NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A-' rating on $413,015,000 of revenue bonds issued by various issuers in DE, FL, GA, and PA on behalf of ACTS Retirement-Life Communities Obligated Group (ACTS).
The Rating Outlook is Stable.
ACTS has outstanding an additional $85,225,000 in long-term debt, which Fitch does not rate.
A gross revenue pledge, a springing mortgage pledge and a debt service reserve fund.
KEY RATING DRIVERS
BENEFIT OF SCALE AND GEOGRAPHIC DIVERSITY: ACTS' scale and geographic diversity reduces overall operating volatility and actuarial risk which results in more consistent year-over-year operating performance relative to Fitch rated portfolio of continuing care retirement communities (CCRCs).
NEW OG MEMBERS: In December 2013, ACTS brought Peninsula United Methodist Homes (PUMH) and Magnolia Trace (MT) into the obligated group (OG), further diversifying its geographic coverage and increasing annual revenues by over $50 million. Fitch notes that the overall financial impact has been accretive.
CONSISTENT FINANCIAL PERFORMANCE: Profitability, liquidity, and debt metrics have been relatively stable over the last several years, despite significant growth and changes to the organization. Liquidity metrics compare unfavorably against the 'A' medians and remain a credit concern, but have kept pace with the growth of the overall organization and produced stable ratios.
STRONG MANAGEMENT PRACTICES: ACTS has demonstrated sound management practices with respect to affiliation activity, capital spending, expense control, and disclosure. Fitch notes that the current CEO is set to retire in August 2014, and a successor is expected to be announced this month. Given the overall stability of the organization, Fitch does not expect this transition to have a material operational or financial impact.
STABILITY EXPECTED: Fitch expects ACTS to continue producing consistent financial metrics, supported by its diverse revenue base and historically stable financial performance.
ACTS is the one of the largest not-for-profit CCRC systems in the nation with 21 campuses housing 23 communities in AL (1), DE (3), FL (6), GA (1), MD (1), NC (2), PA (8), and SC (1). As of March 31, 2014, ACTS operated 5,352 independent living units (ILUs), 854 assisted living units (ALUs) and 1,361 skilled nursing facility (SNF) beds. Total revenues for 2013 were $353.2 million, which includes the full-year financial impact of PUMH and Magnolia Trace.
Fitch notes there are some entities outside the OG, which collectively generated operating revenues of approximately $25 million in fiscal 2013. This analysis focuses on the OG only.
New Obligated Group Members
Effective Dec. 16, 2013, two organizations owned and operated by ACTS were brought into the OG. PUMH consists of three CCRC communities in DE and MT operates one CCRC community in AL. The transaction reflects management's history of disciplined acquisition strategy, admitting acquired communities into the OG only after operations have been improved. The inclusion of PUMH and MT grew operating revenues from $300 million in fiscal 2012 to $353 million in fiscal 2013, and is accretive to the overall financial profile.
Diverse Revenue Base
ACTS' strong qualitative indicators, including the system's operating and geographic diversification, its size and reputation, and effective management practices have been factored significantly into its rating and can offset concerns around some financial metrics unfavorable to the 'A' category medians, particularly liquidity metrics. Fitch views the diversity of ACTS revenue generation and geographic locations as a core credit strength as it serves to reduce the system's overall operating volatility. Further, the system's sheer size significantly reduces the actuarial risk, resulting in very consistent year-over-year attrition and turnovers. The large revenue base allows the system to achieve operating and cost efficiencies through clusters of communities in each market, and generate a consistent number of unit turnovers annually.
Reflecting its stable operating footprint, ACTS' profitability metrics have historically remained consistently sound. Reflecting its Type 'A' structure, ACTS generated an operating ratio of 104.3% and operating margin of negative 0.1% in fiscal 2013, which compare unfavorably against the 'A' medians of 95.8% and 5.6%, respectively. However, solid net entrance fee receipts produced a net operating-margin adjusted equal to the median at 23.1%. Fitch believes sound management practices and further revenue diversification will allow profitability metrics to remain steady.
Fitch's primary credit concern continues to be ACTS' light liquidity. At March 31, 2014, ACTS had approximately $203.1 million of unrestricted cash and investments which translated into 251.5 days cash on hand, a 5.7x cushion ratio and 40.1% of cash to debt; all of which are materially weaker than the respective 'A' category medians of 564 days, 15.3x and 125.2%. However, Fitch notes that unrestricted cash and investments have kept pace with the growth of the overall organization, resulting in stable liquidity ratios. Additionally, the consistency of ACTS' operating performance and level of entrance fee receipts serves to reduce the risk of the system's low liquidity metrics.
Capital plans are manageable and are not expected to materially impact liquidity levels in the near- to medium-term. A planned expansion at Plantation Estates in NC is expected to take place in the next several years, but only if a target of 75% pre-sale rate is achieved. The project will be funded with a revolving line of credit at a projected maximum amount of $45 million. Fitch expects the overall debt levels to be manageable as the funds are drawn down as needed and paid off as entrance fees are received. Significant negative variance from expectations would be viewed negatively.
Manageable Debt Burden
At March 31, 2014, ACTS had $506 million in long-term debt outstanding (79% fixed rate, 17% swapped to fixed, 4% variable), generating a maximum annual debt service (MADS) of $35.6 million. This includes $40.5 million in bank loans issued in 2013 to put in place the addition of new OG members, the impact of which was offset by the overall balance sheet positions of PUMH and MT. Debt metrics are adequate for the rating category with 2.6x MADS coverage and 10.1% MADS as a percentage of revenues in 2013 compared to the 'A' medians of 3.0x and 8.4%. ACTS is counterparty to four fixed-rate payor swaps with a total notional value of $86.8 million with no collateral posted.
ACTS discloses annual financial statements within 120 days and quarterly unaudited financial statements within 45 days through the MSRB EMMA website.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue Supported Rating Criteria', June 3, 2013
--'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
Revenue-Supported Rating Criteria