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Fitch Rates Masonicare Obligated Group, CT, 2016 Revs 'BBB+'; Outlook StableFitch Ratings has assigned a 'BBB+' rating to the expected issuance of the following State of Connecticut Health & Educational Facilities Authority bonds issued on behalf of the Masonicare obligated group (OG) (Masonicare): --$101,570,000 revenue bonds, Masonicare Issue, series F; --$4,720,000 revenue bonds, Masonicare Issue, series G. The bonds are expected to be issued as fixed rate. Bond proceeds will be used to refund Masonicare's series C, 2007 bonds (including the funding of a related swap termination payment), refund the series E, 2012 bonds, fund renovations at Masonicare Health Center (MHC) and Masonicare Ashlar Village (MAV) and other capital expenditures, and pay certain costs of issuance. The bonds are expected to sell via negotiation the week of October 24. The Rating Outlook is Stable. Fitch is also withdrawing the implied general obligation rating on Masonicare. SECURITY Revenue pledge of the OG, which currently comprises the majority of Masonicare's assets and revenues. No mortgage will be offered as security. KEY RATING DRIVERS SIZABLE SENIOR SERVICES PROVIDER: Fitch believes Masonicare's diversified service lines, reputation, and geographic presence throughout much of CT contribute to a good demand for services and a generally stable credit profile. Masonicare's operations include a market-rate senior living community, two skilled nursing sites, a small acute care hospital (focused on geriatric care), and a home health agency. Total operating revenue was $164.2 million in FY2015 (Sept. 30 fiscal year end), with none of its divisions accounting for more than 45% of revenue. MORE CONSERVATIVE DEBT STRUCTURE: Masonicare is moving to all fixed-rate public debt with this debt issuance. The current debt structure is 100% variable-rate debt, with approximately 70% of the debt hedged with fixed payor swaps. Fitch has viewed Masonicare's debt structure as very aggressive and believes that the current debt issue will provide for greater stability in the company's credit profile. MANAGEMENT TRANSITION: Masonicare's long-serving CEO retired and was replaced by the COO as of Oct. 1, 2016. The COO, who has been at Masonicare for over 20 years, was offered the position after an outside search firm completed a national search. A new CFO had started in 2015. Fitch views the CEO transition as largely credit neutral. However, given Masonicare's unique complement of services, Fitch views the new CEO's long tenure with Masonicare positively. With the new CEO the organization is undertaking a strategic planning process that is to begin later this fall. MANAGEABLE DEBT BURDEN: At year-end FY2015, Masonicare's pro forma 4.2% maximum annual debt service (MADS) as a percent of revenue was much lower than Fitch's 'BBB' category median of 12.3%. As a result, despite an adequate operating performance (operating ratio was 97.2% and net operating margin was negative 1.1%); pro forma revenue-only MADS coverage remained good at 1.4x, with coverage including entrance fees at a solid 2x. Masonicare's manageable debt burden is a key credit factor at the current rating level. ONGOING CAPITAL PLANS: Masonicare is in the midst of or has plans for a number of capital projects, both within and outside the OG. A rental facility in Mystic is currently underway outside the OG and will open in November 2016. For the project, Masonicare is guaranteeing its share of the debt service and repayment of the loan, which is approximately 85% (its share of a partnership company). A sizable repositioning project at MHC has been postponed, as Masonicare begins a strategic planning process and other projects outside the OG are currently in the earliest planning stages. RATING SENSITIVITIES STABLE FINANCIAL PERFORMANCE: Fitch does not expect any further erosion in operating performance or liquidity and that Masonicare Obligated Group's (Masonicare) overall credit profile will remain stable over the next year. FUTURE CAPITAL PROJECTS: Fitch expects Masonicare to pursue projects both inside and outside the OG, including addressing capital needs at the Masonicare Health Center. While Masonicare has some financial flexibility at the current rating level, a sizable project and borrowing, or support given to an outside OG entity, could pressure the rating, unless its cash flow increases to offset these expenses. Fitch will evaluate projects as information becomes available. CREDIT PROFILE Headquartered in Wallingford, CT, Masonicare is a large, multi-service non-profit senior living provider with an operating history of over 100 years. Masonicare's senior services include independent living (IL), assisted living (AL), skilled nursing, inpatient geriatric acute care, inpatient geriatric psychiatric care, home health and hospice, and at-home services of homemakers and personal care attendants. Its current unit mix is 453 IL units (360 continuing care retirement community units and 93 rental units), 191 AL units, 512 skilled nursing beds, 30 acute care beds, and 29 psychiatric beds. The 'BBB+' rating reflects a manageable debt burden, good liquidity and a solid market position. These positive credit factors are offset by a thinner operating performance and future capital plans that include a potential debt issuance. Fitch's rating is based on the financial results of the OG, which includes all of Masonicare's major service lines and a foundation, and currently represents the vast majority of the consolidating entities assets and revenues. However, moving forward Fitch expects the non-OG component to grow as Masonicare looks to develop new campuses. Adequate Operating Performance Over the last two audited years, Masonicare has posted an adequate financial performance. In FY2014 and FY2015, Masonicare had operating ratios of 95.5% and 92.2%, respectively, and net operating margins of negative 2.5% and negative 1.1%, relative to Fitch's 'BBB' category medians of 96.1% and 