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Fitch Rts Friendship Village of Dublin, OH 2014 Revs at 'A-' & Affirms Outstanding; Outlook StableNEW YORK --(Business Wire)-- Fitch Ratings assigns an 'A-' rating to the following Franklin County, OH bonds expected to be issued on behalf of Friendship Village of Dublin (FVD): --$25,000,000 health care facilities revenue refunding and improvement bonds series 2014 (Friendship Village of Dublin, Ohio, Inc.) Fitch also affirms the 'A-' underlying ratings on the following parity debt also issued by Franklin County, OH: --$8,235,000 adjustable rate demand health care facilities revenue bonds series 2004A (Friendship Village of Dublin, Ohio, Inc. Project); --$17,515,000 adjustable rate demand health care facilities revenue bonds series 2004B (Friendship Village of Dublin, Ohio, Inc. Project). The Rating Outlook is Stable. The 2014 bonds are expected to be issued as fixed rate. Proceeds from the bonds will be used to refund the series 2004B bonds, fund approximately $7 million of capital expenditures, and pay a portion of the costs of issuance. Maximum annual debt service provided by the underwriter will be $2.1 million. Bonds are expected to sell via negotiation the week of Nov. 10. SECURITY Bonds are expected to be secured by a mortgage (excluding Birchton and Home Care properties), a gross revenues pledge and a springing debt service reserve fund. KEY RATING DRIVERS HIGH IL OCCUPANCY: FVD's independent living (IL) occupancy has averaged 96% over the last four audited years, which has supported a consistent level of financial performance at the current rating level. ABOVE MEDIAN LIQUIDITY: At June 30, 2014, FVD had $50.5 million in unrestricted cash and investments, which equated to 1,139 days cash on hand (DCOH), a 24.1 times (x) pro forma cushion ratio, and 171.1% pro forma cash to debt. A further strength has been the strong growth in unrestricted liquidity, which has increased nearly 30% since fiscal year end 2011. ADEQUATE DEBT SERVICE COVERAGE: FVD's 2.4x coverage of pro forma maximum annual debt service (MADS) in fiscal 2014 is below the rating category median of 3x; however, FVD's coverage has been very consistent through the historical period, reflecting its stable operating performance. NEW SENIOR MANAGEMENT TEAM: Both the Executive Director and the CFO have been at FVD less than a year, after two long serving executives retired. The two new senior management team members have a deep level of experience in the industry and the service area, having both worked at competing senior living facilities, and seem capable of sustaining FVD's operational performance. SIZABLE CAPITAL PLANS: FVD is in the late planning stages of a multi-phased project that will likely include a major skilled nursing renovation, new common areas and dining spaces, and IL expansions. The project, for which more clarity is expected over the current rating cycle, is anticipated to cost between $40 and $60 million with almost half of that paid for by the entrance fees on expansion IL units and the rest by a combination of debt and equity. RATING SENSITIVITIES MAINTAINING CURRENT PERFORMANCE LEVELS: As FVD finishes its Master Facilities Plan and begins implementation, it is critical that FVD maintain current levels of performance. A sustained drop off in performance, coupled with new debt, could lead to negative rating pressure. ADDITIONAL DEBT FOR PROJECTS: Fitch will continue to monitor the project and factor the impact of any additional debt closer to the time of issuance. FVD has debt capacity at the current level, especially given that its current debt amortization is front loaded. CREDIT PROFILE Friendship Village of Dublin is a Type A (lifecare) continuing care retirement center (CCRC) with a total of 366 units, located in Dublin, Ohio, 16 miles northwest of Columbus. There are 260 independent living units (ILUs), with 244 apartments and 16 villas, 33 are assisted living units (ALUs) and 13 are dementia/memory care units, and 60 skilled nursing facility (SNF) beds, mostly semi-private. FVD had total operating revenue of $20.2 million in the fiscal year ended June 30, 2014. The 'A-' rating reflects FVD's high occupancy that supports consistent financial performance and solid debt service coverage, its above median liquidity ratios, and a good market position in a relatively affluent area of Ohio. Credit concerns include a multi-phase capital project that will likely include new debt. STEADY FINANCIAL PERFORMANCE Over the last four audited years, FVD's operating rtio has averaged 95% and its net operating margin - adjusted was 21.7%. Both figures compare well to their respective 'A' medians of 95.8% and 23.1%. FVD's operating performance was slightly weaker in fiscal 2014 with its operating ratio rising to 96.4%, which is still a solid figure for a type 'A' contract. The weakening in performance was due to approximately $600,000 of one-time expenses, including a skilled nursing billing write off, vacation payout to retiring executives, and higher expenses related to the harsh winter. Overall financial performance was helped by a solid year of net entrance fee receipts ($3.9 million) and good investment returns. As a result, FVD's net operating margin - adjusted was adequate at 18.9%, lower than prior years, and its pro forma debt service coverage of 