SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB+' rating to the approximately $53.255 million California Statewide Communities Development Authority revenue bonds, series 2015 issued on behalf of American Baptist Homes of the West (ABHOW). In addition, Fitch has affirmed the 'BBB+' rating on ABHOW's outstanding debt, which is listed at the end of the press release.
The Rating Outlook is Stable.
The series 2015 bond proceeds in addition to the release of the series 2006 debt service reserve fund will refund ABHOW's outstanding series 2006 variable rate demand bonds and provide $20 million of new money for capital expenditures of which $11 million will be reimbursement for prior capital expenditures. The series 2015 bonds will not have a debt service reserve fund. The series 2015 bonds will be fixed rate and expected to sell the week of May 11 via negotiation.
Gross revenue pledge and mortgage pledge of the obligated group (OG) in addition to the guaranty from American Baptist Homes Foundation of the West (Foundation). The guaranty agreement is limited to the Foundation's income earned on its unrestricted net assets; however, its unrestricted cash and investments are included as part of the OG's liquidity covenant calculations. The OG accounted for 82% of the ABHOW consolidated entity's total revenue and 67% of consolidated total assets in fiscal 2014 (Sept. 30 year end).
KEY RATING DRIVERS
GEOGRAPHIC DIVERSITY AND GOOD OCCUPANCY: ABHOW's main credit strength is its revenue size with facilities that are geographically diverse, competitively priced and have a long history of providing care in each of their service areas. Occupancy across all levels of care is solid with 92.7% in independent living, 89.3% in assisted living, 88.6% in dementia care, and 94.5% in skilled nursing through the six months ended March 31, 2015.
IMPROVED OPERATING PERFORMANCE: Since Fitch's last rating review in January 2015 (when the Rating Outlook was revised to Stable from Negative), ABHOW's operating performance continues to improve. There has been strong revenue growth through the six months ended March 31, 2015 and operating performance is ahead of budget. Debt service coverage is slightly weaker due to lower than expected turnover entrance fees, but management expects to meet its targeted turnover entrance fees for the fiscal year ($20 million) due to higher sales activity in the last two quarters of the year. A sustained trend in current operating performance in addition to projected turnover entrance fees would result in 2x MADS coverage for FY 2015.
EXPOSURE TO NON-OBLIGATED AFFILIATES: There are several financially weak non-obligated group affiliates that the OG has consistently supported, and Fitch has viewed this exposure as a main credit concern. The current amount of liquidity support committed from the OG to non-obligated affiliates is $13.2 million with the majority committed to Terraces of Phoenix (ToP). The OG plans to loan ToP $10 million before fiscal year end 2015 for ToP's upcoming refinancing. The OG also has a $30 million revolving line of credit available for affordable housing construction, of which, less than $5 million is currently committed.
MAJOR CAPITAL PROJECT UNDERWAY: Terraces of Los Altos (TLA) is undergoing a major campus transformation, which will result in a brand-new community at the end of construction. There are various phases and operating performance will be pressured over the near term as existing independent living units (ILUs) are not being actively sold. The project is projected to reach stabilized occupancy in fiscal 2019 and approximately $51 million of temporary debt (series 2013B1-B3) is expected to be paid down with initial entrance fees. The project is one-year behind schedule.
GOOD LIQUIDITY: ABHOW's liquidity position (including Foundation cash and investments) improved in fiscal 2014 mainly due to $24.5 million of initial entrance fees received from Valle Verde's 40-ILU expansion and was sustained through year to date fiscal 2015. At March 31, 2015, total unrestricted cash and investments were $120.5 million and management also has $9.9 million of self-restricted funds for capital improvements, which are not included in unrestricted cash and investments. Liquidity is not expected to improve further as management has intentions to increase capital spending at its communities.
SUSTAINED OPERATING IMPROVEMENT: Fitch expects ABHOW to sustain its improved operating performance and meet targeted turnover entrance fees. A deterioration in debt service coverage, although not expected, could result in negative rating pressure.
DECLINE IN LIQUIDITY: Fitch will continue to monitor the liquidity support provided by the ABHOW OG to non-obligated affiliates as it raises credit risk to bondholders in addition to ABHOW's future capital needs. A material decline in liquidity would result in negative rating pressure.
The ABHOW OG consists of seven continuing care retirement communities (CCRCs), which include Terraces of Los Altos in Los Altos, CA, Grand Lake Gardens in Oakland, CA, Piedmont Gardens in Oakland, CA, Plymouth Village in Redlands, CA, Valle Verde in Santa Barbara, CA, Rosewood in Bakersfield, CA, and Terraces of Los Gatos in Los Gatos, CA. ABHOW primarily offers a Type B contract and the majority of the contracts are nonrefundable.
In fiscal 2014, the ABHOW OG had total revenue of $125 million. The consolidated ABHOW entity includes another CCRC, Judson Park in Des Moines, WA, affordable housing entities, the Foundation, Seniority, and American Baptist Properties. In addition, ABHOW and Seniority provide management services and managed 18 affordable housing, three CCRCs, and eight market rate rental communities in fiscal 2014. The affordable housing division is being reorganized under a new subsidiary, Beacon Communities. The consolidated ABHOW entity had total revenue of $153 million in fiscal 2014. ABHOW's sole corporate parent is Cornerstone Affiliates, which includes four other CCRCs - Las Ventanas Retirement Community (LVRC), Terraces of Phoenix (ToP), Terraces at San Joaquin Gardens (TSJG) and a start-up CCRC, Terraces of Boise. Cornerstone's CEO and CFO are the same as ABHOW's. Fitch's analysis is based primarily on the financial profile of the OG and the numbers referenced in this report are for the OG (plus Foundation for liquidity metrics).
