Fitch Upgrades Oak Crest Village, Maryland Revs to 'A'; Outlook Revised to Stable

NEW YORK--()--Fitch Ratings has upgraded the following Baltimore County, Maryland bonds issued on behalf of Oak Crest Village, Inc. (OCV) to 'A' from 'A-':

--$68,295,000 fixed-rate revenue bonds (Oak Crest Village Facility) series 2007A.

The Rating Outlook is revised to Stable from Positive.

SECURITY

The bonds are secured by a revenue pledge, mortgage, and debt service reserve fund.

KEY RATING DRIVERS

CONTINUED LIQUIDITY GROWTH: The upgrade to 'A' reflects the strength of OCV's operating performance coupled with continued liquidity growth that offset concerns about OCV's multi-phase capital plans. From May 31, 2013 to May 31, 2014, OCV increased in unrestricted cash and investments by $15.4 million (a 16% increase), with all of OCV's liquidity ratios now comparing well with Fitch's 'A' category medians.

SOLID FINANCIAL YEAR: In 2013, most of OCV's operating ratios exceeded the 'A' medians, including net operating margin-adjusted of 27% and debt service coverage of 4.9x, both better than their respective 'A' medians.

CONSISTENT REVENUE-ONLY COVERAGE: A significant credit strength supporting the higher rating is OCV's consistent revenue-only debt service coverage. Revenue-only coverage has averaged 2.2x over the last four audited years and was at 2.1x in the five-month interim period. OCV's debt load is manageable as reflected by maximum annual debt service (MADS) as a percentage of revenue of 6% relative to the 'A' median of 8.4%.

FIRST PHASE OF CAPITAL PLANS: OCV is moving forward on the first phase of its campus repositioning project. Over the next year, OCV plans to spend approximately $10 million above its normal yearly capital budget, which will mostly fund a major IT upgrade on the campus.

COMPETITIVE SERVICE AREA: There are five other continuing care retirement communities (CCRCs) in the service area; however, OCV's ongoing marketing campaigns, large wait list, and investment in plant mitigate the competitive pressures as a credit concern.

RATING SENSITIVITIES

CONTINUED CAPITAL SPENDING: Fitch expects the elevated capital spending to continue over the next four to six years. OCV will likely have a phase two and three that will address various parts of the campus, including the community center and skilled nursing center. Given the strength of OCV's cash flow, Fitch believes that OCV can sustain the higher rating level and undertake the projects while OCV's operational performance remains stable, helped by continued strength in occupancy. At May 31, 2014, all three levels of care had occupancy above 95%.

Credit Summary

Oak Crest Village is located in Parkville, MD, which is approximately 20 miles north of Baltimore, MD. The facility is a type-C CCRC with 1,520 independent living units (ILUs) in three neighborhoods, 133 assisted living units (ALUs) and 200 skilled nursing facility (SNF) beds. OCV had total operating revenues of approximately $87.7 million in fiscal 2013.

Solid Financial Profile

Most of OCV's operating ratios compare favorably to Fitch's 'A' category median. OCV's operating ratio and net operating margin-adjusted have averaged 89.1% and 24.5% over the last four audited years, both better their respective 'A' medians of 95.8% and 23.1%. The operating ratio for 2014 five-month interim period remained strong at 901%. The net operating margin-adjusted was lower at 16.1%, driven by the timing on entrance fee collection and refunds. OCV has had a solid 67 sales as of May 30, 2014.

Liquidity, a historical concern, has shown material improvement through the historical period. At May 31, 2014, OCV had $110.3 million in cash and unrestricted investments, which equates to 556.8 days cash on hand (DCOH), a 20.7x cushion ratio, and 161.6% cash to debt, all solid for the rating level. Adding further stability to OCV's liquidity position is its conservative debt profile (all of OCV's $68.3 million of debt is fixed) and its Type 'C' residency contract.

Future Capital Plans

Fitch's main credit concern is OCV's plans to undertake a campus repositioning project. Like many mature CCRCs, OCV needs to address changing consumer tastes and changing care models in order to maintain marketability and ensure the longer term financial health of the organization.

The first phase is an approximately $10 million upgrade to the campuses IT infrastructure. It is expected that a phase two and a phase three will focus on the campus amenities, such as the community center, and the skilled nursing center, including a possible dementia care expansion. OCV is still in the planning stage for these phases, and no additional projects beyond the IT project has been approved by the board. Based on its own analysis, Fitch believes phases two and three could potentially cost between $40 million and $50 million in total, and Fitch would expect the implementation to occur over four to six years. Fitch believes that the recent liquidity growth, coupled with OCV's strong levels of cash flow, provide the financial flexibility to meet this higher level of capital spending at the higher rating level.

OCV's management will continue to invest in lifecycle projects to keep the campus marketable, including renovation of IL units when they become available. IL units with normal wear cost approximately $5,000 to $6,000 to refurbish and a complete unit renovation can range between an additional $10,000 to $15,000 per unit depending on the size and condition.

Strong Occupancy

Occupancy levels at OCV remain very strong through May 30, 2014: 98.6% in IL us, 98% in ALUs and 95.7% in SNFs; these figures are higher year over year. OCV currently has a waiting list of approximately 900 and holds regular marketing events that are well attended, both of which have kept the pipeline for new residents strong.

To support occupancy, OCV uses a promissory note program to facilitate the move-in of new residents, as well as offering other real estate support services. While promissory notes can be a credit concern, OCV manages it well. After 90 days, residents using the promissory note program begin to pay interest if the note remains outstanding. Fitch notes positively the year-over-year decline in the promissory note receivable, which reflects the amount of entrances fees owed to OCV by current residents. From the 2012 to the 2013 audit periods, the receivable dropped to $4.4 million from $7.6 million. OCV management has reported that entering residents are having an easier time selling their home.

Disclosure

OCV covenants to provide audited annual financial information to the Trustee, Underwriter, Rating Agency and to significant bondholders. However, OCV posts all of its disclosure via 'zieglerresearch.com', which includes monthly financial statements (balance sheet, income statement, and statement of cash flows), utilization trends, and payor mix.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

-- Rating Criteria for Not-for-Profit Continuing Care Retirement Communities, July 24, 2014

Applicable Criteria and Related Research:

Rating Criteria for Not-for-Profit Continuing Care Retirement Communities -- Effective July 26, 2011 to July 12, 2012

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=644895

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=846914

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Contacts

Fitch Ratings
Primary Analyst
Gary Sokolow, +1 212-908-9186
Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10014
or
Secondary Analyst
Emily Wadwhani, +1 312-368-3347
Associate Director
or
Committee Chairperson
Eva Thein, +1 212-908-0674
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Gary Sokolow, +1 212-908-9186
Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10014
or
Secondary Analyst
Emily Wadwhani, +1 312-368-3347
Associate Director
or
Committee Chairperson
Eva Thein, +1 212-908-0674
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com