2.4x, consistent with the prior three audited years. For fiscal 2015, Fitch expects FVD's operating ratio to strengthen slightly as the one-time expenses disappear, and FVD benefits from the first full year of its 16 new villas being occupied. The last of the 16 expansion villas was sold in May 2014, and the monthly service fees will be accretive to FVD's overall financial performance. Fitch notes positively FVD's ability to build and fill the 16 villas, which were the first villas built on its campus and are larger and more expensive than FVD's traditional units. FVD management reports continued demand for these larger units and, moving forward, FVD has land on its campus to build additional villas, which would likely be a part of the larger capital plans. A key credit strength at the current rating level is FVD's above median liquidity, which continues to steadily grow. Unrestricted cash and investments increased from $39.3 million at year end fiscal 2011 to $50.5 million at year end fiscal 2014. On a pro forma basis, all of FVD's major liquidity ratios remain above their respective medians. CAPITAL PLANS In our last rating action, Fitch noted that FVD was moving closer to addressing its older health center, which has mostly semi-private rooms. FVD is in the late stages of a multi-phase Master Facilities Plan that will larger in scope than just addressing the health center. The plan has yet to be finalized but will look to be a combination of new revenue projects and infrastructure projects that will include an updated health center, with more private rooms and a larger rehab space, additional IL and AL capacity, with potentially additional Villas, and other projects such as an additional campus center and renovated administrative areas. While it is expected that entrance fees from new ILUs will cover a sizable portion of the costs, FVD will likely make an equity contribution and/or borrow additional funds. FVD's debt burden is slightly elevated for the category and its debt coverage adequate, so potential additional debt is viewed as a credit concern. Mitigating some of this concern is FVD's steady financial performance, strong historical occupancy and its ability to expand and fill units. Additionally, FVD's debt amortization is front loaded which provides some capacity to borrow funds without materially increasing MADS. However, the capital plans and the financing structure have yet to be finalized, and Fitch will factor in any additional debt closer to the time if issuance. Fitch does believe that FVD needs to move forward on capital projects to update parts of its campus, parts of which are 20 to 30 years old, in order to remain competitive. There is a moderate amount of competition in the service area as FVD competes with at least four not-for-profit CCRCs and three for-profit rental facilities within a 10 mile radius. In addition, there has been a recent increase of skilled nursing competition in Dublin, as three for-profit companies are opening separate skilled nursing centers. Fitch toured the campus and found it mostly marketable. An upgrade in 2006 added dining areas and a large pool and physical fitness area. In addition, the new Villas showed very well and add a high margin product to the campus. The older parts of the campus and the skilled nursing would benefit from an upgrade. Fitch also notes the FVD has been purchasing nearby houses as they have become available through an obligated group entity, Birchton, LLC. Fitch views these purchases as a credit neutral, with a longer term horizon for FVD to move on developing these. Currently, FVD is renting them out. Debt Profile Fitch views as a credit positive FVD's move, with the issuance of the 2014 bonds, from 100% letter of credit (LOC) supported variable rate debt to a largely fixed rate debt structure. After issuance, FVD will have approximately $33 million in total debt of which 75% will be fixed rate. FVD management has indicated it would like to have a 50/50 fixed to variable debt mix, which means any additional debt would likely have a variable component. FVD's outstanding variable rate bonds are secured by an LOC from PNC (News - Alert) Bank (rated 'A+/F1+' by Fitch), with an expiration date of July 15, 2018. FVD has one swap outstanding with Morgan Stanley Bank (rated 'A/F1' by Fitch) as the counterparty. The notional amount is $13.8 million as of Sept. 30, 2014. It is a fixed-rate payer swap that terminates Nov. 1, 2022. The mark-to-market valuation as of Sept. 30, 2014 was negative $725,309. Fitch does not view FVD's swap as a credit concern since there are no collateral posting requirements. FVD debt burden is currently elevated with MADS as a percent of revenue at 10.2% and debt to net available of 5.1x, both slightly above category medians. Given the elevated debt burden, any additional debt would a credit concern, without additional revenue to cover the debt. Disclosure: As part of its Continuing Disclosure Agreement, FVD expects to distribute quarterly unaudited and annual audited financial statements as well as utilization data through EMMA. Additional information is available at 'www.fitchratings.com' Applicable Criteria and Related Research: --'Rating Criteria for Not-for-Profit 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=912174 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. |
