NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB+' rating to the expected issuance of $33.3 million of Sarasota County Health Facilities Authority Retirement facility revenue refunding and improvement bonds (Village on the Isle Project), series 2016 on behalf of Village on the Isle (VOTI).
In addition, Fitch downgrades the following outstanding bond to 'BBB+' from 'A-':
--$27.6 million of Sarasota County Health Facilities Authority retirement facility revenue refunding bonds (Village on the Isle Project), series 2007
The Rating Outlook is Stable.
The series 2016 bonds are expected to be issued as fixed rate. Proceeds will be used to advance refund VOTI's outstanding series 2007 bonds, provide $10 million in new money for an assisted living (AL) repositioning project, establish a debt service reserve fund (DSRF), and pay for costs of issuance.
SECURITY
The series 2016 bonds will be secured by a gross revenue pledge, a first mortgage lien, and a DSRF.
KEY RATING DRIVERS
INCREASE IN DEBT BURDEN: The downgrade to 'BBB+' is driven by the increase in VOTI's debt burden with the 2016 debt issuance, which was not expected during Fitch's last review. VOTI's pro forma maximum annual debt service (MADS) increases to $3.1 million, from $2.5 million, equating to an elevated 14.2% of annualized 2016 revenues through the seven-month interim period (ended July 31, 2016), unfavorable to Fitch's 'BBB' median of 12.4%. Additionally, pro forma debt to net available rises to 4.4x, slightly better than the 'BBB' median of 5.9x.
LIQUIDITY IN LINE WITH 'BBB' CATEGORY: VOTI's pro forma debt of $33.3 million represented 76.4% of total unrestricted cash at July 31, 2016, significantly unfavorable to Fitch's 'A' median of 125.1%, but more in line with the 'BBB' median of 60%. Days cash on hand of 546 and pro forma cushion ratio of 8.1x were also more in line with the 'BBB' category. VOTI's capital spending has been elevated over the last four years at 176% of depreciation expense, and management is expecting for routine capital expenditures to be at approximately 100%-125% of annual depreciation, which should help the community preserve its liquidity position over the medium term.
ROBUST OPERATING PROFITABILITY: VOTI's profitability ratios are very strong for the lower rating category, as all of them exceed Fitch's 'BBB' medians. Over the last four audited years, VOTI's operating ratio has averaged an 87.9% and its net operating margin (NOM)-adjusted averaged 29.2%, both significantly above Fitch's 'BBB' category medians of 96.1% and 19.2%, respectively.
LARGE CAPITAL PLANS: VOTI is expecting to commence an AL repositioning project in the early part of 2017. The project will include the downsizing of the AL to 64 units from the original 90, as well as the creation of a dedicated Memory Care floor. Construction is expected to last 16-18 months. Further, management is contemplating a longer-term, multi-phased Master Facilities Plan including a possible addition of new independent living units (ILUs) and a repositioning of the skilled nursing facility (SNF), which would likely include issuance of additional debt. These longer term plans are preliminary and were not incorporated into Fitch's analysis during this review.
HIGH OCCUPANCY AND STRONG MARKET POSITION: VOTI's ILU occupancy has averaged a very strong 96% over the last four audited years. Occupancy was down slightly at July 31, 2016 due to higher levels of turnover, but remained a strong 91%. AL and SNF occupancies were a solid 90% and 96%, respectively, at the same time. VOTI benefits from its location in Venice, FL, on the west coast of Florida in Sarasota County (Issuer Default Rating of 'AAA'/Stable Outlook), limited competition from other full continuum of care providers, and entrance fee prices that compare well with area housing prices.
RATING SENSITIVITIES
OPERATING STABILITY EXPECTED: Fitch expects Village on the Isle to continue producing solid operating cash flows that sustain good debt service coverage over the course of the repositioning project. Additionally, Fitch would expect unrestricted liquidity to be preserved, given the community's lower expected routine capital expenditures.
LONGER-TERM CAPITAL PLANS: Village on the Isle's longer-term capital plans may require debt financing in the future and a larger issuance may not be sustainable at the current rating level. Fitch will evaluate Village on the Isle's longer-term capital plans at the time debt is issued to support such plans.
