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U.S. Not-For-Profit Senior Living Sector Showed Pre-Pandemic Stability In 2019 But Rating Pressures Loom

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U.S. Not-For-Profit Senior Living Sector Showed Pre-Pandemic Stability In 2019 But Rating Pressures Loom

The fiscal 2019 U.S. not-for-profit senior living sector medians highlight pre-pandemic stability in the sector with mixed changes overall in the ratios compared to fiscal 2018 (see table 1). On average, key operating ratios remained stable or weakened while balance sheet metrics improved. S&P Global Ratings' senior living sector portfolio is generally split between medium to high investment grade (A/AA) and low investment grade (BBB) credits. As expected, the financial profiles of the higher-rated cohort are typically stronger, and in fiscal 2019 many key operating and balance sheet median results highlight the underlying, and in some cases growing, gap in credit quality between the two rating levels (see table 2).

The stability of continuing care retirement communities (CCRCs) in fiscal 2019 was driven in part by a robust residential real estate market in many areas, generally favorable investment market performance despite some periods of volatility, a healthy economy, and sector-specific trends related to favorable enterprise profile characteristics, including strong occupancy and continued high demand for new and existing units (see chart 1). Balance sheet ratios, particularly liquidity, have trended favorably for several years, providing many senior living communities the crucial liquidity and financial flexibility needed to meet near-term challenges associated with managing operations with the onset of the novel coronavirus (COVID-19) pandemic earlier this year. Furthermore, we believe the stability of S&P Global Ratings' CCRC portfolio once again reinforces the importance of strong management teams who can provide the necessary leadership to effectively mitigate many pandemic-related and other near-term operational risks. Management capabilities combined with healthy demand and liquidity and financial flexibility metrics support our view of our rated credits' stability despite expected headwinds from the recessionary environment and ongoing uncertainty about the trajectory of the pandemic over the next year or two. If those headwinds accelerate to materially weaken occupancy levels and negatively affect financial performance, it may lead us to revise our view.

Table 1

Three-Year Comparison of Senior-Living Overall Medians
2019 2018 2017
Sample size* 22 26 28
Total operating revenues ($000) 33,469 33,756 36,586
Operating margin (%) (0.90) (0.50) (0.60)
Excess margin (%) 4.60 7.40 5.30
Operating ratio (%) 92.60 92.30 91.80
MADS coverage (x) 1.20 1.40 1.40
Adjusted MADS coverage** (x) 2.70 2.70 3.00
Debt burden (%) 9.80 9.70 9.70
Deferred revenue 51,638 52,990 48,648
Days' cash on hand 750.90 665.30 661.00
Long-term debt/capitalization (%) 50.30 55.20 53.90
Adjusted long-term liabilities /capitalization** (%) 26.90 30.70 33.30
Cushion ratio 17.10 15.60 14.50
Unrestricted reserves/long-term debt (%) 179.20 128.40 138.60
Average age net fixed assets (years) 13.10 12.80 13.20
MADS--Maximum annual debt service. *Includes two confidential ratings. **Includes net entrance fees and deposits.

Table 2

Senior-Living Medians By Rating Level: 2019 Versus 2018
2019 2018
AA/A* BBB AA/A* BBB
Sample size† 15 7 14 12
Total operating revenues ($000) 48,587 31,987 40,892 32,738
Operating margin (%) (1.30) (0.50) (1.50) 1.10
Excess margin (%) 6.40 0.50 9.30 4.10
Operating ratio (%) 91.20 94.30 94.10 92.30
MADS coverage (x) 1.70 0.60 1.70 0.90
Adjusted MADS coverage** (x) 2.70 2.00 2.90 2.60
Debt burden (%) 9.10 11.20 9.20 10.20
Deferred revenue 54,105 49,171 54,935 52,990
Days' cash on hand 908.40 376.00 846.60 397.30
Long-term debt/capitalization (%) 37.70 81.10 42.70 70.90
Adjusted long-term liabilities /capitalization** (%) 26.40 46.50 28.10 48.90
Cushion ratio 20.00 8.60 17.60 7.70
Unrestricted reserves/long-term debt (%) 210.30 63.30 178.10 65.80
Average age net fixed assets (years) 13.60 12.20 13.90 11.60
MADS--Maximum annual debt service. Ratings as of August 31, 2020. *Includes one 'AA' and one 'AA-' credit.†Includes two confidential ratings.**Includes net entrance fees and deposits.

Chart 1

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S&P Global Ratings rates the debt of 22 not-for-profit senior-living obligors, including two confidential ratings. Through the 11-month period between Sept. 30, 2019 and Aug. 31, 2020, which covers the span of rating actions between our last report and this one, we upgraded three credits and downgraded one credit (see table 3). This is consistent with the rating actions included in our 2019 published report. Most of the ratings were affirmed, resulting in minimal movement in the rating distribution, with all CCRC ratings being investment grade (see chart 2). As has been the trend for several years, the majority (all but three) of our rated organizations have a stable outlook, supporting our expectation that credit profiles and ratings on senior-living providers will remain consistent within the two-year outlook horizon (see chart 3).

