CHICAGO--(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):
--$50.23 million, series 2012;
--$34.04 million series 2006A.
The Rating Outlook has been revised to Positive from Stable.
KEY RATING DRIVERS
CONTINUED FINANCIAL STRENGTHENING: The Positive Outlook reflects the improvement in Holland Home's financial profile, specifically capital and liquidity ratios as well as sustained improvements in occupancy and entrance fee generation in its independent living units (ILUs). An upgrade is possible over the next one to two years if liquidity continues to improve and debt service coverage remains at 'BBB' category levels.
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 2013, reflecting an improving real estate market and increased activity and interest from potential residents. Focus on managing expenses and diversifying its revenue stream, including home health and hospice care; have also led to solid operations.
IMPROVING BUT LIGHT LIQUIDITY METRICS: Holland Home's liquidity indicators remain light but are approaching the 'BBB' category medians. At March 31, 2014, days cash on hand of 205.8, cash to debt of 36% and cushion ratio of 5.1x are approaching the 'BBB' category medians.
MANAGEABLE DEBT BURDEN: While maximum annual debt service (MADS) increases to $8.5 million in 2033, debt service is level at about $7.6 million from 2014 through 2032, which equates to a moderate 9.5% of fiscal 2013 total revenues and coverage of 2.4x in fiscal 2013.
RATING SENSITIVITIES
FURTHER IMPROVEMENT IN LIQUIDITY: Upward rating movement is possible over the next two years if liquidity metrics continue to improve and move closer to the 'BBB' category level. In addition, Fitch expects Holland Home to maintain solid profitability and debt service coverage ratios in line with the 'BBB' category median.
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
Holland Home is a type-B CCRC that 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. Total operating revenues in fiscal 2013 were $75.3 million (December 30 fiscal year-end).
The Positive Outlook reflects Holland Home's improved occupancy, which has led to better liquidity and debt metrics. The 'BB+' rating reflects Holland Home's good operating performance, moderate debt burden and adequate debt service coverage, which are somewhat tempered by weak liquidity metrics.
STABLE OPERATING PERFORMANCE
Over the last four fiscal years, Holland Home has maintained steady operating performance. Operating ratio and net adjusted operating margin improved in fiscal 2013 compared to the prior year reflecting improved occupancy, focus on expenses and improved payor mix. Adjusted net operating margin in fiscal 2013 was 15.4%, up from 13.1% in fiscal 2012 and 11.9% in fiscal 2011. Net entrance fees in fiscal 2013 were improved to $8.02 million from $6.07 million in fiscal 2012 and $3.40 million in fiscal 2011. The improved entrance fee receipts reflect stabilization in the area real estate market. Management reported 79 sales in fiscal 2013. Although net entrance fee receipts are down at March 31, 2014 at $730,000 versus $1.1 million the same time the prior year, management reports 28 sales as of May 2014 and expects to sell 70 units in fiscal 2014. ILU occupancy has stabilized and was solid at 91.6% at March 31, 2014, compared to average occupancy of 90% in fiscal 2012 and 89.7% in fiscal 2011. Holland Home is budgeting $7.2 million in entrance fee receipts in fiscal 2014 and a 16.7% adjusted net operating margin ratio.
MANAGEABLE DEBT BURDEN
Holland Home's debt burden is moderate. While MADS increases to $8.5 million in 2033, Fitch uses $7.6 million for analytical purposes, which reflects level debt service from 2014-2032 and equates to a moderate 9.5% of fiscal 2013 revenue compared to the 'BBB' category median of 12.4%. In 2013, Holland Home generated 2.1x coverage of MADS and 2.4x actual annual debt service coverage, which is an improvement from 1.7x in fiscal 2012 and 1.4x in fiscal 2011. Revenue only actual debt service coverage in fiscal 2013 was strong at 1.3x reflecting Holland Home's diversified revenue stream. Debt service coverage at March 31, 2014 (three month interim) is down slightly to 1.4x but Holland Home is budgeting 2.16x debt service coverage ratio for fiscal 2014, which Fitch believes is manageable. However, Fitch does not believe Holland Home has additional debt capacity at a higher rating level.
At March 31, 2014 Holland Home's unrestricted cash and investments equaled $38.9 million, which equates to 205.8 days cash on hand, 36% cash to debt and 5.1x cushion ratio, which are still light but getting closer to the respective 'BBB' category medians of 371.3 days, 58.9% and 6.9x. Fitch acknowledges debt to expenses is light compared to the 'BBB' median but continued improvement to cash to debt and cushion ratio over the near term would position Holland Home for positive rating movement.
Holland Home is in the process of long-term planning and is assessing how to keep up with the changing healthcare market. Plans for ALU construction on the Breton Woods Campus are underway and will likely occur in the near term. Management expects the project to cost about $9-10 million, which will be financed by a combination of donations and cash. Management expects to spend about $1-2 million per year for the next few years in addition to the $4.5 million on routine capital if this project is approved by the board. Fitch does not expect this project to significantly affect financial metrics.
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, 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 because of its light liquidity. 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 $86.5 million, and each of the amortizations on the swaps matches a specific series of bonds. At March 31, 2014, the mark-to-market on all the swaps was negative $9.5 million with the largest individual swap valuation being negative $3.1 million. There is no collateral posting requirement but under certain of the swap agreements, Holland Home is exposed to involuntary termination as a result of a below 'BB' rating.
CONTINUING DISCLOSURE
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:
--'Not-for-Profit Continuing Care Retirement Communities Rating Criteria' dated July 10, 2013.
Applicable Criteria and Related Research:
Not-for-Profit Continuing Care Retirement Communities Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=712401
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=830715
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