Fitch Rates Goodwin House Inc.'s (VA) 2016A Revs 'BBB'; Outlook Stable

CHICAGO--()--Fitch Ratings has assigned a 'BBB' rating to the expected issuance of $64.855 million Fairfax County Economic Development Authority residential care facilities mortgage revenue refunding bonds, series 2016A on behalf of Goodwin House, Inc. (GH).

In addition, Fitch affirms the 'BBB' rating on the following bonds issued by the Industrial Development Authority of the City of Alexandria, VA or the Fairfax County Economic Development Authority (EDA) on behalf of GH:

--$68.8 million series 2015;

--$136.5 million series 2007.

The Rating Outlook is Stable.

Along with the series 2016A bonds, GH intends to issue $55.9 million series 2016B revenue refunding bonds through the Fairfax County EDA bonds as a direct bank placement. Proceeds of the series 2016A&B bonds will be used to refund all but $2.6 million of the series 2007 bonds, fund a debt service reserve fund on the series 2016A bonds and pay costs of issuance. The series 2016A bonds are expected to be priced the week of Aug. 8 through negotiated sale.

SECURITY

The series 2016, series 2015 and series 2007 bonds are obligations of GH and secured by mortgages on GH's real estate, a gross receipts pledge, and respective debt service reserve funds.

KEY RATING DRIVERS

STRONG DEMAND CHARACTERISTICS: Fitch views GH's strong demand as a key credit strength which supports the organization's successful financial profile. Since fiscal 2013 (Sept. 30 year-end; audited), average annual occupancy in the independent living units (ILU) at both campuses has been above 95% while average annual occupancy across the assisted living (ALU) and skilled nursing facilities (SNF) has exceeded 90% and 94%, respectively. Moreover, GH maintains extensive waiting lists at both campuses.

CAMPUS REPOSITIONING PROJECT UNDERWAY: GH has a large campus repositioning project underway at its GHA campus, which includes a new healthcare/memory care building, renovation of common spaces and conversion of existing space to additional ILU and ALU apartments. The project is on budget with the SNF/ memory care building expected to be completed by March 2017 with occupancy in April 2017. Fitch views the project favorably as there is the necessity and demand to modernize healthcare operations and allow for the expansion of ILUs.

SOLID LIQUIDITY METRICS: GH continues to have solid liquidity metrics that are favorable for the 'BBB' rating. At May 31, 2016 (eight-months; unaudited), GH's unrestricted cash and investments totaled $138.7 million, which translated into 883 days cash on hand (DCOH), 11.6x cushion ratio, and 66.7% cash to debt, and exceeded Fitch's 'BBB' medians of 400 DCOH, 7.3x, and 60.0%, respectively.

FAVORABLE SERVICE AREA: GH's northern Virginia markets (Fairfax and Arlington counties - both rated 'AAA' by Fitch) display good service area characteristics such as above average wealth indicators, and stable housing markets - all of which support GH's strong demand.

ELEVATED DEBT BURDEN: Pro forma maximum annual debt service (MADS) of $11.95 million represents a moderate 14.7% of total fiscal 2015 revenues when compared to the 'BBB' category median of 12.4%. Historical coverage of pro forma MADS (including turnover entrance fees) is a very solid 2.8x in fiscal 2015 and 2.1x through the eight month interim period ended May 31.

RATING SENSITIVITIES

SUCCESSFUL PROJECT COMPLETION: Fitch expects that Goodwin House will complete its redevelopment project within budget with the new healthcare facility ready for occupancy in April 2017. A material increase in project costs or lengthy delay in project completion could pressure the rating.

MAINTENANCE OF CURRENT PERFORMANCE: Over the longer term, successful completion of the repositioning project combined with continued strong occupancy and financial performance may drive upward movement in the rating.

CREDIT PROFILE

GH is a predominantly Type A continuing care retirement community (CCRC) that operates campuses in Alexandria, VA and Bailey's Crossroads, VA. Goodwin House Alexandria (GHA) consists of 255 ILUs, 41 ALUs, and 80 SNF beds. Goodwin House Bailey's Crossroads (GHBC) consists of 328 ILUs, 42 ALUs, 69 SNF beds, and 16 memory support beds. In fiscal 2015, GH had total operating revenues of $72.6 million (Sept. 30 fiscal year end).

GHA REPOSITIONING PROJECT

Management is embarking on a two part repositioning project at its GHA campus which includes the construction of a new five story building to house 80 private SNF beds and a 10 room memory care household. Upon completion of the new healthcare building, GH will renovate the existing space to add 16 new ILU apartments and 11 ALUs as well as upgrade a portion of the dining venues and common areas. The healthcare and memory care units are expected to be completed in March 2017 and available for occupancy by April 2017. GH has received all required permits and zoning approvals on the healthcare building project. The renovations and repurposing of the existing space is expected to be completed and occupied by March 2018. Total estimated construction costs for the renovation and repurposing of the existing space is $12.9 million.

