NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A-' rating on the following bonds issued by the Medford Hospital Facilities Authority on behalf of Rogue Valley Manor (RVM):
--$57.26 million fixed rate revenue refunding bonds, series 2013A.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a gross revenue pledge, a first mortgage lien on RVM's facilities and a debt service reserve fund.
KEY RATING DRIVERS
STABILIZED BOARD AND MANAGEMENT: After a governance and management restructuring between RVM and its parent and management company Pacific Retirement Services (PRS) several years ago, the board and administrative functions have stabilized. While Fitch was somewhat concerned about the new arrangement given PRS' reduced control and prior legal dispute, RVM's operational and financial profiles remains consistent and resident satisfaction is favorable.
VERY GOOD OCCUPANCY AND MARKET POSITION: Fitch views RVM's status as a destination continuing care retirement community (CCRC) a key credit strength since it attracts residents from a large geographic region given its favorable climate, appealing amenities and value proposition. After averaging about 90% from fiscal 2010-2012, independent living unit (ILU) occupancies increased slightly each of the last three years and averaged 92.4% for fiscal years 2013-2015.
ADEQUATE PROFITABILITY AND CASH FLOW: After weaker operating performance in fiscal 2013 partially due to expenses from the organizational restructuring, the operating ratio improved to 93.9% in fiscal 2014 (Sept. 30 year-end) and 91.7% through the first three quarters of the current fiscal year. In addition, the net operating margin-adjusted remains healthy as a result of a steady receipt of turnover entrance fees that also allows for solid debt service coverage.
MIXED LIQUIDITY METRICS: As of June 30, 2015, RVM holds $75.2 million of unrestricted cash and investments which amounts to a healthy 689 days operating expenses. While this metric is in line with Fitch 'A' category median of 681 days cash on hand, RVM's cash to debt of 69% and 12 times (x) cushion ratio are below the 125.1% and 18.5x medians, respectively. An additional $12.2 million of cash and investments are held at RVM's affiliated foundation to support programmatic and capital spending.
MODERATELY HIGH DEBT POSITION: RVM's debt position is moderately high with maximum annual debt service (MADS) representing 11.9% of revenues for the nine month period ending June 30, 2015. Debt to capitalization of 51% and debt to net available of 6.3x are slightly unfavorable to Fitch's 'A' category medians of 45.5% and 4.3x, respectively for the nine month period ending June 30, 2015.
RATING SENSITIVITIES
SUSTAINED FINANCIAL PERFORMANCE: Given Rogue Valley Manor's high debt burden for the rating category, weakened operations or cash flow that leads to lower debt service coverage ratios or liquidity metrics, could lead to negative rating pressure.
CAPITAL PLANS: Rogue Valley Manor's capital plans relating to a new memory care facility, renovated skilled nursing center and additional ILU cottages are preliminary. Fitch expects more clarity on the size and scope of the projects within the next 12 months and will factor the effects of any potential construction risks or debt or equity contributions at that time.
CREDIT PROFILE
RVM is a type B CCRC located in Medford, the largest city in southern Oregon, which is situated along the Interstate-5 corridor, about halfway between San Francisco, CA and Portland, OR. RVM is located on a 200-acre campus with three multistory apartment buildings as well as over 300 cottage-style units. There is also a two-story medical services facility consisting of the healthcare center and residential living area. The campus also includes a nine-hole golf course, an 18-hole putting course, outdoor lawn bowling, a croquet court, and tennis courts. RVM consists of 597 ILUs, 90 assisted living units (ALU), 68 skilled nursing beds, and 25 memory care units. RVM's accreditation by the Commission on Accreditation of Rehabilitation Facilities was renewed in April 2015, which Fitch views favorably.
COMPETITIVE POSITION AND OCCUPANCY
Geographically, Medford lies within Oregon's Rogue Valley. RVM has a long-standing presence as it has been in operation since the late 1950s and is the only full-service retirement community in Medford. RVM is considered a destination CCRC and attracts residents from across the country. Approximately 30% of residents are from Oregon, 55% from California and 15% from other states. As of Sept. 30, 2015, RVM had a waiting list of 492 applicants who have paid a refundable $1,000 application fee. Given RVM's favorable location, appealing amenities, effective sales strategies and good value proposition, demand remains favorable. ILU occupancies increased steadily over the last three fiscal years and averaged a healthy 93.6% in fiscal 2015. ALU occupancy remains solid, averaging 88.6% over the past three years. Skilled nursing occupancy remains soft, averaging about 61.5% in fiscal 2015 with private pay residents accounting for a majority of patient days (84% during the current fiscal year). Softer skilled nursing census is not a credit concern given RVM's resident contact that guarantees unlimited temporary stays in the health center that result in higher costs without an increase in revenue.
FINANCIAL PROFILE AND POSITION
RVM enjoys a long history of good profitability and cash flow, even though operations softened several years ago partially as a result of the board and management turnover. After weaker performance in fiscal 2013 partially due to expenses from the organizational restructuring, the operating ratio improved to 93.9% in fiscal 2014 and 91.7% through the first three quarters of fiscal 2015. This improved metric compares well against Fitch's 'A' category median of 94%. Cash flow results remain robust mostly as a result of a steady receipt of turnover entrance fees. The net operating margin-adjusted amounted to 29.2% in fiscal 2014 and 26.3% for the nine month period ending June 30, 2015, both of which exceed Fitch's 'A' category median of 22.2%. Despite the moderately high debt burden, MADS coverage is solid for the rating category at 3.2x in fiscal 2014 and 2.8x through the fiscal 2015 unaudited period ending June 30.
As of June 30, 2015 RVM holds $75.2 million of unrestricted cash and investments which amounts to a healthy 689 days operating expenses. While this metric is in line with Fitch's 'A' category median level, RVM's cash to debt and cushion ratios are below the medians. Liquidity levels are down from a historic high in fiscal 2014 due to elevated capital spending for critical renovation projects and a $5 million contribution to its joint venture with PRS that owns and operates real estate and an adjacent golf club, The Centennial, Inc. As part of the transaction, RVM will assume ownership of The Centennial, Inc. and expects to record an asset value gain. Another credit-strength is the fact that an additional $12.2 million of cash and investments are held at RVM's affiliated foundation to support programmatic and capital spending.
DISCLOSURE
RVM covenants to provide quarterly financial statements to be released within 45 days of the end of each fiscal quarter, including an income statement, balance sheet, and calculation of the long-term debt service coverage ratio. RVM also agrees to release the annual financial report within 120 days of the end of each fiscal year.
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=992679
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=992679
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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