Table 3

U.S. Not-For-Profit Senior-Living Sector Rating Actions*
Obligor State To Outlook From Outlook To Rating From Rating
Upgrades
Carol Woods Retirement Community NC Stable Positive A+ A
Kendal at Ithaca, Inc. NY Stable Stable BBB+ BBB
Presbyterian Homes IL Stable Stable A- BBB+
Downgrades
Army Retirement Residence Foundation TX Negative Stable BBB- BBB
*Rating actions through Aug. 31, 2020. We note that there were five more credits were reviewed under annual surveillance in September 2020 but none resulted in any rating or outlook changes One confidential rating outlook was revised to negative.

Chart 2

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Chart 3

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Management Teams' Swift Response To Adverse Conditions, Including COVID-19, Are Critical To Credit Stability

Management teams have always been a critical factor influencing our view of credit stability. 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. We also recognize that key macro-level factors, such as natural disasters or pandemics, the health of the U.S. economy, and the investment markets, are not directly within management's control but still weigh heavily in maintaining credit stability. As evidenced by the stability of recent rating actions, management's ability to recognize adverse business conditions early and take corrective action helps maintain credit quality during periods of operating stress. Management's focus on what it can control, such as pricing flexibility, revenue growth, and cost containment with a strong emphasis on increasing efficiencies, should remain a priority in our view and includes efforts such as improving staff retention levels, outsourcing non-essential functions, and pursuing more strategic purchasing and contracting.

While the broader retirement sector in the U.S. struggled with the onset of the COVID-19 pandemic, the U.S. not-for-profit CCRC organizations rated by S&P Global Ratings have exhibited overall resiliency. In large part, this has been due to management teams reacting quickly to limit the number of positive COVID-19 cases among both staff and residents (cases have been limited year-to-date among CCRCs that we rate). Since the onset, we believe that the health care and retirement industry has learned a significant amount about how to manage operations within this new environment. And, with more testing capabilities than earlier in the pandemic, we believe management teams are now better equipped to address challenges. Nonetheless, we believe ongoing vigilance is required to continue to mitigate pandemic-related risks and maintain stable financial performance and occupancy rates.

Managements' actions to stem the effect of the pandemic at CCRCs were comprehensive. Precautions included enacting strict protocols for visitors and direct admissions. In most cases, direct admissions into skilled nursing facilities (SNF) were temporarily suspended, not only to prevent COVID-19 from spreading in its community, but also because hospitals temporarily suspended all elective surgeries, resulting in virtually no patients being transferred to a SNF for post-acute care. Management efforts to contain the outbreak typically extended to closing common areas, securing a supply of personal protective equipment, and shutting down various non-essential amenities while at the same time developing contingency planning. Many CCRCs leverage their investments in information technology to keep residents connected or have developed their own formal testing processes and contact tracing procedures campus wide for both residents and staff. We view these efforts as necessary and prudent, despite the disruption it caused to operations and cash flow. To help offset revenue losses and increased expenses associated with the pandemic, many organizations received relief funding through the Coronavirus Aid, Relief, and Economic Security (CARES) Act and leveraged the Paycheck Protection Program where possible.

Overall, Credit Quality Remains Stable Among Rated CCRCs

Occupancy and demand support operations but expenses increase

The benefits of high occupancy continue to support stability for S&P Global Ratings' rated CCRC organizations, which have thus far demonstrated resilience despite the pandemic and ongoing weakness in several macroeconomic trends that affect the sector. Occupancy, which is the predominant factor in operating revenue growth for CCRCs, remained relatively stable in 2019 and comparable to 2018 occupancy levels, although, as of this writing about 70% of our credits have reported occupancy levels for 2019. These high occupancy levels, in combination with adequate rate increase, support revenue growth to cover operating expenses and provide adequate cash flow for capital needs. As fluctuations in assisted living and skilled nursing occupancy 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 and focus more on longer-term trends. We also recognize developing trends in how CCRCs manage occupancy, due in part to the growing trend of aging in place and the influence of technology on the delivery of care. Rather than compete with aging in place services, we have seen providers collaborate to support new residents as they move into their independent living unit or allow residents to remain in that unit for a longer period before moving to assisted living. In some cases, occupancy for an independent living unit and an assisted living unit are combined and categorized 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 influences financial performance.

In the near term, we expect post-pandemic occupancy rates to correlate somewhat with pre-pandemic trends, whereby credits with consistently strong demand and high occupancy will likely perform better than those credits with below average occupancy or generally weak demand. Occupancy levels across the continuum have generally softened from 2019 levels due to move-in delays resulting from the pandemic; however, management teams report that move-in rates have begun to rebound and waitlists have remained stable. Thus, over the long-term we anticipate that the macro trends of the growing senior citizen population will support our assessment that demand for services will continue. Marketing and sales incentives can also be effective tools in managing a prolonged downturn in demand and help jumpstart the recovery for many providers, as exhibited during the last recessionary period and housing downturn that occurred in the 2007-2009 time frame.

The pandemic and recessionary pressures are exacerbating other operating challenges that already existed in the industry, such as staffing and cost pressures relating to increasing wage levels, employee benefit costs and the reluctance to work in an industry with perceived increased health risks. In particular, the pandemic has highlighted nursing shortages and the resulting expense for contract labor. Many providers are elevating their focus on retention strategies to limit turnover and offset difficulties finding appropriate staff to fill open positions, especially due to the negative media attention on the industry stemming from the pandemic. While investments in both staffing and facilities can yield an improved census, we continue to view the latter as more positive from a credit perspective as additional units generate incremental revenue growth.

