CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB+' rating on the approximately $186.8 million bonds issued by the Association of Bay Area Governments (ABAG) Finance Authority for Nonprofit Corporations on behalf of Episcopal Senior Communities (ESC) as follows:
--$68,835,000 series 2012A;
--$18,490,000 series 2012B;
--$6,500,000 series 2012C-1;
--$10,775,000 series 2012C-2;
--$21,500,000 series 2012C-3;
--$60,670,000 series 2011.
The Rating Outlook is Stable.
The outstanding bonds are secured by a gross revenue pledge, mortgage, and a debt service reserve fund for each series of bonds.
KEY RATING DRIVERS
BENEFIT OF SIZE AND SCALE: Episcopal Senior Communities (ESC) includes five continuing care retirement communities (CCRCs) in Northern California with a total revenue base of over $100 million. The Webster House is a sixth CCRC in process of joining the obligated group. Fitch believes the size and scale reduces overall operating risk and provides cost savings as support functions are centralized at the corporate office. In addition, ESC recently signed a letter of intent to affiliate with Northern California Presbyterian Homes and Services (NCPHS; not rated by Fitch), which would further the size and scale of the organization. Fitch will monitor the progress of this affiliation.
SOLID OCCUPANCY: ESC has maintained solid independent living unit (ILU) occupancy across the system, increasing to an overall 94.2% through the six months ended Sept. 30, 2014. Four of the five CCRCs are located in favorable locations with strong socioeconomic indicators.
ROBUST LIQUIDITY: ESC's liquidity ratios all exceed Fitch's 'BBB' category medians. ESC had 540 days cash on hand (DCOH) and 12.4x cushion ratio at Sept. 30, 2014.
SOUND FINANCIAL PROFILE: ESC's overall financial profile is good and the majority of the ratios are in line or above Fitch's 'BBB' rating category medians.
SUCCESSFUL EXECUTION OF PROJECT: Upward rating movement is possible over the near term once stabilization of the Spring Lake Project and pay down of the related short-term debt occur and the acquisition of Webster House and affiliation with NCPHS is complete, assuming the financial profile remains consistent with current performance.
ESC includes five communities that were originally Type A (life care) CCRCs. ESC's parent organization is JTM Communities (JTM, formerly John Tennant Memorial Homes), which ESC capitalized in 2007 with a $10 million loan. The consolidated financials for ESC include two affordable housing entities (non-obligated), which were moved under JTM in April 2013. Historically, the obligated group has provided minimal financial support to the non-obligated group entities and further support is not expected. Beginning with the fiscal 2014 (March 31 fiscal year end) audit, ESC's consolidated financials reflect the five CCRCs (the Obligated Group) plus the Foundation (non-obligated). Fitch's analysis is based on the obligated group financials.
Spring Lake Village is ESC's largest community and is in the midst of a repositioning project that will better position the community in the market for the long term. ESC is adding 62 larger ILUs and renovating its assisted living units (ALUs) to include 11 new memory support apartments. There are significant upgrades to the common areas, including a new auditorium, the addition of a fitness center and updated swimming pool and new dining facilities. The project cost totaled approximately $89 million (excluding financing costs) and was funded by the series 2012 bond proceeds. Construction began in January 2013 with completion expected in January 2015. Only the Type C contract is being offered for the new units and no cannibalization of the existing units is expected. Approximately half of the new ILUs are scheduled to be occupied by the end of the calendar year with the remaining presold apartments to be occupied by the end of ESC's fiscal year. The initial entrance fee pool from the 62 units is projected to be $40 million, which will be used to pay down the series 2012C1-3 bonds, a significant portion of which are expected to be paid-down in fiscal 2015.
BENEFIT OF SIZE AND SCALE
ESC's revenue base is considered sizeable within Fitch's rated CCRC portfolio with over $100 million of total revenue, which Fitch believes provides operating flexibility and stability, as well as cost savings as support functions are centralized at the corporate office. ESC's five CCRCs include Spring Lake Village located in Santa Rosa (276 ILUs, 24 ALUs, 70 skilled nursing facilities [SNF]), San Francisco Towers located in San Francisco (244 ILUs, 12 ALUs, 55 SNF), St. Paul's Towers in Oakland (200 ILUs, 16 ALUs, 43 SNF), Los Gatos Meadows in Los Gatos (120 ILUs, 27 ALUs, 7 memory support apartments, 39 SNF), and Canterbury Woods in Pacific Grove (140 ILUs, 11 ALUs, 24 SNF). ESC has historically offered only a non-refundable Type A (Life Care) residency contract, but has now converted its contract package to include a 90% repayable Type C (new units at Spring Lake Village) as well as two additional contracts available in a lifetime and continuing care classic -- both available in traditional amortizing/nonrepayable and 75% repayable. In addition, the monthly residence agreement is offered in two communities due to market demand and to provide ESC flexibility for the future. The current mix of residency contracts is 72% Type A, 19% Type C and 9% month to month.
