Fitch Affirms Kendal on Hudson (NY) Series 2013 Revs at 'BBB'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'BBB' rating on the following Westchester County Local Development Corporation revenue refunding bonds (Kendal on Hudson Project):

--$66.7 million series 2013 bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a gross revenue pledge and mortgage pledge. A debt service reserve fund provides additional security.

KEY RATING DRIVERS

SOLID OCCUPANCY: Kendal on Hudson (KoH) benefits from strong historical demand for services as demonstrated by occupancy of its 222 independent living units (ILU) that has averaged above 96% over the past five years. In fiscal 2013 (Dec. 31 year-end; unaudited), KoH experienced its first significant amount of natural turnover since the organization began operations in 2005, as ILU occupancy dropped to 90.5%. However, KoH has closed four sales through March 7, 2014, representing approximately $3.3 million in net entrance fee receipts and expects ILU occupancy to rebound to historical levels.

HEALTH CENTER REPOSITIONING PROJECT: KoH expects to incur approximately $18 million of additional debt in the very near term (direct private placement with a commercial bank) to fund a repositioning of the health center. Specifically, the project will add 13 memory support beds, 10 assisted living units (ALUs), and will right-size the mix of skilled nursing and enriched housing units. Additionally, KoH expects to contribute approximately $4 million of equity toward the project for a total cost of $22 million.

ELEVATED DEBT BURDEN: Pro forma maximum annual debt service (MADS) of $5.9 million equates to a high 21.2% of total 2013 revenues as compared to the 'BBB' category median of 12.4%. Coverage of pro forma MADS is just adequate, averaging 1.7x over the past five years. While coverage of pro forma MADS is weak at 1.2x in 2013, coverage of current MADS is above 1.5x.

ASSOCIATION WITH KENDAL: Fitch views KoH's relationship with Kendal Corporation as a positive credit factor. Although Kendal does not have any control at the Board or management levels, Kendal provides assistance and guidance in the areas of finance, marketing and human resources, and the nine Kendal communities share a common mission statement.

SATISFACTORY BALANCE SHEET: Unrestricted cash and investments totaled a high $36 million in fiscal 2013 (improved from $28.8 million in 2010), which translated into 584.2 days cash on hand, 6.1x pro forma cushion ratio, and 42.6% pro forma cash-to-debt. While cushion ratio and cash-to-debt compare unfavorably against Fitch's 'BBB' category medians of 6.9x and 58.9%, respectively, days cash on hand well exceeds the median of 371.3 days.

RATING SENSITIVITIES

INCREASED CASH FLOW: Fitch expects the organization to return to its historical profitability levels, which should produce adequate pro forma debt service coverage metrics going forward. A failure to improve operating profitability and debt service coverage could result in negative rating pressure.

CREDIT PROFILE

Kendal on Hudson is a type-A continuing care retirement community located in Sleepy Hollow, NY. The community consists of 222 ILUs, 24 enriched housing units, and 42 skilled nursing beds. In the year ended Dec. 31, 2013 (unaudited), KoH had total revenues of approximately $27.9 million. KoH provides audited financial statements and operating data to the MSRB's EMMA system not later than 120 days after each fiscal year-end and quarterly unaudited financial statements and operating data with 45 days of each fiscal quarter-end.

RATING AFFIRMATION OF 'BBB'

The 'BBB' rating reflects KoH's strong historical occupancy and operating profitability, satisfactory liquidity, and its association with Kendal Corporation. Fitch continues to view KoH's strong occupancy in its ILUs as a primary credit strength. Over the last five years, occupancy in KoH's 222 ILUs has been very strong at over 96%. In addition, management maintains a wait-list with 164 prospective residents. This solid demand has resulted in steady entrance fee receipts, which has resulted in good profitability and debt service coverage. . Over the past five fiscal years net operating margins and net operating margins-adjusted have averaged 8.9% and 28.5%, respectively, and are in line with the 'BBB' category medians. However, in fiscal 2013 KoH's ILU occupancy and profitability compressed due to a higher level of turnovers reflecting the community's first generation of residents moving through the continuum of care. ILU occupancy fell to 90.5% in 2013 from 96.5% in 2012 and the organization recorded a low 3.5% net operating margin. To date, KoH has begun its return to historical profitability levels, already receiving approximately $3.3 million in net entrance fees from enhanced sales.

KoH's liquidity metrics are adequate when compared to 'BBB' category medians. At Dec. 31, 2013, KoH had $36 million of unrestricted cash and investments, which translated into 584.2 days cash on hand, 6.1x pro forma cushion ratio, and 42.6% pro forma cash-to-debt.

Fitch's main credit concerns include KoH's elevated debt burden and construction risk associated with the organization's health care repositioning project. Pro forma maximum annual debt service (MADS) of $5.9 million equates to a high 21.2% of total 2013 revenues as compared to the 'BBB' category median of 12.4%. Pro forma coverage of MADS in 2013 is a weak 1.2x.

KoH's health center repositioning project will allow the organization to take advantage of new state licensing regulations to provide memory support services, a wider array of aging in place services and right-size the skilled nursing center. While Fitch views the repositioning as beneficial, the additional debt does increase KoH's leverage position and nearly maximizes KoH's leverage capacity at the current rating level.

KENDAL RELATIONSHIP

Fitch views KoH's relationship with Kendal Corporation as a positive credit factor. In total there are 12 Kendal affiliates located in eight states which operate 2,460 ILUs, 625 ALUs and 556 SNF beds. Each Kendal community is separately incorporated and there is no cross collateralization. However, each community benefits from a shared vision and brand identity. Kendal provides assistance and guidance in strategic planning, management, marketing and support services.

CONSERVATIVE DEBT PROFILE

All of KoH's outstanding debt is fixed rate with no outstanding swaps, which Fitch views as conservative. The expected bank placement debt issuance of $18 million with a commercial bank will be in fixed-rate mode and security covenants will be on parity with the organization's currently outstanding series 2013 bonds.

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=823340

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Contacts

Fitch Ratings
Primary Analyst
Michael Burger
Director
+1-212-908-0555
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Gary Sokolow
Director
+1-212-908-1186
or
Tertiary Analyst
Alexander Vaisman
Associate Director
+1-212-908-721
or
Committee Chairperson
Jim LeBuhn
Senior Director
+1-312-368-2059
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Michael Burger
Director
+1-212-908-0555
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Gary Sokolow
Director
+1-212-908-1186
or
Tertiary Analyst
Alexander Vaisman
Associate Director
+1-212-908-721
or
Committee Chairperson
Jim LeBuhn
Senior Director
+1-312-368-2059
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com