Dependence on investment markets remain a credit risk to both nonoperating income and reserves

Investment market performance can affect both non-operating income as well as unrestricted reserves, the latter being one of the cornerstones for CCRCs credit stability. Further, CCRCs are typically reliant on non-operating investment income to support maximum annual debt service (MADS) coverage. We generally view this reliance as a credit risk, given that it can be inconsistent and subject to various external factors, and thus, operational results excluding investment income will always be an important rating factor. The sector had enjoyed solid investment returns in recent years but excess margins, while still positive, weakened in fiscal 2019 whether comparing medians overall or by rating category. When combined with weaker operations for lower investment grade credits, it contributed to a decline in adjusted MADS coverage and days' cash on hand. Higher investment grade credits fared better.

Favorable investment returns can help credits maintain consistent cash flow and strengthen their balance sheets thereby mitigating to some extent weaker operating performance. Management teams have thus increased their oversight and focus on investment portfolios, including asset allocation and liquidity, while also augmenting non-operating income with contributions and donations, as they try to limit some of the downside risk and preserve capital. Strong liquidity and financial flexibility is important to mitigating exposure to several risk factors, including the health care liability of a life-care facility, limited capital access, or earnings volatility related to cost spikes or occupancy pressures.

We observe that most balance sheet metrics for the sector extended a general trend of improvement in 2019. However, upon closer analysis, this improvement is heavily driven by the 'AA/A' rating level medians suggesting there may be a growing divide in the credit quality gap as organizations with stronger underlying credit quality having greater resources and are better positioned to respond to adverse business conditions and unexpected industry challenges, such as the COVID-19 pandemic. In particular, the stronger days' cash on hand (DCOH) and unrestricted reserves to debt metrics for higher investment grade credits suggest meaningful improvement in unrestricted reserves and good expense management. Conversely, relatively stable unrestricted reserves to debt compared to softer DCOH for the 'BBB' rating category suggests that reserves are stable but not growing at the same rate as the expense base for those credits.

With the emergence of the COVID-19 pandemic this spring, there occurred significant volatility in the investment markets reflecting the considerable uncertainty driven by the pandemic and recessionary pressures. The Chicago Board Options Exchange Volatility Index, a closely watched barometer that measures the stock market's expectation of future volatility, increased significantly in 2020 (see chart 4). While volatility persists, many management teams have reported that investment portfolios have since rebounded, providing much-needed cash flow relief during a period of stress.

Chart 4

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The market volatility compounded by the recessionary pressures highlights the risks to unrestricted reserves (depending on the asset allocation) as well as those organizations that remain overly reliant on non-operating revenue, particularly investment income, to mask persistent operating deficits.

Continued capital investment in facilities is key to growing and maintaining demand

As the demand for senior-living facilities is partly due to curbside appeal, amenities offered, and preferred models of care, capital spending in 2019 resulted in only the higher-rated credits achieving modest improvement in the median average age of plant, while the weaker operations and weaker balance sheets for the lower investment-grade credits may have reduced the ability or flexibility to spend on capital improvements, resulting in an uptick in average age of plant. Given that most management teams significantly pulled back on capital spending during the pandemic, we expect near-term weakening of the median average age of plant. However, we expect average age of plant to steadily improve and then stabilize over the medium to longer term, driven in part by the need for ongoing capital investments to remain competitive, or to accommodate demand with new units. Given the very low interest rate environment and modest improvement in debt-related metrics, we expect that some organizations may take this opportunity to access the capital markets to reposition or expand existing communities as pandemic risks subside.

Rating Distribution Edges Toward Higher Investment-Grade Credits

Currently S&P Global Ratings rates the debt of 22 not-for-profit senior-living obligors, including two confidential ratings. The rating distribution over the past several years had been roughly balanced between 'AA/A' and 'BBB' rating level credits with a slight shift in 2019 to more higher investment-grade credits. Of the 20 providers (excluding two confidential ratings) with long-term ratings or underlying ratings, we now rate 59% in the 'A' category and 32% in the 'BBB' category, with 9% (or one credit) in the 'AA' category.

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 or geographic diversity, or favorable locations that higher-rated obligors have. We expect this to hold true with respect to post-pandemic stress and continued recessionary pressures and financial performance between the rating levels will likely remain notably different.

2019: Year of Infrequent Rating Actions And Outlook Revisions

Rating actions remain infrequent but favorable, with three upgrades and one downgrade to public ratings since our last report. We note that the upgrades occurred prior to the pandemic at the end of 2019. 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 negative, with two outlook revisions to negative from stable, including one on a confidential rating. COVID-19 has not yet had a meaningful influence on rating and outlook actions to date among our rated portfolio.

Industry's Near-Term Challenges Include The Pandemic, Shifting Business Models

Pandemic, economic challenges could pressure ratings if demand, occupancy levels destabilize

We recognize that the COVID-19 pandemic continues to evolve and has the potential to further disrupt the long-term care industry, and possibly the not-for-profit CCRC sector. We also believe the pandemic and its associated economic challenges will generally pressure the sector's earnings via ongoing market volatility, potentially affecting non-operating income and unrestricted reserves. Should overall occupancy levels remain near fiscal 2019 medians, we believe U.S. not-for-profit CCRCs generally have some capacity to absorb near-term strain on their financial metrics. However, a more prolonged or severe stress to either operations or key balance sheet metrics could pressure ratings. That said, macroeconomic factors such as the favorable borrowing environment, aging population, and housing markets that remain generally healthy could help management teams navigate these headwinds.

