SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BB' rating to Alhambra, CA's approximately $29,090,000 insured refunding revenue bonds series 2016 issued on behalf of Atherton Baptist Homes (Atherton). In addition, Fitch has upgraded the rating on Atherton's outstanding series 2010A bonds to 'BB' from 'BB-'.
The Rating Outlook is Stable.
The series 2016 bonds will be fixed rate and insured by Cal Mortgage. Bond proceeds will advance refund the series 2010A bonds. Net present value savings are estimated to be over 20% of refunded par. The bonds are expected to price on Oct. 19.
The bonds are secured by a gross revenue pledge, mortgage, and debt service reserve fund.
KEY RATING DRIVERS
SUSTAINED POSITIVE MOMENTUM: The upgrade to 'BB' from 'BB-' reflects Atherton's positive momentum driven by the continued improvement in occupancy. Performance through the eight months ended Aug. 31, 2016 is solid, exceeded expectations, and expected to be sustained. Fitch believes the organization has achieved stability at the new rating level after material organizational changes were made throughout 2014 to address Atherton's historically weak governance and management practices.
IMPROVED OPERATING PERFORMANCE: After a period of weak financial performance, Atherton exceeded its 2015 budget and was compliant with bond covenants. Performance through the eight months ended Aug. 31, 2016 is at a stronger level , especially operating performance, which has significantly improved revenue only coverage. The improved performance has been driven by increased occupancy in its Classic independent living units (ILU) in addition to managing its workers' compensation costs, which had historically plagued the organization. Operating ratio is 100% through the eight months ended Aug. 31, 2016.
GOOD OCCUPANCY: ILU occupancy has improved to 94.1% at Sept. 30, 2016 from 70.6% in 2012. SNF occupancy has steadily been above 90%, and there is not a large reliance on Medicare revenue (17% of SNF revenue).
BENEFIT FROM REFINANCING: Debt service coverage has improved due to better operational performance and will further benefit from the savings on the refinancing. Through the eight months ended Aug. 31, 2016, MADS coverage was 2.2x compared to 2.1x in 2015 and 1.3x in 2014. On pro forma MADS, coverage improves to 2.6x, 2.5x, and 1.5x, respectively.
LIGHT LIQUIDITY: Liquidity is light but in line with below investment grade credits with 215 days cash on hand (DCOH) and 36.7% cash to debt at Aug. 31, 2016. Atherton's days cash on hand covenant will reduce to 150 from 180 with the refinancing.
FUTURE CAPITAL NEEDS: Fitch expects Atherton to maintain financial performance in line with current levels. Further upward rating movement is likely if operating performance is maintained with further growth in liquidity. There are capital needs over the five-year period, but they are expected to be funded from operating cash flow or initial entrance fees received from potential new independent living units.
Atherton Baptist Homes is a Type C continuing care retirement community (CCRC) located in Alhambra, CA with 170 Classic ILUs, 50 Courtyard ILUs, 38 assisted living units (ALU), and 99 skilled nursing facility (SNF) beds. Total revenue in 2015 (Dec. 31 fiscal year end) was $18.6 million. Atherton restructured its pricing for the Courtyard units in 2016 and the predominant contract type for the Courtyard units is 90% refundable while the Classic units are predominantly nonrefundable.
A management consultant report was issued in March 2014 due to the violation of the occupancy requirement in the bond documents and the cumulative cash used for operations financial covenant (this covenant no longer tested as of 2015). There were several recommendations for improvements in the areas of governance and management practices as well as in marketing and sales strategies. These changes were made throughout 2014 and have had a positive impact on 2015 performance, which has continued through the eight months ended Aug. 31, 2016.
Management has implemented tools to track various measures including unit vacancies, time to move in, ongoing renovations, weekly sales report, and daily SNF payor mix. The management consultant is still engaged at Atherton although bond covenant compliance is being met and the consultant provides ongoing feedback to the board and management.
These changes included a new CEO, a new chairman of the board, and restated bylaws to broaden the breadth and diversity of board members. In addition, there is new oversight with a combined sales and marketing director effective November 2015, who is implementing a targeted marketing approach and a new website was launched in September 2016.
Improved Occupancy and Capital Spending
Atherton added 50 Courtyard ILUs in June 2011 and suffered after the slow fill of these units, which reached 90% occupancy by third quarter 2013 and have since maintained high occupancy. The slow fill diverted attention from sales and marketing of the older part of the campus (Classic units - 170 ILUs) and with increased capital investment in these units, faster turnover, and focused sales and marketing - there has been a continuing trend of improved occupancy of Classic units from 79.1% in 2012 to 85.9% in 2015 and was 92.9% at Sept. 30, 2016.
Management is now assessing its unit mix with the possible addition of memory care units. Also, there are additional ILUs in the five-year capital plan. Currently, the five-year capital plan is manageable and capital spending averages $1.6 million a year from 2016-2020. No additional debt is expected.
Improved Operating Performance
Operating ratio is now 100% through the eight months ended Aug. 31, 2016 from 123.2% in 2012. Historical poor operating performance resulted in the dependence on net entrance fees for debt service coverage. However, with the improved operating performance revenue only coverage is now 1.1x through the eight months ended Aug. 31, 2016.
The performance continues to be driven by improved occupancy as well as managing its workers compensation costs, which caused significant pressure on expenses. Atherton has been aggressive with closing older claims, while also reducing and managing any new claims. Past open claims have been reduced to four from eight.
Atherton's unrestricted cash and investments have been volatile since initial entrance fee receipts (used to pay down series 2010B temporary debt) were part of unrestricted cash and investments. Atherton paid off the series 2010B bonds in full in 2014.
At Aug., 31, 2016, Atherton had $10.5 million of unrestricted cash and investments which equated to 215 DCOH, a 4.1x cushion ratio and 36.7% cash to debt compared to Fitch's 'BBB' category medians of 400, 7.3x and 60%. Liquidity is projected to build over the next five years with 340 DCOH and 67.4% cash to debt in 2020. Atherton's investment portfolio is fairly aggressive for its rating level with 57% of its investments exposed to equities, which has been reduced but still remains high.
Atherton maintains a defined benefit pension plan that is currently underfunded ($3 million as of Dec. 31, 2015). The pension plan is not subject to ERISA requirements. The board recently made a decision to fund the plan over a 15-year period.
The series 2016 bonds will refund all of Atherton's existing debt (series 2010A) that has a current outstanding par amount of $28.2 million. The debt will be 100% fixed rate.
The series 2016 bonds will be insured by Cal Mortgage and bond covenants will include 1.25x MADS coverage, 150 days cash on hand, and 1.5x current ratio.
Current MADS is $2.557 million and projected to drop to $2.126 million with the refinancing. Debt service is level. MADS accounted for 12.4% of total revenue through the eight months ended Aug. 31, 2016, which is in line with 'BBB' category medians.
Atherton covenants to provide annual disclosure within 150 days of fiscal year end and quarterly disclosure within 45 days of quarter end to EMMA.
Additional information is available at 'www.fitchratings.com'.
Not-for-Profit Continuing Care Retirement Communities Rating Criteria (pub. 04 Aug 2015)
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
Dodd-Frank Rating Information Disclosure Form
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