NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB' rating on the following bonds issued by the North Carolina Medical Care Commission on behalf of Givens Estates:
--$60.58 million retirement facilities first mortgage revenue refunding bonds, series 2007.
The Rating Outlook is Stable.
The bonds are secured by pledged assets, including gross receipts, a first mortgage lien, and a debt service reserve fund.
KEY RATING DRIVERS
STRONG OCCUPANCY: Givens Estates benefits from strong demand across all levels of care, as independent living unit (ILU) occupancy averaged 96% in fiscal 2014 (Dec. 31 fiscal year end) and 94.6% for the first three quarters of fiscal 2015. Assisted living unit (ALU, 93.4%) and skilled nursing (SNF, 86.9%) occupancies are also good, but SNF occupancy is down a bit from fiscal year 2014's level of 92.1%.
GOOD PROFITABILITY: Givens Estates' profitability is good for the 'BBB' rating category despite some softening in fiscal 2013 and 2014 primarily due to the acquisition of Highland Farms Retirement Community (Highland Farms). Through the nine-months ended Sept. 30, 2015 (unaudited), Givens generated an operating ratio of 93.8%, net operating margin of 12.2%, and net operating margin-adjusted of 23.8%. While these metrics are down from historical figures prior to the Highland Farms acquisition, they are still well in line with Fitch's 'BBB' category medians of 96.1%, 8.9%, and 19.3%, respectively.
SATISFACTORY DEBT SERVICE COVERAGE: Maximum annual debt service (MADS) coverage was solid at 2.0x for both fiscal 2014 and the nine-month interim period for fiscal 2015. MADS coverage improved over prior periods as a result of high realized gains in fiscal 2014 and better net entrance fees receipts from turnover units during the interim fiscal 2015 period. Revenue only coverage is also solid at 1.5x in fiscal 2014 and 1.0x for the nine months ending Sept. 30, 2015. Overall, these metrics are in line with Fitch's 'BBB' category medians of 2.0x and 1.0x, respectively.
CAPITAL IMPROVEMENT PLAN: Given Estates is in the final phase of a project that includes replacing 50 ILU apartments on the Creekside portion of its Asheville community and also has large ILU expansion plans at its Highland Farms campus. Total development costs are estimated at $40 million and Givens will finance the projects through a phased development with bank loans that are not expected to exceed $14 million and will be repaid primarily from initial entrance fee receipts. Fitch views the phased construction favorably as it moderates overall development risk and limits the amount of additional debt outstanding at any given time.
PRESSURED BUT ADEQUATE BALANCE SHEET: At Sept. 30, 2015, Givens Estates had $37.2 million of unrestricted cash and investments, which amounted to 375 days operating expenses, 6.1x cushion ratio or and 44% of debt. These metrics compare slightly unfavorably verses Fitch's 'BBB' category medians of 400 days, 7.3x, and 60%, respectively. Given the softer earnings trends and large capital plans, Fitch does not anticipate much liquidity growth over the next few years. In addition, the use of temporary debt to fund the capital projects places pressure on certain capital-related metrics. However, the longer-term benefit of the additional cash flow and resident service revenue from the ILU expansion projects tempers Fitch's concern.
LIMITED DEBT CAPACITY: At the end of Sept. 30 2015, Givens Estates' debt burden measured by MADS as a percentage of revenue was 13.8%, which was slightly higher against the 'BBB' category median of 12.4%. Additionally, it's debt to net available (7.0x) and adjusted debt to capital (63.7%) ratios are a bit weaker relative to the rating category. In addition, the use of temporary construction loans to finance the ILU expansion projects will increase Givens Estates' debt position over the next few years. Fitch believes the organization has modest capacity for any additional debt at the current rating level.
ILU EXPANSION PROJECTS AND FILL-UP RISKS: While Fitch views the Creekside replacement and Highland Farms expansion projects favorably over the longer term, there is some construction and fill-up risk associated with the undertaking. While early phases of the projects have been successful, any significant cost overruns or slower than anticipated occupancy could lead to negative rating pressure.
