Fitch Affirms Emerald Heights, WA at 'A-'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the rating on the following bonds issued by the Washington State Housing Finance Commission on behalf of Eastside Retirement Association d/b/a Emerald Heights:

--$26.255 million revenue refunding bonds, series 2013.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a gross revenue pledge, mortgage and debt service reserve fund.

KEY RATING DRIVERS

IMPROVED FINANCIAL PERFORMANCE: Operating performance improved mostly due to the addition and rapid fill-up of 43 attractively priced independent living units (ILU) during October 2014. All profitability metrics strengthened during the past two years. The operating ratio dropped to a very healthy 92.8% and 92.2%, respectively during 2015 and the nine month period ending Sept. 30, 2016. Additionally, the net operating margin (9.7% in 2015 and 10.1% for the nine month interim period for 2016) increased to levels above Fitch's 'A' category median of 6.9%.

HEALTHY LIQUIDITY: The rating also reflects robust liquidity balances despite heavy capital spending and advances to affiliates. At Sept. 30, 2016, Emerald Heights holds $59.1 million of unrestricted cash and investments amounting to 984 days cash on hand (DCOH), 228% of debt and 25.8x cushion ratio. These measures easily exceed Fitch's respective 'A' category medians of 671 DCOH, 116.5% cash to debt and 14.4x cushion ratio.

LOW DEBT POSITION: After the repayment of temporary construction loans and steady long-term debt amortization, Emerald Heights enjoys a modest debt position. Maximum annual debt service (MADS) represents a low 7.1% of total revenues for the nine month period ending Sept. 30, 2016. Furthermore, debt to net available (2.5x) and adjusted debt to capital (18.3%) are also very favorable and much better than Fitch's 'A' category medians. Debt service coverage remains excellent due to healthy cash flows at 6.4x and 4.5x, respectively in 2015 and the nine-month interim period for 2016.

SUBSTANTIAL CAPITAL PLANS: A higher rating is precluded by forthcoming capital plans that are expected to result in the issuance of additional debt and use of internal funds for a substantial expansion and renovation project.

NON-OBLIGATED GROUP ACTIVITIES: As of Sept. 30, 2016, Emerald Heights has a $10.7 million investment with its parent corporation, Emerald Communities (EC) for the development of a retirement community known as Heron's Key in Gig Harbor, WA. The 'A-' rating incorporates the existing loan and administrative expenses related to the project, and no further equity contributions are anticipated.

RATING SENSITIVITIES

PENDING CAPITAL PLANS: While financial metrics are supportive of positive rating pressure, Emerald Heights' capital plans are expected to negatively affect the financial profile and create construction and fill-up risk. While some debt capacity exists, Fitch will incorporate the capital projects into the rating when the plan of finance is finalized.

CREDIT PROFILE

Located in Redmond, WA, about 17 miles east from downtown Seattle, Emerald Heights is a type-A continuing care retirement community (CCRC) situated on a 38-acre campus. EC is the parent company and sole member of Emerald Heights. Only Emerald Heights is obligated on the series 2013 bonds and Fitch uses Emerald Heights' financial statements in its analysis and all ratios cited in this press release. Most resident agreements are non-refundable contracts that amortize over 60 months. Emerald Heights currently has 333 ILUs, 56 assisted living units (ALU) and 61 skilled nursing facility (SNF) beds. Total operating revenues for Emerald Heights in fiscal 2015 (Dec. 31 year end) equaled $31.1 million.

CAPITAL PLANS

Despite Emerald Heights' impressive financial profile, a higher rating is precluded by pending capital plans that are expected to increase debt, reduce liquidity balances, and introduce construction and fill-up risk. Emerald Heights is embarking on a large expansion and renovation project that is expected to add a new ALU building with 56 units, renovate and convert all SNF beds to private accommodations, and construct a new apartment building with 42 ILUs. Preliminary costs are approximately $85.6 million and will be funded by a combination of equity, temporary construction loans and long term bonds. Fitch will incorporate the capital projects into the rating once the spending plans are finalized and financial forecasts are analyzed.

INVESTMENT IN NON-OBLIGATED AFFILIATE

Heron's Key is a start-up CCRC in Gig Harbor, WA which began construction in August 2015 and is expected to include 194 ILUs, 36 ALUs and 45 SNFs. Although Heron's Key is outside the obligated group, EC is the shared parent company and management team. Emerald Heights advanced $10 million in the form of a subordinated loan to EC for the Heron's Key project. It is management's intent not to advance any additional funds and expects to be repaid both principal and interest once Heron's Key reaches stabilized occupancy and meets its financial covenants starting in June 2021. Equity contributions beyond the existing loan are not anticipated.

In addition to the loan, other EC administrative and research costs have been paid or advanced by Emerald Heights. However, these expenses ($3.7 million as of Sept. 30, 2016) have been fully reserved for by Emerald Heights. The total Heron's Key project cost is approximately $145 million and pre-sale levels were about 73% as of November 2016. According to EC management, the project is mostly on budget and expected to open about 60 days late in June 2017.

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=1016021

Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1016021

Endorsement Policy
https://www.fitchratings.com/regulatory

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Contacts

Fitch Ratings
Primary Analyst:
Paul Rizzo, +1-212-612-7875
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Emily Wong, +1-415-732-5620
Senior Director
or
Committee Chairperson:
Jim LeBuhn, +1-312-368-2059
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Paul Rizzo, +1-212-612-7875
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Emily Wong, +1-415-732-5620
Senior Director
or
Committee Chairperson:
Jim LeBuhn, +1-312-368-2059
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com