Fitch Rates Haverland Carter Lifestyle Group's (NM) 2015 Revs 'BBB-'; Outlook Stable

SAN FRANCISCO--()--Fitch Ratings has assigned a 'BBB-' rating to the following Oklahoma Development Finance Authority First Mortgage revenue bonds (Sommerset Project) issued on behalf of Haverland Carter Lifestyle Group (HCLG):

--$15.5 million series 2015.

Additionally, Fitch affirms the 'BBB-' rating on approximately $59 million New Mexico Hospital Equipment Loan Council First Mortgage revenue bonds (series 2010A and series 2012).

Series 2015 bond proceeds will be used to fund the acquisition of Sommerset Assisted Living (Sommerset; an assisted living facility located in Oklahoma City, Oklahoma consists of 126 licensed beds also offering memory care services) for approximately $13.75 million, fund $400,000 of capital improvements at Sommerset, pay associated costs of issuance, and fund a debt service reserve fund.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a mortgage on land and buildings and a pledge of gross revenues of the obligated group (OG). Additionally, the bonds are secured by a debt service reserve fund.

KEY RATING DRIVERS

SOLID FINANCIAL PROFILE: The 'BBB-' rating continues to be supported by HCLG's solid financial profile, which is highlighted by an improved balance sheet, solid profitability, and satisfactory debt service coverage indicators.

ENHANCED INDEPENDENT LIVING OCCUPANCY: Independent living unit (ILU) occupancy has increased in fiscal 2015 to 92% from 87% in 2013, due to HCLG's increased marketing efforts and the completed Nueva Vista expansion fill-up. Further, management reports that occupied and sold ILU occupancy is 100% thus far through fiscal 2016. Overall, Fitch views favorably the organization's improved ILU occupancy.

DOMINANT PROVIDER IN THE MARKET: HCLG remains the dominant provider in the marketplace. The continuing care retirement community (CCRC) it operates, La Vida Llena (LVL; a separate 501c3 organization governed by the nonprofit parent organization HCLG), is the only Type A life care provider in Albuquerque, NM. The organization's market position is viewed as a primary credit strength.

HEAVY DEBT BURDEN: Pro forma maximum annual debt service (MADS) of $5.1 million represented a high 19.4% of revenues at fiscal year ended March 31, 2015, which compares unfavorably against Fitch's 'BBB' rating category median of 12.3%. Pro forma MADS incorporates the series 2015 debt associated with the Sommerset acquisition. Fitch continues to view the organization's high debt burden, along with financial support outside the OG, as constraining factors towards positive rating movement at this time.

SUBSTANTIAL FINANCIAL SUPPORT OUTSIDE OBLIGATED GROUP: HCLG purchased land in Rio Rancho, NM, 20 miles northwest of the main campus in 2013, to develop a type A CCRC, consisting of 210 units (90 ILUs, 48 ALUs, 24 memory care, and 48 SNF beds) with a project cost of approximately $54 million. Although the financing for this project is outside of the HCLG obligated group, there is substantial support from the obligated group until project completion and stabilization, which includes a $9.9 million contribution in the form of a subordinated note and a project completion guaranty agreement. Fitch views this as a significant credit concern that could put a drain on financial resources if the Rio Rancho community fails to meet construction budget and occupancy fill-up expectations.

RATING SENSITIVITIES

RIO RANCHO COMMUNITY FILL-UP: Because of the significant support guaranteed by HCLG to the Rio Rancho community, Fitch believes it is imperative for the community to meet the expected project completion timeline as well as fill-up expectations. Failure to do so could result in HCLG stepping in for the community to meet occupancy and financial obligations.

STRONG CASH FLOW GENERATION &AND SUCCESSFUL PROJECT INTEGRATION: With now higher debt service requirements associated with the Sommerset acquisition, Fitch believes HCLG must continue to generate strong cash flow to support sufficient levels of debt service coverage. Continued positive financial results, successful fill-up and project completion at Rio Rancho, and navigating a successful transition of incorporating Sommerset into the current OG could prompt positive rating pressure over the medium term.

