Fitch Ratings has affirmed the 'BBB+' rating on the following revenue bonds issued by the Industrial Development Authority of the City of Winchester, Virginia, on behalf of Westminster-Canterbury of Winchester, Inc. d/b/a Shenandoah Valley Westminster-Canterbury:
--Approximately $34.4 million residential care facilities fixed-rate revenue bonds, series 2005A;
--Approximately $10.9 million residential care facilities variable-rate revenue bonds, series 2005B*.
*Underlying rating. The series 2005B bonds are supported by an irrevocable direct-pay letter of credit (LOC) from BB&T.
The Rating Outlook is Stable.
Debt payments are secured by a pledge of the gross revenues of the obligated group as well as a mortgage on the property and a debt service reserve fund.
KEY RATING DRIVERS
CONSISTENTLY SOLID OCCUPANCY: Independent living occupancy has remained above 90% over the last five years and was 90.9% through the nine months ended Sept. 30, 2012. There has been strong sales activity due to successful marketing initiatives with 24 move-ins through the nine months ended Sept. 30, 2012 compared to 18 in 2011 and 20 in 2010. This has led to solid entrance fee generation. However, ILU occupancy remains below budgeted levels of 94%.
GOOD LIQUIDITY: Shenandoah Valley Westminster Canterbury's (SVWC) liquidity ratios exceed the 'BBB' category medians with 833 days cash on hand and 85% cash to debt at Sept. 30, 2012 compared to the 'BBB' category medians of 369 days and 50.9%, respectively.
HIGH DEBT BURDEN: SVWC has a high debt burden with MADS equating to 14.5% of fiscal 2011 revenue compared to the 'BBB' category median of 12.9%. Debt service coverage (Fitch's calculation) in fiscal 2011 and through the nine-month interim period ended Sept. 30, 2012 was solid at 2.2x and 2.1x, respectively due to solid net entrance fee receipts.
CAPITAL PROJECT UNDERWAY: In 2013, SVWC is executing on part of its strategic plan by expanding its skilled nursing facility by eight beds, expanding the healthcare and wellness center, centralizing administration and upgrading accounting software. The cost of these projects is expected to be about $10 million, which may be financed by cash, additional debt or a combination of both. Fitch will assess the impact of the financing plan on the rating when details are available. However, given SVWC's already high debt burden, there is limited additional debt capacity at the current rating level.
SMALL REVENUE BASE: SVWC's relatively small revenue base inherently subjects the organization to higher debt service coverage volatility as small changes in occupancy or turnover can impact coverage.
SVWC has consistently sustained solid occupancy in its independent living units (ILUs) and occupancy continued to remain above 90% in fiscal 2011 and through the nine-month interim ended Sept. 30, 2012. Marketing initiatives include deferring entrance fee payment without interest for up to four months, a new website and tagline, direct mail efforts and access to amenities for prospective residents. SVWC has a history of solid occupancy across the continuum of care as demonstrated by average occupancies over the past three fiscal years of 92.9% for ILUs, 88.7% for assisted living units (ALUs) and 95.7% for skilled nursing facility units (SNFs). ILU occupancy through the nine months ended Sept. 30, 2012 remained good at 90.9% although below its budgeted level of 94%.
Located in Winchester, VA, SVWC's closest competitor is over 20 miles away. There is currently minimal competition in the primary service area. However, the Village at Orchard Ridge, which is also located in Winchester, has recently reached 70% pre-sales and has broken ground for construction of a new senior living facility just a few miles from SVWC. This new continuing care retirement community (CCRC) is expected to open in 2013. Although Orchard Ridge is a type-C CCRC, offering a different residency contract than SVWC, Fitch views this increased competition negatively and will monitor the impact on SVWC's occupancy levels, if any, when the new facility opens in 2013.
SVWC has a stable operating profile, with an adequate operating ratio of 99.8% in fiscal 2011 compared to the 'BBB' category median of 97.2%. Adjusted net operating margin (includes turnover entrance fees) in 2011 of 19.7% is down from 26.3% in fiscal 2010 but still in line with the 'BBB' category median of 20.3%. Through the nine-months ended Sept. 30, 2012, adjusted net operating margin improved to 36%, reflecting the strong entrance fee generation in 2012. SVWC's strong liquidity metrics are a primary credit strength. Liquidity levels are consistently above the 'BBB' category medians. Total unrestricted cash and investments at Sept. 30, 2012 equaled $37.5 million, which translates into a strong 833 days cash on hand (DCOH), 9.8x cushion ratio, and 85% cash to debt, all well-exceeding the respective 'BBB' category medians of 369 days, 6.6x and 50.9%. Fitch views maintenance of strong liquidity metrics to be important given its small revenue base.
SVWC's debt burden is elevated as indicated by MADS as a percentage of revenue. MADS ($3.8 million) represent a high 14.5% of fiscal 2011 revenues, which is above the 'BBB' category median of 12.9%. SVWC's debt service coverage (DSCR) including turnover entrance fees as calculated by Fitch has been solid at 2.2x in fiscal 2011 and 2.1x through the interim period, which is in line with the 'BBB' category median of 2x. SVWC's definition for debt service coverage under its bond documents and LOC agreement use a five-year average of realized investment gains or losses, which resulted in debt service coverage ratios of 1.97x for the nine months ended Sept. 30, 2012 compared to 1.82x in fiscal 2011. Fitch notes that SVWC's interim period net entrance fee receipts include the outstanding balance on its note receivable program related to its marketing initiative that allows the deferral of an entrance fee payment. Actual net entrance fees received through the nine months ended Sept. 30, 2012 was $4.752 million compared to $5.859 million reflected on the cash flow statement. The $5.859 million figure includes $887,000 of notes receivable outstanding. Fitch's financial analysis uses the $4.752 million figure.
SVWC had a total of $43.1 million in bonds outstanding as of Sept. 30, 2012, of which about 75% are fixed-rate and about 25% are variable-rate demand bonds (VRDBs). The VRDBs are supported by a LOC from BB&T that expires in 2013, and cash to putable debt is a strong 3.46x. Management is currently working with BB&T to determine its options for its LOC-backed outstanding debt.
The Stable Outlook reflects Fitch's expectation that SVWC will maintain strong occupancy, resulting in stable operations and solid liquidity. Fitch believes SWVC has limited debt capacity at its current rating level and will evaluate the impact of the potential financing of future capital projects on its rating once plans have been finalized.
Located on a 65-acre campus in Winchester, Virginia, SVWC is a type-A CCRC with 212 independent living units (ILUs), 60 assisted living units (ALUs) and 40 skilled nursing facility (SNF) beds. Total operating revenue was $22.99 million in fiscal 2011. For the series 2005A bonds, SVWC covenants to provide audited annual financial statements no later than 180 days after the end of each fiscal year including occupancy data. SVWC also covenants to provide quarterly financial statements including the balance sheet, statement of operations and cash flow and occupancy data within 45 days of the end of each fiscal quarter.
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', dated July 12, 2012.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Not-for-Profit Continuing Care Retirement Communities Rating Criteria
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