NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns a 'BB' rating to the following Public Finance Authority Healthcare Facility bonds expected to be issued on behalf of Church Home of Hartford Inc. D/B/A Seabury (Seabury Obligated Group):
--$35,600,000 million expansion/refunding bonds (Church Home of Hartford Incorporated Project), Series 2015A.
The Rating Outlook is Stable.
The bonds are expected to be issued as fixed rate. Proceeds will be used to refund outstanding debt, pay for a variety of capital projects, fund a debt service reserve fund, and pay for the cost of issuance. Bonds are expected to sell via negotiation the week of March 23.
SECURITY
A pledge of gross revenues of the obligated group (OG), a mortgage, and a debt service reserve fund.
KEY RATING DRIVERS
TWO-PHASE BORROWING: The 'BB' rating incorporates the impact of a two-phase borrowing being undertaken by Seabury to fund a major capital plan. The first phase to be funded by $18 million in bonds being issued as part of the current debt issuance will upgrade various parts of the campus, including the front entrance and dining venues. The second phase will be a larger repositioning project that is expected to add 65 independent living units (ILUs) and include renovation and expansion of assisted (ALUs)and skilled nursing (SNFs) areas. The bonds for phase two are expected to be issued in the fall of 2015 and will include a mix of short-term and permanent debt. Total long-term debt is expected to peak at approximately $85 million in 2017, and it assumes the paydown of the short-term debt with new entrance fees.
ENTERING PERIOD OF CREDIT STRESS: The impact of the phase-two debt and the associated construction and fill-up risk for the projects reflect a credit profile that is more consistent with a below investment-grade credit. However, in spite of the credit stress, the 'BB' rating reflects Seabury's underlying credit strengths, which include a long operating history, historically high occupancy, good market position, and strong financial performance.
SOLID OVERALL OPERATING PROFILE: High occupancy - total campus occupancy (ILUs, ALUs and SNFs combined) - has been above 90% over the last seven years and has supported a very good operating ratio which has averaged 93.2% over the last four audited years, particularly strong for a Type 'A' contract facility. Pro forma coverage of first-phase debt was also a solid 2.1x for FY2014 (Sept. 30 year end). Pro forma coverage of the expected phase-two debt was weaker at 1x for FY2014. However, additional revenues from the new units should support higher coverage once they are built and filled. Project completion is expected by 2017 and stabilization of occupancy by 2020.
GOOD MARKET POSITION: Seabury does have competitors in its service area. However, its entrance fees remain in line with area housing prices and competitor pricing. In addition, Seabury markets itself as an active community, which has attracted younger seniors, keeping its average age of ILU entry below 80 and its ILU turnover at below 6% over the last three years.
RATING SENSITIVITIES
SECOND-PHASE BORROWING: While the 'BB' rating incorporates the likely impact of the second-phase bonds, issuance of the bonds is approximately seven-to-nine months away. Should the timing, scope of the project, or financing details change materially, those changes could affect the rating at the time of issuance.
CORE PERFORMANCE STILL STRONG: The rating assumes that Seabury's current financial profile, characterized by high occupancy and solid operating metrics, will remain stable over the next few years. A deviation from this performance could pressure the rating.
CREDIT PROFILE
Seabury is a Type 'A' life care continuing retirement community (CCRC) located in Bloomfield, CT, just northwest of Hartford. The community currently includes 193 ILUs, 49 ALUs, and 60 SNFs.
Fitch bases its financial analysis on the results of the OG, which consists of Seabury, the senior living campus described above, and Seabury Meadows, which operates 58 memory-support beds and is located adjacent to the senior living campus. As part of the current debt issuance, Seabury Meadows will be merged into Seabury, creating a single OG entity. Total OG operating revenues were $26.8 million in FY2014. Seabury also has two non-OG affiliated organizations, the Seabury Charitable Foundation and Seabury At Home, which is a CCRC without walls. The financial performance of the affiliates is not included in the results reported in this press release.
TWO-PHASE CAPITAL PLAN
Seabury is moving forward on a major capital plan. The first phase being funded with the current debt issuance will upgrade various parts of Seabury's campus. The projects include a new front entrance and a new or renovated bistro area, kitchen, arts studio, salon and day spa, administrative offices, as well as additional parking. Construction is expected to begin in April 2015 and be completed by the first quarter of 2016.
The second phase will be a larger repositioning project that is expected to add 65 ILUs and include renovation and expansion of assisted and skilled nursing areas, including a new dedicated short-term rehab unit, a new chapel and auditorium, and a new primary care space. The financing for phase two is expected to occur in the fall of 2015 and will include a mix of short-term and permanent debt. Seabury will begin pre-sales in March 2015.
The rating assumes the issuance of the second-phase bonds; however, the two projects are not contingent upon each other. Changes to the timing, scope, or financing of the project could impact the rating.
Even though the projects will stress Seabury's financial profile over the near term, Fitch views them positively. Seabury's high occupancy and low turnover have limited revenue growth over the last few years, and as a mature facility, there is a need to keep refreshing the campus. Once completed, the projects should keep Seabury competitive and be financially accretive over the longer term.
STEADY OPERATIONAL PERFORMANCE
For FY2014, Seabury maintained a steady operating performance, generating a 90.9% operating ratio and 14.5% net operating margin-adjusted, both in line with prior year performance. The results were supported by high occupancy and good ILU sales, which generated $2.7 million in net entrance fees.
Fitch views Seabury's occupancy as a credit strength. At Dec. 31, 2014, ILU, ALU and SNF occupancy were at 98%, 90%, and 90%, respectively, which is consistent with Seabury's historical occupancy. In addition, Seabury has 172 active members on its priority waitlist and 117 enrolled in Seabury At Home, of which 80% are on the priority waitlist. Membership fees for Seabury At Home average $66,340 per person. The high occupancy and strong waitlist mitigate some concerns regarding Seabury's ability to fill the 65 new ILUs.
Liquidity was solid at Dec. 31, 2014, with $19.6 million in unrestricted cash and investments equating to 317 days of cash on hand (DCOH), a 7.2x cushion ratio, and 134% cash-to debt. However, the cushion ratio and cash-to-debt will weaken significantly after the two debt issuances, with cash-to-debt falling below 25%.
DEBT PROFILE
As of Dec. 31, 2014, Seabury had approximately $13.5 million in variable rate bonds, privately placed, with an associated swap that fixes the interest rate at 3.335%. The current issuance will refund this debt, and bond proceeds will also be used to terminate the swap.
DISCLOSURE
Seabury covenants to provide annual disclosure within 150 days of fiscal year end, and quarterly disclosure within 45 days of each quarter end. Disclosure will be made via the Municipal Securities Rulemaking Board'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).
--'Revenue-Supported Rating Criteria' (June 16, 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
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=980505
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