Fitch Rates RiverWoods at Exeter (NH) 'BBB+'; Stable Outlook
Fitch Ratings has assigned a rating of 'BBB+' to the implied general revenue obligation of RiverWoods at Exeter (RiverWoods) New Hampshire.
The Rating Outlook is Stable.
KEY RATING DRIVERS
HIGH IL OCCUPANCY A CREDIT STRENGTH: Over the last four fiscal years (June 30 year end), RiverWoods' independent living unit (ILU) occupancy has averaged 96.5%. These figures include the fill-up of RiverWoods' 100 units (76 apartments and 24 cottages) expansion project, The Boulders, which opened in March 2010. Fitch views RiverWoods' on time expansion fill up of 100 new units, especially in the current challenging senior living environment, as a credit strength and evidence of a strong demand for RiverWoods' services. Assisted living and skilled nursing occupancy, which has ranged from 85% to 96%, were lower at 65.9% and 83%, respectively, and reflect the impact of the first generation residents at The Boulders, who have yet to move through the continuum of care.
POSITIVE OPERATING TREND: RiverWoods' operating ratio has been at around 100% from fiscal 2009-2011, but audited results for fiscal 2012 show the operating ratio improving to 91.3%. The improved operating ratio reflects the added monthly service fee revenue from the newly occupied Boulder units. RiverWoods' net operating margin - adjusted has also shown improvement rising from 12.1% in fiscal 2010 to 22.5% in fiscal 2011 and remaining solid in 2012 at 21.4%. Fitch's 'BBB' category median is 17.6%. Fitch expects the net operating margin - adjusted to sustain its current levels over the next three to five years as the Boulders apartments begin to turn over.
LIQUIDITY A STRENGTH: At June 30, 2012, RiverWoods had $56.4 million in unrestricted cash and investments, which equated to 782.8 days cash on hand (DCOH), a 14.2 times (x) pro forma cushion ratio, and 89.1% cash to debt, which compare favorably with Fitch's 'BBB' category medians of 361.4, 5.9x and 51%, respectively. Liquidity has steadily increased through the historical period, when unrestricted cash and investments stood at $25 million in June of 2009.
GOOD SERVICE AREA CHARACTERISTICS. Exeter and the surrounding communities have solid demographics with New Hampshire an attractive retirement destination, due in part to its low cost of living with no state taxes. This is reflected in 48% of RiverWoods' current residents coming from out of state. There is competition in the region, but it is not a credit concern and the strong fill up of The Boulders reflects the good demand for services.
MANAGEABLE DEBT BURDEN: Debt levels are manageable at the rating level with pro forma maximum annual debt service (MADS) as percent of revenue at 10.4% and pro forma MADS coverage in fiscal 2012 of 2.2x, both better than Fitch's 'BBB' medians of 13.% and 1.6x, respectively. Pro forma revenue only MADS coverage was solid at 1.3x. It was the first time it was over 1x through the historical period and reflects RiverWoods' improved operating profile in fiscal 2012.
AGGRESSIVE DEBT PROFILE: RiverWoods does have a riskier capital structure for the rating level. Currently, all of RiverWoods' $65.6 million in long-term debt is variable rate. The variable rate debt is privately placed and the placement period is for 10 years. This limits put risk over the medium term; however, it remains uncommitted capital. Approximately all of the debt is swapped to fixed rate. Pro forma MADS is $4 million and was provided by the underwriter.
Located in the Exeter, New Hampshire, RiverWoods at Exeter is a type-A continuing care retirement community with 391 independent living units (ILUs), 71 assisted living units (ALUs) and 78 skilled nursing facility units (SNFs). In 2011, RiverWoods reported total operating revenues of $37.9 million.
RiverWoods has a unique campus layout and is composed of three self-contained campuses within very close proximity to each other. Each campus, the Woods, the Ridge, and the Boulders, was built separately and each offers its own assisted and skilled nursing services, as well as separate dining services, recreation, and programming. While this approach may lead to operating inefficiencies, RiverWoods' management team views it as a marketing strength and reflective of residents' expressed desire to remain within the same campus as they move through the continuum of care.
Additionally, regardless in which campus residents reside, they have access to the dining, recreation, and programming at all three sites. Fitch toured all three campuses. The recently opened Boulders is physically very attractive. The Woods, built in 1990s and the oldest of the three, is marketable, but will need capital investments to update certain sections, including the skilled nursing wing. The Ridge opened in 2004, is in very good condition. RiverWoods management has made regular capital investments in the plant and that is reflected by an average age of plant of 9.7 years.
With the stabilization of the Boulders, RiverWoods showed a marked year-over-year improvement in operating performance. Operating ratio of 91.3% in fiscal 2012 is improved from 101.3% in fiscal 2011, and compares favorably to the 'BBB' category median of 97.2%. Net operating margin-adjusted (including turnover entrance fees) remained consistent year-over-year at 21.4% in fiscal 2011 compared to 22.5% in the prior year and slightly above the 'BBB' category median of 20.3%.
Historical coverage of pro forma MADS (estimated at $4 million as provided by the underwriter) of 2.2x in fiscal 2012 compares favorably to the 'BBB' category median of 2.0x. Pro forma revenue only coverage was also strong at 1.3x and much better than fiscal 2011's 0.7x, which also reflects the improved operating performance. Pro forma MADS equates to a manageable 10.4% of 2012 revenues compared to the 'BBB' category median of 12.9%.
At June 30, 2012, RiverWoods unrestricted cash and investments totaled $56.4 million, which equals 782.8 days cash on hand, 14.2x pro forma cushion ratio and 89.1% cash to debt and are solid for the rating level and better than their respective 'BBB' medians.
Fitch views occupancy as a credit strength and believes it reflects RiverWoods' reputation in the market, the above-average socio-economic characteristics of the service area, and the manageable level of competition. Occupancy in the ILUs has averaged 96.5% over the last four audited years, with fiscal 2012 the first year the Boulders was included. Occupancy in the SNF has averaged just under 90% over the last four audited years. Assisted living (AL) occupancy which was generally high fell to 65.9% in fiscal 2012, but that is due mostly to new Boulders resident not yet moving through the continuum of care. AL units increased to 71 from 47 with the addition of the Boulders. ALU occupancy is not a concern as it is not a driver of cash flow at the level that IL occupancy is.
The Stable Outlook is based on Fitch's expectation that RiverWoods will continue to produce stable debt service coverage supported by strong occupancy and solid turnover entrance fees receipts.
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.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated June 12, 2012;
--Rating Guidelines for Nonprofit Continuing Care Retirement Communities, July 12, 2012.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Rating Guidelines for Nonprofit Continuing Care Retirement Communities
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