Fitch Affirms Oak Crest Village, Inc., Maryland 2007 Revs at 'A'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'A' rating on the following Baltimore County, Maryland bonds issued on behalf of Oak Crest Village, Inc. (OCV):

--$68,295,000 fixed rate revenue bonds (Oak Crest Village Facility) series 2007A.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a revenue pledge, mortgage, and debt service reserve fund.

KEY RATING DRIVERS

SOLID FINANCIAL PROFILE: OCV's financial profile is characterized by high occupancy, a low operating ratio (below 90% three out of the last four years), revenue only debt service coverage consistently above 2x, and steady growth in liquidity.

ABOVE MEDIAN LIQUIDITY: At May 30, 2016, OCV had $122 million in unrestricted cash and investments. Unrestricted cash and investments are up 41% since Dec. 31. 2012, and OCV's days cash on hand of 591 and cash to debt of 165.3% compare well with the 'A' category medians.

HIGH OCCUPANCY: OCV maintains high occupancy across a large base of more than 1,800 total units (1,519 of which are independent living (IL) units). At March 31, 2016, IL occupancy was 98%, assisted living (AL) occupancy 99%, and skilled nursing occupancy 96%. Fitch views the high occupancy as a major credit strength that supports the low operating ratio and generates the solid revenue only coverage.

CYCLE OF CAPITAL SPENDING: OCV has finished the first phase of a three phase capital plan that in total is expected to cost approximately $66 million. Phase one included a major information technology project that cost approximately $10 million. The additional phases will include renovation to skilled nursing and assisted living, and an upgrade of amenities, including a new sports court and garden center. The projects are expected to last through 2019. In 2015, OCV borrowed $30 million to help fund the projects. The remaining project costs will be funded through cash flow.

COMPETITIVE SERVICE AREA: There are five other continuing care retirement communities in the service area; however, Oak Crest's ongoing marketing campaigns, large wait list, and investment in plant mitigate the competitive pressures as a credit concern.

RATING SENSITIVITIES

OPERATIONAL STABILITY: As Oak Crest Village moves forward on its multi-phase capital plan, Fitch expects operational performance to remain stable, helped by high occupancy and strong cash flow.

CREDIT PROFILE

OCV is located in Parkville, MD, approximately 20 miles north of Baltimore, MD. The facility is a type-C CCRC with 1,519 ILUs in three neighborhoods, 133 AL units and 200 skilled nursing beds. OCV had total operating revenues of approximately $92.2 million in 2015.

Solid Financial Profile

Most of OCV's operating ratios compare favorably to Fitch's 'A' category medians. OCV's operating ratio and net operating margin - adjusted have averaged 89% and 24.2% over the last four audited years both better than their respective 'A' medians of 94% and 22.2%. The operating ratio for the 2016 five-month interim period remained strong at 81.8%. The net operating margin - adjusted was lower at 15.3%, driven by the timing on entrance fee collection, refunds, and the use of a promissory note program.

OCV uses the promissory note program to facilitate the move-in of new residents. Residents that utilize the promissory note program have 90 days to repay the note or the note begins to incur interest. The promissory note receivable is down to $6.8 million at May 30, 2016, from $7.2 million at year end 2015. While promissory notes can be a credit concern, OCV has been using them in this capacity for a long time and manages it closely. OCV management reports the majority of notes are paid within the 90-day period.

Occupancy levels at OCV remain very strong through May 30, 2016: 98% in IL, 98% in assisted living (AL) and 92% in skilled nursing. These figures are consistent year over year. OCV currently has a waiting list of approximately 850 and holds regular marketing events that are well attended, both of which have kept the pipeline for new residents strong.

Cycle of Capital Spending

OCV is moving forward on a multi-phase capital plan that is expected to last through 2019. The first phase is an approximately $10 million upgrade to the campuses information technology infrastructure. That project was finished in 2015.

OCV is moving forward on the additional phases, which will include renovation to skilled nursing and assisted living, including a memory care expansion, and an upgrade of amenities, including a new sports court and garden center. The cost for these additional phases is expected to be approximately $50 million, which is in line with Fitch's expectations at the last rating action in 2014.

OCV privately placed $30 million in variable rate bonds in 2015 to help fund the projects with the rest of the funds coming from cash flow. The bonds are structured to be drawn down, and OCV has drawn $5.7 million of the bonds to date. Fitch expects the bonds to be fully drawn by May 2018.

With the bank placement, OCV has increased the renewal risk and the interest rate risk of its debt structure. However, the majority of OCV's debt will remain fixed rate after all the bonds are drawn down, and OCV has ample liquidity relative to the bank debt. Pro forma analysis of the debt shows maximum annual debt service (MADS) increasing to approximately $7.7 million from $5.3 million. Pro forma MADS as a percent of revenue of 8.1% and MADS coverage of 3x in fiscal 2015, compare well to category medians of 9.2% and 3.1x, respectively.

Disclosure

OCV covenants to provide audited annual financial information to the Trustee, Underwriter, Rating Agency and to significant bondholders. However, OCV posts all of its disclosure via 'zieglerresearch.com', which includes monthly financial statements (balance sheet, income statement, and statement of cash flows), utilization trends, and payor mix.

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

Applicable Criteria

Not-for-Profit Continuing Care Retirement Communities Rating Criteria (pub. 04 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=868824

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=1009901

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1009901

Endorsement Policy

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

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Contacts

Fitch Ratings
Primary Analyst
Gary Sokolow
Director
+1-212-908-9186
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Emily Wadwhani
Director
+1-312-368-3347
or
Committee Chairperson
James LeBuhn
Senior Director
+1-312-368-2059
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Gary Sokolow
Director
+1-212-908-9186
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Emily Wadwhani
Director
+1-312-368-3347
or
Committee Chairperson
James LeBuhn
Senior Director
+1-312-368-2059
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com