Fitch Rates Oak Crest Village, Inc. (MD) 2016 Revs 'A' & Affirms Outstanding; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'A' to the expected issuance of the following Baltimore County, MD bonds issued on behalf of Oak Crest Village, Inc. (OCV):

--$54,480,000 revenue bonds (Oak Crest Village, Inc. Facility) series 2016.

The bonds are expected to be issued as fixed rate. Bond proceeds will be used to refinance OCV's 2007A bonds and pay for the cost of issuance. Bond will sell via negotiation the week of Oct. 24.

In addition, Fitch has affirmed the following parity debt also issued by Baltimore County, MD on behalf of OCV:

--$67,030,000 fixed rate revenue bonds (Oak Crest Village Facility) series 2007A at 'A'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a revenue pledge and mortgage.

KEY RATING DRIVERS

SOLID FINANCIAL PROFILE: OCV's financial profile is characterized by high occupancy, a low operating ratio (below 90% three out of the last four years), above 2x revenue only debt service coverage, and steady growth in liquidity.

LOWER DEBT SERVICE: The refunding of OCV's 2007A bonds will lower maximum annual debt service (MADS) by over $1 million providing further financial flexibility at the rating level. OCV covered the pro forma MADS at 3.8x (when including entrance fees) and at 2.2x on a revenue only basis, in 2015, relative to Fitch's 'A' medians of 3.1x and 1.5x, respectively.

ABOVE MEDIAN LIQUIDITY: At July 31, 2016, OCV had $127.3 million in unrestricted cash and investments. Unrestricted cash and investments are up 46% since Dec. 31. 2012, and OCV's days cash on hand of 611 and cash to debt of 171.1% are both above their respective 'A' category medians.

HIGH OCCUPANCY: OCV maintains high occupancy across a large base of more than total 1,800 units (1,519 of which are independent living units (ILU). At July 31, 2016, IL occupancy was 98%, assisted living (AL) occupancy 98%, and skilled nursing occupancy 92%. Fitch views the high occupancy as a major credit strength that supports the low operating ratio and generates the solid revenue only coverage.

CYCLE OF CAPITAL SPENDING: OCV is part of the way through the first phase of a three-phase capital plan that is expected to cost approximately $36.6 million. Phase one includes a major information technology project, which has been completed at a cost of approximately $10 million. The additional projects and phases are expected to last through 2020. In 2015, OCV borrowed $30 million through a private placement that is a draw down loan. The remaining project costs will be funded through cash flow.

COMPETITIVE SERVICE AREA: There are five other continuing care retirement communities (CCRCs) in the service area; however, Oak Crest's ongoing marketing campaigns, large wait list, strategic support from Erickson Retirement Communities, LLC, (ERC) and investment in plant mitigate the competitive pressures as a credit concern.

RATING SENSITIVITIES

OPERATIONAL STABILITY: Fitch expects Oak Crest Village, Inc.'s (OCV), operational performance to remain stable as it undertakes the second and third phases of its multi-phase capital plan. Should OCV sustain its current level of performance through completion of these projects, there could be positive movement in the rating.

CREDIT PROFILE

Oak Crest Village is located in Parkville, MD, which is approximately 20 miles north of Baltimore, MD. OCV is a type-C CCRC with 1,519 ILUs in three neighborhoods, 133 AL units and 200 skilled nursing beds. OCV is managed by ERC, which currently manages 18 other large-scale CCRCs. The management agreement expires on April 30, 2020. OCV had total operating revenues of approximately $92.2 million in 2015.

Solid Financial Profile

Most of OCV's operating ratios compare favorably to Fitch's 'A' category medians. OCV's operating ratio and net operating margin - adjusted have averaged 89% and 24.2% over the last four audited years both better than their respective 'A' medians of 94% and 22.2%. The operating ratio for 2016 seven month interim period remained strong at 87.8%. The net operating margin - adjusted was 19.5%.

OCV uses a promissory note program to facilitate the move-in of new residents. Residents that utilize the promissory note program have 90 days to repay the note or the note begins to incur interest. The promissory note receivable is down to $5.8 million at July 31, 2016, from $7.2 million at year-end 2015. While promissory notes can be a credit concern, OCV has been using it a long time and manages it closely. OCV management reports the majority of notes are paid within the 90 day period.

Occupancy levels at OCV remain very strong through July 31, 2016: 98% in IL, 98% in AL and 92% in skilled nursing. These figures are consistent year over year. OCV currently has a waiting list of approximately 923 and turns over between 150 and 200 units a year, which equates to a solid pipeline of future residents. OCV continues to cultivate the waitlist holding regular marketing events that are well attended.

Cycle of Capital Spending

OCV is moving forward on a multi-phase campus repositioning project that is expected to last through 2020. The first phase will include the expansion and renovation of OCV's Town Center clubhouse. A one story addition will be added with a new dining venue and expanded lounge area. The pool and gym are housed in the Town Center and both of these will be expanded and renovated. The first phase also included a campus wide information technology upgrade and additional generators, and these have been completed at a cost of approximately $10 million.

The second phase will include renovation and expansion of Village Square and the campus medical center. A one story addition will be built to enlarge the space available for in-house physicians, attending doctors, and other medical professionals. The third phase will include renovation of OCV's third clubhouse, Crestview Station.

OCV is also considering additional capital improvements to AL and skilled nursing, including the integration of memory care into the care continuum. The costs of these projects could total approximately $20 million to $30 million, bringing the total capital spend from $36.6 million to $66 million.

Fitch recently toured OCV and found the sizable campus attractive and marketable. OCV has continually invested in life cycle projects (the refreshing of common areas and renovation of apartments) over the years. The three phase campus repositioning project should further strengthen the marketability of the campus, positioning OCV to remain competitive over the longer term.

While there are general construction risks with any large scale project as well as campus disruption issues, Fitch believes that the strategic support provided by ERC, the ability for OCV to fund the project largely from cash flow, and its strong operating profile mitigate much of this concern.

DEBT STRUCTURE

The majority of OCV's debt is fixed rate. OCV's variable rate is a privately placed $30 million issuance from 2015. The bonds are structured to be drawn down, and OCV has drawn $5.7 million of the bonds to date. The MADS assumes the full $30 million draw on the series 2015 bonds. Fitch expects the bonds to be fully drawn by May 2018.

OCV has renewal risk and the interest rate risk with the bank placement. However, OCV has ample liquidity relative to the bank debt, with cash to debt remaining above 100% as OCV draws down all the bond funds. Pro forma analysis of the debt shows the $6.1 million pro forma MADS equating to 7.2% of revenue and revenue only MADS coverage of 4x at July 31, 2016, which compare well to the 'A' category medians of 9.2% and 1.5x, respectively.

Disclosure

OCV covenants to provide audited annual financial information to the Trustee, Underwriter, Rating Agency and to significant bondholders. However, OCV posts all of its disclosure via 'zieglerresearch.com'; which includes monthly financial statements (balance sheet, income statement, and statement of cash flows), utilization trends, and payor mix.

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=1012961

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012961

Endorsement Policy

https://www.fitchratings.com/regulatory

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Contacts

Fitch Ratings
Primary Analyst
Gary Sokolow, +1-212-908-9186
Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10014
or
Secondary Analyst
Emily Wadwhani, +1-312-368-3347
Director
or
Committee Chairperson
James LeBuhn, +1-312-368-2059
Senior Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com