Fitch Affirms The Pines at Davidson (NC) Revs at 'A-'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'A-' rating on $20,105,000 of health care facilities first mortgage revenue bonds issued by the North Carolina Medical Care Commission on behalf of The Pines at Davidson (The Pines).

The Rating Outlook is Stable.

In addition, The Pines has $14,645,000 outstanding in series 2013 bonds privately placed with STI Institutional & Government, Inc. (an affiliate of SunTrust Bank), which is not rated by Fitch.

SECURITY

The series 2006A bonds are secured by a pledge of gross receipts, a mortgage, and a debt service reserve fund.

KEY RATING DRIVERS

SOLID OPERATING PROFILE: The 'A-' rating reflects The Pines' historical operating and financial stability, driven by consistently high occupancy and entrance fee generation. Occupancy rates in the independent living units (ILUs) have been particularly strong at above 94% over the last decade, despite significant local and national economic pressures. The Pines has not posted an operating loss in over two decades.

MAJOR CAPITAL SPENDING: The Pines recently acquired real property adjacent to the existing campus and undertook a construction project to build 23 additional ILU villas. Costs totaling over $16 million were funded by a combination of unrestricted cash, temporarily restricted cash, and a $14.6 million bond issue (series 2013).

INCREASED DEBT BURDEN: Total long-term debt increased over 60% upon issuance of the series 2013 bonds, used to fund the additional villa construction. Having added to the already high debt burden, The Pines' debt metrics are unfavorable against the 'A' category medians, but are expected to recover significantly following the planned early retirement of some outstanding debt with the receipt of initial entrance fees. Fitch believes additional debt capacity is limited at the current rating without commensurate improvement in cash flow.

TEMPORARY LIQUIDITY PRESSURE: While days cash on hand remains strong, significant increase in debt led to weakened cash to debt and cushion ratios. However, the impact is temporary and should improve once the new villas begin generating cash flow.

RATING SENSITIVITIES

SUCCESSFUL PROJECT EXECUTION: Fitch expects the new villas to be completed and filled on schedule, and to generate entrance fees and revenues as expected. Weaker operating or financial performance from projections would lead to negative rating pressure, but are not anticipated given The Pines' history of executing projects and meeting budget.

CREDIT PROFILE

The Pines is a type-B continuing care retirement community (CCRC) located in Davidson, North Carolina, which is approximately 20 miles north of Charlotte. The Pines has 225 ILUs (with 23 additional units under construction), 30 assisted living units (ALUs), and 51 nursing beds. In the fiscal year ended December 31, 2013, The Pines had total revenues of $17 million.

SOLID OPERATING PROFILE

The rating affirmation is supported by The Pines' history of solid operations and occupancy, as well as a highly competent management team with proven ability to plan and execute strategic and expansion projects. Fitch also believes The Pines' benefits from its strong market position, with long standing relationships with major local organizations including Carolinas Healthcare System, Davidson College, and Davidson College Presbyterian Church.

Reflecting its solid operating footprint, The Pines' has produced excellent occupancy metrics over the last decade, despite significant regional and national economic challenges. During this period, ILU occupancy remained solidly above 94% and was most recently reported at 95.8% through the six month ended June 30, 2014. Including sold units, ILU occupancy has been above 97.9% for the last 15 years. Occupancy in the ALUs and nursing facility also has been sound, and was most recently reported at 93.8% and 97.5%, respectively. As a result, The Pines posted positive operating margins for 24 consecutive fiscal years, and have consistently outperformed its budget by a healthy margin.

MAJOR CAPITAL EXPENDITURES

To meet increasing demand, The Pines is currently constructing the Villas at Hickory Crest, which will consist of 23 two-bedroom units adjacent to the existing campus. The project cost is estimated at $14 million with approximately $7 million to be received in initial entrance fees. Management expects the construction to be complete in December, with occupancy beginning January 2015. All units are pre-sold with deposits (10% of entrance fee) down.

In addition to new ILU construction, The Pines also purchased real property adjacent to the campus with a recorded cost of $2.9 million, a majority of which was funded with donor restricted assets. The acquired property is expected to be renovated to provide more independent living space.

INCREASED DEBT BURDEN

Fitch's main credit concern continues to be the high debt burden, which increased significantly with the series 2013 debt issuance in September 2013. At March 31, 2014, long-term debt totaled $34.9 million, which includes a $14.6 million private placement used to fund the construction of the Villas at Hickory Crest. The Pines expects to pay down a portion of outstanding debt ahead of schedule with initial entrance fee receipts. Fitch is using a MADS of $2.5 million, which excludes the planned balloon payment in the next two years.

Debt burden as measured by MADS as a percentage of revenues was very high at 14.5% in fiscal 2013 compared to the median of 8.4%. Similarly, MADS coverage was weak for the rating category at 1.9x in fiscal 2013, compared to the 'A' median of 3.0x. However, the Villas at Hickory Crest are expected to generate approximately $1 million in additional annual revenues, and coverage is expected to return to historical levels at above 2x.

MIXED LIQUIDITY METRICS

Liquidity metrics are mixed due to significant increase in debt in 2013, but overall remain adequate for the rating category. At March 31, 2014, days cash on hand was a high 740 days compared to the 'A' median of 564 days, but cash to debt and cushion ratio of 78.5% and 11.1x were significantly below the respective medians of 125.2% and 15.3x. However, the decline is temporary and should improve with the planned debt reduction.

DISCLOSURE

The Pines 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 16, 2014);

--'Not-for-profit Continuing Care Retirement Communities Rating Criteria' (July 24, 2014).

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=752470

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=842857

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Contacts

Fitch Ratings
Primary Analyst
Jennifer Kim, +1 212-908-0740
Associate Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Michael Burger, +1 415-659-5470
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

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Contacts

Fitch Ratings
Primary Analyst
Jennifer Kim, +1 212-908-0740
Associate Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Michael Burger, +1 415-659-5470
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