Fitch Rates Acts Retirement-Life Communities Obligated Group, PA 'A-'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'A-' rating to $234.9 million of revenue bonds to be issued by various issuers on behalf of Acts Retirement-Life Communities Obligated Group (Acts):

--$96.66 million Montgomery County Industrial Development Authority (retirement community revenue bonds), series 2016,

--$108.87 million Escambia County Health Facilities Authority (retirement community revenue bonds), series 2016,

--$10.95 million Gainesville and Hall County Development Authority (retirement community revenue bonds), series 2016.

Fitch also assigns an 'A-'rating to $18.39 million taxable bonds, series 2016 issued directly by Acts.

In addition, Fitch affirms the 'A-' rating on approximately $301.4 million of existing revenue bonds issued by various issuers in DE, FL, GA and PA.

Bond proceeds and the release of prior debt service reserve accounts will refund all or a portion of Acts' series 2006A PA, 2006B-1 and B-2 PA, series 2006A FL, series 2006B FL, series 2009A-1 PA, series 2009A-2 GA, series 2010 FL, and series 2003 taxable bonds and provide $80 million of new money for construction and renovation projects at several of its retirement communities. About $195.5 million of existing debt will be refunded. The bonds are scheduled to sell via negotiated sale during the week of June 27.

The Rating Outlook is Stable.

SECURITY

The series 2016 bonds are secured by a gross revenue pledge and springing mortgages on Acts' 19 retirement communities. The existing bonds are also secured by debt service reserve funds. The series 2016 refunding and new money bonds will not include debt service reserve funds.

KEY RATING DRIVERS

BENEFIT OF SCALE AND GEOGRAPHIC DIVERSITY: Acts' scale and geographic diversity reduce overall operating volatility and actuarial risk resulting in more consistent year-over-year operating performance relative to Fitch's rated portfolio of continuing care retirement communities (CCRC). Overall occupancy has been maintained at improved levels over the past several years and averaged 87.5% in the independent living units (ILU), 87.2% in the assisted living units (ALU) and 87.3% in the skilled nursing facility (SNF) during 2015.

CONSISTENT FINANCIAL PERFORMANCE: Profitability, liquidity, and debt metrics have been relatively stable over the last several years, despite growth and changes to the organization. While liquidity metrics compare unfavorably against Fitch's 'A' category medians, Acts stable operations and growing net entrance fee receipts have generated improved coverage of pro forma maximum annual debt service (MADS) in each of the last three years and amounted to a healthy 3.0x in 2015.

STRONG MANAGEMENT PRACTICES: Acts has demonstrated sound management practices with respect to affiliation activity, capital spending, expense control, and investor disclosure. Fitch notes that the new CEO appointed in August 2014 was promoted from within the organization. Moreover, both the new COO and CFO were also elevated from executive positions within Acts. As expected, given the enduring mission, vision and values of the organization, this transition did not have a material operational or financial impact on Acts.

RATING SENSITIVITIES

STABILITY EXPECTED: Fitch expects Acts Retirement-Life Communities to continue producing consistent operating metrics, supported by its diverse revenue base and historically stable financial performance.

CAPITAL PLANS: Fitch also expects Acts Retirement-Life Communities to successfully construct and occupy its ongoing repositioning and expansion projects without negatively affecting its operating performance and consistent financial position.

CREDIT PROFILE

The Acts obligated group is one of the largest not-for-profit CCRC systems in the nation, with 19 communities in six states with locations in AL (1), DE (3), FL (4), GA (1), NC (2), and PA (8). Acts' CCRCs are organized into four geographic regions known as the Northeast Region (PA), the Mid-Atlantic Region (PA and DE), the Southeast Region (FL), and the Mid-South Region (NC, GA and AL), each of which is overseen by a three-member executive team. Non obligated affiliates also operate one CCRC in both MD and SC.

As of March 31, 2016, the Acts obligated group operated 5,275 ILUs, 851 ALUs) and 1,361 SNF beds. Total operating revenues for the obligated group in 2015 were $372.5 million. The entities outside the obligated group collectively generated excess income of about $1.7 million on revenues of $25.3 million in 2015. Advances to non-obligated entities are mostly limited to a $6.8 million subordinated note receivable relating to the acquisition of Park Pointe Village (rated 'BBB'/Stable) in Rock Hill, SC in 2005. The analysis and figures cited in this report are based on the Acts obligated group.

DIVERSE BUSINESS BASE

Acts' strong qualitative indicators, including the system's operating and geographic diversification, its size and reputation, and effective management practices have been figured significantly in its rating and can offset concerns around some financial metrics unfavorable to Fitch's 'A' category medians, particularly liquidity metrics. Fitch views the diversity of Acts' geographic locations and revenue generation as core credit strengths, since they reduce the system's overall operating risk. Further, the system's sheer size meaningfully reduces the actuarial risk from its life care contracts, resulting in very consistent year-over-year attrition and unit turnovers. Net entrance fee receipts have improved in each of the last five years growing to $102 million in 2015 from $49.6 million in 2010. In addition, the large revenue base allows the system to achieve operating and cost efficiencies through clusters of communities in each market, and generates a consistent number of unit turnovers annually.

At the end of 2013, Acts brought two additional organizations it owned and operated into the obligated group. The transaction reflects management's disciplined acquisition strategy, admitting acquired communities into the obligated only after operations have been improved. The new obligated group entities grew operating revenues by over $50 million and were accretive to Acts' financial profile.

