SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BB+' rating to the approximately $120,330,000 Washington State Housing Finance commission nonprofit housing revenue and refunding revenue bonds, series 2016A and $12,215,000 Washington State Housing Finance Commission taxable nonprofit housing revenue bonds, series 2016B issued on behalf of Presbyterian Retirement Communities Northwest (PRCN).
The series 2016A&B bonds will be fixed rate and bond proceeds will refund approximately $102 million of debt, provide $36 million of new money for capital expenditures (includes $7.6 million reimbursement for prior capital expenditures), fund a debt service reserve, and pay costs of issuance. The bonds are expected to price the week of Aug. 8th or 15th.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a gross revenue pledge and mortgage pledge of the obligated group (OG).
KEY RATING DRIVERS
WELL-POSITIONED ORGANIZATION: PRCN has three senior living facilities in desirable locations in the Seattle metropolitan area with strong service area characteristics. The organization is under relatively new leadership since 2014 and various initiatives have been implemented to position PRCN for long-term growth and financial improvement.
NEW OBLIGATED GROUP: The current PRCN OG will change with the exit of one facility (Exeter House; sold in May 2016) and the addition of two - Skyline and Fred Lind Manor. The new OG includes three facilities: Park Shore, Skyline and Fred Lind Manor. The financing allows for the addition of approximately $40 million of new money ($7.6 million reimbursement for prior capital expenditures), without materially affecting maximum annual debt service ( MADS). The new money will fund the upgrade of Park Shore's common spaces and amenities, add memory care units and enhance its independent living unit (ILU) mix.
GOOD OCCUPANCY: Skyline was a start-up continuing care retirement community (CCRC) that opened in 2009 and after some initial challenges, reached stabilization in November 2015 after the fill of its new memory care units (converted from existing assisted living units [ALU]). ILU occupancy is very strong and has been above 95% the last three years and 97% through the eight months ended May 31, 2016. Park Shore's occupancy is adequate, but has room for significant improvement. With the financing, Park Shore will significantly upgrade its common space and amenities while combining existing units to make several larger units. Park Shore's ILU occupancy averaged 85% the last three years and was 87% through the eight months ended May 31, 2016.
WEAK LIQUIDITY: Liquidity metrics are weak for the rating level but projected to build fairly quickly due to continued solid cash flow, limited capital needs funded from operations, and improved occupancy at Park Shore. Days cash on hand and cash-to-debt were 207 and 19.8%, respectively, at May 31, 2016, which is very weak even for the 'BB+' rating level. Proforma liquidity metrics after closing are expected to be 274 days cash on hand and 21.4% cash to debt including the reimbursement for prior capital expenditures.
HIGH DEBT BURDEN: The debt burden is very high, reflective of the fairly young age of Skyline. MADS accounted for 21.7% of total revenue in fiscal 2015. However, MADS coverage is solid due to good turnover entrance fee receipts. MADS coverage was 2.2x in fiscal 2015 and 2.7x through the eight months ended May 31, 2016.
RATING SENSITIVITIES
IMPROVED FINANCIAL PROFILE: Fitch views the capital investments in Park Shore favorably and believes it will elevate the marketability of the facility, which is already in a desirable location right on Lake Washington. Fitch expects the new obligated group to continue its solid cash flow, improve liquidity metrics, and maintain solid debt service coverage. Upward rating movement would be dependent on growth in liquidity metrics to levels more in line for an investment grade rating.
Credit Profile
PRCN includes three senior living facilities - Park Shore, Skyline, and Fred Lind Manor, all located in the Seattle metropolitan area. Other affiliates include a foundation, a development and consulting company (PRCN Services), two for-profit entities - Transforming Age and Gerontological Services, which provide management and consulting, market research, and master planning for senior living organizations, and Exeter LLC, which is a holding company to facilitate the transfer of the remaining operations of Exeter House. Exeter House was sold in May 2016 and the majority of the residents are being transferred to Fred Lind Manor, which will be complete by September 2016. Proceeds from the sale of Exeter House will remain within Exeter LLC (outside the OG) and will be used to support future system growth plans.
