Fitch Rates Episcopal Communities & Services (CA) Series 2012 Revs 'A-'; Outlook Stable
Fitch Ratings has assigned an 'A-' rating to the following California Statewide Communities Development Authority bonds issued on behalf of Episcopal Communities & Services (ECS).
--$67,500,000 revenue bonds, series 2012.
The Rating Outlook is Stable.
The bonds are expected to be issued as fixed rate, and proceeds will be used to refinance all of ECS's outstanding bonds. The debt issuance will represent all of the ECS's long term bonded debt. The 2012 bonds are expected to sell the week of November 26 via negotiation.
Bonds are secured by a pledge of gross revenues, a mortgage on ECS facilities, and a debt service reserve fund.
KEY RATING DRIVERS
NEW CORPORATE STRUCTURE: The rating is based on a newly reorganized ECS which consists of two continuing care retirement community (CCRC) campuses, the Canterbury and Covington. ECS's credit profile is characterized by high occupancy, favorable market position, and liquidity ratios and financial performance commensurate with the rating level.
HIGH OCCUPANCY A CREDIT STRENGTH: ECS has a history of strong independent living occupancy and it stood at 94.0% at Oct. 31, 2012.
SOLID LIQUIDITY: Even with a $15 million equity contribution for debt pay down ($7.5 million) and capital projects ($7.5 million), ECS's liquidity figures as of June 30, 2012 are solid for the 'A' category, with days cash on hand near 1,000 days, and other liquidity ratios solid for the rating level.
EXCELLENT OPERATING METRICS: Most of ECS's operating ratios are better than Fitch's 'A' category medians and the strong operating results have supported strong revenue-only pro forma maximum annual debt service (MADS) coverage. Revenue-only pro forma MADS coverage in fiscal 2012 (audit) was 1.7x compared to 2.4x in fiscal 2011 and 1.8x in fiscal 2010. .
AFFLUENT BUT COMPETITIVE MARKET: The Canterbury and Covington are located in affluent areas near the coast around Los Angeles and Orange Counties. The service area is competitive but ECS'ss two campuses have excellent locations, a strong history in the community, and entrance fees that compare well with local area housing prices.
POTENTIAL SUPPORT OUTSIDE ECS: In the near term, ECS is developing a new campus which is currently in pre-sales and is targeted to begin construction and secure permanent financing in July 2013. The debt is expected to be non-recourse to ECS, and ECS has previously transferred $30 million of cash to an affiliate that is non-obligated, and those funds will provide equity support for the project. However, the project is a credit concern until the new campus is built and reaches stabilization. Longer term, ECS's management has indicated that it would consider transfers from ECS to support strategic growth projects at its affiliates.
SLIGHTLY ELEVATED DEBT BURDEN: Debt levels are elevated for the rating category with pro forma (MADS as a percent of revenue at a relatively high 13.7%, compared to a median of 8.7%. However, pro forma MADS coverage including entrance fees has averaged a solid 3.2x over the last three fiscal years, compared to Fitch's 'A' median of 2.7x.
ECS's financial profile can be characterized by strong financial results, high occupancy, good liquidity, and strong market position. The primary credit concerns are a slightly elevated debt burden and the potential for ECS support for strategic projects at its affiliates. Fitch's analysis is based on ECS's financials, which are provided in the consolidating schedules of ECS and Affiliates audit.
Fiscal 2012 was a strong operating year for ECS. Its operating ratio of 89.6% was better than the 'A' median of 95.2% and its net operating margin (adjusted) was 37.6% - much better than Fitch's 'A' category median of 21.9%. Fitch does not expect ECS to sustain such strong net operating margins as fiscal 2012 results were helped by a successful marketing effort at the Canterbury to convert units being rented to entrance fees. In fiscal 2012, net entrance fees received were $7.2 million compared to $3.2 million in fiscal 2011 and $4.5 million in fiscal 2010. However, the net operating margin -(adjusted) also exceeded the 'A' median in the prior two audited years and Fitch expects ECS to continue to outperform the medians over the near term.
