Fitch Rates Presbyterian Retirement Communities (FL) 2016 Revs 'A-'; Outlook Revised to Stable

NEW YORK--()--Fitch Ratings has assigned an 'A-' rating on approximately $160.6 million of Orange County Health Facilities Authority, FL revenues bonds series 2016 expected to be issued on behalf of Presbyterian Retirement Communities (PRC).

In addition, Fitch has affirmed the following parity bonds issued on behalf of PRC:

--$46.4 million Orange County Health Facilities Authority (FL) rev bonds series 2015;

--$43.7 million Orange County Health Facilities Authority (FL) rev bonds series 2014;

--$113 million St. Johns County Industrial Development Authority (FL) rev bonds series 2010A;

--$19.4 million St. Johns County Industrial Development Authority (FL) rev bonds series 2010B.

The Rating Outlook has been revised to Stable from Positive.

The series 2016 bonds will be issued as fixed rate. Bond proceeds will be used to advance refund the series 2010A bonds for interest rate savings, provide $45 million in new money for future capital expenditures, establish a debt service reserve fund (DSRF), and pay for costs of issuance.

SECURITY

Bond payments are expected to be secured by a pledge of gross revenues of the obligated group (OG), a first mortgage lien on certain PRC properties, and a debt service reserve fund.

KEY RATING DRIVERS

ELEVATED DEBT BURDEN: The revision of the Outlook to Stable is driven primarily by the increase in PRC's debt burden. Pro forma maximum annual debt service (MADS) of $16.6 million equated to 9.6% of fiscal 2016 revenues, while pro forma debt (net of premium) to net available was 7.0x in the same year, both unfavorable to Fitch's 'A' category medians of 9.2% and 4.3x, respectively.

LARGE CAPITAL PROJECTS: The Outlook revision also reflects PRC's increased capital spending, which will hamper an improvement in liquidity metrics. PRC is currently in the middle of several capital projects that include the development of Westminster Baldwin Park (WBP), a satellite campus with new independent living units (ILUs) and skilled nursing facility (SNF) beds, as well as other additions to its current campuses. PRC's history of bringing on projects of a similar size, as well as strong pre-sales, mitigate some of Fitch's concern about project and fill-up risks.

IMPROVED ILU OCCUPANCY: ILU occupancy has improved significantly across the entire system over the last four fiscal years. ILU occupancy was at 95% at June 30, 2016, up from just 78% at March 31, 2013. The occupancy improvement is attributed to enhanced marketing efforts, as well as an improving Florida real estate market.

ADEQUATE LIQUIDITY: PRC's 354 days cash on hand (DCOH), 50.4% cash to pro forma debt, and 8.3x pro forma cushion ratio at June 30, 2016, were all light compared to Fitch's category medians of 681 days, 125.1%, and 18.5x. However, Fitch views PRC's liquidity position at the 'A-' rating level as adequate in light of its improved occupancy, mostly non-refundable entrance fee contracts, strong historical capital reinvestment, and solid cash flows.

RATING SENSITIVITIES

COMPLETION OF CAPITAL PROJECTS: Fitch expects the Westminster Baldwin Park campus to open on time and on budget in the summer of 2017 and fill-up according to the projected schedule. Any large deviation from projections which negatively impact the organization's financial profile may lead to negative rating pressure.

MODERATION OF DEBT BURDEN: Fitch expects Presbyterian Retirement Communities' debt burden to moderate over the medium to longer term through revenue and liquidity growth associated with its current and future revenue producing capital projects.

CREDIT PROFILE

Founded in 1954, PRC is a Florida not-for-profit organization focused on residential and health care communities for older adults. The obligated group (OG) consists of seven members, five of which own and operate nine continuing care retirement communities (CCRC) in Jacksonville, Orlando, Winter Park, Bradenton, St. Petersburg, and Tallahassee, FL. Westminster Services, Inc., a management company, and Westminster Retirement Communities Foundation, Inc. are also in the OG. HUD housing comprises most of the non-OG entities. PRC has 12 HUD rental facilities.

As of June 30, 2016, the OG consisted of 2,024 ILUs, 467 ALUs and 751 skilled nursing beds. Total operating revenues in fiscal 2016 were $165.9 million. Fitch's analysis is based on the financials of the OG.

ELEVATED DEBT BURDEN

The revision of the Outlook to Stable is driven primarily by the increase in PRC's debt burden. PRC's pro forma MADS increases to $16.6 million, up by approximately $1.6 million from the prior MADS. Pro forma MADS equated to 9.6% of fiscal 2016 revenues, and improved slightly to 9.5% through the three-month interim period (ended June 30, 2016). Pro forma debt to net available of 7.0x in fiscal 2016 was unfavorable to Fitch's 'A' category median of 4.3x, but also improved through the interim to 5.3x.

