Fitch Upgrades Village on the Isle, FL Revs to 'A-'; Outlook Revised to Stable

NEW YORK--()--Fitch Ratings has upgraded to 'A-' from 'BBB+' the rating on the following bonds issued on behalf of Village on the Isle (VOTI):

--$28.4 million of Sarasota County Health Facilities Authority Revenue Bonds (Village on the Isle, Inc. Project) series 2007.

The Rating Outlook is revised to Stable from Positive.

SECURITY

The bonds are secured by a gross revenue pledge, first mortgage, and DSRF.

KEY RATING DRIVERS

CONSISTENTLY STRONG OPERATIONS: The upgrade to 'A-' is supported by VOTI's high occupancy, strong operating profitability resulting in good revenue only coverage and strong market position. Over the last four audited years, VOTI's operating ratio has averaged an 88.3% and its net operating margin (NOM) - adjusted averaged a 28.8%, both significantly above Fitch's 'A' category medians of 97.1% and 23.4%, receptively.

SOLID DEBT SERVICE COVERAGE: Fitch views VOTI's solid revenue coverage as a credit strength, with revenue only maximum annual debt service (MADS) coverage averaging 1.5x over the last four audited years, favorable to Fitch's 'A' category median of 1.2x, and very strong for a mostly Type-A facility. Coverage by Net Available has been fairly consistent, averaging 2.6x over the last four years, compared to the 3.7x median.

HIGH OCCUPANCY AND STRONG MARKET POSITION: VOTI's occupancy remains very strong across all levels of care with 96% independent living unit (ILU), 99% assisted living unit (ALU) and 99% skilled nursing facility (SNF) occupancies as of March 31, 2015. VOTI benefits from its location in Venice, FL, on the west coast of Florida in Sarasota County (Fitch implied GO rating of 'AAA'), limited competition from other full continuum of care providers, and entrance fees prices that compare well with area housing prices.

INCREMENTAL LIQUIDITY GROWTH: At March 31, 2015, VOTI's unrestricted cash and investments position increased just $1.0 million year over year, which was below Fitch's expectations and reflects a higher level of capital spending in 2014. Key liquidity metrics of 529 days cash on hand (DCOH) and cash to debt of 89.7% at March 31st are improved from the prior year, but remain soft compared to the 'A' category medians. Fitch expects VOTI's capital spending over the next three years to be around annual depreciation expense, which should help further grow liquidity.

RATING SENSITIVITIES

CONTINUED OPERATING STABILITY: Maintenance of the 'A-' rating will be contingent upon Village on the Isle sustaining strong operating cash flows which support solid debt service coverage. Additionally, Fitch would expect unrestricted liquidity to further improve over the medium term given Village on the Isle's muted capital plans.

CREDIT PROFILE

VOTI operates a continuing care retirement community located in Venice, FL approximately 75 miles south of Tampa on Florida's Gulf Coast, which consists of 217 ILUS, 90 ALUs, and 60 skilled nursing beds. VOTI offers both a modified Type 'A' and modified Type 'B' contract. Total revenues for fiscal year 2014 were approximately $21.2 million.

SOLID OPERATIONS AND DEBT SERVICE COVERAGE

VOTI's historically strong operating income and net entrance fee receipts resulted in an average NOM-adjusted of 28.8% over the last four years, significantly above Fitch's 'A' category median of 23.4%. NOM-adjusted was a very high 40.9% through the first quarter, representing a continuing trend of solid cash flows. VOTI's operating ratio of 86.4% through the interim was also strong against the 97.1% 'A' category median.

VOTI's robust operating profitability, coupled with strong entrance fee receipts, has produced historically solid debt service coverage. MADS coverage was 4.2x through the interim period, above the 'A' category median of 3.7x. Coverage through the interim was bolstered by very strong entrance fee receipts, and historical coverage is closer to 2.6x based on the last four years.

VOTI has been able to produce very strong revenue-only coverage, despite approximately 81% of its residents being under a Type-A residency contract. Revenue only coverage was a robust 1.6x through the interim period, comparing favorably to Fitch's 'A' category median of 1.2x. Fitch expects VOTI to continue generating solid operating results that produce debt service coverage in line with historical levels.

FURTHER LIQUIDITY GROWTH

VOTI's $23 million in unrestricted cash and investments at March 31, 2015 have grown from $16.9 million at Dec. 31, 2011. While VOTI's liquidity metrics of 529 DCOH, 89.7% cash to debt and a 9.3x cushion ratio, are all on the lower end of the 'A' category, they have improved significantly over the last four years, despite increased levels of capital spending.

VOTI's capital expenditures have averaged 180% of depreciation expense over the last three years, and were all funded from cash flow, which may have precluded more robust liquidity growth over the time period. The current three-year capital plan anticipates much lower capital spending at levels closer to depreciation, which, together with solid cash flows should help grow liquidity over the medium term.

Fitch views the high level of capital spending positively. Over this time, VOTI has made investments in campus infrastructure, including reinforcing the campus against the weather on Florida's west coast, completed a seven cottage expansion, and continued ongoing enhancements and refurbishing that has kept the campus marketable as indicated by the very high levels of IL occupancy.

MANAGEMENT UPDATE

VOTI's long-term CEO is expected to retire at the end of 2015 and the Board is currently conducting a search for a replacement. While change in senior management is a potential credit concern, especially since VOTI financial performance has improved materially under the current CEO, these concerns are partly mitigated by the length of time the organization has had for the CEO search and the expectation that current CEO will remain with VOTI during the new CEO's period of onboarding.

DEBT AND INVESTMENT PROFILE

All of VOTI's debt is fixed rate and its investment allocation consists of mostly cash and fixed income, which provides further stability at the rating level. VOTI does not have any outstanding swaps.

DISCLOSURE

VOTI covenants to provide audits within 150 days of year end, quarterly statements within 45 days of quarter end, including occupancy statistics, annual budget, and any notice of a material event to EMMA.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Not-for-Profit Continuing Care Retirement Communities Rating Criteria (pub. 24 Jul 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752470

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=986502

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=986502

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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Dmitry Feofilaktov
Analyst
+1-212-908-0345
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Gary Sokolow
Director
+1-212-908-9186
or
Committee Chairperson
James LeBuhn
Senior Director
+1-312-368-2059
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Dmitry Feofilaktov
Analyst
+1-212-908-0345
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Gary Sokolow
Director
+1-212-908-9186
or
Committee Chairperson
James LeBuhn
Senior Director
+1-312-368-2059
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com