SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB+' rating to the following bonds expected to be issued on behalf of Aldersly, CA by the California Statewide Communities Development Authority:
--$6,490,000 revenue refunding bonds, series 2015A;
--$215,000 taxable revenue bonds, series 2015B.
The Rating Outlook is Stable.
The series 2015A and B bonds will be fixed rate and will refund Aldersly's outstanding debt, provide $1.7 million of new money for various capital expenditures and pay costs of issuance. The bonds are expected to price the week of February 2 through negotiation.
Gross revenue pledge and mortgage pledge of the obligated group (OG). In addition, there is a debt service reserve fund.
KEY RATING DRIVERS
VERY STRONG FINANCIAL PROFILE: Aldersly's financial profile is strong for its rating level with very high liquidity metrics, low debt burden, and strong debt service coverage ratios. The majority of Aldersly's financial ratios exceed Fitch's 'BBB' category medians.
SMALL REVENUE BASE: Aldersly generated just $8 million of total revenues in fiscal 2014, which is the smallest revenue base in Fitch's rated portfolio and well below median revenue size of its 'BBB+' peer group. Fitch believes Aldersly's small number of units (56 independent living units [ILUs], 30 assisted living units [ALUs] and 20 skilled nursing facility beds [SNFs]) and revenue base are inherently more volatile, as small changes in occupancy and turnovers can have an outsized impact on financial performance.
IMPROVED OCCUPANCY: Occupancy has improved in fiscal 2014 (Sept. 30 year-end) with average fiscal year ILU occupancy of 93.7%, ALU occupancy of 95.9% and SNF occupancy of 91.3%. ILU occupancy has been driven by enhanced marketing initiatives and a new sales director that was hired in 2011. SNF occupancy has historically been more of a challenge but improved in fiscal 2014 due to efforts in working with discharge planners at local hospitals.
LOW DEBT BURDEN: Aldersly's pro forma debt burden is light. Maximum annual debt service (MADS) of $475 thousand equates to low 5.1% of fiscal 2014 revenues compared to the 'BBB' category median of 12.3%. Historical pro forma coverage of MADS on a revenue-only basis is a strong 3.2x and 3.9x in fiscal 2014 and 2013, respectively.
LONGER TERM CAPITAL NEEDS: Aldersly's campus is well maintained despite its high average age of plant; Fitch believes there may be longer term capital needs to enhance the marketability of the campus especially with a different generation of residents who may seek a higher level of amenities. Although there are no major projects on the horizon, Aldersly expressed interest in purchasing land if and when available to provide flexibility for the future.
MAINTENANCE OF FINANCIAL PROFILE: Given Aldersly's small revenue base, financial metrics will need to be maintained in excess of the 'BBB' category median ratios.
Aldersly is a Type B continuing care retirement community (CCRC) located in San Rafael, CA in Marin County, approximately 20 miles north of San Francisco. Aldersly offers a traditional non-refundable contract and a 50% return of capital contract. Aldersly has been managed by Life Care Services (LCS) since 2004, which Fitch believes provides access to additional resources for a single-site entity. LCS manages 85 CCRCs nationwide. The audited financials are for Aldersly and Subsidiary and currently the Subsidiary has no activity. Aldersly is the only member of the obligated group.
Aldersly was founded in 1921 by Danish immigrants and the community is situated in a residential neighborhood with 41 one-bedroom apartments, 15 studios, 30 ALUs (studio and one-bedroom), and a 20-bed SNF. The campus is well maintained despite its high average age of plant of 16 years. The units are fairly small with the largest ILU being about 700 square feet. Although the campus showed well, Fitch believes Aldersly may be challenged over the longer term as a different generation of residents may desire larger units and/or higher level of amenities.
Aldersly has created a subsidiary to purchase land if and when available for future expansion. However, there has been no activity to date and Fitch will monitor Aldersly's longer term capital plans.
Balance Sheet Growth
Aldersly's financial profile is strong for its rating level with most metrics even exceeding Fitch's 'A' category metrics. Balance sheet strength has grown steadily to $20.3 million of unrestricted cash and investments at Sept. 30, 2014 from $11.8 million at Sept. 30, 2010. Good investment returns have been a contributing factor and Fitch notes that Aldersly's investment portfolio has 55% exposure to equities, which Fitch views as aggressive for its size and rating level. Despite this, pro forma cash-to-debt is very strong at 302% compared to the 'BBB' category median of 60.2%, and maintaining a very healthy level of cash-to-debt will be key to maintaining the current rating level. Days cash on hand was 1,020.6 at Sept. 30, 2014 compared to the 'BBB' category median of 407.6.
Profitability is the only area where Aldersly's ratios do not compare as favorably to Fitch's 'BBB' category medians, with net operating margin of 0.9% in fiscal 2014, negative 1.3% in fiscal 2013 and negative 0.1% in fiscal 2012. Management has a target of 3% for net operating margin. Operating ratio is consistently below 100% and was 97.1% in fiscal 2014. Resident service revenue had good growth in fiscal 2014 of 5% compared to the prior year with flat revenue. Monthly fee increases have been modest and for ILUs was 3.37% in fiscal 2014 compared to 0% in fiscal 2013 and budgeted at 3.2% in fiscal 2015.
Low Debt Burden
Aldersly's debt burden is low with pro forma MADS equating to 5.1% of total revenue in fiscal 2014. Aldersly's total pro forma debt will be $6.7 million. The only debt issuance prior to 2015 was in 2002 for the construction of its ALUs. There are no additional debt plans and capital spending over the next few years (not including projects financed with 2015 bonds) is expected to be similar to historical spending (less than 1x depreciation expense). Debt service coverage (including entrance fee receipts) is very strong at 6.9x and 7.1x in fiscal 2014 and 2013, respectively, compared to the 'BBB' category median of 2x. Similarly, historical pro forma revenue-only coverage has been strong at 3.2x and 3.9x in fiscal 2014 and 2013 respectively.
Fitch views Aldersly's market position favorably as its entrance fees are well below local real estate values and are also priced competitively compared to other CCRCs in its primary market area (PMA). There are four other retirement communities in the PMA that offer various contract types and all the competitors have solid ILU occupancy.
Aldersly's ILU occupancy has improved over the last five years and was 93.7% in fiscal 2014 compared to 86.9% in fiscal 2010. There was higher turnover than normal in fiscal 2010 and lower move-ins in fiscal 2011, but since then, move-ins have been consistently around 10 per year from fiscal 2012-2014 while transfers/move-outs declined from a high of 14 in fiscal 2010. Net entrance fee receipts from turnovers was $1.8 million in fiscal 2014, $1.5 million in fiscal 2013 and $1.2 million in fiscal 2012. The introduction of a 'return of capital' contract about four years ago has resulted in the collection of higher entrance fees.
Plan of Finance
Aldersly's total debt outstanding is $5.6 million and includes the series 2002 Cal Mortgage insured bonds and a note payable. The series 2015A&B bonds will refund all of Aldersly's outstanding debt and provide $1.7 million of new money to fund two major projects - building an elevator and an extension to its existing dining hall to increase resident common space and create a staff lounge. Annual debt service remains the same and is level at approximately $475,000 with a final maturity of 2040 from the prior final maturity of 2032.
Aldersly covenants to provide annual audited information within 150 days of fiscal year end and quarterly information for all four quarters within 45 days of quarter end.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Rating Criteria, this action was additionally informed by information from Ziegler.
Applicable Criteria and Related Research:
-- 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