Fitch Affirms Baywood Court (CA) COPs at 'BBB+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'BBB+' rating on $17,265,000 certificates of participation (COPs) (2010) issued by Eden Township HealthCare District, CA on behalf of Baywood Court (BWC).

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a pledge of the gross revenues of the obligated group, a debt service reserve fund, and a lien and security interest in BWC's property.

KEY RATING DRIVERS

SUSTAINED SOLID FINANCIAL PROFILE: BWC's financial profile is characterized by robust profitability, sound liquidity, and consistent debt service coverage metrics. In the fiscal year ended June 30, 2014 and through the six-month interim ended Dec. 31, 2014, the majority of key metrics exceed Fitch's 'BBB' medians.

HIGH OCCUPANCY: Favorable financial performance is supported by strong occupancy rates across the continuum of care. Further, the stability of occupancy rates has been excellent over the last five years. Through the six-month interim period, occupancy rates in independent living units (ILUs), assisted living units (ALUs), and skilled nursing facility (SNF) were 99%, 94%, and 85%, respectively.

SOUND LIQUIDITY: Liquidity remained stable over the last year and totaled $16.7 million at Dec. 31, 2014. Days cash on hand (DCOH) declined slightly due primarily to a land purchase, but cash to debt and cushion ratios remain very strong against Fitch's 'BBB' medians. Given modest future capital plans, stable to increasing liquidity levels are expected.

LOW DEBT BURDEN: Maximum annual debt service (MADS) coverage has been stable at or above 2.6x over the last three fiscal years compared to the 'BBB' median of 2x, and hit a high of 3x in fiscal 2014. All debt is fixed rate and no additional debt is expected in the near term, which adds further stability at the current rating.

RATING SENSITIVITIES

MAINTENANCE OF CURRENT FINANCIAL TREND: Given BWC's rental structure, strong operating ratios and debt service coverage in excess of the median are essential. Fitch expects BWC to maintain its solid financial results.

CREDIT PROFILE

BWC (fka Eden Hospital Health Services) is a rental retirement facility located in Castro Valley, CA. The facility operates 170 ILUs, 48 ALUs and 56 skilled nursing beds. Total operating revenue in the fiscal year ended June 30, 2014 was $17.1 million.

BWC received administrative support from Life Care Services (LCS) via a consulting agreement from 2010 to early 2015. The LCS contract ended Feb. 28, 2015. Fitch will monitor this transition but does not expect it to negatively affect BWC's operations going forward given the permanent infrastructure and systems put in place at BWC over time and the BWC management team remains largely the same.

Solid Financial Profile

BWC's financial profile continues to be characterized by strong and stable profitability, liquidity and debt metrics. Over the last three fiscal years, BWC's operating performance was consistently strong, with operating ratio averaging 82.7% and net operating margin averaging 21.6% compared to Fitch's 'BBB' medians of 97.4% and 9.2%, respectively. Sound profitability also continued through the six-month interim period ended Dec. 31, 2014.

Strong operating profitability reflects BWC's rental-only model, which differs from entrance-fee model utilized by the majority of continuing care retirement communities (CCRCs) in Fitch's rated portfolio. While BWC may face greater potential to census volatility due to lower financial commitments required for residents, historical occupancy has been very stable. Solid profitability results are essential, given that the underlying operations entirely drive debt service coverage compared to an entrance fee structure.

Strong Occupancy

ILU occupancy is at or near full capacity with occupancy maintained above 98% since fiscal 2012. ALU occupancy has also been steady, averaging 90.3% over the last three fiscal years, and SNF occupancy has stabilized above 80% since the reopening in 2008. BWC has a good relationship with Eden Medical Center, which used to operate the SNF and remains a primary source of referrals. While the strength of the relationship is viewed positively, this exposes BWC to potential volume reductions experienced by the hospital.

Fitch notes that a new retirement community opened in phases in 2013 and 2014 in the city of Pleasanton, 15 miles east of BWC. However, the new facility does not directly compete with BWC given its Type A entrance fee structure and pricing level, and management reports no material impact to BWC's resident draw or staffing.

Solid Liquidity

Unrestricted cash and investments totaled $16.7 million at Dec. 31, 2014, reflecting steady improvement since 2009. However, DCOH of 394 declined from 421 days one year prior and lags the median of 408 days primarily due to a land acquisition of approximately $700,000. Cash to debt of 96.9% and 11.5x cushion ratio continue to exceed respective category medians 60.2% and 6.9x.

Manageable Capital Plans

Capital plans are modest and is budgeted at $1.5 million - $1.6 million for fiscal years 2016 and 2017, close to 2014 depreciation levels. Given manageable capital needs and consistent cash flows, modest growth in liquidity is expected to continue for the next two years. BWC's board has initiated a strategic planning process that will include long-term capital needs. Fitch does not expect immediate, material funding needs to arise from this process.

DEBT PROFILE

BWC has $17.7 million in long-term fixed rate debt outstanding with level debt service requirements around $1.5 million annually. MADS coverage of 3x and MADS as a percentage of total revenue of 8.4% in 2014 are improved from 2.6x and 8.8% the prior year, and compare favorably to respective medians of 2x and 12.3%. BWC currently has no new debt plans.

DISCLOSURE

BWC discloses annual financial statements within 150 days and quarter unaudited financial statements within 45 days through the MSRB EMMA website.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

-- 'Revenue-Supported Rating Criteria', June 16, 2014;

-- 'Not-for-profit Continuing Care Retirement Communities Rating Criteria', July 24, 2014.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

Not-for-Profit Continuing Care Retirement Communities Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752470

Additional Disclosure

Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=982870

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Jennifer Kim, CFA, +1-212-908-0740
Director
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Gary Sokolow, +1-212-908-9186
Director
or
Committee Chairperson
Emily Wong, +1-415-732-5620
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings, Inc.
Primary Analyst
Jennifer Kim, CFA, +1-212-908-0740
Director
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Gary Sokolow, +1-212-908-9186
Director
or
Committee Chairperson
Emily Wong, +1-415-732-5620
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com