Park Shore is a Type B CCRC located in the Madison Park neighborhood in Seattle on Lake Washington. Park Shore was built in 1963 and currently has 113 ILUs, 30 ALUs, and a 28-bed SNF. Park Shore recently purchased three condominium units across the street (included in ILU count), which will be sold under residency contracts. Park Shore offers a non-refundable, 50% refundable, and 90% refundable plan.
Skyline is a Type A CCRC located in downtown Seattle and includes 199 ILUs, 48 ALU, 28 memory care units, and 34-bed SNF. Skyline currently offers an 80% refundable Type A plan or 80% refundable Type B plan.
Fred Lind Manor affiliated with PRCN in October 2014 and is an 82-unit senior rental community located in the Capitol Hill neighborhood of Seattle. Fred Lind Manor has some HUD debt outstanding, which will be refinanced with the series 2016 issuance. Several capital improvements at Fred Lind Manor have been made and will continue including the renovation of common spaces as well as remodeling all vacant units and commitment to remodel all units upon turnover. Occupancy at this facility is expected to improve as the remaining Exeter House residents are transferred to Fred Lind Manor.
Plan of Finance
The series 2016 financing will create a new OG structure, which should facilitate continued solid cash flow with debt service savings on the refinancing. The current PRCN OG has $7.2 million of 2013 bonds outstanding issued under a 2013 MTI. Skyline has separately obligated debt outstanding (series 2007A and 2015) that totals $107 million. With this financing, a new OG will be created under the existing 2013 MTI per addition/withdrawal from OG. The new OG will include Park Shore, Skyline, and Fred Lind Manor. The series 2016 bonds will refund the series 2007A bonds and the Fred Lind Manor HUD debt. The series 2015 Skyline bonds will have a substitution of security, and will be on parity with the other OG debt. The financing will provide approximately $36 million of funds for capital expenditures for projects at Park Shore ($33.5 million) and Fred Lind Manor ($2.5 million) and includes about $7.6 million for reimbursement of prior capital expenditures. Total debt after the financing is approximately $147 million and is 100% fixed rate.
Aggregate debt service is level and pro forma MADS of approximately $9 million is essentially unchanged compared to the current debt structure.
Park Shore Project
Fitch views the Park Shore project favorably as it should further enhance the community's position as it modernizes its amenities and common areas. There will be two phases and the project will be funded primarily from bond proceeds. The project will add memory care units, combine several ILUs to create larger ILUs, create a new lobby and entrance, add a cafe, bistro, fitness center, indoor pool and spa and other common area enhancements, as well as a new facade on the building. The entire project should be complete by June 2018.
Financial Profile
Although the new OG's financial profile is fairly weak for the rating level, the rating is supported by the credit's strong qualitative factors and expectation that the trajectory for financial improvement should be fairly sharp. A financial feasibility study with five years of projected performance was provided and management stated that the projections are conservative.
Resident service revenue totaled $32.4 million in fiscal 2015 compared to $31.6 million in fiscal 2014 and $31 million in fiscal 2013. Operating ratio is fairly weak, but NOM-adjusted is strong due to good turnover entrance fee receipts. Entrance fee receipts have fluctuated as there were some issues with transitioning residents to higher levels of care, with net entrance fee receipts of $16 million in fiscal 2015 compared to $7.6 million in fiscal 2014 and $11.8 million in fiscal 2013. Through the eight months ended May 31, 2016, net entrance fee receipts is strong at $12.9 million, which has benefited debt service coverage. The feasibility study projects ongoing turnover entrance fees to be around $15 million a year.
Liquidity remains the largest concern with very low metrics, which provides limited financial flexibility. Cash to debt remains pressured due to the high debt burden and although days cash is projected to improve to 461 by fiscal 2018, cash to debt remains weak at 38.3%.
Disclosure
PRCN will provide annual audited information within 150 days of fiscal year-end and quarterly financial information within 60 days of quarter-end.
Additional information is available at www.fitchratings.com
In addition to the sources of information identified in the Master Criteria, this action was additionally informed by information from the underwriter.
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=1009744
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1009744
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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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