The project is "on budget" but roughly three weeks behind schedule due to weather delays in January and February and contractor's internal coordination issues. The project team is currently working on resequencing certain parts of the construction to recoup lost time. Fitch analysts toured the campus in 2015 and view the project favorably as there is the necessity and demand to modernize healthcare operations.

The total cost of the project is $68.2 million and is funded by $43.2 million of series 2015 bond proceeds and $25 million equity contribution. Project spending to date has totaled $16.7 million and has been funded by bond proceeds.

STRONG DEMAND DRIVES PROFITABILITY

GH's strong historical occupancy and demand for services continue to be primary credit strengths which drive solid net entrance fee receipts. ILU occupancy as measured by units reserved and occupied was nearly 100% in each of the last four quarters. In addition, GH maintains a wait list with nearly 300 individuals at both the Alexandria and Baily's Crossroads communities. Fitch believes the strong demand reflects GH's excellent reputation and moderate price point relative to area real estate prices. According to management, the estimated median value of a home owned by a homeowner age 65 and over in GH's primary market area is $545,910 which is well above the weighted-average entrance fee (standard contract option) of $358,913 for Goodwin House Alexandria apartments and $337,430 for Goodwin House Bailey's Crossroads apartments, respectively. GH collected net entrance fee receipts of $19.1 million and $17.2 million in fiscal 2015 and 2014, respectively, which translated into net operating margin-adjusted (NOM-adjusted) of not less than 27.0% in each year; well exceeding the 'BBB' category median of 19.3%.

Upon closing of the series 2016 financing, pro forma MADS is expected to drop to $11.95 million from current MADS of $13.4 million. Historical coverage of pro forma MADS including turnover entrance fee receipts is very solid 2.8x and 2.0x in 2015 and 2014, respectively. Pro forma revenue only coverage in fiscal 2015 and 2014 is 1.0x and 0.6x, respectively, which is adequate given GH's type A (predominately nonrefundable) entrance fee contract.

FAVORABLE SERVICE AREA

GH's solid demand characteristics help support the organization's overall successful financial profile. GH has a long history of operating in the Northern Virginia service area, which is an additional positive credit factor. The primary markets of Arlington County (general obligation [GO] bonds rated 'AAA') and Fairfax County (GO bonds rated 'AAA') each have solid population growth trends, high wealth levels, and a diverse economic base. Additionally, entrance fees continue to be moderate compared to service area housing prices.

DEBT PROFILE

After the series 2016 transaction, debt outstanding will include the series 2016A and B bonds, the series 2015 bonds and the 2016 maturity of the series 2007 bonds. The series 2016B bonds will be a direct bank loan with Sun Trust Bank. Final bank documents were not available; however, preliminary terms indicate that covenants will be the same as under the MTI (1.2x debt service coverage and 225 DCOH). The series 2016B bonds have a 15 year term through the maturity of the bonds, which eliminates put risk.

POTENTIAL AFFILIATION

The Board of GH is currently evaluating a potential affiliation with The Virginian, a not-for-profit continuing care retirement community operated by The Temple Foundation, Inc., a not-for-profit 501(c)(3) organization ("Temple"), on land and in buildings currently leased by Temple from an unrelated third party in northern Virginia. The Virginian is located approximately 12 miles west of the Goodwin House Alexandria facility. The Virginian has been in operation for over 35 years and consists of 143 ILUs, 98 ALUs, 90 SNF beds and 11 memory care units with no debt outstanding. The members of the Board of Directors of Temple have recently been changed and now consist of the President of Goodwin House and four members of the Goodwin House Board of Trustees. There is, however, no formal or informal contractual relationship between the two organizations, and Goodwin House has assumed no responsibility for the governance, operations or financial condition of Temple or The Virginian. The Board of GH has authorized Goodwin House Development Corporation (a non-obligated group affiliate) to make a funding commitment not to exceed $15 million to provide credit and liquidity support towards Temple's financing of the proposed acquisition of the buildings and land now leased by Temple. However, no commitment has been made at this time. Fitch will monitor the developments but does not expect these plans as currently presented will have an impact on the rating.

DISCLOSURE

GH provides quarterly utilization and financial information to the MSRB's EMMA system. Fitch views GH's disclosure practices as excellent, since it includes management discussion and analysis and semiannual investor calls.

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

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https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1009913

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1009913

Endorsement Policy

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

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Contacts

Fitch Ratings
Primary Analyst
Jim LeBuhn
Senior Director
+1-312-368-2059
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Dmitry Feofilaktov
Associate Director
+1-212-908-0345
or
Committee Chairperson
Emily Wong
Senior Director
+1-415-732-5620
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Jim LeBuhn
Senior Director
+1-312-368-2059
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Dmitry Feofilaktov
Associate Director
+1-212-908-0345
or
Committee Chairperson
Emily Wong
Senior Director
+1-415-732-5620
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com