing trends in how CCRCs define occupancy, due in part to the growing trend of aging in place and the impact of technology on the delivery of care. We have seen some providers combine independent living unit and assisted living unit occupancy, and categorize it as "Residential Care" as many residents who may need assisted living services can remain in an independent living unit and still get the same quality of care. From a credit risk perspective, we look to the underlying trend of all services provided, and how the delivery of those services influence financial performance.

In the near term, we expect occupancy rates to remain strong and in line with 2018 levels. We anticipate that providers will leverage robust demand to continue striving for stronger revenue growth, reflecting the benefits of capital expansions supported by the retiring baby boomer population and the growing senior citizen population. We continue to view growth in this demographic as a key factor in creating demand for the senior-living sector. We also expect providers to continue to benefit from a solid U.S. economy, although the rising recession risk could create challenges to both operations and capital plans.

Other challenges already exist, such as the tight labor market and cost pressures relating to increasing wage levels, employee benefit costs and staffing needs at all levels of the organization, particularly with regard to nursing shortages and the resulting expense for contract labor. As unemployment rates remain at record lows throughout the country, many providers are focusing on retention strategies to limit turnover and offset difficulties finding appropriate staff to fill open positions. Long-term challenges concerning capital investment will likely always persist and be a key rating factor, as facilities must invest in their plant either to maintain robust demand or add capacity. While both investments can yield an improved census, the latter is more positive from a credit perspective in our view as additional units generate incremental revenue growth.

Chart 1


Balanced Rating Distributions

Currently S&P Global Ratings rates the debt of 26 not-for-profit senior-living obligors, including two confidential ratings (see table 1). The rating distribution has remained stable over the past several years with a roughly balanced distribution between medium- and low-investment-grade credits (see table 2). Of the 24 providers (excluding two confidential ratings) with long-term ratings or underlying ratings, we rate 46% in the 'A' category and 46% in the 'BBB' category, with two credits in the 'AA' category (see chart 2).

Senior living credits generally confront similar pressures regardless of rating level, but we've observed that during economic downturns and weak business cycles, lower-rated obligors tend to deteriorate at a faster pace than their higher-rated counterparts. This is because the former often lack the liquidity to cushion themselves against increased operating stress. They also may not benefit from the strong business positions, revenue and geographic diversity, or favorable locations that higher-rated obligors have. Similarly, the lower-rated obligors appear to recover at a faster pace than their higher-rated counterparts as the economy improves.

Table 1

Three-Year Comparison Of Senior-Living Overall Medians
2018 2017 2016
Sample size* 26 28 28
Total operating revenues ($000) 33,756 36,586 36,709
Operating margin (%) (0.50) (0.60) 2.00
Excess margin (%) 7.40 5.30 3.40
Operating ratio (%) 92.30 91.80 92.20
MADS coverage (x) 1.40 1.40 1.10
Adjusted MADS coverage (x)** 2.70 3.00 2.40
Debt burden (%) 9.70 9.70 10.30
Deferred revenue 52,990 48,648 42,092
Days' cash on hand 665.30 661.00 614.00
Long-term debt/capitalization (%) 55.20 53.90 55.60
Adjusted long-term liabilities /capitalization (%) 30.70 33.30 34.90
Cushion ratio 15.60 14.50 13.30
Unrestricted reserves/long-term debt (%) 128.40 138.60 131.50
Average age net fixed assets (years) 12.80 13.20 12.30
MADS--Maximum annual debt service. *Includes two confidential ratings. **Includes net entrance fees and deposits.

Table 2

Senior-Living Medians By Rating Level: 2018 Versus 2017
2018 2017
Sample size† 14 12 14 13
Total operating revenues ($000) 40,892 32,738 38,362 32,931
Operating margin (%) (1.50) 1.10 (1.60) (1.30)
Excess margin (%) 9.30 4.10 7.30 3.60
Operating ratio (%) 94.10 92.30 92.80 91.50
MADS coverage (x) 1.70 0.90 1.40 1.10
Adjusted MADS coverage ** 2.90 2.60 3.00 2.50
Debt burden (%) 9.20 10.20 9.10 10.30
Deferred revenue 54,935 52,990 45,307 53,017
Days' cash on hand 846.60 397.30 969.00 454.40
Long-term debt/capitalization (%) 42.70 70.90 43.90 73.00
Adjusted long-term liabilities /capitalization (%) 28.10 48.90 28.60 48.70
Cushion ratio 17.60 7.70 19.00 7.70
Unrestricted reserves/long-term debt (%) 178.10 65.80 174.30 63.00
Average age net fixed assets (years) 13.90 11.60 13.70 11.50
MADS--Maximum annual debt service. Ratings as of Sept. 30, 2019. *Includes one 'AA' and one 'AA-' credit. §Only one credit in speculative grade in 2017, which has been excluded. †Includes two confidential ratings. **Includes net entrance fees and deposits.

