|[February 19, 2013]
Fitch Rates Rogue Valley Manor (OR) Series 2013 Rev Bonds 'A-'; Stable Outlook
CHICAGO --(Business Wire)--
Fitch Ratings assigns an 'A-' rating to the approximately $60.2 million
Medford Hospital Facilities Authority, Oregon's revenue refunding bonds,
series 2013 bonds, issued on behalf of Rogue Valley Manor (RVM (News - Alert)).
In addition, Fitch downgrades the following outstanding Medford Hospital
Facilities Authority debt to 'A-' from 'A':
--Approximately $60.9 million series 2007* variable rate bonds issued on
behalf of RVM;
--Approximately $45.2 million, series 2012 variable rate demand bonds
issued on behalf of RVM privately placed with Wells Fargo (News - Alert).
*This Letter of Credit is provided by Bank of America Merrill Lynch,
which Fitch was not asked to rate.
The Negative Rating Watch has been revised to a Stable Outlook.
Proceeds of the series 2013 fixed rate bond issuance will be used to
refund approximately $15 million of the series 2007 bonds, refund all of
the outstanding series 2012 bonds privately placed with Wells Fargo,
fund a debt service reserve fund and pay for certain costs of issuance.
Upon closing of the series 2013 issue, RVM's capital structure will be
about 53% fixed rate bonds and 43% variable rate bonds. Maximum annual
debt service as calculated by the underwriter is expected to be about
$6.38 million. The bonds are expected to be priced the early to mid-
March through negotiated sale.
Bonds are secured by a gross revenue pledge, a first mortgage lien on
the facilities and a debt service reserve fund.
KEY RATING DRIVERS
AMENDED GOVERNANCE STRUCTURE: A settlement agreement between Pacific
Retirement Services (PRS), and Rogue Valley Manor (RVM) was reached in
February 2013. This agreement is a compromise of disputed claims and is
not an admission of liability. As part of this agreement, the governance
structured was modified whereby PRS' level of control over RVM has been
reduced and allows for greater resident involvement. The rating
downgrade reflects Fitch's concern over the potential impact of PRS'
reduced control and the lingering effects of this legal dispute.
HIGH DEBT BURDEN: While Fitch views the increased proportion of fixed
rate debt positively, RVM's debt burden after the series 2013 financing
is high with pro forma MADS equal to 14.3% of fiscal 2012 revenue
compared to the 'A' category median of 8.7%. Furthermore, with
approximately 43% variable rate exposure, RVM's debt structure remains
highly sensitive to bank renewal, put and interest rate risk. Historical
coverage of pro forma MADS of 2.3x at 2012 fiscal year-end (draft audit)
is somewhat light when compared to the 'A' category median of 2.7x.
REGIONAL DRAW: Fitch views RVM's position as a 'destination' CCRC as a
key credit strength as it allows the community to attract residents from
a multi-state region due its climate, amenities and value proposition.
Occupancy in the independent living units (ILUs) has fallen to 90.1% in
fiscal 2012 from 97.8% in fiscal 2008 but is still solid for the rating
STRONG PROFITABILITY: Despite the difficult operating environment, RVM
has been able to maintain strong historical profitability metrics with
net operating margins of 13.7% in fiscal 2012 (draft audit) and 11.2%
through November 30, 2012 (2-month interim period), and adjusted net
operating margins of 29.9% and 38.2%,respectively, over the same periods.
LIGHT BUT IMPROVED LIQUIDITY METRICS: At Nov. 30, 2012, RVM's
unrestricted cash and investments totaled $78.4 million, which is an
improvement from $67.2 million at fiscal 2012 year-end (draft audit)
because of the inclusion of $10.5 million in unrestricted investments
from the Rogue Valley Manor Foundation, which was added to the
consolidated financial statements. This cash position equates to 811.2
days cash on hand and exceeds the 'A' rated median of 494.8 days.
However, RVM's pro forma cash to debt of 73.8% and pro forma cushion
ratio of 12.3x are weak relative to the respective 'A' category medians
of 120.2% and 14.4x.
Deterioration in RVM's financial profile or occupancy levels could lead
to negative rating pressure.
