[January 07, 2014]

Fitch Affirms American Baptist Homes of the West, CA's Revs at 'BBB+'; Outlook Revised to Negative

Fitch Ratings has affirmed the 'BBB+' rating on American Baptist Homes of the West, CA's (News - Alert) (ABHOW) outstanding debt, which is listed at the end of this press release.

The Rating Outlook is revised to Negative from Stable.

SECURITY

Gross revenue pledge and mortgage pledge of the obligated group (OG) in addition to the guaranty from American Baptist Homes Foundation of the West (the foundation). The guaranty agreement is limited to the foundation's income earned on its unrestricted net assets, however, its unrestricted cash and investments are included as part of the OG's liquidity covenant calculations. The OG accounted for 80% of the ABHOW consolidated entity's total revenue and 66% of consolidated total assets in fiscal 2013 (Sept. 30 year end).

KEY RATING DRIVERS

DECLINE IN OPERATING PERFORMANCE: The Outlook Revision to Negative from Stable reflects a decline in ABHOW's operating performance in fiscal 2013, which was due to lower than expected occupancy at its health centers, pressure from the withdrawal of Terraces at San Joaquin Gardens (TSJG) from the OG, and increased expenditures for Seniority, its sales and marketing activities. The decline in operating performance is especially a concern as ABHOW is in a period of added stress on the organization due to a major campus transformation underway at Terraces of Los Altos (TLA) as well as increased liquidity support to non-obligated affiliates.

INCREASED SUPPORT TO AFFILIATES: During 2013, the ABHOW OG increased its liquidity support to several non-obligated affiliates to effectuate debt restructurings or financings. Currently, the ABHOW OG has extended $22 million of credit support to non-obligated affiliates, which is up from $5 million at Fitch's last review. There is another $30 million of credit support available primarily for affordable housing construction completion guarantees, of which, none is currently committed. Fitch has viewed the credit support provided by the ABHOW OG to non-obligated affiliates as a main credit concern and the increased exposure during 2013 raises credit risk to bondholders. This concern is somewhat mitigated by the management team's monitoring and oversight of the performance of the non-obligated group entities.

MAJOR CAPITAL PROJECT UNDERWAY: TLA is undergoing a major campus transformation, which will essentially result in a brand new community at the end of construction. There are various phases and operating performance will be pressured over the near term as existing ILU units are not being re-sold. The project is expected to reach stabilized occupancy in fiscal 2019 and approximately $51 million of temporary debt (series 2013B1-B3) is expected to be paid down with initial entrance fees.

ADEQUATE LIQUIDITY: ABHOW OG's liquidity position (including foundation cash and investments) is adequate with $100 million of unrestricted cash and investments at Sept. 30, 2013. This translated to 348.7 days cash on hand and 41.4% cash to debt. Liquidity is expected to improve in fiscal 2014 with the addition of approximately $30 million of initial entrance fees from Valle Verde's 40 independent living units (ILU) expansion.

PRESSURED OCCUPANCY: ABHOW's main credit strength is its revenue size with facilities that are geographically diverse, competitively priced and have a long history of providing care in each of their service areas. However, occupancy has been pressured in the health centers as well as ILUs due to the TLA project. ABHOW OG's occupancy in ILUs dropped to 89.5% in fiscal 2013 and was 90% in assisted living units (ALU) and a low 79.7% in skilled nursing (SNF). Excluding the impact of TLA, ILU occupancy was 91.6%, ALU occupancy was 90.6% and SNF occupancy was 83.6% for fiscal 2013.

RATING SENSITIVITIES

IMPROVED OPERATING PERFORMANCE: The failure to improve operating profitability, a deterioration in liquidity or a decline in debt service coverage would likely result in negative rating action. ABHOW's 2014 budget calls for improved operating performance, which will be necessary given the added stress on the organization during TLA's construction and fill up in addition to the increased liquidity support to non-obligated affiliates.

CREDIT PROFILE

The ABHOW OG consists of seven continuing care retirement communities (CCRC), which include Terraces of Los Altos in Los Altos, CA, Grand Lake Gardens in Oakland, CA, Piedmont Gardens in Oakland, CA, Plymouth Village in Redlands, CA, Valle Verde in Santa Barbara, CA, Rosewood in Bakersfield, CA and Terraces of Los Gatos in Los Gatos, CA. In fiscal 2013, the ABHOW OG had total revenue of $117 million. The consolidated ABHOW entity includes another CCRC, Judson Park in Des Moines, WA, affordable housing entities, the foundation, Seniority, and American Baptist Properties. In addition, ABHOW and Seniority provide management services and managed 18 affordable housing, three CCRCs, and seven market rate rental communities in fiscal 2013. The consolidated ABHOW entity had total revenue of $146 million in fiscal 2013. ABHOW's sole corporate parent is Cornerstone Affiliates, which includes three other CCRCs - Las Ventanas Retirement Community (LVRC), Terraces of Phoenix (ToP), Terracesat San Joaquin Gardens (TSJG) and plans for a startup CCRC through the entity Boise Retirement Community in Boise, ID. Cornerstone's CEO and CFO are the same as ABHOW's. Fitch's analysis is based primarily on the financial profile of the OG.

Fiscal 2013 Performance

The OG's performance in fiscal 2013 was much weaker than historical results reflecting lower than expected occupancy in its health centers as well as the drag on OG performance related to the withdrawal of TSJG in Sept. 2012. Management is planning on adding a senior management team member dedicated to health center operations and is currently focused on improving referrals from local hospitals, which has been completed at Piedmont Gardens. Further, the ABHOW OG did not receive payment on TSJG's subordinated note payable ($1.5 million in fiscal 2013) related to a $30 million subordinated note issued as part TSJG's campus repositioning financing in September 2012. Under TSJG's bond covenants, the subordinated note debt service cannot be paid unless certain liquidity and debt service coverage tests are met. In addition, half of ABHOW's management fee is deferred through TSJG's construction.

