NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB-' rating on the following bonds issued by the City of Lakeland on behalf of Carpenter's Home Estates (Carpenter's):
--$21.69 million revenue and refunding bonds series 2008.
The Rating Outlook is Stable.
The bonds are secured by a mortgage on Carpenter's land and buildings, gross revenue pledge, and debt service reserve fund.
KEY RATING DRIVERS
SOFT INDEPENDENT LIVING UNIT (ILU) OCCUPANCY: Despite robust marketing efforts and continued facility renovations and upgrades, ILU occupancy remains soft. ILU occupancy averaged 71% for the nine month period ending Sept. 30, 2016, up slightly from 70% in fiscal 2015 (Dec. 31 year-end). Notwithstanding the light ILU occupancy levels over the last six years, management has adjusted expenses well and the financial profile remains adequate for the rating level.
SOLID DEBT SERVICE COVERAGE: Even with the weak ILU occupancy, debt service coverage remains good and was 1.8x in fiscal 2015 and 2.7x for the nine month interim period ended Sept. 30, 2016. Debt service coverage is supported by adequate operating profitability and solid receipt of net entrance fees. However, revenue-only coverage of 0.6x in fiscal 2015 and the interim fiscal 2016 period is more modest, even for a Type-A continuing care retirement community (CCRC). Fitch notes that Carpenter's debt service payments are front loaded, with current maximum annual debt service (MADS) of $2.13 million decreasing to $1.46 million after 2019 through final maturity.
GOOD OPERATING PERFORMANCE: Despite low occupancy in the ILUs, Carpenter's has produced good operating performance with a net operating margin-adjusted of 21.1% in fiscal 2015 and 28.2% for the nine month period ending Sept. 30, 2016, which is above Fitch's 'BBB' category median of 22.3%. However, Carpenter's operating ratio increased to 101.2% during 2015 and 101.5% for the nine month interim period of fiscal 2016 after it was below 100% during 2012-2014.
ADEQUATE LIQUIDITY METRICS: Liquidity remains solid, but still a bit light for a Type-A CCRC. At Sept. 30, 2016, Carpenter's holds $13.4 million of unrestricted cash and investments amounting to 314 days operating expenses, 61.8% of long-term debt and 6.2x cushion ratio which are mixed verses Fitch's 'BBB' category medians.
MODEST OPERATING PROFILE: Carpenter's relatively small revenue base inherently subjects the CCRC to more operating volatility since modest occupancy modifications or unit turnover could potentially alter profitability and debt service coverage. Management reports that last year the local community hospital opened its own short-term skilled care center and reduced the amount of patients it refers to Carpenter's. As a result, skilled nursing facility (SNF) occupancy and revenues were negatively affected at the end of 2015 and early part of the current fiscal year.
EFFECT OF ILU OCCUPANCY IMPROVEMENT: Carpenter's Home Estates has been able to maintain its 'BBB-' rating and stable financial performance despite weak ILU occupancy as a result of good expense control, steady receipt of net entrance fees, and a modest leverage position. Should ILU occupancy increase to higher levels, debt service coverage and liquidity metrics should improve, which could lead to upward rating movement. Conversely, Carpenter's Home Estates challenged occupancy levels leaves little room for further erosion at the current rating level.
Established in 1986, Carpenter's is a Type-A CCRC located in Lakeland, FL, which is approximately 35 miles east of Tampa. The community consists of 372 ILUs, 49 assisted living units (ALU), and 72 SNFs. In fiscal 2015, Carpenter's had total revenues of $17.5 million.
Carpenter's continues to struggle to boost ILU occupancy even though it has used a variety of marketing strategies in an effort to improve advertising and sales. The marketing strategies provided a redesigned website and updated promotional materials. During the middle of last year Carpenter's hired a new marketing director with extensive industry experience. Results have been positive, with increased ILU move-ins during the current fiscal year. ILU move-ins totaled 44 through the first nine months of 2016, up from 36 during the fully year of 2015.
While Carpenter's has been diligently renovating and upgrading the community's facilities, ILU occupancy remains soft mostly as a result of above average unit turnover, lackluster, but improving real-estate market, and difficulty filling a 32-unit expansion that opened during the last recession. Transfers to other levels of care and deaths accelerated over the past few years, causing an increasing number of ILUs to become available. While local real-estate values have increased over the past few years, the market remains soft with home prices remaining below pre-recession levels, a high percentage of homes with negative equity, and above average mortgage delinquency rates.
ALU and SNF occupancies remain adequate, averaging 81% and 86%, respectively for the nine month period ending Sept. 30, 2016. Howvever, ALU occupancy is down from 89% in fiscal 2015 as a result of lower transfers from ILUs, but Carpenter's is actively pursuing strategies for more outside residents. SNF occupancy was pressured during fiscal 2015 due to a new short-term skilled care center that increased competition for Carpenter's directly admitted nursing residents. Regardless, Carpenter's skilled care center remains a preferred provider with the local hospital's bundled payment initiative for short-stay patients and SNF occupancy rebounded to 91% at the end of Sept. 30, 2016.
Carpenter's covenants to deliver to EMMA annual financial statements, calculation of compliance with the debt service coverage ratio and liquidity covenants, and occupancy information within 120 days of fiscal year end and quarterly financial and covenant compliance statements within 45 days after the end of each fiscal quarter.
Additional information is available at 'www.fitchratings.com'.
Not-for-Profit Continuing Care Retirement Communities Rating Criteria (pub. 04 Aug 2015)
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
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