In February, 2013 RVM and PRS signed a settlement agreement resolving an
ongoing dispute between PRS and residents at RVM. This settlement
agreement amends the RVM blaws to have the RVM board of directors
consist of nine voting directors, including two who are residents. The
settlement agreement also changes the policies relating to resident
involvement with the appointment of the executive director and provides
for dual-reporting relationship of the executive director to the RVM
Board and to PRS. This revised management and governance structure
reduces the level of control PRS has over RVM, allowing for greater
resident involvement. The rating downgrade reflects Fitch's concern over
PRS' reduced level of control and potential residual effects of this
Although RVM's exposure to variable rate debt will be somewhat moderated
with the series 2013 issuance, Fitch believes RVM has an elevated
sensitivity to bank renewal, put and interest rate risk given its light
liquidity position for the rating. In addition, the debt burden is high
compared to the 'A' category median. Total debt outstanding after the
series 2013 issuance will remain at $106.2 million and will include
approximately $45.9 million variable rate bonds (series 2007) backed by
a letter of credit from Bank of America (expires in 2015), and the
approximately $60.2 million series 2013 bonds. As a result of this
refinancing, MADS increases significantly to $6.4 million from $5.3
million (excluding LOC fee of $550,000, which is not included in the MTI (News - Alert)
definition), which is a high 14.3% of fiscal 2012 revenues (draft
audit). This is significantly above the 'A' category median of 8.7%. Pro
forma debt service coverage of 2.3x in fiscal 2012 (draft audit) is
below the 'A' category median of 2.7x (turnover entrance fees only). Pro
forma debt service coverage through the interim period ended Nov. 30,
2012 is improved at 3.4x. Fitch expects RVM to maintain debt service
coverage levels in line with the 'A' category median.
Despite management and board turnover, operations at RVM have remained
stable. Expense controls implemented in fiscal 2010 resulted in an
improvement in profitability in fiscal 2011 that has continued through
fiscal 2012. In fiscal 2012 (draft audit), operating ratio was 92.3% and
94.5% through the two-month interim ended November 30, 2012, which
compares favorably to the 'A' category median of 95.2%. Net adjusted
operating margin of 29.9% in fiscal 2012 (draft audit) and 38.2% through
the two-month interim period also exceed the 'A' category median of
RVM's liquidity position is light for the 'A' category but improved at
Nov. 30, 2012 from fiscal 2012 year-end (draft audit) because of the
addition of $10.5 million to the balance sheet when the RVM foundation
was consolidated into the financials. At Nov. 30, 2012, RVM's
unrestricted cash and investments totaled approximately $78.4 million,
equating to a solid 811.2 days cash on hand, comparing favorably to the
'A' category median of 494.8 days. However, pro forma cushion ratio and
pro forma cash to debt of 12.3x and 73.8%, respectively, are weaker than
the respective 'A' category medians of 14.4x and 120.2%. The debt
structure is still a credit risk as RVM has almost 50% variable rate
debt. With this issuance, though, cash to puttable debt is improved and
is now about 1.71x. Fitch expects liquidity to continue to improve and
become more in line with 'A' category medians.
RVM controls the market as it is the only full-service retirement
community in Medford, Oregon and also offers a variety of pricing
options for ILUs. Because of the climate, location and affordability,
RVM attracts residents from outside its service area, which Fitch views
favorably. RVM opened a new building, Manor Terrace, in the fall 2009,
which added 71 units to the campus. There was a significant amount of
internal transfers and then subsequent backfilling of the vacated space,
which resulted in net entrance fee receipts of $13 million in fiscal
2010 compared to approximately $7.6 million annually in fiscal 2007 -
In part due to increased marketing efforts, RVM achieved $8.3 million of
net entrance fees in fiscal 2012 (draft audit) up from $7.5 million in
fiscal 2011. Average annual occupancy over the past three years has been
around 90% for ILUs and assisted living units (ALUs). Skilled nursing
facility occupancy has dropped from a high of 88% in fiscal 2008 to
66.4% as of November 30, 2012. Fitch expects RVM to maintain its current
pace for filling turnover ILUs and for occupancy to remain above 90%
despite the tensions between PRS and the residents.
The Stable Outlook reflects Fitch's expectation that RVM will continue
to sustain or improve its current financial profile and occupancy
RVM operates a type-B CCRC located in Medford, OR. RVM consists of 604
ILUs, 87 ALUs, 68 skilled nursing beds and 25 memory care beds. In the
fiscal year ended Sept. 30, 2012 (draft audit), RVM had total revenues
of approximately $44.1 million, which excludes the possible impact of
the consolidation of 16 affordable senior living HUD housing facilities.
RVM will provide bondholders with quarterly financial statements within
45 days of the end of each fiscal quarter, including an income
statement, balance sheet and calculation of long-term debt service
coverage ratio. RVM will also provide bondholders with an annual
financial report within 120 days of the end of each fiscal year. RVM
will provide EMMA with an annual financial report within 150 days of the
end of the fiscal year.
Additional information is available at 'www.fitchratings.com'.
The ratings above were solicited by, or on behalf of, the issuer, and
therefore, Fitch has been compensated for the provision of the ratings.
Additional information was provided by Cain Brothers, the underwriter.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'Rating Guidelines for Nonprofit Continuing Care Retirement
Communities' (July 12, 2012).
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Rating Guidelines for Nonprofit Continuing Care Retirement Communities
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