8.9%. Over these two years, weaker performances at the home health division, which had historically been a very strong margin contributor, and an operating loss at Masonicare at Newtown (MAN) due largely to a repositioning project on that campus, were a drag on financial results. The project at MAN which was completed in July 2015 refurbished skilled nursing and assisted living, and created 17 private skilled nursing rooms. Occupancy has returned to high levels on that campus, with AL at 88% and skilled nursing at 92%. For the home health division a change in leadership has also helped improve performance in FY2016. Nine-month FY2016 interim consolidated results show a 99% operating ratio, a negative 08% net operating margin, and 2x pro forma MADS coverage. The consolidated performance is lower than the OG performance due to the impact of the Mystic construction project. Masonicare's unrestricted cash and investments declined in FY2015, driven by the thin operating results, capital spending, and unrealized losses on investments. At June 30, 2016, Masonicare had $91.3 million in unrestricted cash and investments (on a consolidated basis), which equated to 184 days cash on hand and 88% cash to debt. Days cash on hand isadequate for the rating level, while cash to debt is above the 'BBB' category median of 60%. Capital Plans Masonicare has near-term and longer-term capital plans for both within the OG and outside. The project completed in 2015 at MAN is the largest recent project in the OG. Outside the OG, Masonicare is nearing completion of a rental senior living facility in Mystic, CT. The campus will have a total of 179 units (81 IL units, 50 AL units, and 48 memory care units). The project is being built in partnership with a third party and is being funded by a $38.2 million bank loan of which $13.3 million has been drawn to date. The OG is making a $5 million equity contribution and is guaranteeing its share of the debt service coverage and loan repayment, which is approximately 85% (its current share of the partnership company), with the JV partner guaranteeing the remaining share. The project fell behind schedule by a year as Masonicare had to replace the first contractor hired for the project, which led to a $19 million increase in cost. While the delay and cost overrun are concerns, Fitch believes the project's location and strong pre-opening demand, which has been sustained even through the delay, mitigate some of this concern. Mystic will open by November 2016 and demand has remained good with the pre-sales currently at 53 units. With the new CEO in place, Masonicare is beginning a strategic planning process and is putting major capital plans on hold, since these plans may evolve as a result of the new strategic plan. However, Fitch believes MHC will be an important part of any strategic plan. MHC is located on Masonicare's main campus in Wallingford on the same campus as Ashlar Village, its market rate CCRC. MHC is unique in that it offers IL, AL, acute care, psychiatric, and skilled nursing services, and has over 40 employed physicians and mid-level providers and a number of independent specialists with offices on the campus. The MHC building is in good condition but is an older building, and the provision of care for seniors has evolved from when the building was first built and will continue to evolve. Masonicare's management has indicated it wants a potential project at MHC to be current with the senior living marketplace. Masonicare has plans for two other potential projects outside the OG, which are expected to be entrance fee communities and will likely require a larger debt issuance. However, these projects are at least three years away and their potential impact on the OG is not factored into the rating. Fitch will continue to monitor the projects and any commitments that Masonicare's OG makes. Debt Profile With this debt issuance all of Masonicare's long-term debt within the OG will be fixed-rate. Fitch views this as providing more stability at the current rating level as all of Masonicare's $98 million in long-term debt is currently variable rate, with about 70% hedged with fixed payor swaps. The company will also be terminating its swaps with this debt issuance. The cost of the termination is expected to be approximately $22 million. The more conservative debt structure also offsets concerns about Masonicare's investment allocation, which is very aggressive, with approximately one-third allocated to hedge funds and alternatives, about half to equities, and less than 15% to fixed income. Masonicare has sustained unrealized losses over the last three years. Post-issuance Masonicare's debt burden remains very manageable. At year-end FY2015, pro forma MADS as percentage of revenue was 4.2% and debt to net available was 6.5x, relative to Fitch's 'BBB' category medians of 12.3% and 5.9x. The calculation does not include the guarantee of the Mystic debt. Fitch believes Masonicare has the capacity at the current rating level to honor this guarantee, which will burn off as the occupancy at Mystic stabilizes in approximately three years. However, a sizable debt issuance or additional guarantees could pressure the rating without a commensurate growth in cash flow. Disclosure Masonicare covenants to post annual reports no later than 150 days after fiscal year-end on EMMA and 60 days after each of the first three quarters. Additional information is available at 'www.fitchratings.com'. Applicable Criteria Not-for-Profit Continuing Care Retirement Communities Rating Criteria (pub. 04 Aug 2015) https://www.fitchratings.com/site/re/868824 Revenue-Supported Rating Criteria (pub. 16 Jun 2014) https://www.fitchratings.com/site/re/750012 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1012968 Solicitation Status https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012968 Endorsement Policy https://www.fitchratings.com/regulatory ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. 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