NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB-' rating on the following bonds issued by the Washington State Housing Finance Commission on behalf of Riverview Retirement Community (Riverview):
--$15.2 million revenue and refunding bonds, series 2012.
The Rating Outlook is revised to Positive from Stable.
SECURITY
The bonds are secured by a pledge of the obligated group's gross revenues, a mortgage on Riverview's properties and debt service reserve fund.
KEY RATING DRIVERS
IMPROVED OPERATING PROFITABILITY: The revision of the Outlook to Positive reflects the improvement in Riverview's operating ratio to 93.5% in 2015 from 98.3% in 2014, which was better than Fitch's 'BBB' category median of 96.8%. The improvement was driven largely by stronger skilled nursing facility (SNF) occupancy, which improved to 95% from 84% over the same time period. Improvement was sustained through the nine-month interim period (ended Sept. 30, 2016) with a 91.6% operating ratio. Independent living and assisted living units (ILUs and ALUs) occupancy have been maintained at over 90% and were at 97% and 94%, respectively, through the interim.
SOLID LIQUIDITY: The Positive Outlook also reflects Riverview's $16.1 million in unrestricted cash and investments at Sept. 30, 2016, which equated to a strong 109.5% cash-to-debt and 16.9x cushion ratio, both ahead of Fitch's respective 'BBB' medians of 57.4% and 7.2x. Days cash on hand (DCOH) of 306 was below the 425 days median, but has improved incrementally since 2012.
LIGHT DEBT BURDEN: Riverview's debt burden is light as evidenced by maximum annual debt service (MADS) equating to just 4.1% of annualized revenues through the interim, which compares favorably to Fitch's median of 12.7%. In addition, debt service coverage has averaged a solid 2.6x over the last four years, ahead of the 1.9x median.
FUTURE CAPITAL PROJECTS: Riverview is contemplating several near- and longer-term capital projects. The projects have not been board approved and the size and scope of any such plans is subject to change; as such, they have not been incorporated into Fitch's current review.
RATING SENSITIVITIES
SUSTAINED OPERATING PERFORMANCE: Fitch expects Riverview Retirement Community to sustain its improved operating performance, which should continue to produce good debt service coverage and support further liquidity growth. The continuation of this trend, in combination with the clarity regarding the financial impact of the proposed capital projects, may lead to an upgrade over the near term.
CREDIT PROFILE
Riverview Retirement Community is a Type-C continuing care retirement community that consists of 164 ILUs, 135 ALUs, and 75 SNF beds on a 27-acre campus in Spokane, Washington. Total operating revenue in fiscal 2015 (Dec. 31 year end) was $21.2 million.
Historically, Riverview was composed of three separate corporations and these entities were merged into one corporation effective Jan. 1, 2016, which was expected and communicated to Fitch during the last review in November 2015. Riverview Lutheran Home of Spokane (Riverview Terrace; an IL and AL facility) and Riverview Village (an IL facility) were merged into Riverview Lutheran Care Center (a SNF), which was renamed Riverview Lutheran Retirement Community of Spokane dba Riverview Retirement Community. All three facilities are located on the same campus. The transaction did not require bondholder approval and the obligated group members remained unchanged.
IMPROVED OPERATING PROFITABILITY
Riverview's operating ratio improved to 91.6% through the interim period, ahead of Fitch's median of 96.1%. Net operating margin (NOM)-adjusted also improved to 19.2%, from 7.2% in 2012, coming more in line with the 'BBB' median of 22.3%. The improvement is attributed to higher occupancy in the SNF and solid expense controls. Management reports that there are current wage pressures associated with recruitment of nursing and medical staff, which they expect to continue over the medium term as they continue to compete with local area hospitals for staff. Due to these pressures management is budgeting breakeven operating performance for 2017.
Management has apprised Fitch of a pending change in its auditor to CliftonLarsonAllen from a regional auditor. The change will be effective with the 2016 audit. As part of the change Riverview will be capitalizing renovation expenses, which have been expensed on the income statement, going forward. The 2017 budget does not account for this change, therefore audited performance may be better than budget. The change should benefit Riverview's profitability ratios and debt service coverage in 2017 and beyond.
LIGHT DEBT BURDEN
Riverview's MADS equated to just 4.1% of annualized revenues through the interim, while debt-to-net available was 3.2x through the same period. Both ratios exceed Fitch's respective medians of 12.7% and 6.3x, indicative of Riverview's light debt burden. Debt service coverage has been solid over the last four years and was a strong 4.8x through the interim. However, coverage was the same in the prior year interim (4.8x) and the full-year 2015 coverage was a lower 3.8x, possibly due to the cyclicality of net entrance fee receipts.
DEBT PROFILE
The 2012 bonds are fixed rate and Riverview does not have any outstanding swaps. Total outstanding debt was $15 million. Riverview has an outstanding line of credit for $3 million which expires on Aug. 20, 2017. No amounts were drawn on the line at Sept. 30, 2016.
DISCLOSURE
Riverview covenants to provide audited financial information within 150 days of fiscal year end, and quarterly financial information including internal financial statements, occupancy statistics, payor mix data, and an officer's certificate within 45 days of each quarter end.
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=1014635
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014635
Endorsement Policy
https://www.fitchratings.com/regulatory
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