SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB+' rating on the $143.42 million bonds issued by the Association of Bay Area Governments (ABAG) Finance Authority for Nonprofit Corporations (CA) on behalf of Episcopal Senior Communities (ESC) as follows:
--$68,835,000 series 2012A;
--$15,170,000 series 2012B;
--$700,000 series 2012C-1;
--$58,715,000 series 2011.
The $32.3 million in series 2012C-2 and C-3 bonds have been paid off with initial entrance fees from the Spring Lake Village project.
The Rating Outlook is revised to Positive from Stable.
SECURITY
The outstanding bonds are secured by a gross revenue pledge, mortgage, and a debt service reserve fund for each series of bonds.
KEY RATING DRIVERS
SOLID PERFORMANCE IN BUSY YEAR: The Positive Outlook reflects Episcopal Senior Communities' (ESC) good financial performance since Fitch's last rating review in November 2014, while successfully executing on several projects/transactions led by a capable management team. ESC completed an expansion project at its largest facility ahead of schedule and under budget, completed the acquisition of a continuing care retirement community (CCRC; Webster House), which is now part of the obligated group, and continued progress on the affiliation with Northern California Presbyterian Homes and Services (NCPHS; not rated by Fitch), which is expected to finalize by the end of the year. ESC's overall financial profile is good and the majority of the ratios are above Fitch's 'BBB' rating category medians.
BENEFIT OF SIZE AND SCALE: ESC's main credit strength is its size and scale with six CCRCs in desirable locations in Northern California with a total revenue base of over $100 million. Fitch believes the size and scale reduces overall operating risk and provides cost savings as support functions are centralized at the corporate office.
SOLID OCCUPANCY: ESC has maintained solid independent living unit (ILU) occupancy across the system, with 92% occupancy at Sept. 30, 2015 compared to 90% in fiscal 2015, 92.3% in fiscal 2014, and 92.1% in fiscal 2013.
DECLINE IN LIQUIDITY: ESC's liquidity ratios declined at Sept. 30, 2015 due to unrealized investment losses. In addition, days cash on hand (DCOH) was impacted by the addition of Webster House. Despite this, liquidity ratios remain comparable to 'BBB' category medians with 373 DCOH and 70.7% cash to debt at Sept. 30, 2015 compared to the 'BBB' category medians of 400 and 60%, respectively.
MODERATING DEBT BURDEN: Maximum annual debt service (MADS) as a percentage of revenue has declined to 8.7% through the six months ended Sept. 30, 2015 from 11% in fiscal 2012 and MADS coverage improved to 3x from 2.1x in fiscal 2015. MADS coverage has historically been inconsistent and swings with net entrance fee receipts.
RATING SENSITIVITIES
SUSTAINED SOLID PERFORMANCE: Fitch believes upward rating action is likely over the next two years if ESC maintains solid operating performance, sustains debt service coverage above 3x and grows liquidity.
ACTIVITY AT CORPORATE PARENT LEVEL: Fitch will monitor developments at ESC's corporate parent level, but no transfers or guarantees from the obligated group are expected. These include the finalization of the affiliation with NCPHS as well as a planned start up CCRC (Viamonte) that will be financed on a stand alone basis and jointly managed by ESC and NCPHS.
CREDIT PROFILE
ESC's parent organization is JTM Communities (now dba Senior Resources of the West [SRW]), which ESC capitalized in 2007 with a $10 million loan. There is a SRW audit and ESC audit. Fitch's analysis is based on ESC's obligated group financials (from consolidating statements of ESC audit), which excludes the Foundation, which is non obligated. The other subsidiaries within the SRW audit are mainly affordable housing entities. Total revenue in fiscal 2015 (Mar. 31 fiscal year end) was $108 million.
With the NCPHS affiliation, SRW will become NCPHS's sole corporate member and there will be common governance and management for ESC and NCPHS. NCPHS has three CCRCs, three affordable care communities and total operating revenue of about $80 million.
BENEFIT OF SIZE AND SCALE
ESC's revenue base is considered sizeable within Fitch's rated CCRC portfolio with over $100 million of total revenue, which Fitch believes provides operating flexibility and stability, as well as cost savings as support functions are centralized at the corporate office.
ESC's six CCRCs include Spring Lake Village located in Santa Rosa (325 ILUs, 24 ALUs, 11 memory support units, 70 skilled nursing beds [SNF]), San Francisco Towers located in San Francisco (244 ILUs, 12 ALUs, 55 SNF), St. Paul's Towers in Oakland (197 ILUs, 16 ALUs, 43 SNF), Los Gatos Meadows in Los Gatos (120 ILUs, 27 ALUs, 7 memory support apartments, 39 SNF), Canterbury Woods in Pacific Grove (134 ILUs, 18 ALUs, 24 SNF), and Webster House in Palo Alto (37 ILUs, 145 SNF).
ESC changed its entry fee contract options in January 2014 and now offers a lifetime (Type A) and classic continuing care (Type C) contracts which are both available in a traditional, amortizing nonrepayable option and a 75% repayable option. In addition, ESC offers a monthly residence agreement in two communities based on market demand and to provide ESC flexibility for the future. The current mix of resident contracts in place within the ESC system is: 62% Type A; 28% Type C and 10% Monthly.