Chart 2


Infrequent Rating Actions And Outlook Movements

Rating actions remain infrequent but favorable, with three upgrades to public ratings since our last median report (see table 3). For additional details on the rating actions, please see the issuer review of rated obligors containing a summary of key credit factors from our latest published reports for each rated senior-living credit (see table 4). Movement in our outlook distribution within the most recent review cycle was also minimal, though more balanced, with two outlook revisions to positive from stable and two outlook revisions to negative from stable. Both positive revisions reflected consistently improving operating performance and an improving financial profile characterized by a strengthening balance sheet. The negative outlook revisions reflected the strong likelihood of a substantial new debt issuance for the construction of a second campus to add capacity and the loss of a civil lawsuit resulting in a potentially large payout. We note that the positive outlook changes are intrinsic to improving the overall, long-term financial profiles while the negative outlook revisions are more one-time in nature, though still within scope of senior living business operations. Our outlooks are indicators of the credit quality we expect over a 12- to 24-month horizon. As has been the trend for several years, the majority (all but four) of our rated organizations have a stable outlook, suggesting our expectation that credit profiles and ratings on senior-living providers will remain consistent within the two-year outlook horizon (see chart 3). We note two rating changes (one upgrade and one downgrade) that occurred in October 2019 (see table 4) and subsequently were not captured in this analysis as all rating actions in this report are through Sept. 30, 2019.

Table 3

U.S. Not-For-Profit Senior-Living Sector Rating Actions*
Obligor State Outlook To From
Evangelical Lutheran Good Samaritan Society SD Stable BBB+ BBB
Kendal at Oberlin OH Stable A A-
Mercy Ridge MD Stable A A-
*Rating actions through Sept. 30, 2019. There was one downgrade of a confidential rating.

Chart 3


Sector Outlook: Predominantly Stable With Pockets Of Stress

S&P Global Ratings believes that the senior-living sector demonstrates general credit stability, supported by our affirmation of the vast majority of sector ratings, which carry predominately stable outlooks. While we anticipate that pockets of operating stress across the rating spectrum will always exist, demand appears to be steady and will likely be sustained, in our view, as baby boomers age and providers introduce new care delivery models and technologies that can provide higher-quality care at a reduced cost. While we consider the growing ranks of senior citizens a long-term positive credit factor for the sector (the U.S. Census Bureau projects about 78 million adults 65 years of age or older by 2035, compared to about 50 million today), we anticipate that the trend will likely result in higher capital spending over the longer term and an increasing debt burden for many providers as the sector expands to service the growing population. In particular, we've observed the sector increasing its information technology investments, driven primarily by residential demand as seniors become more comfortable with and adept at incorporating advancing technologies into their daily lives. We also expect the aging population to spur increased competition as new entrants, from CCRCs to single specialty type providers, look to capitalize on the growing demand.

As indicated, this expanding demographic gives rise to both greater competition and potentially more consolidation among providers in some markets. While consolidation is not as prevalent in this sector as it is in the acute-care hospital space, acquisition and affiliation activity does occur. Furthermore, as hospitals and health systems continue their transformation to population health, a post-acute care strategy is becoming ever more crucial. This strategy is leading some to consider consolidation between acute care and post-acute care providers. For example, Sanford Health (A+) acquired Evangelical Lutheran Good Samaritan Society (BBB+) and ProMedica (BBB) acquired HCR ManorCare out of bankruptcy. While we do not expect to see a proliferation of these types of mergers, it does highlight the evolving nature of the business model and importance of post-acute care services. We expect the stronger CCRCs to be opportunistic in their approach to mergers and acquisitions, and we believe strategic affiliations will likely continue at a modest pace so that providers remain competitive over the long term. We also believe that size and scale may take on greater importance over time, allowing CCRCs to expand their footprint, diversify their revenue base, while also gaining cost efficiencies.

However, organizations with aging facilities, whose product offerings do not meet current market expectations, or that are based in particularly competitive markets, could and do experience credit stress. These organizations may increasingly look for affiliations, partnerships or mergers to remain viable over the long term. Those that pursue strategic growth may also experience some credit pressure, although historical trends suggest that if a project is well conceived and well implemented, credit pressure tends to be short-lived. Furthermore, CCRCs are increasingly collaborating with accountable care organizations to provide more effective and coordinated care at lower costs.

The senior-living providers rated by S&P Global Ratings generally have experienced and well tenured management teams that operate in markets with strong demand and historically limited direct competition, particularly from other not-for-profit long term care facilities, though we recognize competition does exist. We also recognize that key macro-level factors, such as the strength of the U.S. economy and the investment markets, also weigh heavily in maintaining credit stability. While these factors are not directly within management control, the ability to recognize adverse business conditions and effectively take corrective action helps maintain credit quality during periods of operating stress. In light of tight labor markets creating heightened staffing challenges and increasing labor expenses, management's focus on cost containment with a strong emphasis on increasing efficiencies throughout the organization is a priority and includes efforts such as improving retention levels, outsourcing non-essential functions such as landscaping, and more strategic purchasing and contracting.

