NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded to 'BBB+' from 'A-' the rating for the following County of Franklin, Ohio Health Care Facilities bonds, issued on behalf of Friendship Village of Dublin (FV Dublin):
--$23.3 million revenue refunding bonds, series 2014.
The Rating Outlook is Stable.
SECURITY
Outstanding debt is secured under a Master Indenture.
Security includes a mortgage (excluding Birchton and Home Care
Properties), gross revenue pledge and a springing debt service reserve
fund (if days cash on hand falls below 600 days).
KEY RATING DRIVERS
SIZABLE CAPITAL PLAN: The downgrade to 'BBB+'
from 'A-' is primarily driven by the operational stress and doubling of
debt as FV Dublin begins to execute on its large master plan projects
that include the construction of new independent living units (ILUs),
the expansion of the assisted living space and addition to memory care,
increase to the number of private rooms in health care, and the
remodeling and expansion of community spaces. The full project is
expected to be complete by the end of calendar year 2019 with a total
cost of $73 million.
HIGH DEBT BURDEN: FV Dublin completed a bank purchase placement on Sept. 29 to fund Phase I of its capital projects. The series 2016 financing also included a tax-exempt borrowing of $6.7 million with the same bank to refund the previously outstanding series 2004A bonds. The incremental debt of $32.5 million almost doubles FV Dublin's debt to a pro forma debt of $62.5 million. Pro forma debt service coverage of 1.1x (excluding the initial entrance fee deposits received in 2016) and pro forma maximum annual debt service (MADS) to revenue of 17.7% compare unfavorably with the medians for the 'BBB' rating category of 2.0x and 12.4%, respectively. Pro forma MADS debt service coverage will be pressured until the revenue generating projects are brought online. FV Dublin expects to fund Phase II of the capital projects with entrance fees, cash and fundraising and therefore does not expect to incur additional debt.
EXCELLENT LIQUIDITY: With $53.9 million in unrestricted cash and investments, 1,149 days cash on hand (DCOH) and 165.5% cash to debt at fiscal year end June 30, 2016 (unaudited), FV Dublin's liquidity has historically been a significant credit strength. The strong cash position provides a cushion during the construction period and is a source of additional funds for Phase II of the Master Plan.
STRONG OCCUPANCY: FV of Dublin's ILU and assisted living unit (ALU) occupancy have each averaged 94.5% over the past four years, which indicates a strong and consistent level of demand of FV Dublin's product.
WEAKENING OPERATING METRICS: FV Dublin's financial results reflect a multi-year softening of its operating indicators through fiscal 2016. Operating ratio of 101.4% in fiscal 2016 (unaudited) compares unfavorably to 91.9% in fiscal 2013 or to the median of 96.1% for the 'BBB' rating category. Fiscal 2017 and 2018 will have further compressed margins as the community expects declining revenue from a smaller ILU complement during the repositioning and before the new apartments are occupied.
RATING SENSITIVITIES
STABILITY AT THE 'BBB+' RATING: The downgrade to 'BBB+' incorporates Friendship Village of Dublin's (FV Dublin) changing profile as it faces the challenges of a large construction, temporarily decreasing revenue and increased leverage. At this time, Fitch does not expect any additional, long-term disruptions that would further pressure the rating.
CREDIT PROFILE
FV Dublin is a Type A (lifecare) continuing care retirement center (CCRC) with a total of 247 ILU apartments and villas, 33 ALUs, 13 memory care units, and 60 skilled nursing facility (SNF) beds as of fiscal year end 2016. It is located in Dublin, OH, 16 miles northwest of Columbus. Total revenues for fiscal 2016 were $21.1 million.
FV Dublin offers three different resident plans. The Traditional Plan has a refundable portion of the entrance fee that decreases over the resident's stay, the Return of Capital Plan (80% or 90% refundable), and the Alternate Plan contract that is a lower priced option similar to the Traditional Plan. Resident contracts are predominantly represented by the Traditional Plan.
MASTER PLAN PROJECTS
As expected, FV Dublin has launched its multi-year plan to improve and expand its facility with both new revenue projects (approximately 60% of the plan) as well as necessary capital updates (40% of the plan). Phase I of the project consists of construction of 79 new ILUs; 28 Flats and 51 Riverstone apartments. FV Dublin had 262 ILUs at the end of fiscal 2013, which decreased to 247 by the end of fiscal 2016 as FV Dublin consolidated smaller one-bedrooms and took other smaller units out of service that were no longer marketable. The facility is expecting to take another 26 smaller apartments off-line and add the 79 new units by December 2017, bringing it to a total of 300 ILUs. Phase I is funded by the series 2016 financing.
