NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BB+' rating on the following Kentwood Economic Development Corporation (MI) revenue bonds issued on behalf of Holland Home Obligated Group (Holland Home):
--$50.2 million , series 2012;
--$34 million series 2006A.
The Rating Outlook is Stable.
KEY RATING DRIVERS
STABLE OPERATING PERFORMANCE: Holland Home's operating trend over the past three years has been very stable with incremental improvement in operating profitability metrics. Net entrance fee receipts increased in 2012 reflecting an improving real estate market and increased activity and interest from potential residents. .
WEAK LIQUIDITY METRICS: Although improved, Holland Home's liquidity indicators remain weak with days cash on hand of 183.0 days, a cushion ratio of 4.5x and cash to total debt of 31.2% at March 31, 2013.
DIVERSIFIED REVENUE STREAM: Holland Home has improved operating profitability over the last two years, which can somewhat be attributed to its diversified revenue stream, including home health and hospice care, which has helped to blunt the impact of lower occupancy in the independent living (ILUs) and assisted living units (ALUs).
MANAGEABLE DEBT BURDEN: While maximum annual debt service (MADS) increases to $8.5 million in 2033, debt service is level at $7.5 million from 2013 through 2032, which equates to a moderate 10.0% of fiscal 2012 total revenues and coverage of 1.59x in fiscal 2012.
CAPITAL STRUCTURE RISK: Although moderated by the series 2012 financing, Holland Home has roughly $24.9 million of direct bank-placed variable-rate debt that has a mandatory tender date of Jan. 15, 2018. Relative to its current liquidity position, Fitch believes Holland Home's capital structure subjects the organization to elevated remarketing and interest rate risk.
RATING SENSITIVITIES
FURTHER IMPROVEMENT IN LIQUIDITY: Despite a positive trend in operating performance and debt service coverage, upward movement in the rating action is precluded until liquidity metrics improve and approach 'BBB' category medians.
SECURITY
Debt payments are secured by a revenue pledge of the obligated group (OG), a first mortgage lien on certain property, and a debt service reserve fund.
CREDIT PROFILE
The 'BB+' rating reflects Holland Home's improving operating performance, moderate debt burden and adequate debt service coverage which are tempered by weak liquidity metrics. Over the last three fiscal years, Holland Home has generated year-over-year improvement in operating profitability despite the difficult operating environment. Operating ratio and net operating margin (NOM) weakened slightly in 2012 compared to the prior year reflecting investment in community-based services. However, NOM-adjusted improved to 13.1% from 11.9% reflecting improved net entrance fee receipts. Fitch believes the improvement reflects management's effective expense control and the corporation's growth in community-based services, which has extended Holland Home's brand and diversified its revenue stream. The improved entrance fee receipts reflect stabilization in the area real estate market. Management reported 18 ILU sales in the first quarter of 2013 compared to 13 in the year earlier period. ILU occupancy was 92% at March 31, 2013, compared to average occupancy of 90% in fiscal 2012 and 89.7% in fiscal 2011.
Holland Home's debt burden is moderate. While MADS increases to $8.5 million in 2033, Fitch uses $7.5 million for analytical purposes, which reflects level debt service from 2013-2032 and equates to a moderate 10.0% of fiscal 2012 total (compared to the 'BBB' category median of 12.9%). In 2012, Holland Home generated 1.59x coverage on the $7.5 million debt service which is improved from 1.41x in 2011 and 1.24x in 2010. Coverage of actual debt service of $7 million in 2012 was 1.77x.
While Holland Home's unrestricted cash and investments have grown to $34.1 million at March 31, 2013 from $31.7 million at fiscal year-end 2012 (Dec. 31) and $26.2 million at fiscal year-end 2011, Holland Home's liquidity indicators remain weak when compared to 'BBB' category medians. At March 31, 2013, Holland Home's days cash on hand of 183.0, cushion ratio of 4.5x, and cash to debt of 31.2% trail the respective 'BBB' medians of 369.0,6.6x, and 50.9%.
Holland Home's debt structure consists of 77% natural fixed-rate and 23% direct bank-placed variable-rate bonds. The series 2012 financing moderated Holland Home's capital structure risk by replacing certain variable-rate debt with natural fixed-rate debt. However, in light of Holland Home's light liquidity position, Fitch believes the $24.9 million of bank-placed mandatory tender bonds subjects the organization to an elevated level of remarketing and interest rate risk. The swap portfolio consists of seven separate swap transactions including three floating- to fixed-rate swap agreements and four basis swap agreements with three different counterparties. The floating- to fixed-rate swaps are structured as hedges to convert Holland Home's variable-rate debt to a synthetic fixed-rate obligation. The total notional value of the swaps is approximately $88.3 million and each of the amortizations on the swaps matches a specific series of bonds. At March 31, 2013, the mark-to-market on all the swaps was negative $10.9 million with the largest individual swap valuation being negative $3.1 million. Under certain of the swap agreements, Holland Home is exposed to involuntary termination as a result of a below 'BB' rating.
The Stable Outlook reflects Fitch's belief that the operating environment and real estate market are materially improved in 2013, which should result in improved financial performance. Despite our expectation for better operating performance and debt service coverage in 2013, positive rating action is precluded until Holland Home's cash and investment position and liquidity metrics strengthen and approach 'BBB' category medians.
Holland Home operates three campuses of multi-level senior housing in Grand Rapids, MI, providing a total of 723 ILUs and cottages, 435 assisted living and dementia units, 20 residential hospice units and 241 nursing beds. Under the Continuing Disclosure Agreement, Holland Home covenants to provide audited financial statements and utilization statistics within 180 days of each fiscal year-end and quarterly interim financial statements and utilizations within 60 days of each fiscal quarter-end. Holland Home's disclosure to Fitch has been excellent in terms of content and timeliness.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated June 12, 2012;
--'Rating Guidelines for Nonprofit Continuing Care Retirement Communities', dated Jul. 12, 2012;
For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.
Applicable Criteria and Related Research:
Rating Guidelines for Nonprofit Continuing Care Retirement Communities
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=40171
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=792259
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