Fitch Affirms Ridgecrest Village (IA) Revs at 'BBB-'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'BBB-' rating on the following bonds issued by Scott County (IA) on behalf of Ridgecrest Village (Ridgecrest):

--$13.82 million revenue refunding bonds, series 2006;

--$5.95 million revenue refunding bonds, series 2004.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a pledge of gross revenues, a mortgage, and a debt service reserve fund.

KEY RATING DRIVERS

WEAKER FY14 OPERATING PERFORMANCE: In fiscal 2014 (June 30 year end), Ridgecrest Village's (Ridgecrest) operating ratio rose to a very high 113.5%, due to a combination of lower revenues and a rise in expenses. Operations have improved through the three month fiscal 2015 interim period, with revenue growing slightly and the operating ratio down to 106.8%.

Chief Financial Officer (CFO) Turnover: A CFO, who started in the last fiscal year and had replaced a long serving CFO, left the organization. Fitch believes this disruption in senior management contributed to the poorer operating performance and Ridgecrest's audit being filed late in fiscal 2013. A new CFO at Ridgecrest was starting at the time of this press release.

STRONGER ENTRANCE FEE YEAR: Offsetting the weaker operating performance was a very solid year for unit sales and net entrance fee receipts, which totaled $2.3 million. The figure was the highest over the last four years, which helped lift debt coverage to 1.4x. However, this figure was significantly below the median of 2x and lower than Ridgecrest's 1.6x coverage in fiscal 2013.

GOOD MARKET POSITION: A key credit strength at the current rating level is Ridgecrest's market position. It is the only life care continuing care retirement community (CCRC) in its primary service area and its entrance fees are relatively modest, with prices ranging from $42,000 to $174,000, for a fully amortizing contract.

RATING SENSITIVITIES

IMPROVED OPERATING PERFORMANCE: Fitch expects Ridgecrest's operating performance to improve over the next year. Failure to improve the operating ratio or debt service coverage over this time would likely lead to negative rating action.

CREDIT PROFILE

Located in Davenport, Iowa, Ridgecrest Village is a Type 'A' CCRC with 157 independent living (IL) units, 60 assisted living (AL) units (including 15 Alzheimer's units), and 100 skilled nursing facility (SNF) beds. Total operating revenues equaled $12.5 million in fiscal 2014 (unaudited).

WEAKER OPERATING YEAR

After two consecutive years of improved operating performance, Ridgecrest's operations weakened, as all major financial ratios fell year over year. The weaker performance was driven by softer AL occupancy and a shift in payor mix within Ridgecrest's skilled nursing center. Ridgecrest's AL occupancy, which has historically hovered around 85%, fell below 80% in fiscal 2014. Ridgecrest management does not believe it was specific to Ridgecrest but reflected a short-term softening in the broader market. Ridgecrest has been steadily rebuilding its AL occupancy in early fiscal 2015.

Operating performance was also affected by a shift in payor mix in Ridgecrest's skilled nursing center. Ridgecrest experienced an increase in Medicare managed care, which reimburses at a lower rate than traditional Medicare. While Ridgecrest's Medicare census remained steady in fiscal 2014, the contribution margin from Medicare eroded due to this shift to lower payment source. Ridgecrest management reports focusing more on intake procedures to try to offset the impact of this shift.

On the expense side, an increase in food costs and expenses related to the harsh winter negatively impacted expenses. Ridgecrest did manage employee costs well, with year over year wage and benefit expenses remaining relatively flat. However, the pressured revenues and other increased costs led to the weak operating year for Ridgecrest.

Complicating the challenged operating year was instability at the CFO position, as the replacement for a longstanding CFO left the organization in less than year. A new CFO has been hired and was starting at the time of this press release.

Fitch believes that all these factors contributed to year of poor performance but that operations should return to more historical levels, with the operating ratio closer to 100% and the net operating margin, which was negative in 2014, returning to positive territory. First quarter fiscal 2015 results have shown improvement over the year end results.

GOOD IL OCCUPANCY

Fitch notes positively that IL occupancy has held steady and was at approximately 88% at the end of the first quarter of fiscal 2015. The high IL occupancy reflects solid unit sales, which led to a strong year for net entrance fee receipts in fiscal 2014. Ridgecrest management reports that the hiring of an outside marketing consultant a few years ago has been key in the improved sales figures. Net entrance fee receipts have remained steady in the first quarter on fiscal 2015, consistent with the prior year performance.

SLIGHTLY ELEVATED DEBT BURDEN

Ridgecrest's debt burden remains slightly elevated as reflected by maximum annual debt service (MADS) as a percent of revenue of 14.7% and debt to net available of 7.2x, above the category medians. MADS coverage of 1.4x and revenue only coverage of 0.2x were thin in fiscal 2014.

ADEQUATE LIQUIDITY METRICS

Unrestricted cash and investments equaled $9.9 million at Sept. 30, 2014 compared to $11.5 million at fiscal year-end 2014. The decline in the interim is primarily due to timing issues. Liquidity remains light relative to operating expenses with 300.6 days cash on hand, compared to a 'BB' median of 408 days. However, liquidity metrics relative to debt remain adequate for the 'BBB-' rating with 52.6% cash-to-debt and 5.1x cushion ratio.

Concerns related to Ridgecrest's liquidity metrics are tempered by a conservative balance sheet with 100% fixed-rate debt, no swaps, and a relatively conservative investment portfolio.

DISCLOSURE

Ridgecrest covenants to provide annual disclosure within 150 days of the end of each fiscal year and quarterly disclosure within 60 days of the end of each fiscal quarter. Disclosure is provided through the Municipal Securities Rulemaking Board's EMMA system. In fiscal 2014, Ridgecrest passed the 150.

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:

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=958276

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Contacts

Fitch Ratings
Primary Analyst
Gary Sokolow
Director
+1 212-908-9186
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Stephen Friday
Associate Director
+1 212-908-0384
or
Committee Chairperson
James LeBuhn
Senior Director
+1 312-368-2059
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Gary Sokolow
Director
+1 212-908-9186
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Stephen Friday
Associate Director
+1 212-908-0384
or
Committee Chairperson
James LeBuhn
Senior Director
+1 312-368-2059
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com