Through the initial phases of the pandemic, demand appears to be steady as many seniors and their families perceive the relative safety and community of a quarantined campus facility as preferable to living independently in isolation. And, we consider the growing ranks of senior citizens a long-term positive credit factor for the sector (the U.S. Census Bureau projects about 73 million adults will be 65 years of age or older by 2030, compared to about 56 million today with nearly one in four Americans projected to be 65 years of age or older by 2060). However, in the near term, the stability of demand and occupancy levels could waver should ongoing vigilance be insufficient to prevent the spread of COVID-19, undermining the sense of safety and security among residents and their families. We anticipate that the need to ensure the health and safety of residents and staff, in tandem with continued strong demand, 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 expect the pandemic will spur management teams to develop new strategic and capital plans, revise campus and residence layouts, continue to invest heavily in technology, and establish business or operating models that may be more flexible and resilient in the face of future pandemics or other crises.

Strategic affiliations, consolidations may be key as sector evolves

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. The competitive landscape comes in all shapes and sizes as the U.S. retirement industry includes a broad array of providers and facilities, some of which are free standing and not part of a full continuum such as CCRCs. These include independent or active adult living facilities, assisted living facilities, memory care facilities, nursing homes, and combined memory care and assisted living facilities. Further, there are for-profit and not-for-profit operators. In addition, there are various niche and specialty type providers that may restrict admissions to targeted constituencies. Senior living facilities also exhibit a myriad of housing, service, and affordability characteristics. Organizations with aging facilities, whose product offerings do not meet current market expectations, or that are based in particularly competitive markets, are more likely to experience financial stress. These organizations may increasingly look for affiliations, partnerships, or mergers to remain viable in the long term.

While consolidation is not as prevalent in this sector as it is in the acute-care hospital space, acquisition and affiliation activity does occur. We expect the stronger CCRCs to continue to be opportunistic in their approach to mergers and acquisitions (M&A), and we believe strategic affiliations will likely continue at a modest pace so that providers remain competitive in the long term. We also believe that size and scale may take on greater importance over time, allowing CCRCs to expand their footprint and diversify their revenue base, while also gaining cost efficiencies. Those that pursue strategic growth through acquisitions may also experience some credit pressure, although historical trends suggest that if M&A or affiliations are well conceived and well implemented, credit pressure tends to be short-lived. As hospitals and health systems continue their transformation to population health, a post-acute care strategy is becoming ever more crucial. In a post-pandemic environment, the evolving nature of the business model and role of post-acute care services includes new challenges, potentially making mergers more difficult to consummate with additional risk factors.

