CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BB-' rating on the $15 million series 1998 Franklin County, Ohio health care facilities revenue refunding and improvement bonds issued on behalf Friendship Village of Columbus (FVC).
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a revenue pledge, first mortgage, and debt service reserve fund.
KEY RATING DRIVERS
STABLE BUT WEAK PROFILE: The affirmation of the 'BB-' rating reflects FVC's continued weak but stable financial profile with light liquidity and minimal coverage due to sustained low occupancy.
INCREMENTAL OCCUPANCY IMPROVEMENTS: Independent living unit (ILU) occupancy remains low but continued to improve to 77.8% as of March 31, 2013 from 75% at June 30, 2012. The improvement is due to reduced entrance fees implemented in fiscal 2012, strengthened marketing efforts and reduced turnover in the nine-month interim period ending March 31, 2013 (the interim period).
VOLATILE PROFITABILITY: FVC's operating ratio increased to 109.4% in fiscal 2012 from 100.9% in fiscal 2011, reflecting increased staffing related to efforts to improve skilled nursing facility (SNF) occupancy. Conversely, net operating margin - adjusted improved to 14% in fiscal 2012 from 6.6% in fiscal 2011 due to strong entrance fee generation.
MODERATE DEBT BURDEN: FVC's debt burden is moderate with maximum annual debt service (MADS) equal to 9% of revenues in fiscal 2012. However, MADS coverage is highly dependent upon entrance fee generation with revenue only MADS coverage equal to negative 0.3x in fiscal 2012 and MADS coverage including turnover entrance fees equal to a solid 1.9x.
LIGHT LIQUIDITY: Unrestricted liquidity remains light with 28.7% cash to debt and 3.0x cushion ratio at March 31, 2013, but limited capital needs and continued improvements in occupancy should allow for improved liquidity metrics.
RATING SENSITIVITIES
CONTINUED OCCUPANCY IMPROVEMENT: Continued improvement in ILU occupancy should allow for improved profitability and debt service coverage. Failure to meet FVC's rate covenant requirement of 1.15x MADS coverage would likely result in negative rating pressure.
CREDIT PROFILE
The affirmation of the 'BB-' rating and Stable Outlook reflects FVC's low but improving ILU occupancy, light liquidity and thin debt service coverage. The rating rationale has not changed significantly since Fitch's last rating action.
ILU occupancy continues to improve but remains low. ILU occupancy increased to 77.8% at March 31, 2013 from 71% in the second quarter of 2011. SNF occupancy increased from a low of 69.7% to 87.1% while ALU occupancy remains above 90%. The increased occupancy reflects the impact of the 25% reduction in ILU entrance fees, increased marketing efforts, with a particular emphasis on skilled nursing, and decreased turnover in the interim period.
The 25% reduction in ILU entrance fees was implemented in fiscal 2012 and was necessary to bring entrance fees in line with local real estate prices. While the Columbus, Ohio area faired fairly well through the recent recession, the three primary zip codes that FVC draws from were hit particularly hard. The reduced entrance fees stimulated strong sales in fiscal 2012 with net entrance fees increasing to $3 million in fiscal 2012 after averaging $1 million per year between fiscal years 2007 and 2011. However, sales appear to have subsided somewhat in fiscal 2013 with net entrance fees of $1.2 million in the 11-month interim period ending May 30, 2013.
Operating profitability has been volatile reflecting the challenging operating environment. Operating ratio increased to 109.4% in fiscal 2012 and 107.3% in the interim period from 100.9% in fiscal 2011, reflecting increased staffing relating to efforts to improve the SNF census. However, net operating margin - adjusted improved to 14% in fiscal 2012 from 6.6% in fiscal 2011 reflecting the improved entrance fee generation but moderated to 7.8% in the interim period. Management continues to assess cost management and productivity improvement initiatives, particularly within dining services and SNF.
With $15 million of fixed rate debt outstanding, FVC's debt burden is moderate with MADS equal to 9% of revenues in fiscal 2012. FVC is highly dependent upon entrance fees to cover debt service as is typical of many type A CCRCs. The compressed operating performance resulted in poor revenue only coverage of negative 0.3x in fiscal 2012 and negative 0.1x in the interim period. However, strengthened net entrance fee generation improved MADS coverage including turnover entrance fees to 1.9x in fiscal 2012 and 1.1x in the interim period. Per FVC's rate covenant calculation, MADS coverage equaled 1.85x in fiscal 2012 and exceeded the covenant requirement of 1.15x. MADS coverage below 1.15x based upon the covenant calculation would require a consultant call-in.
Unrestricted liquidity has been consistent, but relatively light. At March 31, 2013, FVC had $4.2 million of unrestricted cash and investments equating to 98.7 days cash on hand, 28.7% cash to debt and 3.0x cushion ratio. These metrics are consistent with the 'BB' category. Future capital plans include regular maintenance and refurbishment of units with no major capital projects planned in the near to medium term.
The Stable Outlook reflects Fitch's expectation that continued improvements in occupancy and management's focus on cost management will improve operating performance and strengthen coverage.
FVC operates a type-A CCRC located in Columbus, OH, which consists of 221 independent living units, 63 assisted living units, and 80 skilled nursing beds. Total operating revenue equaled $15.1 million in fiscal 2012. FVC covenants to provide annual disclosure within 150 days of the end of each fiscal year and quarterly disclosure within 50 days of the end of each quarter. Disclosure is provided through the Municipal Securities Rulemaking Board's EMMA system.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--Revenue-Supported Rating Criteria (June 12, 2012);
--'Not-for-profit Continuing Care Retirement Communities Rating Criteria' (July 12, 2012).
Applicable Criteria and Related Research
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015
Not-for-Profit Continuing Care Retirement Communities Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682258
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=790729
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