Fitch Affirms Casa de las Campanas (CA) 2010 Revs at 'A-'; Outlook Revised to Negative

NEW YORK--()--Fitch Ratings has affirmed the 'A-' rating on following bonds issued on behalf of Casa de las Campanas, Inc. (Casa):

--$49,650,000 ABAG Finance Authority for Nonprofit Corporations Insured Revenue Bonds, Series 2010.

The Rating Outlook is revised to Negative from Stable.

SECURITY

The bonds are secured by a gross revenue pledge, first mortgage, and a debt service reserve fund.

KEY RATING DRIVERS

INCREASE IN DEBT: The Negative Outlook reflects the expected issuance of $39 million in debt, after a $19 million debt issuance in 2014, which in total will nearly double Casa's long-term debt since fiscal year (FY) 2014 (July 31 year-end). The 2016 debt will be issued to fund Phase II of a three-phase master facility plan.

SIZABLE CAPITAL PLANS: Casa will construct a new 72-bed skilled nursing center, with more private rooms and a larger therapy space than Casa's current skilled nursing center as part of Phase II of the master facility plan. The cost will be approximately $41 million. The Negative Outlook reflects a larger size to the Phase II cost and a sooner start than Fitch expected. Casa's solid financial profile and good market position are key factors in Fitch not downgrading the rating at this time.

SOLID FINANCIAL PROFILE: In FY2015, Casa had a 97.8% operating ratio, a 36% net operating margin-adjusted, and 3.1x coverage, all good for the rating level. Independent living (IL) occupancy remained strong as well at 95%. Pro forma maximum annual debt service (MADS) coverage, which includes the additional debt, averaged 2.8x over the last four audited years, relative to Fitch's 'A' median of 3.1x. Pro forma coverage fell to 1.7x through the nine month interim period, but Fitch expects this figure to improve by year end.

AGGRESSIVE INVESTMENT ALLOCATION: Casa has approximately 60% of its unrestricted investments allocated to either equities or alternative investments, which Fitch views as aggressive. Casa's balance sheet has been volatile as a result.

RATING SENSITIVITIES

NEGATIVE OUTLOOK: The Negative Outlook reflects the stress that the cost and related debt of Phase II of Casa de las Campanas' (Casa) master facility plan have put on Casa's credit profile. Over the next 12 to 36 months, a weakening of performance or a material drop in liquidity could result in a downgrade.

PHASE III EXPANSION: Over this time period, Fitch expects to gain more clarity on the phase III IL unit expansion, which is expected to total approximately 60 additional units and include a dementia/assisted living (AL) component. Depending on the final structure of the financing and Casa's financial profile at that time, there could be negative rating pressure.

CREDIT PROFILE

Casa de las Campanas is a type-A continuing care retirement community (CCRC) located in Rancho Bernardo, CA (approximately 25 miles north of San Diego). The community consists of 376 ILUs, 45 AL units, 27 assisted living dementia care units and 99 skilled nursing beds. Casa has been managed by Life Care Services since 1997.

In fiscal year ended (FYE) July 31, 2015, Casa generated total operating revenues of approximately $37.5 million.

Master Facility Plan

Casa is nearing completion of Phase I of its master facility plan, with a Wellness Center expected to be completed by December 2016. A new bistro has already opened. Fitch's expectation for Phase I was that it would be a $15 million borrowing and include a dementia/AL renovation. The borrowing grew to $19 million, and Casa had to move the AL/dementia component and a small IL expansion to Phase III, due to code issues. However, $4.7 million of the $19 million will carry over to Phase II.

Phase II will be the building of a new 72-bed skilled nursing building, which will replace the original 99-bed skilled nursing center, providing for more private rooms and expanded physical therapy space. Construction began this month and is expected to be completed by early-2018. The new building is being constructed on a parking lot on the current campus and grading work has begun on the parking lots. The Phase II cost is expected to be $41 million, which is higher than Fitch anticipated back in 2014. Management stated that the increased costs are due in part to higher construction costs relative to what Casa was budgeting in 2014 due to the building industry's recovery.

Phase III is expected to be a 60 units IL expansion and include the AL/dementia component and be built where the current skilled nursing building is located. Phase III is in the planning phases and a cost estimate was not available. The potential debt for Phase III is not factored into the rating. A pool of entrance fees would be available, which would offset some of the need for permanent debt, but much will depend on the final scope and cost of the project.

