Fitch Affirms Haverland Carter Lifestyle Group's (NM) Revs at 'BBB-'; Outlook Revised to Stable

NEW YORK--()--Fitch Ratings has affirmed the 'BBB-' rating on the following bonds issued by the New Mexico Hospital Equipment Loan Council, on behalf of Haverland Carter Lifestyle Group (HCLG) fka La Vida Llena (LVL).

--$42.5 million series 2012;
--$18.5 million series 2010A.

The Rating Outlook is revised to Stable from Negative.

SECURITY

The bonds are secured by a mortgage on land and buildings and a pledge of gross revenues of the obligated group. Additionally, the bonds are secured by a debt service reserve fund.

KEY RATING DRIVERS

SATISFACTORY PROFITABILITY AND DEBT SERVICE COVERAGE: In fiscal 2013 (March 31; year-end audited), HCLG earned $2.7 million in operating income, or a net operating margin of 11.9%, which compared favorably to Fitch's 'BBB' category median of 9.9%. This helped support maximum annual debt service (MADS) coverage from turnover entrance fees of 2.0 times (x). These measures have shown an improvement since fiscal 2011, and continued to trend positively through the interim period, to a 13% net operating margin and 2.6x MADS coverage. Fitch's Outlook revision to Stable from Negative is in part driven by the organization's improved financial performance.

INDEPENDENT LIVING OCCUPANCY RECOVERING: Independent living unit (ILU) occupancy had dropped to 86% in mid fiscal 2013, due to higher than usual attrition, with turnover of 17.7%. LVL's marketing team increased their efforts, bringing main campus occupancy up to 90%, and occupancy at the Nueva Vista expansion (which opened April 2012) to 78% by the end of October 2013. Overall, Fitch views favorably the organization's stabilized ILU occupancy since Fitch's last credit review.

DOMINANT PROVIDER IN THE MARKET: HCLG is the dominant provider in the marketplace. The continuing care retirement community (CCRC) it operates, LVL, is the only Type A life care provider in Albuquerque, NM. Fitch views the organization's market position as a primary credit strength.

HEAVY DEBT BURDEN: With the series 2012 bond issuance in January 2013, MADS increased to $4.1 million (from $3.3 million), and represented 18.2% of revenues at fiscal year ended March 31, 2013, which is high and compared unfavorably against Fitch's 'BBB' rating category median of 12.4%.

SIZEABLE CAPITAL PLANS: HCLG purchased land in Rio Rancho, NM, 20 miles northwest of the main campus, to develop an approximate $60 million Type A CCRC, consisting of 210 units. Although the financing for this project will likely be outside of the HCLG obligated group (OG), there is expected support from the OG, which to date includes a $7.5 million contribution in the form of a subordinated note. Contingent on sufficient pre-sales, ground-breaking is expected in the first quarter of 2015. Fitch will evaluate the impact of this project on the OG if and when it is brought to market.

RATING SENSITIVITIES

LIMITED DEBT CAPACITY: Fitch believes any significant additional borrowing would cause negative rating pressure, as HCLG has limited capacity for debt at this rating level.

RETRENCHMENT FROM AMBITIOUS CAPITAL PLANS: In prior reviews, Fitch noted HCLG's plans to expand in relatively distant locations: Durango, Colorado and Hobbs, New Mexico (five hours from Albuquerque on the Texas border). Both transactions appear to have been abandoned, which Fitch views favorably, since these plans are considered aggressive for the current rating level. Any return to these or similar expansion plans could cause negative rating pressure.

CREDIT PROFILE

Located in Albuquerque, New Mexico, Haverland Carter Lifestyle Group (formerly La Vida Llena) is a Type A CCRC consisting of 330 ILUs, 84 assisted living units (ALUs), and 50 skilled nursing facility beds (SNFs). In fiscal 2013, HCLG had $22.3 million in total revenues.

The rating affirmation of 'BBB-' reflects HCLG's solid market position, improved financial performance, and sustained ILU occupancy. Fitch's main credit concerns center around the organization's high debt burden coupled with potential large capital plans.

HCLG has a long history in the market as the organization became incorporated in the late 1970s and officially opened in 1983. Furthermore, LVL is the dominant provider, as it is the only CCRC and Type A life care provider in Albuquerque. Fitch views LVL's market position as a primary credit strength.

At March 31, 2013 (audited; year-end), HCLG earned approximately $2.7 million in operating income, which equated to a net operating margin of 11.9% and net operating margin-adjusted of 35.3%, which compared favorably against Fitch's 'BBB' category medians of 9.9% and 21.3%, respectively. HCLG's good profitability helped support MADS coverage from turnover entrance fees of 2.0x, which was slightly above Fitch's median of 1.9x. These measures have shown an improvement since fiscal 2011, and continued to trend positively through the Sept. 30, 2013 (six-months; unaudited) interim period, to a 13% net operating margin, 41% net operating margin-adjusted, and 2.6x MADS coverage.

Unrestricted cash and investments at fiscal year-end March 31, 2013 totaled $25.8 million, which illustrated an improving trend over the past four fiscal years. As of Sept. 30, 2013, unrestricted cash and investments increased further to $31 million. Relative to expenses, liquidity has remained consistently well above the 'BBB' rating category median, rising to 661 days cash on hand from 469 days in 2010, compared against the category median of 371 days. However, due to HCLG's increase in long-term debt with the issuance of the series 2012 bonds, debt related liquidity measures have remained suppressed. Cash to debt was 42.3% in fiscal 2013 and cushion ratio was 6.3x, which were unfavorable against Fitch's medians of 58.9% and 6.9x, respectively.

SIZEABLE CAPITAL PLANS
HCLG has purchased land in Rio Rancho, NM, 20 miles northwest of the main campus, to develop an approximate $60 million Type A CCRC, consisting of 210 units. Management stated that this campus will likely be financed outside of the OG. Despite this, there will be support from the OG, which will start with a $7.5 million contribution from LVL in the form of a subordinated note. Contingent on sufficient pre-sales, ground-breaking is expected in the first quarter of 2015. The current rating review does not take this project into account and Fitch will evaluate the impact of the capital plans on the OG if and when financing plans are finalized.

DEBT PROFILE
All of HCLG's outstanding debt is in fixed-rate mode, which Fitch views positively. HCLG has no outstanding swaps, but does maintain an interest rate cap to hedge against interest rate fluctuations related to its previously outstanding variable-rate bonds. At March 31, 2013, the fair market value of the cap was $61.

MANAGEMENT & DISCLOSURE
In the prior credit review Fitch had concerns related to management practices, which have since been ameliorated. During this credit review process management was consistent and responsive in its responses to Fitch, which is an improvement from the prior review.

HCLG has covenanted to provide financial information to the MSRB's EMMA system.

Additional information is available at www.fitchratings.com.

Applicable Criteria and Related Research:
--'Rating Guidelines for Nonprofit Continuing Care Retirement Communities (July 10, 2013).

Applicable Criteria and Related Research:
Rating Guidelines for Nonprofit Continuing Care Retirement Communities
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=40171

Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=810556
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Contacts

Fitch Ratings
Primary Analyst:
Michael Burger, +1-212-908-0555
Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst:
Jennifer Kim, +1-212-908-0740
Associate Director
or
Committee Chairperson:
Emily Wong, +1-415-732-5620
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst:
Michael Burger, +1-212-908-0555
Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst:
Jennifer Kim, +1-212-908-0740
Associate Director
or
Committee Chairperson:
Emily Wong, +1-415-732-5620
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com