Fitch affirms BBB+ rating for Diakon Lutheran Social Ministries bonds; outlook stable

New York, N.Y. (Monday May 14, 2018)

Fitch Ratings of New York has affirmed its BBB+ rating of bonds issued on behalf of Diakon Lutheran Social Ministries, with a financial outlook of “stable.”

“As during the past few years, we are pleased with the continuation of our rating,” says Mark T. Pile, president/CEO of Diakon, “which provides external validation of our fiscal strength. We believe that Fitch continues to recognize how well Diakon executes the plans our staff members develop.”

According to Fitch’s media release, the affirmation reflects Diakon’s sustaining the “improved performance it achieved in fiscal 2015. For the three-year period ending in 2017, Diakon’s operating ratio declined each year and measured a healthy 93.4% in 2017, better than Fitch's ‘BBB’ category median of 97.4%. 

“In addition,” the release continued, “Diakon’s net operating margin measured 9% in both 2016 and 2017, well above levels from a few years earlier. The performance reflects the outcomes of a variety of growth, expense and efficiency initiatives.” In addition, the creation of the separate organization, Diakon Child, Family & Community Ministries, simplified organizational structures related to Diakon’s bond obligations.

Fitch noted that “during fiscal 2017 … independent living unit … occupancy averaged 91.3%, [personal care] unit occupancy averaged 94.6%, and skilled nursing facility … averaged 93.7%. Importantly, ILU occupancy continued its positive trajectory, crossing 90% in 2016, after being as low as 83% in 2010. The improved ILU occupancy has been driven by Diakon's effective marketing efforts and facility improvements across the system.”

According to Fitch, in “2017, Diakon produced a 93.5% operating ratio and a 9% net operating margin, both on par with prior year performance. The results were consistent and even slightly better than in 2015, and represent a material improvement over 2014, when Diakon produced a 99.4% operating ratio and a 7.5% net operating margin adjusted. These results have led to stronger revenue only cash flow over the last few years … first-quarter 2018 results show Diakon’s performance remaining consistent, with a 92.2% operating ratio and a 9.1% net operating margin.”

Beyond marketing and capital-improvement initiatives, Fitch notes that “revenue-maximizing opportunities in skilled nursing … [help to] mitigate concerns regarding Diakon's exposure to SNF services that accounts for over 60% of resident service revenue. Further, Diakon’s high exposure to governmental payors (at about 70% of SNF gross revenues) leaves [it] susceptible to program modifications and reimbursement changes. In fact, Pennsylvania is transitioning to a Medicaid managed care program that is designed to more effectively treat long-term care nursing home residents. Diakon’s broad operating platform and increased patient acuity should adequately position them under the new program.”

The Fitch review and ratings relate to a $35,000,000 revenue bonds series of 2016 and also to the following bonds previously issued on behalf of Diakon, all though the Cumberland County Municipal Authority:

  • $32.7 million in revenue bonds, series 2016
  • $142.4 million in revenue bonds, series 2015
  • $9.2 million in revenue bonds, series 2009.

Most recent bonds were issued as fixed-rate debt, says Scott Habecker, chief operating office and chief financial officer, to take advantage of then-low rates in the fixed-rate debt markets, reduced risks associated with existing variable-rate debt, and provided an overall debt structure that is more predictable and conservative.”