Ratio Analysis Offer Snapshots Of Financial Performance

While we view ratio analysis as an important tool in our assessment of the credit quality of not-for-profit senior-living providers, it is only one of several factors that we take into consideration. Our analysis of the enterprise profile is as important. However, median ratios offer a snapshot of the financial position of our rated CCRCs and help in the comparison of credits across rating categories. In addition, we believe tracking median ratios over time allows for a clearer understanding of industrywide trends and provides a tool to better assess the sector's future credit quality. Because of the intertwining of mission and operations among all members of an organization, the financial statements we generally use for the medians and our analyses are for system-wide results, which include results for obligated and non-obligated group members.

Economic Outlook

We view the senior-living sector as moderately to highly influenced by macroeconomic trends. For example, healthy housing markets can have a positive affect on occupancy rates allowing seniors to sell their homes in order to move into a CCRC. Alternatively, the ability to sell a home becomes more difficult in weak housing markets which can stall demand, decrease occupancy rates and pressure operating margins. An increase in household net worth enhances a consumers' financial position thereby boosting consumer confidence so that making the move to a CCRC and transitioning into a new lifestyle feels more easily accessible. Conversely, a negative stock market shift would be negative for the sector which relies heavily on investment earnings and appreciation of its relatively large investment portfolios for credit strength and debt service coverage.

S&P Global Ratings sees heightened risks in the U.S. economy and calculates a 30%-35% probability of recession in the next 12 months, an increase from the prior calculated odds of 20%-25% earlier in the year. In line with our expectation from last year, S&P Global Ratings anticipates economic growth easing over the next year and is now forecasting a slowing to 2.3% full-year U.S. GDP this year and 1.7% in 2020 (down from 2.5% and 1.8%, respectively) as the long economic expansion faces uncertainty related to the ongoing trade dispute with China and rising geopolitical tensions. In addition, the inversion of the yield curve raised red flags for a potential downturn in the economy and reflects more sensitive financial markets sentiments and recent market volatility. Further, cybersecurity threats to business activity and unintended consequences from regulation and environmental risks all add uncertainty to the slowing economic expansion. S&P Global Ratings follows 10 leading indicators of short-term U.S. economic growth. While these indicators have shifted over the past year to signal fading economic momentum, tight labor markets and low inflation appear to keep consumer sentiment stable in our view, with housing markets and consumer spending likely to remain strong, in our opinion. At the same time, the housing sector remains constrained by limited inventory, particularly for less-expensive starter homes. For more information, please see the reports "Economic Research: U.S. Business Cycle Barometer: Recession Risk Rises" published Aug. 15, 2019, on RatingsDirect, and "Economic Research: Will Trade Be The Fumble That Ends The U.S.'s Record Run," published Sept. 27, 2019.

On balance, S&P Global Ratings anticipates that the senior living sector will remain stable in the near term based on our affirmation of the vast majority of sector ratings, which carry predominately stable outlooks, and the growing senior citizen population which contributes to steady demand. In addition, CCRCs are increasingly collaborating with accountable care organizations to provide more effective and coordinated care at lower costs allowing management teams to contain expense growth. We also expect credit pressures such as a tight labor markets, increasing competition, and elevated capital spending to persist. At the same time, we expect occupancy to remain strong and strategic growth plans to be well executed by experienced and well tenured management teams. As a result, risks associated with an economic slowdown, volatile investment markets and the reliance on non-operating income should be sufficiently moderated to allow the sector to remain stable into 2020.

