NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BB+' rating on the following bonds issued by Lee County Florida Industrial Development Authority (IDA) on behalf of Cypress Cove at HealthPark Florida, Inc. (Cypress Cove):
--$19.5 million series 2014;
--$64.4 million series 2012.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a pledge of gross revenues, an assignment of the obligor's interest in a ground lease on land on which the community is located, and debt service reserve funds.
KEY RATING DRIVERS
SOLID CASH FLOWS AND OCCUPANCY: Cypress Cove generated a solid $7.0 million in net entrance fee receipts through the nine-month interim period (ended June 30, 2016). In addition, independent living unit (ILU) occupancy was strong at 96% through the same period, up from 80% in fiscal 2012. Improved occupancy has resulted in good top-line revenue growth and solid cash flow generation over the last four fiscal years.
HIGH DEBT BURDEN: Cypress Cove's debt burden remains high, as evidenced by maximum annual debt service (MADS), at 17.1% of annualized revenues through the interim fiscal 2016 period. Offsetting the high debt burden is Cypress Cove's debt service coverage, which has been solid over the last three years and was at 2.1x through the interim period. Cypress Cove is contemplating a debt issuance for potential new construction, as well as for certain renovations which were originally planned to be funded out of cash flows and reserves. Fitch will evaluate the impact of the potential debt at the time of issuance.
LIGHT LIQUIDITY: Cypress Cove's $25.3 million in unrestricted cash and investments, although improved from the prior year, equated to a light 311 days cash on hand (DCOH), 29.9% cash-to-debt and a 4.4x cushion ratio at June 30, 2016.
Management's current projections assume the funding of certain community renovations out of cash flows and liquidity over the next few years, and expect unrestricted cash balances to decline as a result, hitting a low of $18.5 million in 2018. Cash is expected to increase starting in 2019. However, if a debt issuance is executed to fund certain capital projects, management is expecting a much lower decline in unrestricted cash over the medium term.
LEE MEMORIAL HEALTH SYSTEM AFFILIATION: The sole corporate member of Cypress Cove is Lee Healthcare Resources (LHR), a support organization for both Cypress Cove and Lee Memorial Health System (LMHS), a four-hospital system located in Lee County, FL. While Cypress Cove is not part of LMHS, Fitch believes the two organizations have a close working relationship that benefits Cypress Cove both strategically and financially. Cypress Cove is located on land owned by LHR for which it pays an annual ground lease payment, of approximately $1 million, which is subordinate to debt service payments.
COMPETITIVE SERVICE AREA: Cypress Cove is located approximately seven miles away from Shell Point Retirement Communities, an over 1,200 ILU continuing care retirement community (CCRC). While Shell Point is Cypress Cove's largest competitor it does not offer a dedicated Memory Care facility, which should help Cypress Cove's marketing and sales efforts going forward.
RATING SENSITIVITIES
LIMITED DEBT CAPACITY: Given Cypress Cove's already high debt burden, Fitch believes that the community has limited debt capacity at the current rating level. Any additional debt would have to be supplemented by further revenue and liquidity growth in order to preserve the rating.
SUCCESFUL PROJECT FILL-UP: Fitch expects Cypress Cove to occupy its recently completed 44-unit Memory Care facility at the projected fill-up rate of 18 internal transfers and 2 additional residents per month, and to reach stabilization at 90% occupancy in August of 2017. Any large deviation from the projections which significantly impact the community's financial profile may lead to negative rating pressure.
CREDIT PROFILE
Cypress Cove is a type-A CCRC located in Fort Myers, FL. The community currently consists of 333 ILU apartments, 30 ILU villas, 44 ALU apartments, 44 ALU Memory Care apartments, and a 64-bed skilled nursing facility (SNF). Cypress Cove opened in 1999 and is situated on a 48-acre parcel of land that is part of 402-acre master development called HealthPark Florida, which also features the HealthPark Medical Center (a 368-bed acute care hospital), part of LMHS. Cypress Cove offers fully-amortizing, 75% refundable, 90% refundable, and 100% refundable entrance fee plans. In fiscal 2015 Cypress Cove generated total revenues of $32.2 million.