Issuer Review

Table 4

Obligor/Rating/Comments Type* Last Rated§
Army Retirement Residence Foundation (dba Army Residence Community [ARC]), Texas(BBB-/Negative)  
The rating reflects our expectation that ARC will maintain an enterprise profile we view as acceptable supported in part by a service niche with little direct competition as resident eligibility is exclusively limited to retired career U.S. military officers with at least 20 years of service from any branch of the armed services or a spouse, widow, or widower of a career officer. While demand and occupancy for its independent living and assisted living units had waned through fiscal 2019, management aggressively expanded marketing efforts and created a new strategic plan resulting in an increase in ILU sales to date in fiscal 2020 compared to prior year reflecting marginal effects from the COVID-19 pandemic to date. We view ARC's financial profile as fair, characterized by larger than expected operating losses through the interim reporting period that fall short of budget and generate thin adjusted maximum annual debt service (MADS) coverage coupled with declining unrestricted reserves, both on a nominal basis and as measured against operations and debt. Unrestricted reserves remain a source of credit pressure if they do not stabilize and begin to be rebuilt. While we view modest operating losses as acceptable, in order to offset those losses other financial metrics such as sufficient adjusted MADS coverage and stable key balance sheet metrics are necessary in our opinion. Management forecasts operating losses to modestly narrow by fiscal year end. We believe increased ILU occupancy rates and entrance fees coupled with improved operating performance that supports higher adjusted MADS coverage and a stable balance sheet is critical to maintaining the current rating. We note management's plans for up to roughly $10.0 million of new money debt plans within the outlook period which, while modest, could create additional rating pressure as adjusted leverage is already high in our view. However, management has indicated it will not undertake additional debt unless certain financial performance metrics are sustained. The COVID-19 pandemic continues to be a rapidly changing situation with the potential to disrupt the long-term care industry. While the duration, timing, and severity are unclear, and may vary by type of long-term care facility and region, we believe the pandemic, and its associated economic and social challenges, will pressure earnings including non-operating income as well as unrestricted reserves due in part to market volatility. Should occupancy levels remain near current levels, we believe ARC will have limited capacity to absorb near-term strain on its financial metrics and that a more prolonged or severe stress to either operations or its balance sheet could pressure the rating further. In light of the COVID-19 outbreak, ARC has taken early and appropriate steps in our view to manage its operations and the safety of its residents, including enacting strict protocols for visitors and direct admits, increasing security, closing common areas, increasing supplies--particularly for sanitation efforts, re-evaluating capital spending plans, and working with local government agencies, while considering contingency planning. While the San Antonio area has not had a significant increase in cases to date, and the ARC has had no staff or residents who have tested positive for COVID-19 to date, any spike in cases could cause some interim operating stress, especially if the situation is prolonged. However, we believe ARC's credit fundamentals, including the strengths of its enterprise profile, may help support the credit over the medium to longer term. The two-year negative outlook reflects our view of ARC's declining occupancy and uneven operating performance including larger-than-expected operating losses in fiscals 2019 and 2020, supporting thin adjusted and revenue only MADS coverage. A 04/10/2020
Brethren Home Community dba Cross Keys Village (CKV), Penn.(A-/Stable)  
The rating reflects increasing negative operating results through the 12-month interim period ended June 30, 2020, which included the impact of the COVID shutdown through the second half of fiscal 2020. This followed a fiscal 2019 where CKV posted a slight operating loss as the community continued to implement its strategy to reduce the number of skilled nursing beds and build out the capacity of independent living (ILU) and personal care (PC) units. We expect CKV to continue expanding its ILU capacity, most recently with 46 homes and 30 hybrid homes, which were online and 80% filled as of year-end 2020. We believe it can manage this continued growth as long as it follows its pattern of 70% presale and continues to generate cash flow to cover the remaining cost of construction. CKVs strong business position, which is highlighted by limited nearby competition in the CRCC space, as well as a wealthy surrounding population and low cost of living, will support a high occupancy rate and strong demand profile for its ILUs and PC units going forward. CKV balance sheet strength continues to be a key credit strength, with strong liquidity and moderate debt leverage, providing a cushion in the event of operating stress. While management has indicated it might issue additional debt to fund future capital needs, nothing has been formally planned at this time. 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 09/11/2020
Carleton Willard Village (CWV), Mass.(A-/Stable)  
The rating reflects the organization's healthy business position in its local market, high demand, healthy occupancy that has improved over fiscal 2018 after the completion of extensive multi-year renovations, and light debt load with modest leverage contributing to sufficient balance-sheet metrics that we believe somewhat offset ongoing operating losses. The assigned rating reflects 2019 year to date operating results that are slightly ahead of budget as calculated by CWV through the first eight months of the fiscal year (ending Dec. 31). We anticipate that year-end operating performance will likely be in line with the year to date budget variance for fiscal 2019, meeting or slightly exceeding operating budget expectations of negative $1.2 million. We expect Carleton Willard's enterprise profile, pro-forma 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. Post transaction, CWV will have a more conservative debt profile in our opinion, with no contingent liabilities. In addition, management reports no new debt plans. Management will not use the proceeds from the series 2019 bonds to finance its Arlington Court project. Carleton Willard is on track to move forward with the construction of 12 independent living units (ILUs) on its Arlington Court campus. We expect the project to be accretive to both its overall business position and financial profile. Management reports that the 10-month project will begin in March 2020 and plans to finance the roughly $8.5 million project with approximately $7.5 million of cash and $800,000 of entrance fee deposits on the new units, each of which has interest from potential residents. Once completed, entrance fees on the new units will subsequently reimburse the cost of the project. 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 11/15/2019
Carol Woods Retirement Community (CWRC), N.C. (A+/Stable)  