Table 4

Obligor/Rating/Comments Type* Last Published§
Army Retirement Residence Foundation (dba Army Residence Community [ARC]), Texas(BBB/Stable)  
We view ARC's enterprise profile as stable, with consistently solid demand and occupancy for its independent living and assisted living units, and with very little competition for its service niche. We view ARC's financial profile as adequate and sufficient for the rating in addition to recognizing its improving operating performance and better-than-breakeven operations through the interim reporting period, as the organization executes ongoing operating efficiencies. With new leadership, we expect ARC to continue to progress toward profitability in fiscal 2019 and achieve another year of outperforming operating budget expectations, driven partially by senior management's commitment to making operating improvements and enhancing marketing efforts. As financial operating performance and cash flow improve, we expect ARC's balance of unrestricted reserves to grow steadily, leading to healthier balance-sheet ratios for the next several years. A 01/29/2019
Brethren Home Community dba Cross Keys Village (CKV), Pennsylvania(A-/Stable)  
The rating reflects improved operating results through the nine-month interim period ended March 31, 2019, compared with the slight deficit results the prior two fiscal years (fiscal 2018 and 2017). In addition, we believe CKV maintains strong liquidity and moderate debt leverage, providing a cushion in the event of operating stress. In our opinion, CKV's strong business position and high demand for services will sustain strong occupancy levels as it expands its independent living facilities and continues its planned reduction in its health center. We expect CKV to continue expanding its independent living units (ILUs), with several ongoing projects or in the planning phase, to accommodate demand. We believe it can manage this growth as long as it follows its pattern of 70% presale and continues to generate cash flow to cover the remaining cost of construction. While management has indicated it might issue additional debt to fund future capital needs, the earliest expected date is sometime in 2021 or later. We would expect any additional debt to be commensurate with strong cash flow and maintenance of key balance sheet metrics to absorb the additional carrying charges at the current rating level. C 07/11/2019
Carleton Willard Village (CWV), Massachusetts(A-/Stable)  
The rating reflects the organization's healthy business position in its local market, high demand, a return to healthy occupancy following some softening due in part to extensive multi-year renovations, and light debt load with modest leverage contributing to sufficient balance-sheet metrics that we believe somewhat offset larger than budgeted operating losses in recent fiscal years. The current rating reflects year to date operating results that are slightly ahead of budget and our expectation that year end operating performance will be in line with fiscal 2019 budget expectations. We expect CWV's enterprise profile, debt service coverage and balance sheet will remain intact over the two-year outlook horizon supported in part by a reliance on non-operating income and net entrance fees and deposits. In addition, CWV is moving forward with its plans to construct 12 independent living units (ILUs) on its Arlington Court campus, which we expect to be accretive to both its overall business position and financial profile. The 10-month project is slated to begin in the spring of 2020 and will be financed with approximately $8.5 million of cash and short-term investments subsequently reimbursed from entrance fees. S&P Global Ratings will monitor the timing of the construction and fill up, and will assess whether the potential variances in cash flow and reserves compared to projected levels could affect the rating. B 08/21/2019
Carol Woods Retirement Community (CWRC), North Carolina(A/Positive)  
The outlook revision reflects our view of Carol Woods' key credit strengths, including its considerable unrestricted reserves, consistent cash flow and maximum annual debt service (MADS) coverage (excluding a non-recurring realized loss in the current fiscal year), and excellent demand for independent and assisted living. Year-to-date results through the first six months show improved operational performance with CWRC generating a small operating deficit. We would consider raising the rating over the two-year outlook period if Carol Woods can sustain its improved operations and excellent demand, while continuing to strengthen its financial profile, including reducing leverage and generating MADS coverage in line with historical levels in the 2.5x-3x range. This rating was raised to 'A+' on Oct. 25, 2019. B 09/14/2018
Concordia Lutheran Ministries (CLM), Pennsylvania(AA-/Stable)  
The long-term rating reflects our opinion of CLM's ability to absorb the additional $29.95 million in long-term debt, with $14 million being used to reimburse the Concordia Lutheran Ministries Foundation for the purchase price of the Villa St. Joseph of Baden facility. The remaining funds will be used to construct 65 additional independent living units on the Sumner campus. We believe that the organization will adequately mitigate the construction risk, as it is using the same contractors as in previous expansion projects, and that it will mitigate fill-up risk with its prior experience in selling units during expansions. As of October 2018, 10 units had already been sold, and management expects sales to ramp up in early 2019 after the availability of model units and as the project nears completion. Construction will be completed in spring 2019, and the units are expected to be about 50% sold at that time, with the community reaching stable capacity within 18 months. Although operations through fiscal 2018 have softened, this was expected with the acquisition of the Tampa campus and the Villa St. Joseph. However, management reports that the Tampa campus has ramped up more quickly than expected with the completion of renovations and that the Villa St. Joseph campus is performing as expected. Operations are expected to remain soft through 2019 as the facilities get integrated, but we view positively that one facility is already exceeding expectations and still consider operations solid for a continuing care retirement community. C 11/09/2018