ABHOW's OG had an operating ratio of 101.7% and net operating margin of 1.5% in fiscal 2013 compared to 96.9% and 6.5%, respectively in the prior year. These results also compared unfavorably to Fitch's 'BBB' category medians of 97.2% and 9.9%, respectively. Given the decline in operating performance, coverage of MADS of $14.4 million dropped to 1.6x in fiscal 2013 from 2x in fiscal 2012 and 2.1x in fiscal 2011. However, debt service coverage as calculated under the MTI (News - Alert) (based on actual debt service) was much stronger at 2.8x in fiscal 2013 due to capitalized interest as well as low actual variable rates.

ABHOW's fiscal 2014 budget indicates an improvement in operating performance, but turnover entrance fee receipts are budgeted at lower levels than fiscal 2013. Turnover entrance fees for the OG totaled $18.5 million in fiscal 2013 and are only budgeted at $15.5 million in fiscal 2014. Through the two months ended Nov. 30, 2013, the ABHOW OG is ahead of budget.

Pressured Occupancy

The ABHOW OG had 944 ILUs (the Residences), 170 ALUs (the Lodge), 76 dementia/memory care units (the Grove) and 342 SNF beds (the Village) in fiscal 2013. Through the three months ended Dec. 31, 2013, the ABHOW OG had 91.1% occupancy in the Residences, 92.8% in the Lodge, 77.4% in the Village and 70.2% in the Grove including TLA, which has had a delay in the opening of its Village and Grove till Feburary. Excluding TLA, year to date occupancy in the Village and Grove was 83.5% and 84.9%, respectively.

Non-Obligated Group Activity

During Fitch's reviews, there has been an increased focus on the performance of the non-obligated affiliates as the performance of these entities can have a direct effect on the OG. Future potential liquidity support includes $2.1 million for Judson Park, $2 million for LVRC, $8.9 million for ToP, $5 million for Boise, and $1 million for international business initiatives.

Judson Park's liquidity support was in conjunction with its debt refinancing to a seven-year direct placement with Washington Federal. LVRC's liquidity support is also related to its debt restructuring. ToP's liquidity support is new since Fitch's last review and is conjunction with a three-year direct placement with Santander Bank. The current structure is intended to be an interim step for ToP to find another financing alternative. ABHOW OG has committed $1 million cash advance plus a maximum of $2.5 million to support any covenant requirements, $2.4 million to potentially fund a debt service reserve fund if necessary to secure a replacement bank, as well as a loan to value test in the third year of the agreement, which could require a $3 million advance. Also new since Fitch's last review is the support extended to the start up facility in Boise. Boise issued a preliminary offering statement in October and upon successful completion of financing ABHOW has committed $3 million of equity, $1 million funded liquidity support, and $1 million unfunded liquidity support. Also included in the $22 million total potential liquidity support for non-obligated affiliates is a $3 million land loan guaranty for Boise that will dissolve with a new financing.

In fiscal 2013, Judson Park, LVRC, and TSJG were in compliance with bond covenants. ToP missed its debt service coverage requirement but will use existing cash to fund the shortfall. TSJG has not yet paid the subordinated debt service to ABHOW OG pending calculation of its liquidity covenant in March as there are 10 residents on campus that may move to the new construction, and TSJG would use existing liquidity to pre fund the initial entrance fee versus waiting to resell the existing apartments for entrance fee proceeds.

Management expects that only approximately $10 million of the $22 million liquidity support to actually be drawn on. Fitch will assess the impact of the draws as they occur in conjunction with operating performance. A dilution to OG performance would likely result in downward rating action given the recent decline in core operating performance.

TLA Project

Currently, TLA consists of 73 ILUs, 14 ALUs and 65 SNF beds. After the three phases of construction, the campus will be expanded from 121,000 square feet to roughly 180,000 square feet with only 21,000 square feet of current space retained and will consist of 105 ILU apartments, 30 ALUs, 16 memory support suites and 30 SNF beds. The total project cost is $118 million and funded primarily from $108 million of debt (previously issued - series 2013, 2012, 2010 and 2006 bond proceeds) with the remainder from equity. The 81 new ILU apartments will generate an entrance fee pool of approximately $72 million, which will be used to pay down $51 million of temporary debt (series 2013 B1-B3 bonds), which mature in 2019, 2020 and 2021. As of Sept. 30, 2013, 70 of the 81 (86.4%) apartments have been reserved with a 10% deposit. The project is about five months behind schedule and the project is expected to reach stabilized occupancy in fiscal 2019 after a 12-month fill up of the health center in fiscal 2014-2015 and a 24-month fill up of the ILUs in fiscal 2016-2018.

Debt Profile

The OG had total debt of $242 million, which was 73% fixed rate and 27% variable rate. Of the variable rate, $44 million are variable rate demand bonds supported by a letter of credit from Bank of America that expires in September 2016. The remaining variable rate is a direct bank loan with PNC (News - Alert) Bank and is at an indexed floating rate. The OG does not have any swaps outstanding besides an interest rate cap.

Disclosure

ABHOW's financial disclosure practices are excellent and include annual and quarterly financial statements, utilization statistics, management discussion and analysis and quarterly investor calls.

Outstanding Debt:

--$105,170,000 California Statewide Communities Development Authority (CA) (American Baptist Homes of the West) revenue bonds series 2010;

--$71,250,000 California Statewide Communities Development Authority (CA) (American Baptist Homes of the West) revenue bonds series 2013A, B1-B3.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Not-for-Profit Continuing Care Retirement Communities Rating Criteria', July 10, 2013.

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=712401

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=813549

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