The higher rating reflects our view of Carol Woods' key credit strengths, including its considerable unrestricted reserves, consistent cash flow and maximum annual debt service (MADS) coverage, 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. While Carol Woods' remains somewhat dependent on nonoperating income to generate positive excess margins, it maintains exceedingly high, and growing unrestricted reserves and liquidity, which is one of the main drivers of the higher rating. In addition, the higher rating also reflects Carol Woods' excellent demand, consistent cash flow and declining leverage. B 10/25/2019
Concordia Lutheran Ministries (CLM), Penn.(AA-/Stable)  
The rating reflects a stable enterprise profile highlighted by good demand (in three states) and a stable financial profile highlighted by consistently solid operations and a healthy balance sheet. Following softer operations through fiscal 2019 which were expected due to the acquisition and integration of the Tampa campus and the Villa St. Joseph, year to date operations through the first six months of fiscal 2020 have recovered well in our view as the Tampa campus ramped up faster than expected with the completion of renovations and the Villa St. Joseph campus is performing as expected. Operations are solid for a continuing care retirement community (CCRC). While we understand that fluctuations in occupancy rates are often driven by capacity changes or the timing of transitions by residents from one level of care to another and therefore view a certain amount of variance in occupancy rates as routine to business operations, we expect demand to remain solid and occupancy levels to remain relatively consistent in the near term. C 02/28/2020
Eskaton and Subsidiaries, Calif.(BBB/Negative)  
The rating also reflects our view of Eskaton's healthy business position underlined by its diverse offerings, growing footprint, various strategic initiatives, and historically stable occupancy. However, we do note that occupancy, specifically from an assisted living and skilled nursing facility standpoint, is softer in interim 2020 due to COVID-19. To mitigate this, Eskaton has enhanced its marketing efforts and continues to enhance its service lines and offerings. In addition, management is expecting occupancy will rebound to historical levels by mid-fiscal 2021. Rental 10/03/2020
Foulkeways at Gwynedd, Penn.(BBB/Stable)  
The rating reflects our view of Foulkeways' strong unrestricted reserves that somewhat offset the modest operating losses, solid demand for its services evidenced by strong occupancy and a large wait list, and an experienced management team. Despite posting operating losses for the past few years, Foulkeways has been able to supplement its losses with investment income and net entrance fees, resulting in stable-to-improving adjusted debt service coverage. Foulkeways is slightly ahead of budget for the first nine months of fiscal 2019, and because occupancy has improved in the past couple months management anticipates being able to exceed budget through the end of the 2019. In 2020, Foulkeways is budgeting a positive operating margin, which we believe would be achievable if strong occupancy is maintained and management continues its focus on improving operations. With some larger capital projects beginning in 2020, we expect that reserves will decline slightly. A 12/06/2019
Front Porch Communities and Services, Calif.(A-/Stable)  
The rating reflects our view of Front Porch's healthy business position underlined by strong occupancy levels and geographic diversity, as Front Porch operates in multiple regions across California. While operating in a single state inherently carries some risk, Front Porch continues to realize high demand for its services, which should sustain strong occupancy levels as it completes its repositioning project at Wesley Palms and other ongoing capital projects across its facilities. The rating also reflects the better than breakeven results (for the consolidated entity) in fiscal 2019 and the first three months of fiscal 2020; although, management anticipates year end fiscal 2020 results will be below breakeven due to one-time costs associated with the implementation of updated business systems (ERP/Kronos) throughout the organization as well as reduced Medicare reimbursement due to the rollout of the new payment methodology (Patient Driven Payment Model, PDPM). Management also anticipates labor costs will remain high. Although, operating losses should be tempered by additional revenue related to the new units coming online at Wesley Palms, expansion of Summer House at Claremont Manor, and increased resident rates. We expect Front Porch will meet budgeted expectations and end the year around negative 0.4% operating margin given the abovementioned one-time costs which have already been factored into the budget. Nonetheless, Front Porch's ample liquidity and financial flexibility should provide cushion if Front Porch were to realize any declines in occupancy and operating performance. Lastly, management has indicated it might issue additional debt in the near term to refinance existing variable rate debt. Mostly rental and A 11/20/2019
Kendal at Ithaca Inc., N.Y.(BBB+/Stable)  
The upgrade reflects our view of Kendal's trend of improving operations through fiscal year 2018, which supports steady balance sheet accretion. Kendal is also on track to meet fiscal 2020 occupancy projections for its independent living units (ILUs). 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 supported by both annual residential monthly fee increases as well as a residential entry fee increase for all contract types in fiscal 2020. The organization's enterprise profile, including its location and ties to the Cornell community and to the Kendal organization, continue to serve as credit strengths in our opinion. The rating also reflects our expectation that Kendal's new executive director will be focused on improving occupancy in conjunction with an augmented marketing campaign and other initiatives that should allow Kendal to reach ILU projections of 90% in fiscal year 2020. A 12/20/2019
Kendal at Oberlin, Ohio(A/Stable)  
The rating reflects Kendal's extensive diversity with the ability to attract a wide array of people from 36 states and the District of Columbia while maintaining a high occupancy rate and ample waitlist numbers showing a desire to join the community. Kendal also benefits from an experienced management team, with further support from the Kendal Corporation, with historical results of coming in above budget and continuing to manage facilities including a multi-wave living quarter's improvement plan with additional upgrades to community spaces. A continuing trend of a solid balance sheet with high day's cash on hand and respectable positive margins leaves Kendal in sound financial position which is continually a strength of the credit. While management expects 2020 margins to soften due to COVID-19 related drivers, particularly slower move in rates and higher equipment costs, we believe margins should return to historical levels within the two-year outlook period given Kendal's solid business position, steady demand, and long term trend of consistent operations. Through the first quarter of 2020 margins were above the historical trend and could help offset some of the COVID-19 related drivers. Furthermore, Kendal is typically not reliant on non-operating income, which we view as a positive at this time but also recognize the strong balance sheet could support cash flow in a weaker operating environment. Kendal secured a Paycheck Protection Program loan under the CARES act that totaled $1.7 million and has the ability to be forgiven, all or in part, depending on how the funds are used for qualified expenses. Management believes the majority, if not all, of the loan will be forgiven when analyzing usage so far. Kendal also initially received an HHS