NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BB+' rating on the following bonds issued on behalf of Harrogate, Inc. (Harrogate):
--$11,360,000 of New Jersey Economic Development Authority revenue refunding bonds, series 1997.
The Rating Outlook is Stable
SECURITY
The bonds are secured by mortgage on certain property and equipment and a debt service reserve fund.
KEY RATING DRIVERS
SOLID LIQUIDITY: Harrogate's liquidity remained strong at 278 days cash on hand (DCOH), 102.6% cash-to-debt and 9.4x cushion ratio at Dec. 31, 2014. Fitch notes that Harrogate's liquidity metrics fell in 2014 due to increased capital expenditures. Still, liquidity has historically been solid for the rating level, and remains a primary credit strength.
WEAK OPERATING PROFITABILITY: Harrogate's operating profitability was very light with adjusted net operating margin (NOM) of 5.4% in 2014, weaker than the 7.4% in 2013. Additionally, Harrogate's operating ratio increased to 110.9% in 2014, above 104.2% in 2013, reflecting pressured occupancy and limited pricing power in a competitive environment.
CHALLENGED ILU OCCUPANCY: Harrogate's independent living unit (ILU) occupancy fell to 76% in 2014 from 77.5% in 2013. The decline in occupancy is attributed to lower than expected move-ins (26) and high attrition rates in 2014. Management is budgeting for 40 move-ins in 2015, which Fitch notes is above historical levels, but may be feasible given the addition of a third sales counselor.
MANAGEABLE DEBT BURDEN: Harrogate's debt burden remains manageable with maximum annual debt service (MADS) at 7.6% percent of 2014 revenue. However, MADS coverage of 1.2x in 2014 was weak compared to Fitch's below investment grade (BIG) median of 1.6x, reflecting challenged operations and weaker entrance fee receipts.
FUTURE CAPITAL PLANS: Average age of plant remained significantly elevated at 22.2 years in 2014, and is indicative of deferred capital spending. Harrogate is in the process of developing a master facilities plan (MFP), which could include a replacement of its health care center, as well as possible apartment consolidations and additions. The plan is in the early development phase and no time frame has been established.
RATING SENSITIVITIES
OPERATING IMPROVEMENT NECESSARY: Harrogate's liquidity position provides some cushion against operating volatility at the current rating. However, Harrogate will need to meet budgeted expectations for better core operating profitability, improved occupancy and net entrance fee receipts in order to generate debt service coverage levels which are more consistent with the current rating.
CREDIT PROFILE
Harrogate is a type 'A' continuing care retirement community (CCRC) located in Lakewood, New Jersey with 266 ILUs and 68 skilled nursing facility (SNF) beds. Harrogate is managed by Life Care Services (LCS). Total revenues in 2014 were $17.5 million.
SOLID LIQUIDITY
Harrogate's unrestricted cash and investments of $12.6 million at Dec. 31, 2014, while down from the prior period due to increased capital spending, still equated to a robust 278 DCOH, 102.6% cash-to-debt and a 9.4x cushion ratio, comparing well to BIG medians of 233 days, 36.7% and 4.9x, respectively. Liquidity has remained relatively stable over the last few years and is considered a key credit strength at the 'BB+' rating level, providing a strong financial cushion against poor operating profitability. Fitch does not anticipate further declines in liquidity over the near term.
WEAK OPERATING PROFITABILITY
Harrogate's NOM of negative 10.2% in 2014 was weaker than negative 2.1% in the prior year, indicative of soft occupancy and a challenging competitive environment. NOM-adjusted of 5.4% in 2014 was also lower than 7.4% in the prior year, as well as the BIG median of 14.5%, reflecting weaker core operating profitability. Entrance fee receipts were slightly improved in 2014 at $2.3 million.
Light profitability and modest entrance fee receipts resulted in a stressed 1.2x MADS coverage in 2014. According to Harrogate's covenant calculation under the Master Trust Indenture (MTI), the LCS management fees are subordinate to the bonded debt and are added back to income available for debt service. Coverage under the MTI was 1.41x in 2014. Fitch believes it will be necessary for Harrogate to have stable entrance fee receipts, and improved operating profitability, in order to make timely debt service payments over the near- to medium-term.
CHALLENGED ILU OCCUPANCY
2014 was challenged by high attrition rates and a low number of move-ins, as 44 vacancies against 26 move-ins resulted in a low ILU occupancy of 76%. Management attributes occupancy issues to the lack of a third sales counselor through most of 2014. A new sales counselor was hired in the first quarter of 2015, and management is budgeting to have an improved 40 move-ins this year. Fitch views this as feasible given the increased salesforce, coupled with consolidation of certain apartments into larger, more desirable, units. Year-to-date 2015, Harrogate has generated four move-ins. Fitch expects Harrogate's sales initiatives to improve occupancy and to generate improved entrance fee receipts and operating cash flow in order to support adequate debt service coverage going forward.
MANAGEABLE DEBT BURDEN
Harrogate's debt is fixed rate with level debt service through maturity. The debt burden is manageable with MADS as a percent of revenue of 7.6%, favorable to Fitch's BIG median of 11.1%. Debt to net available of 7.5x was higher than 2.9x in 2013, reflecting increased operating losses, but remained consistent with the 7.8x median. There is no additional debt expected over the near term, though Harrogate's longer-term capital plans may require debt financing.
FUTURE CAPITAL PLANS
Harrogate's high average age of plant of 22.2 years remains a credit concern. Capital spending was elevated at $3.6 million in 2014 and included renovations to the pool deck and an outdoor meeting space, the installation of video surveillance capabilities, and the consolidation of several apartments into larger units. The capital budget for 2015 remains above depreciation at $2.2 million, and includes sidewalk and asphalt renovations and the implementation of an electronic medical record. The capital budget does not incorporate any additional apartment consolidations that may take place in 2015.
Harrogate's longer term capital plans will be incorporated in its MFP. Future plans may include the construction of a new health center and the expansion and renovation of current ILUs. Harrogate's medium- to long-term plans are not incorporated in the current rating and will be reviewed when more clarity and certainty about the size and scope of the projects becomes available.
DISCLOSURE
Harrogate provides its annual financial statements to the Municipal Securities Rulemaking Board's EMMA system, along with regularly scheduled disclosure calls to bondholders. Fitch reports that disclosure has been timely and complete, with good access to management.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating Guidelines for Nonprofit Continuing Care Retirement Communities' (July 24, 2014).
--'Revenue-Supported Rating Criteria' (June 16, 2014)
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
Rating Guidelines for Nonprofit Continuing Care Retirement Communities
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=40171
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=983701
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