In spite of the sizable increase in debt, the potential for additional debt, and the project risks, Casa's financial and market strength support the affirmation. However, Casa has very limited financial flexibility over the next three to five years, and a fall off from current levels of performance or a material drop in liquidity would likely lead to a downgrade.

High IL Occupancy/Good Market Position

Casa has been able to maintain solid IL occupancy after a period of lower occupancy a few years back. At Jan. 31, 2016, IL occupancy was 94%, which is consistent with the IL occupancy at year end FY2014 and FY2015 and represented a strong recovery from when occupancy stood at 85% at FYE 2012.

The high IL occupancy has led to good years for net entrance fee receipts: $19 million in FY2013, $14.8 million in FY2014, and $11.2 million in FY2015. Moving forward, Fitch expects $11 million to be the typical entrance fee year given that most units are currently filled, and Casa will be refilling turned over units only and not a backlog of available units. Fitch notes that the majority of Casa's residents are on a fully amortizing contract, which limits Casa's refund exposure.

Casa has a solid market position, characterized by a good reputation in the community, including a four star Medicare rated skilled nursing facility, and limited competition. Casa is the only life care, full continuum facility in its primary service area. There is one rental CCRC located six miles away and four entrance fee facilities between 19 and 26 miles away, but Casa draws most of its residents from a 10 mile radius around the facility. There are a few potential start up facilities in the service area, but none are currently in the construction phase. In addition, Casa's entrance fees remain modest relative to the local housing market, which is in an affluent part of San Diego County.

Good Liquidity/Aggressive Investment Allocation

At March 31, 2016, Casa had $68.7 million in unrestricted cash and investments, which equated to 849 days cash on hand and 100.3% cash to debt, relative to Fitch's 'A' medians of 681 days and 125.1%. Unrestricted cash and investments were down over $10 million from year end 2015, driven largely by a downturn in the investment markets. Management reports regaining nearly $5 million of that loss since the end of March. However, it highlights the vulnerability that Casa's balance sheet has to the investment markets.

The additional debt will weaken Casa's cash to debt, with cash to debt falling to approximately 76% on a pro forma basis, adding additional pressure to Casa's balance sheet. Casa's debt is expected to peak at approximately $99 million in 2018, and Fitch expects Casa's cash to debt to have improved by then.

Casa has been able to grow its balance sheet, as unrestricted cash and investments stood at $48 million at year end 2012. Strong sales and investment performance supported the growth in unrestricted liquidity leading up to FY2016.

Debt Profile/Debt Burden

At Jan. 31, 2016, long-term debt totaled $68 million, which was all fixed rate. Pro forma MADS of $6.9 million, which is up from of $5.4 million was a high 18% of fiscal 2015 revenues, which is unfavorable against the 'A' median of 9.2%. Coverage of pro forma MADS was adequate at 2.4x in 2015.

Fitch anticipates that the $39 million bank loan will be closed within the next three months. The $19 million loan has a maturity date of 2021. It is expected that $39 million loan will have maturity around that same time, which in Fitch's view increases the bank renewal risk in Casa's debt structure.

Casa relies on entrance fee receipts for debt service coverage and has historically produced light revenue-only coverage metrics. Revenue-only coverage of 0.8x in fiscal 2015 and 0.5x in the interim period are below the 'A' median of 1.5x. Casa does not have any swaps outstanding.

DISCLOSURE

Casa provides annual audits within 120 days of each fiscal year end, and quarterly, unaudited financials within 45 days of each quarter end through the Municipal Securities Rule Making Board'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
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1006259

Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1006259

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

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Contacts

Fitch Ratings, New York
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com
or
Primary Analyst
Director
Gary Sokolow, +1-212-908-9186
or
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Associate Director
Ryan Pami, +1-212-908-0803
or
Committee Chairperson
Senior Director
James LeBuhn, +1-312-368-2059

Contacts

Fitch Ratings, New York
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com
or
Primary Analyst
Director
Gary Sokolow, +1-212-908-9186
or
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Associate Director
Ryan Pami, +1-212-908-0803
or
Committee Chairperson
Senior Director
James LeBuhn, +1-312-368-2059