El Castillo Retirement Residences (ECRR), New Mexico(BBB-/Negative)  
The outlook revision reflects our view of the strong likelihood of substantial debt in connection with the construction of a second campus in Santa Fe slated to begin in spring 2019. Preliminary estimates put debt issuance at as much as $75 million, which would fund the construction costs as well as reimburse for prior capital expenditures, fund capitalized interest and a debt service reserve fund, and pay costs of issuance. While more concrete plans are not available, we believe that the expected debt issuance will put pressure on debt metrics. However, we view positively that ECRR is able to expand its presence in its strong market and expect that fill-up of the new ommunity will occur quickly given a waiting list of approximately 300 individuals and couples. We will continue to monitor the plans for the new campus and debt issuance and their impact on the rating. The rating reflects our view of ECRR's firm occupancy, favorable business position with limited competition, overall strong financial performance, ample liquidity, and stable governance and management. A higher rating is unlikely, in our view, as ECRR is both a single-site and smaller life-care-based CCRC with a modest operating revenue base of just $10.3 million (excluding investment income) as of fiscal year-end June 30, 2018. While ECRR effectively lacks competition from other life-care-based CCRCs in Santa Fe or its immediate surrounding area, it does have very modest competition, in our view, from local senior living providers that offer less than the full continuum of services associated with a CCRC. This rating was lowered to 'BB+' from 'BBB-' on Oct. 9, 2019 and withdrawn at the issuers request on Oct. 23, 2019. A 10/31/2018
Eskaton and Subsidiaries, California(BBB/Negative)  
The negative outlook revision is driven by a recent jury rendering for $42.5 million against Eskaton for a seven year old civil case related to an alleged wrongful death of a resident. The jury ruled in favor of the plaintiff in April 2019, awarding the plaintiff $42.5 million for punitive ($35 million) and compensatory ($7.5 million) damages. The case arose from a medication error in 2012. As of this analysis, Eskaton has not booked a reserve for any payout, as a final judgement has not been rendered. Although Eskaton does carry insurance, the coverage has not been determined. Also, punitive damages are not covered by insurance in the state of California. Per Eskaton's 2018 audit, it has filed motions to reduce the amount of damages and is looking at all options, including appealing the jury verdict. Final payment cannot be confirmed at this time, thus Eskaton has not estimated any reserved that should be booked. If we determine the final outcome is material, we could lower the rating. The rating continues to reflect our view of Eskaton's healthy business position with multiple locations in its local market, as reflected by its high occupancy across most of its facilities. Overall, the success that Eskaton has enjoyed is primarily driven by the diversity of the levels of care it offers that range from an adult day care to a continuing care retirement community. Therefore, Eskaton continues to review its portfolio of offerings and will add strategic facilities or divest facilities as it did with Eskaton FountainWood. Coupled with the healthy business position, Eskaton continues to produce positive operations while seeing incremental growth in the balance sheet. However, it continues to have a leveraged balance sheet, though it has successfully operated in this manner for a number of years. Rental 07/08/2019
Evangelical Lutheran Good Samaritan Society, South Dakota(BBB+/Stable)  
The upgrade reflects Sanford Health's (Sanford) Jan. 1, 2019, acquisition of ELGSS and our application of group rating methodology. Although each organization will retain separate obligated groups, our analysis is based on the combined enterprise and financial characteristics of both organizations together and their relative strategic importance to the combined system. We consider ELGSS moderately strategic to the new combined organization because of its more risky and differentiated business profile, unproven strategic value to Sanford, and weaker financial performance relative to the group. Based on its moderately strategic status, ELGSS achieves a one-notch uplift to our stand-alone rating of 'bbb'. We may consider tying the rating on ELGSS more closely to the group once ELGSS has a longer track record of operating under Sanford, if ELGSS' produces sustained financial performance improvement, and when Sanford demonstrates ELGSS' long-term strategic and financial synergies to the system. We consider Sanford core to the newly combined organization and therefore the rating on Sanford's debt and the group assessment is the same. For more information on Sanford's 'A+' rating please see the analysis published May 6, 2019, on RatingsDirect. The rating on ELGSS reflects expected benefits of joining Sanford including opportunities for cost savings and synergies from being part of a larger system with new management and progress made to date on divesting underperforming assets. The rating also reflects ELGSS' persistent and material operating losses with a lower rating precluded by ELGSS' adequate balance sheet. Mostly C 05/06/2019
Foulkeways at Gwynedd, Pennsylvania(BBB/Stable)  
The rating reflects our view of Foulkeways' strong unrestricted reserves, continued solid demand for its services, and experienced management team. The Abington House North project was completed in December 2017, on time and on budget. As of June 2018, all assisted living units (ALUs), including those added in the Abington House North, were 78% occupied. Management reports that occupancy has continued to improve since and should fill up at a faster rate through the end of the year with the addition of a marketing employee to fill the beds with per diem residents. Despite posting operating losses for the past few years, Foulkeways has been able to supplement its losses with investment income. Foulkeways is on budget for the first half of fiscal 2018, and with additional fill-up of the new assisted living units (ALUs) we believe that Foulkeways will meet its budget for fiscal 2018. We expect that Foulkeways' operations will improve as the projects are completed. A 10/25/2018