Series 2015 Plan of Finance
Fitch did not expect the new money issuance, but with the refinancing ABHOW's pro forma MADS is essentially unchanged. This was achieved through extending the maturity of the series 2006 bonds with the refinancing to 2045 from 2028. Pro forma MADS is $14.962 million. In addition, the reimbursement of prior capital expenditures will mute the impact of the expected loan to ToP.
Fiscal 2015 Year to Date Performance
Since Fitch's last rating review in January 2015, operating performance has improved with a 99.2% operating ratio in the six months ended March 31, 2015 compared to 101.4% in fiscal 2014 and 101.7% in fiscal 2013. Resident service revenue grew 12% from the prior year period due to rate increases, improved occupancy, and expanded capacity (Valle Verde's 40 ILUs and TLA's ALUs).
However, MADS coverage declined to 1.5x through the six months ended March 31, 2015 from 1.7x in FY 2014 due to lower than expected turnover entrance fees ($6.6 million). Management expects that turnover entrance fees will total at least $20 million for fiscal 2015 due to stronger sales activity in the last two quarters. This would result in MADS coverage of 2x for fiscal 2015 if current operating performance is sustained. MADS coverage will also be pressured in the near term until the TLA project reaches stabilization.
ABHOW had 380.3 days cash on hand and 50.9% cash to debt at March 31, 2015 compared to the 'BBB' category median of 407.6 days and 60.2% cash to debt. Cash to debt should improve by 2019 as initial entrance fees from the TLA project are used to pay down the temporary debt.
TLA originally consisted of 73 ILUs, 14 ALUs and 65 SNF beds. After the three phases of construction, the campus will be expanded from 121,000 square feet (sf) to roughly 180,000 sf with only 21,000 sf of current space retained and will consist of 105 ILU apartments, 30 ALUs, 16 memory support suites and 30 SNF beds. The total project cost is $118 million and funded primarily from $108 million of debt (previously issued - series 2013, 2012, 2010 and 2006 bond proceeds) with the remainder from equity. The 81 new ILU apartments will generate an entrance fee pool of approximately $72 million, which will be used to pay down $51 million of temporary debt (series 2013 B1-B3 bonds), which mature in 2019, 2020 and 2021. As of March 31, 2015, 67 of the 81 (82.7%) apartments have been reserved with a 10% deposit. The existing ILUs have not been actively sold since December 2010 and the current number of occupied units was 22 of the remaining 24 as of March 2015. The skilled nursing and memory care building opened in April 2014 and the assisted living opened in January 2015. The ILUs are expected to be complete in August 2016.
Additional Capital Expenditures
Of the ABHOW OG communities, four (including TLA) have undergone major repositioning projects and there are additional capital needs that are expected to be made at the other three campuses. Capital spending is budgeted at $12.5 million for fiscal 2015. Approximately $9 million of the series 2015 bond proceeds will fund various projects at each OG community (except for TLA). A new corporate facilities director position was established in April 2014 and an analysis of deferred maintenance needs is underway.
Non-Obligated Group Activity
The ABHOW OG has provided a finite amount of liquidity support to non-obligated group affiliates including Judson Park, LVRC, ToP, and Boise. The total amount of liquidity support extended totals $1.1 million for Judson Park, $2 million for LVRC, $7.9 million for ToP, and $1.2 million for Boise. All of these communities are currently compliant with their covenants. The exposure to ToP will be realized by fiscal year end with the OG's intention of loaning $10 million to support ToP's upcoming refinancing.
In September 2012, TSJG withdrew from the ABHOW OG to complete a repositioning project, and payments due to the ABHOW OG include a management fee and debt service on a subordinated note payable. During construction at TSJG, certain financial performance targets need to be met before there is payment on 50% of ABHOW's management fee and the subordinated debt. Through fiscal 2014, $1.6 million of the management fee is due (and not accrued by ABHOW OG) and $1.2 million of the subordinated debt was accrued and unpaid in fiscal 2014.
There is a $30 million revolving line of credit for affordable housing construction; however, the amounts that have been drawn under the revolving line of credit have never been used as the liquidity support burns off after construction completion. With the reorganization of the affordable housing division under Beacon Communities, it is expected that future construction completion guarantees will be provided by Beacon.
Lastly, there are initiatives at Cornerstone to develop international activities and the ABHOW OG has funded this activity by $1 million a year over the last two years, which is expected to continue.
Proforma OG debt after the series 2015 financing is approximately $250 million with 92.2% fixed rate and 7.8% variable rate. Fitch views the elimination of variable rate demand bond exposure with the series 2006 refinancing as a credit positive. The only variable rate exposure the OG will have is a $19.5 million direct bank loan with PNC Bank that is at an indexed floating rate. The OG does not have any swaps outstanding besides an interest rate cap which expires in December 2015.
ABHOW's financial disclosure practices are excellent and include annual and quarterly financial statements, utilization statistics, management discussion and analysis and quarterly investor calls.
--$104,415,000 California Statewide Communities Development Authority (CA) (American Baptist Homes of the West) revenue bonds series 2010;
--$71,250,000 California Statewide Communities Development Authority (CA) (American Baptist Homes of the West) revenue bonds series 2013A, B1-B3.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Not-for-Profit Continuing Care Retirement Communities Rating Criteria', July 24, 2014;
--'Revenue-Supported Rating Criteria', June 16, 2014.
Applicable Criteria and Related Research:
Not-for-Profit Continuing Care Retirement Communities Rating Criteria
Revenue-Supported Rating Criteria