An example of Acts' diverse business base that provides operating flexibility and reduced business risk is the ILU occupancy performance among its four regions. While overall ILU occupancy improved to 90.6% at the end of 2015 from 85.7% at the end of 2012, ILU occupancy results lagged in the Southeast. ILU occupancy of 86.5% in the Southeast trailed the Northeast (93.6%), Mid-Atlantic (91.6%), and Mid-South (92.0%) at the end of 2015. This is primarily due to Acts' communities in Boca Raton recovering more slowly from the real estate collapse and overbuilding in southeast Florida.

Reflecting its stable and diverse operating profile, Acts' profitability metrics have historically remained consistently sound. Reflecting its Type 'A' life care contract structure, Acts generated an operating ratio of 103.9% and net operating margin of negative 0.1% in 2015, which compare unfavorably against the respective 'A' category medians of 94.0% and 7.0%. However, strong net entrance fee receipts due to healthy unit turnover and mostly nonrefundable contracts produced a net operating margin-adjusted nicely above the median at 25.9%. Fitch believes that Acts' sound budgeting practices and revenue diversification will allow profitability metrics to remain steady.

MODEST CASH POSITION

Acts' primary credit limitation continues to be its modest liquidity for the rating category. At Dec. 31, 2015, Acts had $227.4 million of unrestricted cash and investments which translated into 267 days cash on hand, a 6.2x cushion ratio and 46.8% of debt; all of which are weaker than the respective 'A' category medians of 681 days, 18.5x and 125.1%. Liquidity balances are down a bit as of March 31, 2016, but that is typical for Acts during the first quarter of each fiscal year.

In addition, Fitch notes that unrestricted cash and investments have kept pace with growth of the overall organization, resulting in stable liquidity ratios. Furthermore, the consistency of Acts' operating performance and level of entrance fee receipts serves to moderate the system's moderate liquidity balances. Acts also carries $29.9 million of short-term debt in the form of bank lines of credit as of March 31, 2016, most of which is expected to be repaid with proceeds of the new money portion of the series 2016 bonds. Acts typically uses its short-term bank lines of credit to provide funds for capital projects that are expected to be permanently funded with long-term bonds. Over the next several years, Acts does not expect its bank lines of credit to exceed $20 million outstanding at each respective year-end.

CAPITAL PLANS

Capital plans from 2016-2019 are moderately high (at about $386 million or a projected 198% of depreciation expense) and are being partially funded with the $80 million of series 2016 new money bond proceeds. Additionally, a $65 million temporary construction loan and the bank lines of credit will fund a portion of the capital spending plans. The most significant project is a multi-phase expansion at Plantation Estates in Matthews, NC that is expected to include 146 ILUs and 100 SNF beds and cost approximately $89.2 million in the first phase. Construction began in November 2015 and the ILU expansion achieved 82.2% presale levels as of March 31, 2016. Initial entrance fees of about $51.6 million from the first phase are expected to repay a portion of the temporary debt or used for the next segments of the project. Permanent debt of about $45 million is projected to be issued in 2019 for the Plantation Estates expansion.

The other major project is a $33 million repositioning of Granite Farms Estates in Media, PA that includes ILU conversions to ALUs, larger renovated ILUs, extensive remodeling to the health care center, and common area renovations including dining facilities, lobby and the addition of a pool. The ILU count will be reduced by 60 units to accommodate the larger, upscale apartments and additional ALUs. Additionally, the 40 ALU count increases by 20 units and the SNF will be downsized by 22 beds and include private accommodations. The Granite Farms Estates project is being initially funded with a bank line of credit that is expected to be repaid with a portion of the series 2016 bonds.

Fitch views this level of additional debt and project risk to be very manageable for an organization of Acts' size and scope, especially since pro forma MADS only increases by about $1 million. Further, the additional revenues associated with the Plantation Estates project and other modest ILU expansion plans are expected to provide cash flow to support debt service. Fitch expects Acts capital-related and liquidity metrics to be around current levels throughout the construction and fill-up periods. Significant cost overruns or negative variances from expected performance levels would be viewed negatively.

MANAGEABLE DEBT BURDEN

After the series 2016 bond issues, Acts will have approximately $508 million of long-term debt outstanding (83% fixed-rate and 17% variable-rate that is swapped to fixed-rate), generating MADS of $36.5 million. Acts also has $29.9 million drawn on short-term lines of credit, some of which is expected to be repaid with the series 2016 bond proceeds. As of March 31, 2016, Acts also has $16.7 million of temporary construction loans that are expected to increase to approximately $54 million by fiscal 2018 and then be partially repaid from initial entrance fees and permanently financed into long-term debt. Debt metrics are good for the rating category with 3.0x pro forma MADS coverage and 9.8% pro forma MADS as a percentage of revenues in 2015 compared to the 'A' category medians of 3.1x and 9.2%. Acts is counterparty to four fixed-rate payor swaps with a total notional value of $86.8 million that do not have collateral posted. The fair market value of the swaps was a negative $15.3 million as of March 31, 2016.

DISCLOSURE

Acts discloses annual financial statements within 120 days and quarterly unaudited financial statements within 45 days through the MSRB's EMMA website. Also, as part of the series 2016 bond issue, an independent consultant was engaged to complete a compliance review to determine whether remedial action and disclosure of past filing failures is necessary in the preliminary official statement. The independent consultant did not find any disclosure issues that are currently outstanding.

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

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Contacts

Fitch Ratings
Primary Analyst:
Paul Rizzo, +1-212-612-7875
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Gary Sokolow, +1-212-908-9186
Director
or
Committee Chairperson:
Jim LeBuhn, +1-312-368-2059
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Paul Rizzo, +1-212-612-7875
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Gary Sokolow, +1-212-908-9186
Director
or
Committee Chairperson:
Jim LeBuhn, +1-312-368-2059
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com