The second phase of the plan includes the remodeling and expansion of community spaces and dining venues. Importantly, it also updates the SNF space and triples the number of private nursing beds from the current 12 to 38. The total number of SNF beds was reduced to 50 from 60 as of July as the community is accepting less patients from outside FV Dublin with more of its SNF capacity reserved for lifecare residents. The assisted living and memory care space is also being expanded to 60 beds with the addition of 14 new memory support beds. Phase II will be primarily funded by approximately $28 million in new entrance fees, cash and fundraising.
The project is expected to be complete by the end of calendar year 2019 at a total cost of approximately $73 million, which is higher than the $40 million-$60 million expectation at the time of Fitch's last review. The debt and new entrance fees cover approximately $60 million of the total cost, but with the increased cost there is a larger equity contribution expectation, depending on the success of fundraising. The $13 million funding gap is expected to reduce the $53.9 million in unrestricted cash and investments, but is not a significant credit concern due to FV Dublin's ample cash position. Cash is projected to begin increasing again in 2020 and the years following the conclusion of the project.
In addition to the master plan, FV Dublin has also been upgrading the renovations on existing apartments as they turnover in an effort to maintain an appealing facility. Fitch views all these projects favorably as it should allow FV Dublin to remain competitive and continue to meet the high demand for its products. Fitch expects that FV Dublin will be able to return to its historically strong operating levels after the repositioning is complete.
STRONG OCCUPANCY AND DEMAND
FV Dublin has historically enjoyed high occupancy and demand for its products, despite operating in a competitive market with a number of other retirement facilities and stand-alone SNFs. There are three new competing retirement facilities in the area. Part of growth in retirement communities is driven by the growth in the city of Dublin itself. Dublin has seen rapid population growth, solid per capita income, and property value appreciation in recent years. Most of FV Dublin's residents originate within a five-mile radius of the community.
Continued demand for FV Dublin's services is evidenced in the strong pre-sales of the new units, with 25 of the 28 Flats and 25 of the 51 Riverstone apartments pre-sold. FV Dublin collects a 10% entrance fee deposit at the time of pre-sales. Due to the strong pre-sales, FV Dublin expects a rapid fill-up period in fiscal 2018 with approximately $22.5 million in initial entrance fees received that fiscal year (ending June 30, 2018).
OPERATING METRICS AFFECTED BY REPOSITIONING
Mostly as a result of high occupancy and strong net entrance fees, FV Dublin's net operating margin-adjusted ratio is solid at 27.6% and above Fitch's 'BBB' category median of 19.3%. However, the operating ratio has been steadily increasing over the past three years to 101.4% in fiscal 2016 primarily due to declining monthly revenue as smaller ILUs have been consolidated or taken out of service in preparation for the repositioning.
Additionally, the SNF occupancy has also been low (75% in fiscal 2016) due to additional competition from more updated SNFs in the area and because of management's decision to use some of the shared rooms as private room settings. Management and the board of FV Dublin have decided to right-size the SNF unit and reduce the number of beds to 50 as of July. With an increasing number of SNF beds reserved for residents with lifecare contracts, the small number of available beds did not attract hospitals as a referral destination for patients needing a SNF setting. Consequently, SNF revenue has also decreased.
DEBT PROFILE
With the issuance of the 2016A&B bonds, FV Dublin has pro forma debt of $62.5 million, of which $23.3 million (series 2014 bonds) are fixed rate debt. The series 2016A bonds (final maturity of Nov. 1, 2022) were used to refund the outstanding series 2004A variable rate bonds. The series 2016B bonds (final maturity of Nov. 1, 2046) provided $32.5 million to fund Phase I of the Master Plan. Both the series 2016A&B bonds are direct bank purchases from the same bank lender with an initial seven-year commitment. The series 2016B bonds are structured as a draw down loan, with the full amount to be drawn by January 2018. Pro forma cash to debt is expected to reach a low of 71% in fiscal 2018 according to management's projections.
The series 2016 bonds are issued as parity debt under FV Dublin's Master Indenture. The debt service coverage ratio is 1.2x and the series 2016 lender has agreed to lower the coverage ratio to 1.0x for fiscal year 2018 to accommodate any unexpected disruptions from construction or one-time expenses.
DISCLOSURE
FV Dublin covenants to disclose certain financial and operating information, including audited financial statements and occupancy data, within 150 days after the end of each fiscal year. Quarterly financial information is to be disclosed within 60 days after the end of each quarter. Disclosure is provided on the Municipal Securities Rulemaking Board's EMMA website.
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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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013860
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