NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB-' rating on the following St. Louis County Industrial Development Authority revenue bonds issued on behalf of Friendship Village of West County (d/b/a Friendship Village of Chesterfield, FVC):
--$23.5 million series 2012;
--$18.0 million series 2007A.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a pledge of revenues, a mortgage lien, and a debt service reserve fund.
KEY RATING DRIVERS
STRONG OCCUPANCY: The affirmation at 'BBB-'is supported in large part by FVC's continued solid demand for its services, as evidenced by its occupancy rates of 96% in its independent living units (ILUs) and 90% in its health center in fiscal 2016. Additionally, FVC currently maintains a solid waitlist of 62 people for its 270 ILUs.
SUFFICIENT LIQUIDITY: FVC improved its liquidity position as unrestricted cash and investments increased to $19.7 million in fiscal 2016, due in large part to its ongoing release of restricted initial entrance fee funds from its 2012 construction. Total unrestricted cash and investments translated into 400 days cash on hand (DCOH), a 6.2x cushion ratio, and 46.3% cash to debt, which all remain sufficient for its current rating level.
WEAK CORE PROFITABILITY: FVC's weak operating performance continued in fiscal 2016. FVC generated a 108.3% operating ratio, 2.1% net operating margin, and 17.6% adjusted net operating margin which are all unfavorable to Fitch's 'BBB' category medians of 96.8%, 8.9%, and 22.3%, respectively. While this weak performance translates into a weak 1.1x coverage ratio, FVC's release from restriction of $4.7 million in initial entrance fees helped augment its annual coverage ratio to 2.6x.
HIGH DEBT BURDEN: FVC remains significantly leveraged as MADS equated to a high 16.3% of fiscal 2016 revenues, which remains weaker than Fitch's 'BBB' category median of 12.7% though is improved over prior year. Furthermore, debt to net available weakened in fiscal 2016 to 11.7x which also is weaker than the category median of 6.3x.
RATING SENSITIVITIES
OPERATIONAL IMPROVEMENT: Friendship Village of Chesterfield's operational improvement will be necessary to reduce reliance on net turnover entrance fees and to maintain sufficient coverage ratios at the current rating level. Therefore, if weak profitability persists, there could be negative pressure on the rating.
INCREASED DEBT BURDEN: Fitch believes that FVC has little to no debt capacity at its current rating level and an increased debt burden may put negative pressure on the rating. Over the intermediate term, FVC may proceed with further campus repositioning projects which this rating does not incorporate.
CREDIT PROFILE
Friendship Village of West County (d/b/a Friendship Village of Chesterfield) is a Type-A continuing care retirement community with 270 ILUS, 39 villa apartment units, 22 residential care beds, and 99 skilled nursing beds. FVC is located on 34 acres of land in Chesterfield, MO, approximately 25 miles west of St. Louis. FVC is currently being managed by Life Care Services which manages more than 100 long-term care properties in the U.S. Total revenues in fiscal 2016 (ending June 30) were $19.6 million.
STRONG DEMAND
FVC maintained strong demand for its service lines in fiscal 2016, evidenced by 96% ILU and 90% health center occupancy. Occupancy has remained stable into the interim period ending Sept. 30, 2016. Management expects to continue to renovate and expand its existing units to support demand and ensure steady occupancy moving forward. FVC remains one of only two true 'Type A' LifeCare products within the St. Louis metro service area which is a differentiating factor to prospective residents and should continue to support demand.
THIN CORE PROFITABILITY
FVC's weak profitability continued in fiscal 2016 translating into a low 0.2x revenue only coverage and heightened reliance on entrance fees from turnover units for coverage, which is a credit concern. Net entrance fees from turnover units declined approximately 27% in fiscal 2016; this translated into a 1.1x coverage ratio that is still weaker than the category median of 1.9x.
FVC benefitted from the release from restriction of approximately $4.7 million in initial entrance fees from its 30-unit ILU expansion in 2014. Approximately $5 million in restricted initial fees remain, which management will amortize at a rate of 1% per month. As they are released, these funds should continue to bolster coverage ratios over the intermediate term and should provide some relief if entrance fees from turnover units remains low. However, improvement in operating profitability and cash flow from turnover units will be necessary in the long-term to maintain sufficient coverage and mitigate FVC's high debt burden.
SUFFICIENT LIQUIDITY
Despite weak core operations, FVC increased its unrestricted cash and investments to $19.7 million in fiscal 2016. This can be attributed to higher entrance fees from turnover units and the aforementioned release of initial entrance fees. This $19.7 million translates into 400 DCOH, 6.2x cushion ratio, and 46.3% cash to debt which, while weaker than Fitch's 'BBB' category medians, it remains sufficient for its current rating level. FVC's strong demand, adequate liquidity position, and its entrance fee escrow fund currently mitigate concerns over its weak operations and low coverage ratio by core operations.
CAPITAL PLANS
FVC completed phase one of a two-phase campus restructuring in early 2014 with the opening of its 30-unit ILU expansion. The larger units are highly desirable and were filled on opening. Due to the high demand of these larger units, FVC has also converted some of its smaller units into larger combined units to address demand for larger units.
Moving forward, management expects routine capital expenditures to be approximately $2 million for the next few years, which are expected to be funded from operating cash flow. A second phase of FVC's campus repositioning/expansion is currently being contemplated; however, it is not finalized and will depend on market conditions. Given these plans are in the early development phase, Fitch has not incorporated this potential repositioning/expansion into its rating.
HIGH DEBT BURDEN
FVC had total debt outstanding of $41.6 million at June 30, 2016 which is 100% fixed-rate. FVC has no exposure to derivative instruments. FVC remains highly leveraged with MADS of $3.2 million equating to a high 16.3% of fiscal 2016 revenues. While this represents an improvement from prior year's levels, it still remains weaker than Fitch's 'BBB' category median of 12.7%. Given its already elevated debt burden and somewhat thin core profitability, Fitch believes FVC has little to no capacity for additional debt at the current rating level.
DISCLOSURE
FVC covenants to provide both annual disclosure (within 150 days) and quarterly disclosure (within 45 days) to bondholders, including both financial and occupancy data. FVC has consistently provided Fitch with routine disclosure and good access to management.
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/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1014483
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014483
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https://www.fitchratings.com/regulatory
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