The operating performance supported strong pro forma MADS (estimated at $4.1 million as provided by the underwriter) of 3.5x in fiscal 2012, which compares favorably to the 'A' category median of 2.7x. Pro forma revenue-only coverage was also strong at 1.7x, also well above the median. However, ECS's debt burden is elevated with MADS as a percent of revenue at 13.7%, well above the 'A' median of 8.9%. Fitch expects this figure to ease over time.
Fitch views occupancy as a credit strength, and high occupancy has been a key driver of the strong operating performance, with all levels of care showing occupancy above 90% through the historical period. At Oct. 31, 2012, IL occupancy was at 95% and assisted living occupancy at 92%. High occupancy has been supported by the strong market position of both campuses. Fitch visited both campuses and found them attractive and located in desirable and affluent communities. ECS has recently finished constructing a new entranceway for the Canterbury, as well as renovating and upgrading some common use indoor and outdoor spaces. These campus upgrades were funded out of cash flow and ECS management has a solid history of investing in its facilities. Entrance fees for both locations are in line with area housing prices.
At June 30, 2012, ECS's unrestricted cash and investments totaled $74.2 million. ECS management plans to pay down $7.5 million in debt as part of this issuance as well as fund an additional $7.5 million in capital projects at the Covington, including renovation of its main dining room and the building of a more casual bistro. Adjusting the balance sheet for this $15 million equity contribution would bring ECS's cash and unrestricted investments down to $59.2 million, which equates to 913.4 days cash on hand, a 14.3x cushion ratio and 88.4% cash to debt, all of which are solid for the rating level. ECS's investment allocation is aggressive with 57% in equities and another 10% in alternatives, but ECS' solid overall financial profile coupled with its conservative debt allocation, 100% all fixed-rate debt, mitigate the concern.
ECS is moving forward on a start-up CCRC, MonteCedro, an affiliate, to be located in Altadena, CA, near where ECS had its original senior living facility, Episcopal Home. ECS has a strong connection and reputation within that service area and transferred $30 million to an affiliate, not obligated on ECS' debt, to support MonteCedro during its start-up phase. ECS management has indicated that ECS will not provide additional support to MonteCedro, however, until the project is built and occupancy reaches stabilization, Fitch views it as a risk to ECS.
Longer term, ECS management has indicated that it would transfer additional assets from ECS to support strategic growth initiatives. Both of ECS's campuses, while very attractive, are built out, and for the organization to grow, such external growth initiatives will likely be needed. Fitch will monitor the level of support to non-obligated affiliates and the impact, if any, to ECS.
The Stable Outlook reflects Fitch's belief that ECS's financial profile will remain stable supported by strong occupancy.
Headquartered in Pasadena, California, ECS is a California non-profit public benefit corporation and an organization described in Section 501(c)(3) of the Internal Revenue Code. ECS owns two continuing care retirement communities (CCRCs): The Canterbury, located in Rancho Palos Verdes, in Los Angeles County, and The Covington, in Aliso Viejo, in Orange County. The current rating is based on the financial results of these two campuses. Both campuses offer a Type 'B' contract and together have 253 independent living units (ILUs), 61 assisted living units (ALUs) and 52 skilled nursing facility units (SNFs). In 2012, ECS reported total operating revenues of $29.9 million.
The non-obligated affiliates of ECS include the Sophie Miller Foundation, Community Housing Management Services, a manager of affordable housing properties, and the start-up CCRC, MonteCedro.
ECS covenants to disclose financial results to bondholders within 120 days following the fiscal year end, and 45 days following each fiscal quarter end. Disclosure is provided via Zeigler, and includes regular investor disclosure calls with management.
Additional information is available at 'www.fitchratings.com'.The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's Revenue Supported Rating Criteria, this action was additionally informed by information from Ziegler, the underwriter.
Applicable criteria and Related Research:
--'Revenue-Supported Rating Criteria', June 12, 2012;
--Rating Guidelines for Nonprofit Continuing Care Retirement Communities, July 26, 2012.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Rating Guidelines for Nonprofit Continuing Care Retirement Communities
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