ESC acquired Webster House in June 2015 from SRW. Webster House is located in Palo Alto, and the SNF has a strong relationship with Stanford Hospital and a local medical group. The total operating revenue is approximately $20 million and was accretive to the OG on an operating basis and dilutive to DCOH. Webster House had approximately $9 million of debt, which ESC refinanced with a direct bank loan that is on parity with the outstanding debt.
ESC also acquired 22 ILUs in Los Gatos from the Board of Pensions of the Presbyterian Church in October 2015 to increase capacity at its Los Gatos campus. These units are approximately 1.5 miles from ESC's campus and will be marketed as market rate rentals. ESC financed this transaction with an $11.2 million promissory note that has a bullet maturity on Nov. 1, 2020.
Management indicated that there are no major capital plans at the OG and ongoing capital spending is expected to be about $17 million a year.
SUCCESSFUL EXECUTION OF EXPANSION PROJECT
Spring Lake Village is ESC's largest community and recently completed its repositioning project under budget. ESC added 62 larger ILUs, renovated its assisted living units (ALUs) to include 11 new memory support apartments, and provided significant upgrades to the common areas, including a new auditorium, the addition of a fitness center and updated swimming pool and new dining facilities. The project cost ($89 million) was funded by the series 2012 bonds and the project was completed in January 2015.
Of the 62 new ILUs, 59 (95%) were occupied as of Oct. 19, 2015 and the remainder are under deposits (10% of entrance fee). The initial entrance fee pool of approximately $40 million was earmarked to pay down the series 2012C1-3 bonds ($38.8 million) and to date, only $700,000 of the series 2012C-3 bonds are remaining, which will be paid down by Dec. 1, 2015.
SOLID OVERALL OCCUPANCY
ILU occupancy has remained solid across the system and the two communities which historically had more difficulty were Canterbury Woods and Los Gatos Meadows. With the introduction of rental contracts, occupancy has improved at both facilities. There were longer term repositioning projects at these two campuses but those plans have been placed on hold.
As of Sept. 30, 2015, ILU occupancy was 92%, ALU occupancy was 85.6% and SNF occupancy was 83.2% compared to 90%, 89.7%, and 81%, respectively in fiscal 2015 and 92.3%, 88.1%, and 87.4%, respectively in fiscal 2014.
GOOD LIQUIDITY METRICS
ESC had total unrestricted cash and investments of $112.3 million at Sept. 30, 2015, which equated to 373 DCOH, a 10x cushion ratio and a cash to debt ratio of 70.7% compared to the 'BBB' category medians of 400, 7.3x and 60%. Unrestricted cash and investments declined by $10 million since fiscal year end 2015 mainly due to unrealized investment losses ($7.6 million). DCOH dropped from 514 due to the added expenses with Webster House without a commensurate increase in unrestricted cash and investments.
GOOD PROFITABILITY
ESC has solid operating performance with operating ratios of 98.3% in fiscal 2014, 95.9% in fiscal 2015 and 98% through the six months ended Sept. 30, 2015. Webster House added approximately $20 million of revenue on an annualized basis as of June 2015 and its operating performance has been solid, which is accretive to ESC's operating and leverage ratios.
Net turnover entrance fees have been inconsistent with $14 million in fiscal 2015, $28 million in fiscal 2014, $22 million in fiscal 2013, and $32 million in fiscal 2012. Management projects ongoing turnover entrance fees to be around $22 million-$25 million.
OUTSTANDING DEBT PROFILE
Total outstanding debt as of Sept. 30, 2015 was $152 million and is primarily fixed rate. The only variable rate exposure is the $8.7 million direct bank loan (refinanced Webster House debt). The direct bank loan has an initial term to 2022 and the financial covenants conform to the covenants in the master trust indenture (MTI).
ESC has one outstanding swap agreement with Wells Fargo Bank, N.A. as counterparty. The notional amount is approximately $41 million. Under the terms of the swap, ESC receives a fixed rate of 0.20% and pays the excess of BMA over 72% of one-month LIBOR, if any. Collateral payments would be triggered if DCOH fell below 100 days, or ESC was downgraded below 'BBB'. To date, ESC has not been required to post collateral. The swap expires in January 2018.
In October 2015, ESC executed a promissory note for $11.2 million to fund the acquisition of ILUs in Los Gatos and this debt is factored in MADS. The promissory note has a bullet maturity on Nov. 1, 2020 and management will pay down or refinance the debt then.
Fitch used MADS of $11.3 million, which excludes the series 2012C-1 temporary debt, the bullet maturity on the promissory note and calculates the debt service on the direct bank loan per the MTI.
MADS coverage has fluctuated due to the swing in net entrance fees received. MADS coverage was 2.1x in fiscal 2015, 3.3x in fiscal 2014, 2.4x in fiscal 2013 and 3.3x in fiscal 2012. Through the six months ended Sept. 30, 2015, debt service coverage was strong at 3x. Maintaining debt service coverage above 3x would likely result in upward rating movement.
DISCLOSURE
ESC covenants to submit audited consolidated financial statements within 120 days after year-end, unaudited financial statements and utilization statistics 45 days after the first three quarter-ends, and 60 days after the fourth quarter-end, to the MSRB's EMMA system.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Not-for-Profit Continuing Care Retirement Communities Rating Criteria (pub. 04 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=868824
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
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Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=995193
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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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