NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded its rating to 'BBB+' from 'BBB' on the following bonds issued on behalf of Pennswood Village (PV):
--$40.5 million Bucks County Industrial Development Authority, PA revenue bonds, series 2013.
The Rating Outlook is revised to Stable from Positive.
The bonds are secured by a pledge of gross revenues, a first lien mortgage, and a debt service reserve fund.
KEY RATING DRIVERS
IMPROVED OPERATING PROFILE: The upgrade to 'BBB+' reflects PV's improved operating performance that has been driven by stronger independent living unit (ILU) occupancy. Net operating margin (NOM)-adjusted of 25.2% through the five-month interim (ended Aug. 31, 2016) was above Fitch's 'BBB' median of 19.3% and was up from 15.6% in fiscal 2013. Concurrently, ILU occupancy has grown to 91% from 82% over the same time period.
GOOD LIQUIDITY: PV's liquidity position is good for the rating category with 459 days cash on hand (DCOH), an 11.2x cushion ratio, and 78.2% cash-to-debt at Aug. 31, 2016, all above Fitch's 'BBB' medians of 400 days, 7.3, and 60%, respectively.
MANAGEABLE DEBT BURDEN: PV's debt burden is manageable as evidenced by a low 8.7% maximum annual debt service (MADS) as a percent of revenue and 4.3x debt-to-net available through the interim, both better than Fitch's 'BBB' medians of 12.4% and 5.9x, respectively. Additionally, MADS coverage of 3.3x through the interim was better than the 2.0x median.
STRATEGIC PLAN IN PROCESS: PV is in the process of developing a strategic plan for the facility, which will guide the development of a Master Facilities Plan (MFP). Fitch believes that PV can absorb the impact of the strategic plan at the higher rating level, but will assess the scope and full financial impact once further clarity is available.
STABILITY EXPECTED: Fitch expects Pennswood Village to continue producing solid cash flows that support its liquidity position and good debt service coverage over the medium- to longer-term.
Pennswood Village is located in Newtown, PA, which is in Bucks County, PA. PV is a type-A continuing care retirement community (CCRC) with 303 ILUs, 37 assisted living units (ALU) and 53 skilled nursing facility (SNF) beds. PV's total operating revenue was approximately in $30.5 million fiscal 2016.
IMPROVED OPERATING PROFILE AND OCCUPANCY
The upgrade is driven primarily by improvements in PV's operating performance. PV's operating ratio improved to 99% through the interim period, from a high of 108.3% in fiscal 2014. Improvements are attributed to better occupancy, solid rate increases, a lower average age of entry and a declining interest expense due to the 2013 refinancing.
ILU occupancy has improved to 91% through the five-month interim from a low of 82% in fiscal 2013 despite its competitive operating environment, which is characterized by a large number of other CCRCs in the region. Occupancy improvement has been driven by enhanced marketing initiatives and an improving real estate market.
Occupancy improvement has supported solid net entrance fee receipts over the last three years. Net entrance fee receipts have averaged a strong $8.6 million from fiscal 2014 to fiscal 2016, and remained solid at $3.1 million through the five-month interim. Good entrance fee receipts resulted in a strong NOM-adjusted of 25.2% through the interim, above Fitch's median of 19.3%. PV had a very strong 42 move-ins in fiscal 2016 and management reports a solid 10 move-ins through September of 2016, with an additional eight expected to move-in within the next few months. PV's occupancy is expected to stabilize at around 95% over the medium term and PV is expecting to average approximately 25 move-ins annually going forward.
PV's $31.4 million in unrestricted cash and investments, while down from $33.5 million at fiscal 2015 year-end, equated to a solid 459 DCOH, 78.2% cash-to-debt and 11.2x cushion ratio, all above Fitch's 'BBB' category medians. Unrestricted liquidity was impacted by larger capital expenditures of $7.6 million in fiscal 2016, as PV completed extensive hallway renovations. Capital expenditures are expected to be at around depreciation levels (approximately $5 million) over the medium term, which, along with solid entrance fee receipts, should help PV incrementally grow its liquidity.
MANAGEABLE DEBT BURDEN
PV's MADS equated to just 8.7% of annualized revenues through the five-month interim period, much lower than Fitch's 'BBB' median of 12.4%. In addition, MADS coverage was a strong 3.3x through the same time period, ahead of the 2.0x median. Revenue-only coverage of 0.7x was below the 1.0x median, but has improved from prior years due to improvements in operating profitability.
No new debt issuance is expected at this time; however, PV is in the process of developing a strategic plan which will guide its MFP. Fitch will assess the scope and financial impact of the MFP once further clarity is available.
PV's outstanding debt is a bank qualified, direct placement with Bank of America. The term of the bank-qualified bonds is five years (ending in 2018) with a fixed rate over that time. PV has two outstanding basis swaps with a negative mark-to-market of $6.2 million as of Aug. 31, 2016. PV is required to post a collateral deposit on the swaps, which was $3.1 million at Aug. 31, 2016.
PV does not disclose publically, as all of its debt is currently privately held.
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)
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