Front Porch Communities and Services, California(A-/Stable)  
The rating reflects our view of Front Porch's continued market position strength with good revenue and geographic diversity operating primarily in multiple regions across California. While operating primarily in a single state carries some risk, demand, as measured by occupancy rates and the active waiting list, is holding up well allowing Front Porch to absorb some temporary margin compression due to the repositioning project at Wesley Palms and still maintain better than breakeven operations, which we expect will improve as the project nears completion. While project completion is not expected until June 2019, we view Front Porch's approach of phasing in various components of project favorably. The rating also reflects our assessment of the system's consolidated operating performance in fiscal 2018 and year to date through the first two months of fiscal 2019 (ended May 31), which were in line with expectations and slightly stronger than budget. The risks associated with the remaining repositioning project are factored into the current rating, as Front Porch maintains ample liquidity and financial flexibility in our view to support any declines in occupancy or operating performance, which is not expected. Mostly rental and A 08/14/2018
Garden Spot Village (GSV), Pennsylvania(BBB/Stable)  
The rating reflects our view of GSV's strong occupancy, positive operations, and improved unrestricted reserves. The West Campus expansion project has been completed with 25 of 27 units sold and occupied. Because the first phase of the cottages was successful and demand remains strong, management will begin construction on as many as 50 more cottages, with the ability to build in phases as units are presold. The community also has high demand and consistently full occupancy of its memory care unit. To address the need within the community, GSV will also begin construction on an additional building with two 20-unit memory care households in early 2019. While the memory care expansion will likely be funded with debt, the cottages will be initially funded with a construction loan, which will then be repaid with the entrance fees to the cottages. Although GSV will begin construction of two projects in 2019, we believe that the organization's history of successfully completing other projects lessens most of the construction risk and that the strong demand for the services and units will adequately mitigate fill-up risk. C 10/19/2018
Kendal at Ithaca Inc., New York(BBB/Stable)  
The rating reflects our view that Kendal's solid days' cash on hand remains a credit strength along with steadily improving debt related metrics and operating performance in fiscal 2018 likely improving over prior-year results. The organization's enterprise profile, including its location and ties to the Cornell community and to the Kendal organization, also remain credit strengths. The rating also reflects our expectation that Kendal's ongoing marketing campaign to improve occupancy will meet with continued success supporting and strengthening its financial profile such that operating performance remains positive for fiscal 2018 and throughout the two-year outlook period. We base this expectation in part on the successful completion in March 2017 of Kendal's campus building project and augmented marketing efforts designed to fill up legacy independent living units resulting in occupancy rates that will likely continue to increase steadily in the near term. A 10/30/2018
Kendal at Oberlin, Ohio(A/Stable)  
The upgrade reflect our view of Kendal at Oberlin's consistent operating performance and solid financial profile, including a sound balance sheet, particularly favorable liquidity and financial flexibility. Kendal's ability to generate annual operating surpluses that meet or exceed budget is a credit strength in our view as it both reduces the reliance on non-operating income, which can be inconsistent and demonstrates strong business practices of monitoring performance against budgeted goals throughout the year. After completing significant renovations and expansions from its master facility plan, we believe management has demonstrated an ability to successfully manage project risk, which will benefit the organization as it continues to update its cottages and facilities on an ongoing basis with more routine capital spending. Leadership is currently implementing a five-year strategic plan focused on service offerings to position Kendal at Oberlin for continued success and meet the future healthcare needs of its residents. After recently rebalancing the personal care units and the skilled nursing units, occupancy rates for those units have shifted slightly although independent living unit (ILU) occupancy remains above 90% and stable. Kendal at Oberlin continues to serve as a preferred provider in Mercy Health Systems' accountable care organization. Management also reports good relationships with the other large healthcare systems in the area, all of which now have rehabilitation facilities in Lorain County. While the competitive landscape is evolving with regard to skilled nursing and personal care facilities in the area, we believe Kendal at Oberlin is well positioned to stay competitive in its market, remain financially stable, and ultimately sustain high occupancy levels at each level of care offered including the now reduced number of skilled nursing units. A 04/18/2019
Loomis Communities, Massachusetts(BBB/Stable)  
