Fitch Affirms Bishop Gadsden (SC) Rev Bonds at 'BBB'; Outlook Stable

CHICAGO--(BUSINESS WIRE)--As part of its ongoing surveillance efforts, Fitch Ratings has affirmed the 'BBB' rating on Bishop Gadsden Retirement Community's outstanding debt.

--$17.97 million South Carolina Jobs-Economic Development Authority variable rate demand bonds, series 2002*

--$17.95 million South Carolina Jobs-Economic Development Authority revenue bonds, series 2002F1

--$24.595 million South Carolina Jobs-Economic Development Authority revenue bonds, series 2007

*These bonds are supported by a letter of credit (LOC) from Wells Fargo and Fitch does not rate the bonds based on the LOC support.

The Rating Outlook is Stable.

RATING RATIONALE:
--Consistently strong demand, evidenced by 95.2% occupancy in independent living (ILU), 94.7% in assisted living (ALU) and 95.5% in skilled nursing (SNF) for fiscal year (FY) 2010 with improvements especially in ILU occupancy to 97.2% as of March 31, 2011.

--Good market position as the only lifecare facility in the service area.

--Strong cash position relative to expenses with 558 days cash on hand at March 31, 2011, which compares favorably to Fitch's 'BBB' median of 373 days. However, liquidity is significantly down from historical levels due to investment losses and capital spending.

--High debt position, with maximum annual debt service (MADS) at 23% of revenue and adequate debt service coverage of 1.9 times (x) in fiscal year (FY) 2010.

--Weak profitability with operating ratios in excess of 100% historically, but improved to 100.4% through the three months ended March 31, 2011 compared to 104.2% in fiscal 2009.

KEY RATING DRIVERS:
--Maintain success of its marketing efforts, which should result in consistent strong occupancy.

--Continue to generate solid turnover entrance fee receipts to service is high debt burden.

SECURITY:
The bonds are secured by mortgages on Bishop Gadsden's real estate, a gross receipts pledge, and a debt service reserve fund.

CREDIT SUMMARY:
The affirmation is supported by Bishop Gadsden Retirement Community's (Bishop Gadsden) strong demand, good market position, and solid liquidity relative to expenses. Occupancy remains strong and has improved as of March 31, 2011 to 97.2% in the ILU from 92% for the fiscal year ended December 31, 2009. Given the economic environment, Bishop Gadsden implemented additional marketing initiatives in 2009 that have continued to translate in good sales activity. One of the marketing initiatives includes offering a bridge loan of up to one year for new residents and management states that many of the residents pay off the bridge loan within six months. Occupancy in the assisted living units (ALU) and skilled nursing facility (SNF) has also remained solid at 95.2% and 95.5%, respectively for fiscal 2010 and 95.4% and 95.6%, respectively as of March 31, 2011. All the residents in the ALU and SNF are private pay.

Bishop Gadsden is the only life care facility in the Charleston area and there is no new competition in the market. The Charleston area has had relatively stable real estate values with a median home sale price of approximately $220,000. As of March 31, 2011, Bishop Gadsden had $27.7 million of unrestricted cash and investments, equating to 558 days cash on hand, which compares favorably to Fitch's 'BBB' median of 373 days, however this is significantly down from historical levels due to capital spending. Bishop Gadsden had $42.2 million of unrestricted cash as of fiscal year end Dec. 31, 2007, which was 853 days cash on hand.

The main credit concerns are Bishop Gadsden's high debt burden and weak profitability. Maximum annual debt service as a percentage of total operating revenues remains high at 23% in 2010, as compared to Fitch's 'BBB' median of 12.8%. Debt service coverage is adequate at 1.9x for FY 2010 and 1.6x for FY 2009, but has improved to 2.3x for the three months ended March 31, 2011 driven mainly by improved operating performance. Bishop Gadsden's operating ratio has been above 100% since FY 2008 and recently dropped to 100.4% through the three months ended March 31, 2011. Management had a reduction in force in January 2011 to manage its expense base. However, its FY 2011 has a small operating loss and management targets to break even over the near term. Rate increases across all levels of care improved in FY 2011 to 5.5% from 3.5% the prior year. Bishop Gadsden relies on solid turnover entrance fee receipts to generate sufficient coverage of its debt service. Turnover entrance fees totaled $2.3 million in FY 2008, $6.5 million in FY 2009, $7.7 million in FY 2010, and $2.2 million for the first quarter 2011.

Bishop Gadsden has invested over $14 million in its facilities (FY 2008 and 2009), which included renovations of the ILU and SNF and upgrades to the common spaces and amenities. Fiscal year 2010 capital spending was more moderate at $2.3 million. Bishop Gadsden has several projects in its long range capital plan including a potential ILU expansion, new health center and renovations to its ALU. Management stated that these plans are several years away.

Total debt outstanding as of December 31, 2010 was $60.5 million and includes $17.97 million of series 2002 variable rate demand bonds (VRDBs) and $42.53 million fixed rate bonds. The series 2002 VRDBs are supported by a letter of credit from Wells Fargo Bank, which was recently renewed and expires in May 2012. If there is a draw on the LOC, the term out period for the repayment of the draw is 36 months, which Fitch views as manageable given Bishop Gadsden's healthy liquidity metrics.

The Stable Rating Outlook reflects Fitch's belief that Bishop Gadsden will continue to maintain solid turnover entrance fee receipts and improve its operating performance, which should result in better debt service coverage.

Bishop Gadsden is a type A CCRC with 215 independent living units, 101 assisted living units (inclusive of a 19-bed Alzheimer unit), and 46 nursing care beds. The community is located on James Island, approximately six miles from downtown Charleston. For FY ended Dec. 31, 2010, Bishop Gadsden had total revenues of $23.3 million. Bishop Gadsden covenants to provide annual and quarterly disclosure to bondholders through EMMA, which Fitch views favorably.

Additional information is available at www.fitchratings.com.

In addition to the sources of information identified in the U.S. Municipal Revenue-Supported Rating Criteria, this action was additionally informed by information the underwriter.

Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (Oct. 08, 2010).
--'Rating Guidelines For Nonprofit Continuing Care Retirement Communities' (Dec. 15, 2008).

For information on Build America Bonds, visit www.fitchratings.com/BABs.

Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130
Rating Guidelines For Nonprofit Continuing Care Retirement Communities
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=418608

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