Givens Estates operates two Type C continuing care retirement communities in western North Carolina: Givens Estates located in Asheville and Givens Highland Farms located in Black Mountain, about 15 miles east of Ashville. The total combined unit count includes 575 ILUs, 77 ALUs, and 144 SNFs. Givens Estates generated $41.5 million of total revenue in fiscal 2014.
CONSISTENTLY STRONG DEMAND INDICATORS
ILU demand has remained strong due to favorable demographics, attractive pricing and a healthy real-estate market, with occupancy averaging above 95% over the last three years. Assisted living unit (ALU, 93.4%) and skilled nursing (SNF, 86.9%) occupancies are also good but SNF occupancy is down from last year's level of 92.1% as a result of heightened competition from local health care providers for directly admitted residents. Additionally, Givens Estates successfully filled all of its first phase 24-unit expansion at Creekside during 2013-2014. Furthermore, 22 of the 24 (91.67%) second phase Creekside ILUs are filled as of Nov. 16, 2015. Both Givens Estates' Ashville community and Highland Farms maintain robust waiting lists, which have allowed them to quickly re-occupy existing units, fill their ILU expansions and pre-sell a majority of the proposed units in advance of construction.
Givens Estate's closest competitor, Deerfield Episcopal Retirement Community (rated 'BBB+'; Positive Outlook by Fitch), is located about two miles from Givens Estates' Asheville campus and also maintains very high occupancy. However, Deerfield Episcopal Retirement Community is a life care community and draws a significant portion of its residents from outside the Asheville area, somewhat limiting competition.
ILU EXPANSION PLANS
After constructing and filling 24 ILU apartments during 2013-2014, Given Estates is in the middle of a project that includes replacing 50 ILU apartments on the Creekside portion of its Asheville community. The first 24 units are fully occupied. The second 24 units were completed in September/October and are expected to be fully occupied by the end of the year. Construction on the final 24 ILUs is expected to begin in early 2016 when 75% of the units are pre-sold with an estimated completion date of late 2016. Management reports that 15 of the 24 ILUs are pre-sold with prospective residents depositing 10% of the entrance fee. The 24 unit second phase expansion that was just completed was financed with an $8 million bank loan that was repaid on Nov. 25, 2015, primarily from initial entrance fee receipts. The third phase will also be financed with a bank loan ($9 million) that is expected to be repaid with initial entrance fee receipts after occupancy in late 2016. Despite the large capital plans, Fitch views the strategy of updating its ILU services favorably since Givens Estates is taking out older less-marketable units, enjoys strong demand and has a sizeable waiting list.
Givens Estates also has expansion plans at its Highland Farms campus, which is expected to be done with a phased approach at a cost of approximately $24 million over the next three to four years. Construction of the first phase at Highland Farms commenced on Nov. 1, 2016 and will have 18 ILUs. Costs are estimated at $6 million with an anticipated completion date of September 2016. Management reports that 15 of the 18 ILUs (83.3%) are pre-sold with prospective residents depositing 10% of the entrance fee. The financing plans for Highland Farms is similar to the Creekside projects as all construction will be financed through temporary bank loans and repaid by initial entrance fees. Assuming phase I at Highland Farms is successfully built and occupied, Givens Estates plans three additional phases that will add another 54 ILUs.
Givens Estates' debt profile includes about $63 million of fixed-rate bonds, $14 million of variable rate bank loan that matures in 2022, $9 million of floating rate bank loan for phase II at Creekside that matures in May 2017, and $5 million floating rate bank loan for Highland Farms that matures in May 2017. Fitch used MADS of $6.08 million, which includes all debt except the construction loans since they are expected to be repaid with initial entrance fees from the sale of the new ILUs.
Givens Estates has covenanted to provide annual audits within 120 days of fiscal year end and quarterly disclosure within 30 days of quarter end via the MSRB's EMMA system. Fitch views the disclosure requirements imposed by the state of North Carolina Department of Insurance favorably and considers the content as an industry best practice.
Additional information is available at 'www.fitchratings.com'.
Not-for-Profit Continuing Care Retirement Communities Rating Criteria (pub. 04 Aug 2015)
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
Dodd-Frank Rating Information Disclosure Form