The affirmation reflects our view that Loomis' continued excellent balance sheet, characterized by 533 days' cash on hand and 2.1x cash-to-debt as of April 30, 2019, provides sufficient cushion at the rating level for the weaker financial performance experienced in fiscal 2018 (year ended Dec. 31) and through the first four months of fiscal 2019. Fiscal 2018 closed with a $1.6 million operating loss (negative 6.7% operating margin), which management attributes to some occupancy rate decreases at two of its three retirement communities (Loomis Village and Applewood), caused in part by a softer local real estate market that dampened the number of new entrants into the community. Through the first four months of fiscal 2019, Loomis is generating an improved $427,000 operating loss (negative 4.7% operating margin), which is slightly better-than-budgeted and is driven by rebounding occupancy rates. Management expects to close fiscal 2019 with an operating loss of about $1.2 million, which we think is a reasonable estimate based on the first third of the year's performance and manageable at the rating level given the balance sheet strength. Life-care (5%); B (50%); C (45%) 06/11/2019
Masonic Villages of the Grand Lodge of Pennsylvania(A/Stable)  
The affirmation reflects the organization's strong liquidity and moderate debt leverage, offset by heavy historical operating losses. Masonic Villages' strong business position and high demand for senior-living services further support the rating, and we expect the organization will sustain strong occupancy levels as it expands its facilities. Furthermore, we expect that Masonic Villages' balance sheet will remain intact over the next several years, because management indicates it has neither debt plans nor an intention to deplete its unrestricted reserve balance throughout the two-year outlook period. Rental 06/05/2019
Mercy Ridge Inc., Maryland(A/Stable)  
The upgrade reflects our view of Mercy Ridge's consistent operating performance and improving financial profile, including a strong balance sheet, favorable liquidity, and financial flexibility, which provides ample cushion and is consistent with a higher rating level. In addition, Mercy Ridge's strong enterprise profile, characterized by consistently solid occupancy for both the independent living and assisted living service lines, and favorable demand in the form of a consistent and growing wait list, further supports the higher rating. While Mercy Ridge's financial performance remains negative (as calculated by S&P Global Ratings), this is due, in part, to a change in accounting rules pertaining to refundable entrance fees dating back to 2012. Because of the structure of Mercy Ridge's contracts, it could no longer treat a portion of the refundable entrance fees as deferred revenue and had to make an accounting adjustment. In our opinion, the underlying financial performance at Mercy Ridge is generally consistent and the operating trend will likely remain at or near current levels. C 06/21/2019
Moorings Park Institute (MPI), Florida(A+/Stable)  
The rating affirmation reflects our expectation that MPI's demand profile will remain very strong in the near term and occupancy will improve after a temporary decline. The enterprise profile also incorporates our view of a favorable location with a strong economy, and a management and governance team we view as capable and experienced. The rating also reflects MPI's recent and projected financial profile, characterized by operating losses, exceedingly strong liquidity as measured by days' cash on hand and a modest but sufficient debt profile for the rating in our view. Although operating results are projected to remain negative though the outlook period, cash flow from operations is expected to remain positive and steadily grow. Further, cash flow from the Moorings Park Grande Lake (MPGL) project is projected to remain solidly positive through each construction phase. While there will remain an increasing reliance on non-operating investment income which can be volatile, Mooring Park's portfolio is intentionally weighted toward fixed income assets (61% in fiscal 2018) to help fund construction costs. We understand that management expects to close on a $50 million line of credit to be drawn in small increments in order to help smooth cash flow during the construction of the Grande Lake campus as Moorings Park builds up reserves from entrance fees. While unexpected, any disruptions in cash flow could result in a longer payback period or use of cash reserves to pay the line of credit. S&P Global Ratings will monitor the timing of the construction and fill up, and will assess the effect on the rating, if any, from potential variances in cash flow compared to projected levels shared with S&P Global Ratings. A 09/16/2019
Noland Health Services (NHS), Alabama(A/Stable)  
The rating reflects our view of NHS' strong occupancy trends in all levels of care and very healthy balance sheet. The company also has light leverage, robust cash on hand, and very strong unrestricted cash to long-term debt. The rating further incorporates our view of NHS' strong management team and very limited competition in the long-term acute care hospital (LTAC) business as a result of Alabama's certificate-of-need laws, which limit the number of licensed and available LTAC beds by region. Despite operating volatility since fiscal 2017, we believe that NHS has the balance sheet strength to sustain the depressed margins while the organization works to reposition itself in the market with a larger emphasis on senior living services. Rental 03/21/2019
Otterbein Homes, Ohio(A/Stable)  
The rating reflects our view of Otterbein's sustained solidly positive operating margins, which are typically over 4%-5%, and which we consider a credit strength. We view Otterbein's balance sheet as adequate for the rating albeit constrained with elevated pro forma leverage and moderate unrestricted reserves, although management has no plans to materially draw down on reserves. We expect overall occupancy rates to remain solid as management continues to invest in renovating and updating facilities to meet demand and support healthy financial performance that continues to meet consistently positive operating budgets in the near term. We believe there is limited room for additional debt (beyond the $15.0 million private placement borrowing planned for later this year) at the current rating level and would negatively view any significant increase in leverage or adjusted MADS coverage that weakens further from current levels without a return to more historic margins of over 4%. Future debt capacity, including a second issuance of another $15 million being contemplated by management, will likely be contingent upon commensurate growth in unrestricted reserves and net assets, and maintenance of adjusted MADS coverage at current levels or better which we view as possible given the front-loaded amortization schedule. We therefore believe Otterbein can absorb at the current rating the $15 million bank loan arrangement expected to be entered into later this fiscal year as long as demand remains good and operating performance remains steady. C 06/24/2019
