CHICAGO--()--Fitch Ratings has assigned a 'BBB+' rating to the following revenue bonds expected to be issued by the California Statewide Communities Development Authority (CSCDA) on behalf of American Baptist Homes of the West (ABHOW):
--$20 million series 2013A;
--$9.7 million series 2013B-1 (TEMP 70; final maturity in 2021);
--$12 million series 2013B-2 (TEMP 55; final maturity in 2020);
--$30 million series 2013B-3 (TEMP 40; final maturity in 2019).
In addition, Fitch affirms the 'BBB+' rating on the $105.2 million of outstanding series 2010 revenue bonds issued through CSCDA issued on behalf of ABHOW.
The Rating Outlook is Stable.
The series 2013A bonds will be structured as permanent fixed rate bonds. The series 2013B-1, B-2 and B-3 bonds will be structured with fixed coupons and will be retired from entrance fees received from the repositioning project at Terraces of Los Altos. Bond proceeds will be used to fund a three-phase repositioning project that will replace the existing health center, replace the current assisted living units, replace/ expand 49 of the existing 73 independent living apartments with 81 new entrance fee independent living units (ILUs), fund debt service reserve funds on all the series 2013 bonds, fund 36 months of capitalized interest and pay costs of issuance. The series 2013 bonds are expected to be priced through negotiation the week of Jan 21st.
Gross revenue pledge, mortgage on all facilities, and debt service reserve funds on each series of the 2013 bonds.
KEY RATING DRIVERS
GEOGRAPHIC DIVERSITY: ABHOW facilities are geographically diverse, competitively priced and have a long history of providing care in each of their service areas.
STABLE FINANCIAL PERFORMANCE: Operating performance of the obligated group has been solid and consistent.
COMPLEX ORGANIZATION: There are several layers to ABHOW's organizational structure with direct and indirect financial support as well as management time and attention on non-obligated group affiliates.
DEVELOPMENT RISK: The debt structure of the series 2013 issue elevates the development and fill risk as the series 2013B bonds are intended to be temporary debt and redeemed from entrance fees collected on the new ILUs at Terraces of Los Altos, which is expected to generate an entrance fee pool of $77 million.
ADEQUATE LIQUIDITY: At Sept. 30, 2012 ABHOW Obligated Group plus Foundation (provides guaranty on the debt) had $94.9 million of unrestricted cash and investments which equated to 348 days cash on hand, 6.4x pro forma cushion ratio and 62.5% cash-to-debt.
WHAT COULD TRIGGER A RATING ACTION
SUPPORT TO NON-OBLIGATED AFFILIATES: Support to Cornerstone Affiliates or other non-obligated affiliates that would materially weaken the obligated group's liquidity or profitability would place downward pressure on the rating.
DELAYED ENTRANCE FEE COLLECTIONS: Because of the structure of the series 2013B (TEMPS), a delay in the construction and/ or the expected timing in the collection of entrance fees at the Terraces of Los Altos would likely result in negative rating action, as $50 million of debt would need to be paid down or refinanced.
The 'BBB+' rating reflects the geographic diversity and moderate price point of ABHOW's facilities, which has resulted in steady entrance fee receipts and solid profitability and the benefits derived from its experienced, long-tenured management team. The ABHOW obligated group is comprised of seven continuing care retirement communities (CCRC) with a guaranty of American Baptist Homes Foundation of the West (the Foundation). In aggregate, the communities in the obligated group operate a total of 1,017 ILUs, 183 assisted living beds (ALUs), 56 memory support suites and 407 skilled nursing beds (SNFs) with locations in Los Altos, Los Gatos, Bakersfield, Oakland (two), Redlands and Santa Barbara. Relative to its competitors and area housing values, ABHOW's price point is affordable.
Fitch's main credit concern is the complexity of ABHOW's organizational structure and potential for dilution to the obligated group bondholders from future support of non-obligated affiliates from the obligated group. The structure basically has three layers, with the obligated group at the core, the ABHOW consolidated entity, and Cornerstone. ABHOW is a member of Cornerstone Affiliates, which appoints the majority of ABHOW's board. Cornerstone includes other communities, which are financially distressed (i.e. Las Ventanas Retirement Community). The non-obligated affiliates within the ABHOW consolidated entity include Judson Park (a CCRC in Des Moines, WA) and affordable housing entities. Fitch's analysis is based on the obligated group and consolidated entity.
