Fitch Affirms Asbury Communities (MD) Revs at 'BBB-'; Outlook Stable

CHICAGO--(BUSINESS WIRE)--

As part of its ongoing surveillance efforts, Fitch Ratings has affirmed the 'BBB-' rating on the following Gaithersburg Economic Development Revenue Bonds issued on behalf of the Maryland Obligated Group of Asbury Communities (Asbury-MD):

--$84,735,000 Refunding Revenue Bonds, Series 2006A;

--$44,245,000 Refunding Revenue Bonds, Series 2009B;

--$16,000,000 Revenue Bonds, Series 2009A.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a pledge of gross revenues, a mortgage, and a funded debt service reserve.

KEY RATING DRIVERS

HEALTHY CASH FLOW: The rating affirmation reflects healthy ILU sales and strong occupancy at Asbury-MD, which continue to drive steady entrance fee revenues and solid coverage metrics through the nine-month interim period ended Sept. 30, 2011.

STRONG OCCUPANCY: Occupancy remains strong at both Asbury Methodist Village (AMV) and Asbury Solomons (A-S), supported by healthy ILU demand for the AMV courtyard project, of which 34 of 43 units have been sold through the interim period.

LIGHT LIQUIDITY: Liquidity remains light for the category, with metrics well below Fitch's 'BBB' category median levels. Fitch notes that Asbury-MD does have the benefit of unconditional and unlimited support from Asbury Communities (AC). The combined group (Asbury-MD, Asbury-PA and AC), had $76.1 million in unrestricted cash as of Sept. 30, 2011, equating to 235 days of cash on hand (DCOH).

CASH TRANSFERS A CONCERN: One of Fitch's key credit concerns continues to be the transfers out of Asbury-MD to the parent organization (AC), which are expected to continue at approximately $3 million per year.

WHAT COULD TRIGGER A RATING ACTION

IMPROVED BALANCE SHEET METRICS: Improved liquidity to levels more in line with Fitch's 'BBB' median ratios, at both Asbury-MD as well as at the combined entity could result in positive rating movement.

IMPROVED CREDIT PROFILE AT ASBURY-PA: Sustained improvement at the Asbury-PA affiliate to levels which reduce its dependence on AC support could have a positive impact on Asbury-MD's risk profile and rating.

CREDIT PROFILE

The rating affirmation at 'BBB-' is driven primarily by strong operations and occupancy at Asbury-MD, which have been bolstered by healthy demand for the courtyard village project at Asbury Methodist Village (AMV). For the nine months ended Sept. 30, 2011, occupancy at Asbury-MD was 90.8% in ILUs, 96.2% in ALUs, and 94.4% in the SNFs. In addition, revenue growth coupled with expense controls generated a 94.7% operating ratio, and 12.5% net operating margin through the interim period ended Sept 30, 2011, against Fitch's 'BBB' category medians of 97.4% and 9.9%, respectively. Solid operating performance and turnover entrance fee receipts through the interim period generated debt service coverage of 2.5 times (x) and was 1.0x by revenue-only.

The courtyard project includes 43 new ILUs at AMV, of which 100% of Phase I (23 units) and 55% of Phase II (11 of 20) have been sold. Phase I was financed with temporary debt ($16 million of bonds due in 2015) and the cost of Phase II ($8.7 million) is being financed by a portion of the entrance fee pool. The total entrance fee pool projected is $27.4 million, of which $13.1 million has been received to date.

Fitch expects the successful fill up of the courtyard home project in 2012 to generate sufficient entrance fees to redeem the $16 million in 2009A bonds by 2015, with no impact to the balance sheet.

Positive rating movement is precluded by Asbury-MD's light liquidity metrics, which remain well below Fitch's 'BBB' median levels. As of Sept. 30 2011, Asbury-MD had 183.5 days of cash on hand (DCOH), 27.1% cash to debt, and a 3.7x cushion ratio, as compared to Fitch's 'BBB' category metrics of 361.4 DCOH, 51.0% cash to debt, and a 5.9x cushion ratio. Fitch also notes that Sept. 30 interim cash values are inflated since it includes initial entrance fees for the project, which will be spent on construction for Phase II.

Liquidity measures at Asbury-MD have improved year over year since fiscal 2008, and liquidity at the combined group level improved to 235 DCOH as of Sept. 30, 2011 from 225 DCOH at fiscal 2010 and 207 DCOH at fiscal 2009. Any upward movement in the rating will require continued improvement in liquidity at both Asbury-MD and the combined group, to levels more commensurate with Fitch's 'BBB' category median ratios.

Asbury's structure allows the transfer of funds to the parent entity, which can then be distributed to either entity (MD or PA). Over time, Asbury-PA has received $1.7 million more support from AC versus transfers upstream whereas, Asbury-MD has provided more transfers upstream versus distributions received. Management indicates that Asbury-PA will transfer $2 million to AC this month, and is budgeted to transfer over $600,000 in 2012.

Although this structure is concerning, there are bond covenant requirements (debt service coverage and days cash on hand) that are tested on the individual obligated groups as well as the combined group.

Asbury-MD's exposure to the weaker performance of Asbury-PA under this structure remains a credit concern. However, through Sept. 30 2011 Asbury-PA generated a 15% net operating margin, 171 DCOH, and 1.58x debt service coverage, which is an improvement over prior years.

The combined group also has a sizeable debt level, which includes approximately $60 million (23%) in variable rate demand bonds (VRDBs) out of $261.4 million in total long-term debt at Sept.30, 2011. Combined group cash to debt was light at 35% at Sept. 30, 2011, but improved over 32% at fiscal 2010. Asbury-MD has two swap agreements outstanding with Lehman Brothers as counterparty, which remain unresolved but continue to effectively hedge against the non-obligated VRDBs. The counterparty cannot terminate either swap agreement, which currently have a combined negative MTM value of approximately $31 million with no collateral posting requirements.

The Stable outlook reflects Fitch's expectation that Asbury-MD will maintain its solid operating performance and will continue to manage the challenges relating to the current real estate environment through enhanced marketing initiatives to sustain solid turnover entrance fee receipts.

The Maryland Obligated Group (Asbury-MD) consists of Asbury Methodist Village (AMV) and Asbury-Solomons Island (A-S). Asbury-MD operates a total of 1,107 ILUs, 157 ALUs and 305 SNFs. Operating revenues were $91.7 million in 2010. Asbury-MD has covenanted to provide annual audits and quarterly unaudited financial information through EMMA, and also provides voluntary quarterly disclosure calls for investors. Disclosure to Fitch has been very good to date with quarterly disclosure that includes detailed financial statements, utilization statistics, and a brief management discussion and analysis section. Further, management has been very approachable and accessible to Fitch during periodic reviews.

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.

This action was informed by the sources of information identified in the Revenue-Supported Rating Criteria.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (Jun. 20, 2011);

--'Rating Guidelines for Nonprofit Continuing Care Retirement Communities' (July 26, 2011).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130

Rating Guidelines for Nonprofit Continuing Care Retirement Communities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=40171

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