CREDIT PROFILE
VOTI operates a continuing care retirement community located in Venice, FL approximately 75 miles south of Tampa on Florida's Gulf Coast, which currently consists of 214 ILUS, 90 ALUs, and 60 skilled nursing beds. VOTI currently offers a Type-B contract which provides a 10% discount on AL and SNF services. Management is expecting to begin offering a higher priced Type-B contract, which will provide enhanced health benefits for AL services, later this year. VOTI offers fully-amortizing and 50% refundable entrance fee plans. Total revenues for 2015 were approximately $21.7 million.
INCREASED DEBT BURDEN
The downgrade to 'BBB+' is driven primarily by the increase in VOTI's debt burden, which was not expected during Fitch's last review. Most pro forma debt metrics are more in line with the 'BBB' category medians. VOTI's pro forma maximum annual debt service (MADS) rises to 14.2% of annualized revenues through the interim period, while pro forma debt to net available increases to 4.4x, compared to Fitch's 'BBB' medians of 12.4% and 5.9x, respectively. Pro forma debt service coverage by net available remained solid through the interim period at 2.4x, compared to the 2.0x median, while revenue-only coverage of 1.0x was the same as Fitch's median. Management's projections, which incorporate the AL repositioning project, expect coverage by net available to be around 2.1x over the medium term, while revenue-only coverage declines to 0.7x; both remain sufficient for the current rating. Fitch notes that the series 2016 bonds mature in 2032 and the shorter amortization schedule results in a higher MADS, which puts stress on certain debt metrics.
With the new issuance, VOTI's cash to debt falls from 103.4% to 76.4% on a pro forma basis, at July 31, 2016, which is more comparable to the 'BBB' median of 60%. Pro forma cushion ratio of 8.1x is slightly better than the median of 7.3x. VOTI's capital spending has been elevated over the last four years at 176% of depreciation expense, and management is expecting for routine capital expenditures to be at approximately 100%-125% of annual depreciation, which should help the community preserve its liquidity position over the medium term. Management projections anticipate cash to debt returning to over 100% by 2021.
ROBUST OPERATING PROFITABILITY
VOTI's high occupancy and strong market position has resulted in robust profitability over the last four years. All of VOTI's profitability and cash flow metrics, including an operating ratio of 91% and a NOM-adjusted of 31.2% were above Fitch's 'BBB' medians. Management is projecting a decline in AL revenues through the course of the repositioning and beyond, due to a decreased number of units. Operating ratio is projected to increase to the 96-97% range over the medium term, which is much higher than it was historically, but still in line with the 'BBB' median of 96.1%. NOM-adjusted is also expected to decline, but is projected to remain very strong at around 27% over the same time period.
LARGE CAPITAL PLANS
VOTI is expecting to proceed with the AL repositioning project in early 2017. The total project cost is anticipated to be approximately $12.5 million (with $2 million built in for contingencies); $10 million is being funded through new money proceeds from the series 2016 bonds, and the rest through cash reserves and cash flows. Fitch notes that VOTI currently holds approximately $2 million of its 2007 bonds, which should come back on its balance sheet in 2017; this mitigates the possibility of additional cash outlays related to contingencies for the project. The project will include the downsizing of VOTI's AL facility to 64 units from the original 90, as well as the creation of a dedicated Memory Care floor. The facility will be remodeled under the neighborhood model of care, featuring four 16-unit floors with a country-style kitchen on every floor. Construction is expected to last 16-18 months and will be done one floor at a time to decrease interruptions in patient care.
Additionally, VOTI is contemplating a longer-term, multi-phased Master Facilities Plan, which may include the addition of new ILUs and the repositioning of the SNF, which would likely include the issuance of additional debt. These longer-term plans are preliminary and were not incorporated into Fitch's analysis during this review.
MANAGEMENT UPDATE
VOTI's long-term CEO retired at the end of 2015 and VOTI successfully recruited a replacement who started in November of 2015. Fitch met with the new CEO and found him to be forthcoming and experienced.
DEBT AND INVESTMENT PROFILE
Post-issuance, all of VOTI's debt will continue to be fixed rate. The community's investment allocation consists of mostly cash and fixed income, which provides further stability at the rating level. VOTI does not have any outstanding swaps.
DISCLOSURE
VOTI covenants to provide audits within 150 days of year end, quarterly statements within 45 days of quarter end, including occupancy statistics, annual budget, and any notice of a material event to EMMA.
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=1011128
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1011128
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