Pickersgill Inc., Maryland(A/Stable)  
The affirmation reflects our opinion of Pickersgill's considerable unrestricted reserves and consistently positive financial performance and cash flow over the past few years, which has led to growth in key metrics. The facility's long waitlist and high occupancy in independent living and skilled nursing units denote a steady demand, with assisted living occupancy steadily improving. To promote further resident satisfaction, Pickersgill is beginning a facility improvement plan that will refresh and expand many common spaces and combine smaller assisted living units (ALUs) into larger ones that are more in demand. The projects will be funded from reserves already set aside and no additional debt will be issued. Apart from these relatively small projects, management does not have any other significant capital or debt issuance plans. For fiscal 2019, the operating margin is expected to moderate slightly, but we expect that it will continue to improve in the longer term with improved occupancy in the ALUs, comparatively favorable rates with a majority of residents covered under private payers, and continued expense management. C 02/22/2019
Presbyterian Homes Obligated Group (PHOG), Illinois(BBB+/Stable)  
The rating continues to reflect our assessment of Presbyterian Homes' continued ability to operate at a level that is no less than what the leadership team has shared with S&P Global Ratings. (Our analysis is based on the consolidated system.) As Presbyterian Homes has finished the first phase of its capital project at The Moorings and has moved into phase two, the leadership has noted higher occupancy than expected. This has helped to support the good operations, but operations are now closer to break-even. Historically, Presbyterian Homes had been one of the few rated organizations that posted positive operations. While the operations are below historical levels, the leadership team attributed this to the opening of an assisted living building and a new memory care unit. In our view, once the newly opened facilities stabilize, Presbyterian Homes should return to historical levels of operations. A 10/11/2018
Shell Point, Florida(BBB+/Stable)  
The rating reflects our view of Shell Point's healthy operating performance on a consolidated basis that continues to meet or exceed budget expectations supported by stable occupancy rates, fast fill up for new projects, and a solid waitlist for the independent living units. We recognize the additional debt weakens pro-forma debt metrics, further dilutes liquidity metrics and weakens coverage as SP embarks upon and completes a number of expansion and renovation projects. However, give the rate of earnings, solid business position, and recent trend of balance sheet growth, we believe the 'BBB+' rating can be supported through a short-term diminution of reserves as we expect the current capital projects to be accretive to the overall financial profile. A 05/07/2019
St. Leonard Healthcare Center, Ohio(BBB-/Positive)  
The outlook revision reflects St. Leonard's improved operating margins in fiscal 2018 and through the four-month interim period ended Oct. 31, 2018; consistently solid adjusted maximum annual debt service (MADS) coverage; and continued growth in liquidity, specifically days' cash on hand. We expect St. Leonard to continue generating positive operating margins and adjusted MADS coverage while improving balance sheet metrics. The affirmation reflects our opinion of St. Leonard's consistent occupancy levels above 90% for all service lines and improving census. Management attributes the high occupancy and census to campus improvements that have modernized the units and helped market the facility to prospective residents. The rating also reflects St. Leonard's somewhat weak balance sheet, with low unrestricted reserves-to-long-term debt and high leverage, although both are in line with medians and comparable peers at the rating level. St. Leonard also benefits from its affiliation with Catholic Health Initiatives (CHI) as part of CHI Living Communities. B/C 12/18/2018
Westhills Village Retirement Community, South Dakota(A+/Stable)  
The rating reflects our view of Westhills' very strong enterprise profile, with continued robust occupancy trends and favorable demand, and its healthy financial profile, highlighted by consistently profitable operating results and favorable balance sheet characteristics, including exceedingly high reserves. The series 2017 bond proceeds were used to fund a new assisted living apartment building that contains 44 assisted living units (ALUs). Construction was completed in May and opened to residents in June 2018. Because 31 of the units were replacement units, only 13 units were new. With Westhills' strong waiting list, the additional units were filled by August 2018, mostly from the community's internal waiting list, and we view this as very positive for the project. Management is still considering what to do with the vacated building and property that housed the old ALUs, but plans to make a decision in 2019 after more carefully evaluating Westhills' waiting list and the resident needs, although it would likely execute the plan outside the outlook period. A 01/22/2019
N/A--Not applicable. *For definitions and explanations of the contract types, see our Senior-Living Criteria. §The "Last Published" column indicates the most recently published rating release and report. Any subsequent credit events and related analysis will be captured in future rationales and media releases.

This report does not constitute a rating action.

Primary Credit Analysts:Wendy A Towber, Centennial (1) 303-721-4230;
Stephen Infranco, New York (1) 212-438-2025;
Secondary Contact:Kenneth T Gacka, San Francisco (1) 415-371-5036;
Additional Contact:Prashant Singh1, Pune (91) 20 4200 8254;

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