CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB-' rating on the following St. Louis County Industrial Development Authority revenue bonds issued on behalf of Friendship Village of West County (d/b/a Friendship Village of Chesterfield, FVC):
--$23.5 million series 2012;
--$20.8 million series 2007A.
The Rating Outlook is Stable.
SECURITY
The bonds are supported by a pledge of revenues, mortgage, and debt service reserve.
KEY RATING DRIVERS
ILU EXPANSION COMPLETE: FVC completed its 30-unit independent living unit (ILU) expansion and campus renewal project on time and within budget in early 2014. All units were filled with no attrition in presales, and as a result, generated approximately $10 million in initial entrance fees.
SIZEABLE DEBT BURDEN: FVC remains significantly leveraged, though no additional debt is currently planned and modest capital needs should support moderation over the near term. Debt service coverage was elevated in fiscal year (FY) 2014 due to higher realized gains on investments and FVC covered maximum annual debt service (MADS) of $3.2 million at 2.4 times (x) in fiscal 2014 (year ended June 30). FVC's covenant calculation, based on actual annual debt service over a rolling 12 month period, was 3x for fiscal 2014.
SOLID OCCUPANCY LEVELS: Health center occupancy dipped to 87% during 2013, but has since rebounded to 94% in the three-month interim period ended Sept. 30, 2014 due in part to increased short term rehab volume and less attrition. Additionally, the 30-ILU expansion did not pressure existing ILU occupancy and overall ILU occupancy was solid at 91.3% for the three months ended Sept. 30, 2014. FVC will continue to renovate and expand its existing units to support demand and ensure steady occupancy going forward. FVC has been successful in marketing its type A contract as a differentiating characteristic to prospective residents.
ADEQUATE LIQUIDITY: Per Fitch's calculation, FVC's liquidity was steady at Sept. 30, 2014 with $17.3 million in unrestricted cash and investments equating to 363.5 days of cash on hand (DCOH), and a 5.5x cushion ratio. Metrics remain slightly below Fitch's 'BBB' category medians of 407.6 DCOH and a 6.9x cushion ratio. Fitch expects FVC's capital plans will likely inhibit liquidity growth over the next few years; however, material erosion is not anticipated.
RATING SENSITIVITIES
STEADY CASH FLOW: Consistent occupancy and turnover entrance fee levels will be necessary for FVC to meet its high debt service requirements and preserve liquidity against capital expenditures. Over the intermediate term, FVC may proceed with further campus repositioning related to skilled nursing facility (SNF) services, which this rating does not incorporate. Absent meaningful improvement in current leverage metrics, Fitch believes FVC has little to no additional debt capacity at the current rating level.
CREDIT PROFILE
Friendship Village of West County (d/b/a Friendship Village of Chesterfield) is a Type-A continuing care retirement community with 276 ILUs, 36 villa apartment units, 22 residential care beds and 99 skilled nursing beds. FVC is located on 34 acres of land in Chesterfield, MO, approximately 25 miles west of St. Louis. Total revenues in fiscal 2014 (June 30 year end) were $16.4 million.
CAPITAL PLANS
In early 2014, FVC completed a $13.5 million 30-unit ILU project financed with the series 2012 bonds, which was phase one of a two-phase campus restructuring. The units were 100% filled upon opening, and generated approximately $10 million in initial entrance fees. The initial entrance fees are in an escrow account, a portion of which is eligible for release and are expected to be reclassified as unrestricted cash over the near term.
Fitch expects routine capital expenditures to remain near $2.3 million annually through 2017, which should be supported by cash flow and remaining bond construction funds (approximately $4.2 million at June 30). Conversion of some smaller units into larger combined units will occur over the intermediate term, depending on attrition and demand. Four of those units were sold during 2014.
A second phase of FVC's campus repositioning/expansion plan would address health care services, though that phase is still not yet finalized and will depend on market conditions.
HIGH DEBT BURDEN
As of Sept. 30, 2014, total debt equals $43.3 million, which is 100% fixed rate. FVC has no swaps, and no current plans for additional debt issuance. MADS equals $3.2 million, which is level through 2028, declining to $2.3 million through maturity in 2042.
FVC's debt metrics demonstrate its significant leverage, with ratios well below Fitch's 'BBB' category medians. MADS is $3.2 million, which represented a high 15.7% of total revenues in fiscal 2014 (year ended June 30). Debt service coverage of 2.4x was elevated in fiscal 2014 due to higher realized investment gains that totaled $3.7 million. Debt service coverage was only 0.9x through the three months ended Sept. 30, 2014, which is more in line with historical performance with 1.2x coverage in fiscal 2013 and fiscal 2012.
Fitch believes there is little room for operating volatility given FVC's high debt burden. FVC is budgeting for steady operating results in fiscal 2015, supported by consistent occupancy and turnover, which results in 1.2x debt service coverage.
DISCLOSURE
FVC covenants to provide both annual disclosure (within 150 days) and quarterly disclosure (within 45 days) to bondholders, including both financial and occupancy data. FVC has consistently provided Fitch with routine disclosure and good access to management.
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:
Not-for-Profit Continuing Care Retirement Communities Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752470
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=928875
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