NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed its rating on the following bonds issued on behalf of Haverland Carter Lifestyle Group (HCLG), New Mexico at 'BBB-':
--$15.4 million Oklahoma Development Finance Authority first mortgage revenue bonds, series 2015;
--$40.9 million New Mexico Hospital Equipment Loan Council revenue bonds, series 2012;
--$17.9 million New Mexico Hospital Equipment Loan Council revenue bonds, series 2010A.
The Rating Outlook is revised to Positive from Stable.
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 Positive Outlook is supported by HCLG's improving financial profile which is characterized by growing liquidity, solid profitability and good debt service coverage metrics.
IMPROVING INDEPENDENT LIVING OCCUPANCY: Positive operations over the last four years have been supported by year-over-year improvement in independent living unit (ILU) occupancy. Occupancy has grown from 87% in fiscal 2013 to 93% in fiscal 2016, driven by enhanced marketing efforts and a stabilizing real estate market.
ELEVATED, BUT MODERATING DEBT BURDEN: HCLG's debt burden continues to be elevated with maximum annual debt service (MADS) equating to 16.6% of fiscal 2016 revenues, compared to Fitch's 'BBB' median of 12.4%. However, MADS as percentage of revenues has moderated from 22.7% in fiscal 2013, due to sustained year-over-year revenue growth.
ACTIVITY OUTSIDE THE OBLIGATED GROUP: Construction of the non-obligated Rio Rancho community was completed in April of 2016, on time and within budget. As of May 31, 28 of the 90 ILUs were occupied and 53 (59%) were 'occupied and sold'. Management is expecting to reach 69% occupancy by the fiscal year end and to reach stabilization (85% occupancy) over an 18-month period. HCLG provided substantial support to the community in the form of a $9.9 million subordinate note and a project completion guarantee. The guarantee is expected to terminate in March 2017. Fitch views opening of Rio Rancho favorably, but takes note of the remaining operational and fill-up risks associated with the start-up community.
RIO RANCHO COMMUNITY STABILIZATION: Fitch expects the Rio Rancho community to adhere to its fill-up schedule and to reach stabilization by the fall of 2017. Additional credit support from Haverland Carter Lifestyle Group (HCLG) to the non-obligated Rio Rancho community that dilutes the financial profile of the HCLG could cause a revision of the Outlook back to Stable.
MAINTENANCE OF OPERATING PROFILE: Fitch expects HCLG to continue producing solid operating results and net entrance fee receipts that support good debt service coverage and liquidity growth. Further strengthening of the financial profile would likely result in upward movement in the rating.
The Haverland Carter Lifestyle Group OG consists of La Vida Llena (LVL) and Sommerset Assisted Living (Sommerset). LVL is a Type A CCRC located in Albuquerque, New Mexico and consists of 324 ILUs, 84 assisted living units (ALUs; including 30 Memory Care units), and 50 skilled nursing facility beds (SNFs). Sommerset is located in Oklahoma City, Oklahoma and consists of 126 ALUs (including 20 Memory Care units). In fiscal 2016 (draft audit) HCLG had $31 million in total revenues.
SOLID FINANCIAL PROFILE
HCLG generated $6.2 million in income from operations and $7.7 million in net entrance fee receipts in fiscal 2016, which resulted in very strong net operating margin (NOM) and NOM-adjusted of 18.8% and 40%, respectively. Both metrics significantly exceeded Fitch's respective 'BBB' category medians of 8.9% and 19.3% and were improved from 11.9% and 35.3% in fiscal 2013.
Solid operating profitability and net entrance fee receipts resulted in good debt service coverage of 2.5x by net available and 1x on a 'revenue-only' basis, compared to Fitch's medians of 2x and 1x, respectively. While HCLG's debt burden remains elevated with MADS equating to 16.6% of fiscal 2016 total revenues, solid revenue growth has allowed that measure to moderate from 22.7% in fiscal 2013.
Positive operations continue to be driven by good occupancy across all levels of care, but particularly in the IL, where occupancy has been above 92% over the last three years. Stable occupancy has been supported by enhanced marketing initiatives and HCLG's dominant position in its market place, as LVL is the only Type-A life care provider in Albuquerque, NM. The organization's market position is viewed as a primary credit strength.
HCLG's $41.8 million in unrestricted cash and investments at March 31, 2016 have grown from $25.8 million at March 31, 2013, and equated to 722 days cash on hand (DCOH), 56.1% cash to debt and 8.1x cushion ratio. Liquidity metrics compared well to Fitch's 'BBB' medians of 400 DCOH, 60% cash to debt and 7.3x cushion ratio. No major capital plans or debt issuances that would have an impact on HCLG's balance sheet position are expected at this time.
ACTIVITY 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 90 ILUs, 72 ALUs and 48 SNF beds. Construction was completed on time and within budget and the community was opened in April 2016. As of May 31, 2016, Rio Rancho was 59% 'sold and occupied' and management is expecting to reach 69% occupancy by the fiscal year end. Stabilization at 85% occupancy is expected to be reached over an 18-month period.
While the Rio Rancho community was financed outside the HCLG obligated group, HCLG provided a $9.9 million subordinated loan and a 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 the first of: 150 days post project completion, or until the bonds have been repaid. The guarantee is currently expected to terminate in March 2017. Further support from HCLG to Rio Rancho beyond the existing agreement would likely lead to a revision of the Outlook to Stable from Positive.
All of HCLG's current outstanding debt is in fixed-rate mode, which Fitch views positively. HCLG has no outstanding swaps.
HCLG has covenanted to provide financial information to the MSRB's EMMA system.
Additional information is available at 'www.fitchratings.com'.
Not-for-Profit Continuing Care Retirement Communities Rating Criteria (pub. 04 Aug 2015)
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
Dodd-Frank Rating Information Disclosure Form