Pro forma MADS coverage of 2.4x in fiscal 2016 was below Fitch's median of 3.1x. Coverage has been consistent over the last four fiscal years due to stable operations and good entrance fee receipts, which mitigates some concern associated with the increase in MADS. Aside from the 2016 issuance, no new debt is anticipated over the medium term, and Fitch believes that PRC has limited debt capacity at the current rating level.

LARGE CAPITAL PROJECTS

PRC is currently in the middle of several capital projects that include the development of WBP, a satellite campus to Westminster Winter Park (WWP). WBP will be located less than half a mile away from WWP and is being constructed on a 7.5 acre site. Stage I of the project includes the construction of 80 ILUs and 40 SNF beds which are being moved from WWP (which currently has 120 SNF beds). The remaining 80 beds at WWP will be remodeled to add additional private rooms and common areas. Management reports that all 80 ILUs have been pre-sold to date.

Phase II of the project includes the construction of an additional 80 ILUs on the campus. The project was initially earmarked to be funded through entrance fees from Phase I, but will now be funded through the series 2016 issuance, with the entrance fees going back onto PRC's balance sheet. Construction for Phase II will not begin until the initial 80 units are stabilized at 80% occupancy.

Additional projects to be funded entirely, or in part, through the 2016 issuance include the construction of up to 50 ILUs and 40 memory care assisted living units (ALUs) on PRC's Westminster Oaks campus, construction of 40 memory care ALUs on the Westminster Bradenton Manor campus, construction of up to 60 ILUs on the Westminster Shores campus, and construction of a parking lot and office space on the Westminster Towers campus. PRC's annual capital spend has averaged 153% of annual depreciation expense from fiscal 2013, to fiscal 2016, indicative of continued reinvestment into its facilities, which is viewed favorably by Fitch.

IMPROVED OCCUPANCY

System-wide ILU occupancy improved to 95% at June 30, 2016 from 78% at March 31, 2013. The largest improvements in occupancy occurred in PRC's West Coast market, where ILU occupancy increased to 93% in fiscal 2016, from 86% in the prior year. Occupancy improvements were achieved through enhanced marketing efforts, an improving real estate market, as well as apartment consolidations. Total ILUs at the communities in this market decreased to 879 in fiscal 2016 from 973 in fiscal 2013. ALU and SNF occupancies remained solid at 93.6% and 88.5%, respectively. PRC's North and Central markets retained good occupancies at 94.7% ILU, 94% ALU, and 90.1% SNF occupancies in fiscal 2016.

Total move-ins for fiscal 2016 remained stable at 278, compared to 286 in fiscal 2015. Entrance fee receipts have averaged a solid $25.5 million annual over the last four fiscal years. In addition, improved occupancy has contributed to stable year-over-year revenue growth for the organization, as revenues have increased by 17.4% since fiscal 2013.

Fitch notes that PRC had a year of lower operating profitability in fiscal 2016 with a 103.2% operating ratio. The lower profitability reflects management's pro-active focus on addressing resident needs, as fiscal 2016 expenses included significant improvements to PRC's dining services, an area of lower resident satisfaction previously, as well as improvement in patient care through the hiring of more Registered versus Licensed nurses. Over the medium term management is budgeting for a reduction in Medicaid rates due to expected changes to the program in Florida. Management is expecting a conservative negative impact of about $700,000 annually, which Fitch views as manageable given PRC's current operating profile.

ADEQUATE LIQUIDITY

PRC's $137.6 million in unrestricted cash and investments at June 30, 2016 equated to 354 days cash on hand (DCOH), 50.4% cash to pro forma debt, and 8.3x pro forma cushion ratio, light compared to the 'A' category medians of 681 days, 125.1%, and 18.5x. However, Fitch views PRC's liquidity position as adequate at the 'A-' rating level in light of the organization's declining refund contract, strong capital spending and historically solid cash flows. In addition, PRC maintains $27 million from the sale of one of its HUD properties in a separate Foundation outside the OG. The monies are unrestricted and are available to PRC at the Foundation board's discretion.

DEBT PROFILE

Including the series 2016 issue, PRC debt structure will consist of 93% fixed-rate bonds and 7% variable rate debt. Fitch views PRC's current debt structure positively, believing it provides stability to PRC's overall credit profile.

DISCLOSURE

PRC covenants to provide annual audited financial statements, quarterly un-audited financial statements, and occupancy statistics to the Municipal Securities Rulemaking Board's EMMA system and to bondholders.

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

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Contacts

Fitch Ratings
Primary Analyst
Dmitry Feofilaktov, +1-212-908-0345
Associate Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Paul Rizzo, +1-212-612-7875
Director
or
Committee Chairperson
James LeBuhn, +1-312-368-2059
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com