payment from the CARES act of $390 thousand with an additional $80 thousand received later based on the size of Kendal's Skilled Nursing Home. We view favorably management's diligence in pursuing and obtaining all available funding associated with the CARES act. The COVID-19 pandemic continues to be a rapidly changing situation that is disrupting the health care sector across the country. While the duration, timing, and severity of the impact are unclear and may vary by type of health facility and region, we believe the pandemic and its associated economic and social challenges could pressure occupancy, earnings, and unrestricted reserves. We believe Kendal has the ability to absorb some strain on its financial metrics at the current rating, but a more prolonged or severe stress could cause us to revise that view. As of June 15, there was one confirmed positive case of COVID-19 at Kendal related to a staff member and not impacting resident exposure. We view the preventative steps taken to date as prudent and effective, evidenced by the lack of positive cases of COVID-19 with residents. Overall, we believe management has navigated these challenges well while continuing to move new residents into the community since the start of quarantine. Effective practices included a hard closure of the campus, adapting to a more virtual environment for residents with increased usage of technology and instituting a mandatory 14 day quarantine for new residents that had moved in while the hard closure was in place. Construction has continued on track while new tenant logistics have been adjusted to be more virtual but continue onward through the changing landscape of the pandemic. Management is currently looking at solutions for a phased reopen of campus to try and assume a more normal day to day life for the residents while remaining aware of quarantine practices to reduce unnecessary COVID exposure. A 06/17/2020
Loomis Communities, Mass.(BBB/Stable)  
The rating reflects our view of Loomis' continued excellent balance sheet, characterized by 610 days' cash on hand (DCOH) and consistent debt coverage, providing sufficient cushion at the rating level to absorb small operating losses typically experienced at Loomis, before accounting for net entrance fees and deposits. Furthermore, we expect that Loomis' balance sheet will remain stable over the outlook period, as management indicates it has neither debt plans nor an intention to spend down its unrestricted reserve balance. Loomis' enterprise profile, which has been characterized by historically strong and consistent occupancy levels, as well as a stable service area, also supports the rating. Life-care (5%); B (50%); C (45%) 09/29/2020
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., Md.(A/Stable)  
The rating reflects our view of Mercy Ridge's excellent liquidity and financial flexibility, which provides ample cushion at the current rating level to offset historical operating losses as per S&P Global Ratings' calculation. Furthermore, we expect that Mercy Ridge's balance sheet will remain intact over the next several years; as management indicates it has neither debt plans nor an intention to spend down its unrestricted reserve balance over the outlook period. While operating performance in fiscal 2020 (unaudited) was weaker than prior years, we believe it is still manageable given the level of nonoperating income being generated has risen as well, allowing for consistent coverage of maximum annual debt service. 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 rating. C 09/09/2020
Moorings Park Institute (MPI), Fla.(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), Ala.(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. We also consider Noland's expansion of its senior living division beneficial, as LTAC reimbursement can be more subject to reimbursement changes. Although these changes in LTAC reimbursement have led to operating volatility since fiscal 2017, we believe that NHS has the balance sheet strength to sustain the depressed margins, albeit at break-even, while the organization works to reposition itself in the market with a larger emphasis on senior living services, and more recently with the completion of the new Anniston facility and near-completion of the renovations for the Fairhope facility. The COVID-19 pandemic continues to be a rapidly changing situation that is disrupting the health care sector across the country. While the duration, timing, and severity of the impact are unclear and may vary by type of health facility and region, we believe the pandemic, and its associated economic and social challenges, could pressure occupancy, earnings, and unrestricted reserves. We believe Noland has the ability to absorb some strain on its financial metrics, but a more prolonged or severe stress could cause us to revise that view. Rental 04/10/2020
Otterbein Homes, Ohio(A/Stable)  
The rating reflects our view of Otterbein's overall solid business position including diversity of communities across the western half of Ohio in parallel with continued positive operating performance over the past two fiscal years, with year-to-date operations through the first six months of fiscal 2020 (ending Dec. 31) tracking above the 3.0% budget. This includes $1.4 million of realized Coronavirus Aid, Relief, and Economic Security (CARES) Act grants with an additional $4.4 million of CARES Act funding received but not yet realized. We continue to view Otterbein's balance sheet as constrained with elevated leverage and moderate unrestricted reserves, although key liquidity ratios will likely remain stable as reserves are expected to rise with the recent affiliation with Sunset Retirement Communities (SRC), effective Sept. 1, 2020. C 09/17/2020
Pickersgill Inc., Md.(A/Stable)  
The rating reflects our view of Pickersgill's considerable unrestricted reserves and consistently positive financial performance and cash flow over the past few years, which have led to growth in key metrics. The facility's long wait list and high occupancy in independent living and skilled nursing units denote steady demand, with assisted living occupancy steadily improving. Pickersgill is in the middle of a facility improvement plan that will refresh and expand many common spaces and has recently completed renovation of 13 smaller assisted living units (ALUs) into six larger ones. Construction is halted as a result of COVID-19 restrictions as well as move-ins, but five of the six new units have been spoken for, and we expect quick fill-up. The project is being funded from reserves already set aside, and no additional debt will be issued. Apart from these relatively small projects, management has no other significant capital or debt issuance plans. For fiscal 2020, the operating margin is expected to moderate slightly as a result of delayed move-ins and higher supply costs, but we expect that Pickersgill will receive some grant money to partly offset these effects and expect at least break-even operations overall. However, as Pickersgill is reliant on nonoperating income--primarily investment income for debt service coverage (DSC)--we expect that any market volatility through the end of the year may trip Pickersgill's DSC covenant, and we note that the rating could come under pressure if overall metrics fail to improve. The COVID-19 pandemic continues to be a rapidly changing situation that is disrupting the health care sector across the country. While the duration, timing, and severity of the impact are unclear and may vary by type of health facility and region, we believe the pandemic and its associated economic and social challenges could pressure occupancy, earnings, and unrestricted reserves. We believe Pickersgill has the ability to absorb some strain on its financial metrics, but a more prolonged or severe stress could cause us to revise that view. C 05/07/2020