CREDIT PROFILE

Located in Albuquerque, New Mexico, Haverland Carter Lifestyle Group is a Type A CCRC consisting of 324 ILUs, 84 assisted living units (ALUs), and 50 skilled nursing facility beds (SNFs). In fiscal 2015, HCLG had $26.3 million in total revenues. Post series 2015 issuance, the OG will also consist of Sommerset, which had total revenue of approximately $3.5 million in 2014.

The 'BBB-' rating continues to reflect HCLG's continued solid market position, improved overall financial performance highlighted by a strengthened balance sheet, and enhanced ILU occupancy. Fitch's main credit concerns center around the organization's high debt burden, transition of incorporating Sommerset into the current OG, and financial exposure related to a new CCRC construction outside the obligated group (Rio Rancho).

In fiscal 2015, Haverland earned a high $4.9 million in income from operations, which equated to an improved operating ratio of 95.3% (from 100.4% in fiscal 2014), 15.6% net operating margin, and 46.7% net operating margin-adjusted. Pro forma debt service coverage by turnover entrance fees in fiscal 2015 was a solid 2.9x and compared favorably against the median of 2x. Additionally, pro forma revenue-only coverage has consistently improved since fiscal 2011 from 0.3x to 0.8x in 2015, which Fitch views positively. Ultimately Fitch views the strategy behind acquiring Sommerset favorably as it will expand the organization's geographic reach, services available, and revenue base with minimal capital requirements. Currently, Sommerset is 75% occupied, which management believes can be improved with enhanced marketing efforts.

Unrestricted cash and investments at March 31, 2015 (audited) totaled approximately $38 million, which was consistent with fiscal 2014's $37 million unrestricted reserve balance and significantly improved from 2013's total of $25.8 million. Management attributes the liquidity increase to solid operations and initial entrance fee receipts received in 2014. Relative to expenses, liquidity has remained consistently well above the 'BBB' rating category median, rising to 759 days cash on hand from 462 days in 2012, compared against the category median of 408 days. Pro forma cash to debt was 50.5% in fiscal 2015 and pro forma cushion ratio was 7.4x, which were mixed against Fitch's medians of 60.2% and 6.9x, respectively.

SIZEABLE SUPPORT OUTSIDE THE OBLIGATED GROUP

In 2014, HCLG purchased land in Rio Rancho, NM, 20 miles northwest of the main campus, to develop a type-A CCRC, consisting of 210 units and estimated project cost of $54 million with expected construction completion by April 2016. Despite the Rio Rancho community being financed outside the HCLG, there is substantial support consisting of a $9.9 million subordinated note and project completion guarantee agreement. The completion guaranty agreement specifically states that HCLG will guarantee project completion, cost overruns, and ensure Rio Rancho is not in default of its various covenants until 150 days after the project completion or until the loan has been repaid. Although unexpected, Fitch views this as a significant credit concern that could put a drain on HCLG's financial resources if the Rio Rancho community were to not meet fill-up expectations. To date, management reports presales of 73%, which is ahead of projections with construction more than one-third complete.

CONSERVATIVE DEBT PROFILE

All of HCLG's current outstanding debt is in fixed-rate mode and the series 2015 bonds will be fixed-rate, which Fitch views positively. HCLG has no outstanding swaps.

DISCLOSURE

HCLG has covenanted to provide financial information to the MSRB's EMMA system.

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

Applicable Criteria

Not-for-Profit Continuing Care Retirement Communities Rating Criteria (pub. 24 Jul 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752470

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=987403

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=987403

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Michael Burger
Director
+1-415-659-5470
Fitch Ratings, Inc.
650 California Street, Fourth Floor
San Francisco, CA 94123
or
Secondary Analyst
Jennifer Kim
Director
+1-212-908-0740
or
Committee Chairperson
Jim LeBuhn
Senior Director
+1-312-368-2059
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Michael Burger
Director
+1-415-659-5470
Fitch Ratings, Inc.
650 California Street, Fourth Floor
San Francisco, CA 94123
or
Secondary Analyst
Jennifer Kim
Director
+1-212-908-0740
or
Committee Chairperson
Jim LeBuhn
Senior Director
+1-312-368-2059
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com