NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed at 'BBB' the following Gaithersburg, MD bonds issued on behalf of the Maryland Obligated Group of Asbury Communities (Asbury-MD):
--$15,760,000 (Asbury Maryland Obligated Group) refunding revenue bonds series 2014;
--$84,735,000 (Asbury Maryland Obligated Group) refunding revenue bonds series 2006A;
--$44,245,000 (Asbury Maryland Obligated Group) refunding revenue bonds series 2009B.
The Rating Outlook is Stable.
SECURITY
Bonds are secured by a pledge of gross revenues, a mortgage, and a debt service reserve fund.
KEY RATING DRIVERS
STEADY OPERATING PROFILE: Unaudited 2015 year-end results show a 97.9% operating ratio, a 26.4% net operating margin - adjusted and 2.3x debt service coverage. These figures are consistent with the prior four years of audited results and all compare well to Fitch's 'BBB' category medians.
STRONG DEMAND FOR SERVICES: At Dec. 31, 2015, occupancy across all three levels of care was above 90%, which is also consistent with the prior four audited years. Fitch views the steady operating performance and high occupancy as key credit strengths that support the rating.
LIGHT LIQUIDITY: Asbury-MD's liquidity metrics remain thin for the rating level, with Asbury-MD having 219 days cash on hand (DCOH) and 40.1% cash to debt, at Dec. 31, 2015, both below category medians. Asbury-MD has access to additional liquidity support from Asbury Communities (ACOMM), its parent corporation. The parent corporation held approximately $23.1 million of unrestricted cash and investment at Dec. 31, 2015.
INCREASE IN MADS: Asbury-MD's maximum annual debt service (MADS) remained elevated in the current year ($13.5 million) due to a forward swap that became effective in January 2013. Asbury-MD still covered MADS at 2.3x in 2015. Fitch does not expect the MADS to rise much higher, and while the swap is a concern, the coverage levels mitigate concerns.
POTENTIAL EXPANSION AT SOLOMONS: Asbury-MD is contemplating an expansion on its Solomon campus, which has a high demand for units and is located along the waterfront in Calvert County. The project has not been board approved and would likely not begin until 2018. Asbury-MD has some debt capacity at the current rating level. Fitch will evaluate the project and any associated debt as the details become available.
RATING SENSITIVITIES
STABLE PERFORMANCE: Fitch expects the Maryland Obligated Group of Asbury Communities to continue to produce median-level operating performance and debt service coverage over the next year.
CREDIT PROFILE
The Maryland Obligated Group consists of Asbury Methodist Village (AMV) and Solomons and has a total of 1,127 independent living units (ILUs), 157 assisted living units (ALUs) and 305 skilled nursing beds. Asbury-MD offers a Type 'C' contract. Total operating revenue (unaudited) in 2015 was $101.8 million.
The affirmation reflects historically solid debt service coverage, a steady operating performance, and high occupancy. In addition, affiliated continuing care retirement communities (CCRCs) in PA continue to show financial stability. As a result the consolidated organization is on firming financial footing, which eases Fitch's historical concerns on asset transfers from Asbury-MD to the parent.
SOLID FINANCIAL PERFORMANCE
Unaudited year-end financial results show a 97.9% operating ratio, a 26.5% net operating margin - adjusted, and 2.3x debt service coverage (on MADS of $13.5 million). The solid financial performance was supported by high occupancy across all levels of care. After a few years of a steady improvement in occupancy, ILU, ALU and skilled nursing occupancies have stabilized in the mid- to-high 90% range at Dec. 31, 2015. ILU sales remained solid as well in 2015 at 133, compared to 143 in 2014 and 132 in 2013.
Fitch expects this level of performance to be maintained over the next year.
Asbury-MD is exploring a potential ILU expansion at Solomons. The project is in its early stages and has not been approved by the board. Fitch notes that ILU occupancy at Solomons is consistently in the 95% range and the campus is a destination senior living community given its waterfront location. Fitch will evaluate the project and associated debt as details emerge.
Thin Liquidity/Cash Transfers
Asbury-MD's liquidity metrics are thin compared to Fitch's 'BBB' category medians. As of Dec. 31 2015, Asbury-MD total unrestricted cash and investments of $52 million, which equated to 219 DCOH, 40.1% cash to debt, and a 3x cushion ratio, which are weaker than their respective 'BBB' category medians of 408 DCOH, 60% cash to debt, and a 7.3x cushion ratio.
However, Fitch notes that bondholders benefit from the unconditional and unlimited support from ACOMM, which held roughly $23.1 million of unrestricted cash and investments at Dec. 31, 2015, which is available for support of both the Asbury-MD and the Asbury-PA obligated groups.
Under its bond documents, Asbury-MD is allowed to transfer funds to ACOMM. The transfers have moderated over last three years and are approximately $2.5 million annually. Certain liquidity and debt service coverage tests have to be met before a transfer can be made, but the ability to transfer cash to the parent remains a credit concern and has had an impact on Asbury-MD's liquidity growth, in spite of its good cash flow.
Mitigating some of this concern about the transfers has been the improved operating performance at Asbury-PA. Quarterly bond documents show that Asbury-PA had ILU occupancy above 90%, DCOH of 122, and debt service coverage of 1.6x through the 12-month period ended Dec. 31, 2015.
DEBT PROFILE
All of Asbury-MD's long-term debt, currently $133.4 million, is fixed rate. In January 2013, a forward-starting fixed payer swap with a notional value of $74 million became effective, with Asbury-MD paying 5.128% and receiving 67% of one-month Libor. Given the low interest rate environment, the mark-to-market of the swap as of Dec. 31, 2015 was a negative $31.3 million and the cost above the debt service on the bonds was an increase to Asbury-MD's debt service of approximately $3.4 million.
This figure will fluctuate yearly depending on Libor, and Fitch does not expect the yearly impact on debt service to get any worse. Asbury-MD is seeking to refinance the swap when the mark-to-market improves. The increase to debt service is a credit concern but Asbury-MD has been covering the higher MADS at above the median.
In addition, Asbury-MD has a variable-rate basis swap outstanding, with a notional amount of $23.3 million and a mark-to-market as of Dec. 31, 2015 of $1,084. There are currently no collateral posting requirements for the swaps and the counterparty cannot terminate either swap agreement.
Disclosure
Asbury-MD has covenanted to provide annual audits and quarterly unaudited financial information through EMMA, and also provides voluntary quarterly disclosure calls for investors.
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=1001702
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1001702
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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