Presbyterian Homes Obligated Group (PHOG), Ill.(A-/Stable)  
The upgrade reflects overall consolidated financial metrics that are in line with a higher rating due to incremental balance sheet accretion and better than budget operating results sustaining healthy adjusted and revenue only maximum annual debt service (MADS) coverage. We expect PH's balance sheet to continue to improve, supported by healthy cash flow coupled with moderate levels of capital spending expected over the next ten years. Further, the enterprise profile continues to strengthen with proven strategic success of PH's most recent property, The Moorings, which opened in February 2018, The rating reflects our expectation that Presbyterian Homes will sustain positive, albeit compressed operations while maintaining key balance sheet metrics, particularly liquidity and financial flexibility, at or near current levels. With the successful completion of the final phase of its large capital project at The Moorings that included the opening of a memory care unit, occupancy levels reflect increasing demand for the assisted living units. We expect the newly opened facilities and management's strategic plans to expand beyond the Chicago area to help the organization maintain its enterprise strengths and remain competitive. A 12/24/2019
Shell Point, Fla.(BBB+/Stable)  
The rating reflects our view of Shell Point's solid business position and demand for independent living units (ILUs) supporting stable occupancy rates and fast fill-up of new projects. A smooth transition to a new chief financial officer (CFO) in December 2019 followed the resignation of the long-tenured CFO who entered a planned retirement. Current expansion and renovation projects continue as scheduled for a fall 2021 completion and we expect these projects to be accretive to the overall enterprise and financial profiles. While overall financial performance has considerably softened due to several one- time expense adjustments coupled with the COVID-19 pandemic, we believe the underlying business is sound and operating cash flow remains supported by net entrance fees allowing for a still respectable adjusted maximum annual debt service coverage for the rating level. Further, liquidity is trending lower and the temporary decline has been incorporated into the rating as management is using internal funds to finance capital projects. With current capital projects progressing as planned, in parallel with management's projected rate of earnings over the outlook period, we believe the 'BBB+' rating can be supported through a short-term diminution of unrestricted reserves and compressed margins. The COVID-19 pandemic continues to be a rapidly changing situation with the potential to disrupt the long-term care industry. While the duration, timing, and severity are unclear, and may vary by type of long-term care facility and region, we believe the pandemic, and its associated economic and social challenges, will continue to pressure earnings including non-operating income as well as unrestricted reserves due in part to market volatility. Should balance sheet metrics and operations not approach projected levels, we believe Shell Point will have limited capacity to absorb near-term strain on its financial metrics and that a more prolonged or severe stress to either operations or its balance sheet could pressure the rating. In April, Shell Point received approximately $1.9 million of federal Coronavirus Relief Fund (CRF) funding under the Coronavirus Aid, Relief, and Economic Security Act (H.R. 748) (CARES Act). This includes about $1.2 million for the Fort Myers campus and about $650,000 for the Alliance campus to cover lost revenue and elevated expenses. These funds are not reflected in year to date interim results or projections for fiscal 2020 performance as management is still determining how to best allocate. We expect the CRF funding will help offset operating pressure for fiscal 2020. In light of the COVID-19 outbreak, Shell Point has taken early and appropriate steps in our view to manage its operations and the safety of its residents, including enacting strict protocols for visitors and direct admits, closing common areas, securing its supply of personal protective equipment, and shutting down various non-essential amenities such as its golf course and hotel, while developing contingency planning. Management reports very few positive COVID-19 cases at the Shell Point campus, and none at the smaller Alliance campus, while any spike in cases could cause some interim operating stress, especially if the situation is prolonged. However, we believe Shell Point's credit fundamentals, including the strengths of its enterprise profile, may help support the credit over the medium to longer term. The stable outlook reflects our view of Shell Point's solid service demand, good expense management and good adjusted MADS coverage for the rating level further supported by generally consistent operating cash flow. We believe overall campus amenities coupled with the recent and current capital projects will allow Shell Point to retain a competitive business position with occupancy rates at or near existing levels over the outlook horizon. A 06/18/2020
Westhills Village Retirement Community, S.D.(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. Westhills is constructing six independent living units, with residents expected to move in June 2020. As the project is small and management has successfully completed projects more recently, we see no risk in the completion of the project. The units have already been reserved with deposits by the new residents, which we believe further mitigates the risk for Westhills. While we expect some volatility in Westhills' unrestricted reserves as a result of current market conditions, we believe the robust reserves will provide adequate cushion in the medium term. Additionally, Westhills is beginning to form a master facility plan, which may require spending of reserves or issuance of additional debt, but management notes the planning phase is just beginning and no estimates of the project size are yet available, so we have not included this in our analysis. The COVID-19 pandemic continues to be a rapidly changing situation that is disrupting the health care sector across the country. While the duration, timing, and severity of the impact are unclear and may vary by type of health facility and region, we believe the pandemic, and its associated economic and social challenges, could pressure occupancy, earnings, and unrestricted reserves. We believe Westhills has the ability to absorb some strain on its financial metrics, but a more prolonged or severe stress could cause us to revise that view. A 04/08/2020
N/A--Not applicable. *For definitions and explanations of the contract types, see our Senior-Living Criteria. §The "Last Rated" 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.

Related Research

The U.S. Economy Reboots, With Obstacles Ahead," Sept. 24, 2020

This report does not constitute a rating action.

Primary Credit Analysts:Wendy A Towber, Centennial (1) 303-721-4230;
wendy.towber@spglobal.com
Stephen Infranco, New York (1) 212-438-2025;
stephen.infranco@spglobal.com
Secondary Contacts:Kenneth T Gacka, San Francisco (1) 415-371-5036;
kenneth.gacka@spglobal.com
Suzie R Desai, Chicago (1) 312-233-7046;
suzie.desai@spglobal.com
Research Assistant:Adwait C Chandsarkar, Mumbai

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