Fitch Ratings has affirmed the 'BB' rating on the following Alachua County Health Facilities Authority (FL) bonds expected to be issued on behalf of East Ridge Retirement Village (ERRV):
--$68.2 million health facilities revenue bonds, series 2014.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a pledge of gross revenues and receivables of the obligated group (OG; ERRV is the only member), a first mortgage lien on all current and future property of the OG, and a fully-funded debt service reserve.
KEY RATING DRIVERS
PROJECT PROGRESSING AS PLANNED: The $53 million total project is progressing on schedule and within budget, with an anticipated completion in August 2015 and occupancy in November 2015.
LIGHT BUT STEADY PROFITABILITY: ERRV's cash flow is largely reliant upon turnover entrance fees, which is not inconsistent with a Type A facility. Area housing trends are positive, but did have a significant impact on independent living (IL) occupancy from 2008-2011. ERRV will need to maintain its net entrance fee levels and existing occupancy levels to produce adequate coverage near 1.0x through construction and stabilization.
GOOD ILU OCCUPANCY: Despite heavier turnover than prior years, solid sales and marketing helped increase ERRV's average ILU occupancy to 81% at the end of 2014. Fitch notes that the level of discounting and other subsidies for entrance fees fell significantly in 2014, and are expected to wane in the next few years. With a total $2.7 million in net entrance fee levels, ERRV has maintained results in line with budget expectations.
SIGNIFICANT DEBT LEVEL: Overall, ERRV's leverage metrics reflect an immense debt burden against its current financial profile, as indicated by 0.9x coverage of maximum annual debt service (MADS) by turnover entrance fees and MADS equal to 25% of 2014 revenues. ERRV's first full debt service payment is expected to occur no sooner than fiscal 2018.
LIMITED COMPETITIVE THREAT: Within the primary service area encompassing Cutler Bay and reaching 10-15 miles to the west and north, there are only two continuing care retirement communities (CCRCs) which are rental communities. The nearest Type A CCRC is the Vi at Aventura (33.1 miles away) and John Knox Village (53 miles away), both well outside ERRV's target market.
RATING SENSITIVITIES
CONSTRUCTION AND FILL: The project comes with the typical risk associated with construction projects, as well as the need to fill the additional units. Fitch believes the risk on the fill up of the units is mitigated by the strong demand for skilled nursing services and the experience of sponsor, manager and developer in successfully managing campus repositioning projects. Keeping the project on time and within budget is critical to maintaining the rating.
CREDIT PROFILE
East Ridge Retirement Village (ERRV) is a Type 'A' life care continuing CCRC located on 76 acres in the Town of Cutler Bay, Florida, approximately 20 miles south of Miami. The community currently includes 221 IL units, 57 AL units, and 60 skilled nursing beds. An expansion is underway which will bring the total unit mix to 90 ALUs, 31 memory support units, and 74 SNF units, and the 221 existing ILUs. ERRV reported total revenues of $20.4 million (unaudited) in fiscal 2014 (Dec. 31 year end).
Since 2008, ERRV has been controlled by SantaFe Senior Living (SFSL) via an affiliation agreement between ERRV and SFSL's corporate parent, SantaFe HealthCare (SFHC). Neither SFSL nor SFHC are obligated on the series 2014 bonds. Fitch's analysis is done solely on the financial results of ERRV.
STEADY OPERATIONS
During 2014, ERRV maintained steady operating performance, generating a 90.5% operating ratio and 21.3% net operating margin-adjusted. Steady performance was generated by solid ILU sales of 23 and $2.7 million in net entrance fees, which helped to offset some slippage in ALU and SNF occupancy to 83% and 86%, respectively. Fitch notes that the use of incentives fell significantly in 2014, and growth in home health services helped to grow revenue - though it likely delayed some transitions into ALUs. Steady performance is anticipated in fiscal 2015, which should be supported in part by continued service area growth and improved home values and sales.
Fitch views ERRV's competitive position as a credit positive, especially for ERRV's entrance fee, Type 'A' life care contract. There are only two other retirement communities within 20 miles; both of them are for profit and only one of them currently provides the full continuum of care. The limited competitive landscape coupled with a recovering housing market should support steady to improving demand at ERRV over the near to medium term.
Liquidity remains adequate, with $17.3 million in unrestricted cash and investments equating to 395 days of cash on hand (DCOH) and 25.4% cash to debt as of Dec. 31, 2014. Fitch notes a very conservative investment mix and no pension exposure helps to mitigate risks to ERRV's balance sheet.
CAMPUS EXPANSION
ERRV is in the midst of its campus expansion project, which will include 90 new AL units, 31 new memory support units (MSUs), and 74 new skilled nursing beds. The buildings will replace the existing AL and skilled nursing buildings. The project is progressing on time and within budget, with expected completion in August 2015 and occupancy in November 2015. Stabilization of occupancy at approximately 93% for the new units will happen between August 2016 and May 2017. Fitch believes the fill-up risk for the project is manageable against ERRV's average occupancy levels of 86% in skilled nursing and 83% in AL during 2014. Occupancy for AL and SNF is expected to improve in fiscal 2015 to nearer 90%, which is consistent with historical results.
Overall, Fitch views the project positively as ERRV's largely outdated buildings with mostly shared units will be replaced by new contemporary buildings, with larger units and mostly private rooms. As of Dec. 31, 2014, ERRV's average age of plant near 16 years is indicative of the need for plant reinvestment.
DEBT PROFILE
As of Dec. 31, 2014, ERRV had approximately $68.2 million in fixed rate term bonds, subject to optional and mandatory redemption, with maturity in 2049. MADS is equal to $5.1 million, and debt service is level from 2020 through maturity. ERRV's first debt service payment will occur in fiscal 2018, and its first debt service covenant test (equal to 1.1x MADS initially, then 1.2x) will occur at the earlier of stabilized occupancy or fiscal year end 2019.
DISCLOSURE
ERRV covenants to provide annual disclosure within 150 days of fiscal year end, and quarterly disclosure within 45 days of each quarter end. Disclosure will include a balance sheet, statement of revenues/expenses, statement of cash flows, calculation of DCOH, debt service coverage, and occupancy. Disclosure will be made via the Municipal Securities Rulemaking Board's EMMA System.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating Guidelines for Nonprofit Continuing Care Retirement Communities' (July 24, 2014).
Applicable Criteria and Related Research:
Not-for-Profit Continuing Care Retirement Communities Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752470
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=978764
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