Fitch Affirms Carpenter's Home Estates (FL) at 'BBB-'; Outlook Stable

NEW YORK--()--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.

SECURITY

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.

RATING SENSITIVITIES

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.

CREDIT PROFILE

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.

DISCLOSURE

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'.

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=1014664

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014664

Endorsement Policy

https://www.fitchratings.com/regulatory

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Copyright (c) 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.

The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.

For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

Contacts

Fitch Ratings
Primary Analyst
Paul Rizzo
Director
+1-212-612-7875
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Gary Sokolow
Director
+1-212-908-0186
or
Committee Chairperson
Emily Wong
Senior Director
+1-415-732-5620
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Paul Rizzo
Director
+1-212-612-7875
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Gary Sokolow
Director
+1-212-908-0186
or
Committee Chairperson
Emily Wong
Senior Director
+1-415-732-5620
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com