The extent of ABHOW's financial support to the non-obligated group affiliates have varied but most notably include direct support to Judson Park to assist in meeting a liquidity covenant ($1.5 million in February 2012) as well as indirect support through one of ABHOW's subsidiaries (American Baptist Properties) to Las Ventanas. ABHOW also has the ability to extend guarantees of up to $30 million (only $5 million outstanding) to the affordable housing entities during development, which are reimbursed or burn off upon successful completion and fill up of the project. On Sept. 26, 2012, ABHOW transferred ownership of the Terraces at San Joaquin Gardens campus out of the obligated group (OG) to a newly formed corporation to effect a campus repositioning. While this strategy helps to insulate the OG from the dilutive effect of Terraces at San Joaquin Gardens' (TSJG) $71 million debt issuance, the OG remains liable for repayment on $30 million of proceeds of its series 2006 and series 2010 bond issues to finance and refinance the construction and renovations that are part of TSJG redevelopment.
Operating performance of the obligated group (excluding the results of TSJG) has been solid and consistent. Operating ratios of 97.7% and 96.9% in fiscal 2011 and 2012, respectively, are favorable to the 'BBB' category median of 97.2%. Net entrance fee receipts improved in fiscal 2012 to $18.4 million compared to $16.8 million in the prior year. As a result, coverage of pro forma maximum annual debt service (MADS) improved to 2.0x in 2012 from 1.9x in 2011. Occupancy, although improved, continues to be pressured despite strong sales due to above-average attrition and a difficult economic environment. Occupancy in the ILUs at Sept. 30, 2012 was 91.6% compared to 88.2% at fiscal year end (FYE) 2011 while occupancy in the ALUs and SNFs were virtually unchanged at FYE 2012 at 85.8% and 79.9%, respectively. Turnover entrance fees are expected to be pressured going forward as ABHOW executes its redevelopment plans at Terraces at Los Altos.
The series 2013 bond proceeds will be used to fund a three-phase repositioning project at The Terraces at Los Altos (TLA). Currently, TLA consists of 73 ILUs, 14 ALUs and 65 SNF beds. Upon completion, the current campus will be expanded from 121,000 square feet to roughly 180,000 square feet and will consist of 105 ILU apartments, 30 ALUs, 16 memory support suites and 30 SNF beds. The 81 new ILU apartments will generate an entrance fee pool of approximately $76.7 million. As of Jan. 10, 2013 58 (72%) of the 81 apartments have been reserved with a 10% deposit. The series 2013B bonds are structured as non-amortizing bullet maturities that will be redeemed from the entrance fees received from the sale of the new ILUs. Fitch believes that management has implemented adequate controls (including a guaranteed maximum price contract that includes liquidated damages, engagement of a construction monitor, etc.) to ensure that construction, fill-up and redemption of the series 2013B occurs prior to the nominal maturity dates in 2019, 2020 and 2021. For purpose of Fitch's analysis, pro-forma MADS of $14.4 million assumes payoff of the series 2013B bonds.
At Sept 30, 2012, the ABHOW Obligated Group had $94.9 million of unrestricted cash and investments which equated to 348 days cash on hand, 6.4x pro forma cushion ratio and 62.5% cash to debt. Including the $20 million of the series 2013A permanent debt causes the pro-forma cash to debt ratio to decline to 55.3%. ABHOW's variable-rate exposure is manageable with cash to puttable and bank placed debt of the consolidated entity of 2.0x at Sept. 30, 2012.
The Stable Outlook reflects Fitch's expectation that the ABHOW obligated group will continue to maintain solid operating performance consistent with historical results. The structure of the series 2013B bonds elevates the development and fill risk associated with the TLA repositioning project. However, Fitch believes management has sufficiently mitigated the development risks to maintain the current rating. The failure to execute on the TLA repositioning project would place downward pressure on the rating. In addition, support to Cornerstone affiliates or other non-obligated group affiliates that would materially weaken the Obligated Group's liquidity or profitability would also place downward pressure on the rating.
The ABHOW Obligated Group consists of seven CCRC facilities in California which are further supported by a guaranty of American Baptist Homes Foundation of the West. In fiscal 2012, total revenues of the obligated group were $119.1 million. In addition, ABHOW manages and controls various senior housing/CCRC facilities through various non-obligated affiliates. ABHOW's financial disclosure practices are excellent and include annual and quarterly financial statements, utilization statistics, management discussion and analysis and quarterly investor calls. ABHOW is a member of Cornerstone Affiliates, which includes three CCRCs, Las Ventanas Retirement Community, Terraces of Phoenix and Terraces at San Joaquin Gardens. Fitch did not analyze Cornerstone Affiliates.
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.
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