SOLID CASH FLOWS AND OCCUPANCY
Cypress Cove's net entrance fee receipts have been solid over the last four fiscal years, averaging $11.8 million annually. Strong receipts are attributed to improved occupancy over the time period, as ILU occupancy increased from 80% in fiscal 2012 to 96% in fiscal 2015. Occupancy improvement has been driven by a healthy real estate market and enhanced marketing initiatives.
Cypress Cove has generated $7.0 million in net entrance fee receipts through the nine-month interim period, while retaining occupancy at 96%. Management is expecting net entrance fee receipts of $8 million - $10 million annually, now that the community is stabilized at over 95% occupancy. Cypress Cove maintains an active waiting list, currently consisting of 114 prospective residents, which should help the community retain strong occupancy over the medium term.
Assisted living and skilled nursing occupancies have both been strong at over 90% over the last four years. Fitch notes Cypress Cove's reliance on Medicare revenues in its SNF, as approximately 70% of net SNF revenues come from Medicare residents. This could present a credit concern over the longer term as the future of Medicare revenues is less certain with the introduction of the bundled payment program. However, given Cypress Cove's affiliation with LMHS, the community should be well positioned for future Medicare reform. SNF revenues make up approximately 23% of total resident revenues.
HIGH DEBT BURDEN
Maximum annual debt service (MADS) of $5.8 million made up a high 17.1% of annualized revenues through the interim, unfavorable to Fitch's 'below investment grade' (BIG) median of 10.0%. Under the bond documents Cypress Cove is allowed to use a lower MADS of $4.5 million for its covenant calculations through the Memory Care project stabilization period (through 2017).
According to Fitch's calculations, Cypress Cove's debt service coverage has averaged 2.4x from 2012 through 2015 and was a solid 2.1x through the interim period. Annual ground lease expense has been added back to net available for the purpose of debt service coverage calculations, as ground lease payments are subordinate to debt service on the bonds. Ground lease payments were deferred when Cypress Cove was facing occupancy challenges and in a weaker financial position. The ground lease liability was at $7.0 million at June 30, 2016, and management expects lease payments to become current by 2022. The ground lease cannot be terminated as long as Cypress Cove's debt is outstanding.
LIGHT LIQUIDITY
Cypress Cove's $25.3 million in unrestricted cash and investments at June 30, 2016 produced light liquidity metrics when compared to BIG category peers. Management is projecting liquidity to decline further over the next three years, as certain capital projects are funded out of cash and expected net entrance fee receipts stabilize at a lower level. Cypress Cove is expecting to begin renovations of its SNF in 2016, which will put additional stress on revenues and liquidity as beds are taken out of service throughout the process.
Management is projecting unrestricted cash to decline to $18.5 million, or 227 DCOH, in 2018 and to improve to $21.1 million by 2020. Cypress Cove is currently contemplating a debt issuance to supplement the SNF renovation, as well as fund some new revenue producing construction, which is likely to help keep liquidity levels higher over the medium term. Fitch believes that Cypress Cove's continued reinvestment in its facilities will be beneficial in maintaining the community's marketability in the long run. Fitch will continue to closely monitor Cypress Cove's liquidity position, and any large deviations from projections will likely lead to downward rating action.
MIXED PROFITABILITY
Cypress Cove's operating ratio and net operating margin (NOM) have averaged 121% and negative 4.6%, respectively, over the last four fiscal years; both unfavorable compared to BIG category peers. While both operating ratio and NOM improved through the interim period, management is not projecting any significant operating improvements over the medium term. Fitch notes that operating ratio and NOM reflect the impact of Cypress Cove's fully amortizing lifecare contracts, higher expenses related to improving occupancy of the ILUs, and ground lease and management fee expenses.
Cypress Cove's NOM-adjusted has averaged a very strong 31.4% from fiscal 2012 to fiscal 2015 reflecting improved net entrance fee receipts. Given management's expectation of lower net entrance fee receipts going forward, Fitch would expect NOM-adjusted to normalize at approximately 25% over the medium term.
DEBT PROFILE
All of Cypress Cove's debt is fixed rate. Cypress Cove does not have any swaps outstanding.
DISCLOSURE
Cypress Cove is expected to provide audited financials within 150 days of its fiscal year-end and quarterly unaudited financials within 45 days of its fiscal quarter-end to the EMMA system, which includes balance sheet, income statement and statement of cash flow, covenant performance, and occupancy statistics.
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/site/re/868824
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/site/re/750012
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1010990
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1010990
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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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