ESC is in the process of further increasing its size with the purchase of Webster House from JTM and the affiliation with NCPHS. Webster House is located in Palo Alto, near Stanford University and has 37 ILUs and 145 SNF units and total operating revenue of about $18.8 million in fiscal 2014. The facility is on a campus shared by Lytton Gardens, an affordable senior housing community. ESC is purchasing Webster House from JTM communities for a preliminary selling price of about $34 million. The payment to JTM includes cancellation of the $10 million promissory note from JTM to ESC, assumption of bond indebtedness (about $8.9 million), and assumption of deposit and entry fee repayment liabilities and cash payment. The merger is still in approval stages but management expects to close before the end of the current fiscal year.
ESC signed a letter of intent with NCPHS in October 2014 to affiliate. NCPHS has three CCRCs, three affordable care communities and total operating revenue of about $80 million. Steering committees for the two boards are currently working together on the affiliation, but it is expected that each organization will retain financial autonomy. Fitch will monitor the affiliation but views the move positively as it will further the size and scale of ESC.
Several initiatives are being pursued as part of ESC's strategy, which Fitch believes to be innovative and responsive to a changing environment. These include a senior resources initiative, which is designed to position the organization to manage the health of seniors in its greater communities who are not residents of its communities as more seniors want to remain in their homes. ESC has expanded its home care offering as well as other community based services that may be lacking in the communities. Also, there are longer term campus repositioning plans that are currently on hold for two campuses but these communities have transitioned to monthly care contracts for flexibility.
SOLID OVERALL OCCUPANCY
ILU occupancy has remained solid across the system, with four of the five communities located in the favorable locations of Nob Hill in San Francisco, Los Gatos (the nation's 33rd wealthiest community), Santa Rosa, and Pacific Grove. As of Sept. 30, 2014, ILU occupancy across all communities was solid at 92.3%, ALU occupancy was 88.1% and SNF occupancy was 87.4%. Canterbury Woods is the smallest and oldest of ESC's communities and management has moved from lifecare contracts to monthly care contracts, similar to the Los Gatos community, to improve occupancy.
VERY STRONG LIQUIDITY METRICS
ESC had total unrestricted cash and investments of $127.5 million at Sept. 30, 2014, which equated to 540 days cash on hand, a 12.4x cushion ratio and a cash to debt ratio of 83.6% excluding the short term series 2012C bonds, which are expected to be paid off in 2015 and 2016. ESC's liquidity metrics compare favorably to Fitch's 'BBB' rating category medians of 408 days, 6.9x and 60.2%, respectively. Fitch expects ESC's balance sheet to remain strong even with the purchase of Webster House.
ESC's operating ratios of 98.3% in fiscal 2014 and 97.6% through the six months ended Sept. 30, 2014 are in line with the 'BBB' category median of 97.4%. Net entrance fees received in fiscal 2014 were robust at $28 million resulting in a very strong adjusted net operating margin in fiscal 2014 of 27.9% compared to the 'BBB' category median of 20.4%. Through the six months ending Sept. 30, 2014, net entrance fees were very light at $7.7 million, resulting in adjusted net operating margin of 18.5%, likely a function of the move to monthly care contracts at Los Gatos and Canterbury Woods.
OUTSTANDING DEBT PROFILE
ESC currently has approximately $190 million of fixed-rate bonds outstanding, including $38.8 million of short-term debt consisting of consisting of the series 2012C-1, 2 & 3 bonds. The short-term debt matures July 1, 2019, although management expects to pay off the debt in the 2015-2016 timeframe with initial entrance fees. Cash flow metrics improved in fiscal 2014, with debt service coverage increasing to a very strong 3.6x and revenue only coverage growing to 0.9x compared to the 'BBB' category medians of 2x and 0.9x, respectively. At Sept. 30, 2014 coverage fell to 2.1x and revenue only coverage was 0.6x, which is still adequate for the rating.
ESC has one outstanding swap agreement with Wells Fargo Bank, N.A. (rated 'AA-'/'F1+' by Fitch) as counterparty. The notional amount is approximately $41 million. Under the terms of the swap, ESC receives a fixed rate of 0.20% and pays the excess of BMA over 72% of one-month LIBOR, if any. ESC realizes approximately $82,000 annually from the swap, paid semi-annually. The mark-to-market as of Sept. 30, 2014 is approximately $11,000. Collateral payments would be triggered if days cash on hand fell below 100 days, or ESC was downgraded below 'BBB'. To date, ESC has not been required to post collateral. The swap expires in January 2018, and ESC intends to leave it outstanding until then.
ESC covenants to submit audited consolidated financial statements within 120 days after year-end, unaudited financial statements and utilization statistics 45 days after the first three quarter-ends, and 60 days after the fourth quarter-end, to the MSRB's EMMA system.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating Criteria for Not-for-Profit Continuing Care Retirement Communities' (July 24, 2014).