Fitch Affirms Miriam Osborn Memorial Home Assoc. (NY) Revs at 'A-'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed the 'A-' rating on the following Dormitory Authority of the State of New York bonds issued on behalf of Miriam Osborn Memorial Home Association (dba The Osborn):

--$43.7 million series 2012

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a pledge of gross revenues and receivables, and a mortgage on certain obligated group property. Additional security is provided by a funded debt service reserve.

KEY RATING DRIVERS

INCREMENTAL LIQUIDITY IMPROVEMENT: The Osborn's liquidity has improved since the initial rating, to 450.8 days of cash on hand (DCOH) and 127.8% cash to debt at May 31, 2014; both sufficient for the rating category against Fitch's 'A' category medians of 563.7 DCOH and 125.2% cash to debt. Balance sheet risk is heightened by an aggressive investment mix, though offset by a conservative capital structure and limited health care liability as a type C fee-for-service community.

FAVORABLE SERVICE AREA CHARACTERISTICS: The Osborn's primary market has favorable wealth indicators, a growing population in the 65+ age group, and housing values which are consistent with The Osborn's entrance fee pricing. Additionally, The Osborn's 100+ year history has generated a strong market position and favorable reputation.

MANAGEABLE DEBT LEVEL: The Osborn has approximately $44 million in fixed rate debt, with maximum annual debt service (MADS) of $3.5 million. Coverage and leverage metrics remain comparable to Fitch's 'A' category medians, and should moderate over time. No additional debt is anticipated over the near to medium term.

SOLID OCCUPANCY: The Osborn has maintained very consistent occupancy over the past decade, averaging over 95% across all units since 2002. A sizeable wait list of 136 residents coupled with consistent ILU turnover and expanding memory care, home health and outpatient rehabilitation service lines should provide healthy revenues going forward.

LIMITED CAPITAL NEEDS: The Osborn's future capital needs are modest, including routine needs near $4 million annually, as well as ongoing upgrades to existing units over the next 6 years as units turn over. Healthy cash flow including turnover entrance fee receipts should provide adequate cushion against any balance sheet impact.

RATING SENSITIVITIES

SUSTAINED OPERATING PERFORMANCE: Fitch expects The Osborn to continue generating steady entrance fee revenues, and solid operating cash flow, which should enable continued balance sheet growth over the medium term as capital expenditures moderate post-2014. Any upward rating pressure would require a more robust level of liquidity in order to offset the market risk associated with an aggressive investment mix.

CREDIT PROFILE

Miriam Osborn Memorial Home Association (The Osborn) began its operations in 1908 as a retirement home for the aged in Rye, New York, and currently operates as a type 'C' fee-for-service CCRC. Rye is approximately 35 miles north of New York City, in Westchester County. The Osborn provides 148 entrance fee units, 40 entrance fee garden homes, 97 rental apartment units, 13 memory care units, and 84 skilled nursing beds. The Osborn also provides home health services through the charitable organization Osborn Home Care. For fiscal 2013 (year ended Dec. 31) total revenues were $47.3 million.

BALANCE SHEET IMPROVEMENT

As expected, The Osborn's liquidity improved to a level which is in line with Fitch's 'A' category medians. As of May 30, 2014 The Osborn had $55.9 million in unrestricted cash and investments, equal to a 15.9x cushion ratio which is commensurate against Fitch's 'A' category median of 15.3x. Additional growth is anticipated over time as The Osborn's capital needs wane beyond 2014. The Osborn is budgeted to spend about $8 million in 2014 on both routine and project capital, including the ongoing renovation of its existing IL and AL units.

Fitch notes that balance sheet growth has been driven in large part by an aggressive investment portfolio, which generated $6 million in unrealized investment gains in 2013. As of Dec. 31, 2013 The Osborn maintained an investment portfolio weighted to nearly 90% equities and hedge funds. While there has not been a change in the Osborn's overall investment policy, this reflects a shift from a mix of approximately 68% equities and hedge funds in 2011. Fitch believes liquidity metrics in excess of median levels are necessary to adequately cushion against any short-term investment volatility. Fitch notes The Osborn's defined benefit pension plan was 90.4% funded, and it has no derivative instruments.

HEALTHY OCCUPANCY

The Osborn's occupancy remains robust, still averaging above 95% and generating consistent net entrance fees and operating cash flow. The addition of memory support units has helped support steady occupancy, as those units are now 100% occupied after opening in early 2013. Through 2013 The Osborn produced a 93.7% operating ratio and 20.6% net operating margin-adjusted, both in line with Fitch's 'A' category medians of 95.8% and 23.1% net operating margin-adjusted. This resulted in solid coverage of 3.8x including entrance fees and 1.9x by revenue-only. Further, debt to net available has moderated to 3.3x in 2013, from 4.1x in 2011.

ENTRANCE FEES

Net entrance fee receipts were consistent in 2013 at $6.6 million, and are expected to remain stable for 2014. Fitch notes that The Osborn's methodology of tying its entrance fees to local market trends has allowed it to remain competitive and benefit from the overall housing recovery over the past several years.

Fitch notes that the FASB accounting amendment effective Jan. 1, 2013 had an impact on The Osborn's financial profile. Based on the reclassification of entrance fees from deferred revenue to liability, The Osborn reported a negative balance for unrestricted net assets of (-$17.8) million as of Dec. 31, 2013. The accounting change also impacted The Osborn's total operating revenue, as $3.6 million in amortized of entrance fees were eliminated in 2012 and none were recorded in 2013.

While these non-cash adjustments do not materially impact Fitch's quantitative analysis, Fitch will continue to monitor both the accounting and the actuarial calculations for future service obligation as part of its review. For additional information on the accounting change, see Fitch's report 'Accounting Change on Refundable Entrance Fees Not Expected to Affect Ratings' dated Nov. 30, 2012.

ONGOING DISCLOSURE

Annual disclosure is provided within 165 days of each fiscal year end, and will include financial statements, operating data, covenant performance, and management discussion & analysis. Quarterly disclosure is provided within 45 days of each quarter end. All disclosure will be provided via 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 24, 2014).

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=842944

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Contacts

Fitch Ratings
Primary Analyst
Emily E. Wadhwani
Director
+1-312-368-3347
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Dmitry Feofilaktov
Analyst
+1-212-908-0345
or
Committee Chairperson
Emily Wong
Senior Director
+1-415-732-5620
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Emily E. Wadhwani
Director
+1-312-368-3347
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Dmitry Feofilaktov
Analyst
+1-212-908-0345
or
Committee Chairperson
Emily Wong
Senior Director
+1-415-732-5620
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com