Fitch Affirms Friendship Village of Schaumburg (IL) at 'BB-'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed the 'BB-' rating on the following Illinois Finance Authority revenue bonds issued on behalf of Friendship Village of Schaumburg Obligated Group (FVS):
--$65.5 million series 2005A;
--$5 million series 2005B;
--$33.6 million series 2010.
The Rating Outlook is Stable.
The bonds are supported by a pledge of gross revenues, a mortgage interest in property and improvements, and a debt service reserve fund.
KEY RATING DRIVERS
IMPROVED INDEPENDENT LIVING OCCUPANCY: Independent living unit (ILU) occupancy of 79% in fiscal 2016 (unaudited; year ended March 31, 2016) was improved from 72% in fiscal 2015. Occupancy improvement is attributed to strong sales, normalized attrition and apartment consolidations.
STABLE DEBT SERVICE COVERAGE: Debt service coverage has averaged 1.5x over the last four fiscal years and was at 1.7x in fiscal 2016. Although FVS had a strong year of entrance fee receipts, certain expense overruns and lower than budgeted revenue in the assisted living and skilled nursing service lines have resulted in lower operating profitability, which prevented coverage from improving more significantly from prior years.
WEAK LIQUIDITY: FVS' liquidity remains weak with 188 days cash on hand (DCOH), 24.6% cash to debt and a 3.1x cushion ratio. All ratios are unfavorable to Fitch's 'below investment grade' (BIG) medians of 227 DCOH, 37.3% and 5.0x, respectively.
ELEVATED DEBT BURDEN: FVS' debt burden remains elevated with maximum annual debt service (MADS) equating to 15.3% of fiscal 2016 revenues, unfavorable to Fitch's median of 10%. In addition, revenue only coverage remained weaker at 0.6x.
NON-OBLIGATED GROUP (OG) ACTIVITY: FVS' parent company (Friendship Senior Options; FSO) has a non-OG affiliate, Friendship Village of Mill Creek (dba Greenfields at Geneva (Greenfields)). Greenfields' first financial covenant test is scheduled for June of 2016. Management reports that they are not likely to meet the covenant requirements and are considering a debt refinancing or restructuring to address the issue. Fitch does not expect the developments at Greenfields to have a negative impact on FVS.
CONTINUED OCCUPANCY IMPROVEMENT: Fitch expects Friendship Village of Schaumburg to continue improving its ILU occupancy over the medium term, which should result in improved profitability and coverage. Sustained improvement could lead to positive rating action.
EXPOSURE TO SKILLED NURSING REVENUES: Given Friendship Village of Schaumburg's high reliance on skilled nursing revenues to support operations, any deterioration in the payor mix, or utilization, which negatively impacts debt service coverage may lead to negative rating pressure.
FVS is a Type B continuing care retirement community (CCRC) currently consisting of 591 independent living apartments, 28 independent living cottages, 81 assisted living units, 25 assisted living dementia units, and 248 skilled nursing beds. FVS is owned and operated by FSO who is not obligated on FVS' bonds. The CCRC is located in Schaumburg, IL, approximately 30 miles northwest of downtown Chicago. In fiscal 2016 ended March 31 (unaudited), FVS reported total operating revenues of $53.1 million.
Fitch uses the FVS obligated group financial statements in its analysis. The consolidated organization also includes non-obligated entities consisting of FSO, Friendship Village Neighborhood Services, Friendship Village of Mill Creek dba Greenfields at Geneva, and Friendship Senior Service Foundation. At unaudited fiscal year ended March 31, 2016 the obligated group represented 76% of total assets and 58% of total revenues.
IMPROVED ILU OCCUPANCY AND STABLE CASH FLOW
FVS had a robust sales year in fiscal 2016 which resulted in 122 move-ins, the highest in FVS' history, and 45 deposits for the year. Attrition was lower in fiscal 2016 with 101 turnovers, compared to 111 in fiscal 2015. Additionally, 51 of the turnovers were internal transfers to higher levels of care, against 35 in 2015, which helped retain more revenues in the community over the prior year.
FVS has been combining smaller studio apartments since 2013 in order to increase its inventory of larger accommodations which are desired by the market. All of these factors lead to improved ILU occupancy of 79% for the year, up from 72% in fiscal 2015. Assisted living unit (ALU) and skilled nursing facility (SNF) occupancies of 90% and 84%, respectively, were in line with historical results.
FVS has high exposure to the skilled nursing facility business line at about 50% of revenues and significant concentration to Medicare (43% of SNF net revenues) and Medicaid (25% of SNF net revenues) in this service line. Pressure on SNF census and revenues are elevated for FVS given governmental reimbursement limitations (especially in Illinois) and modifications to short-stay rehabilitation care management programs under Medicare.
FVS' net operating margin (NOM)-adjusted has averaged 20.7% over the last four fiscal years and was 23.2% in fiscal 2016, significantly ahead of Fitch's 'BIG' median of 14.5%. Cash flow over the last four fiscal years has been supported by solid entrance fee receipts and should show further improvement with growing ILU occupancy.
WEAK LIQUIDITY AND ELEVATED DEBT BURDEN
FVS' unrestricted cash and investments of $25.4 million equated to 188 DCOH, 24.6% cash to debt and a 3.1x cushion ratio, all weaker than Fitch's BIG median ratios. The absolute level of liquidity has remained stable over the last four fiscal years, however, growth in FVS' revenue and expense base has resulted in a year-over-year decline in DCOH. FVS' liquidity covenant requires at least 180 DCOH and management continues to monitor the ratio closely. Breaching the DCOH covenant does not constitute an event of default.
FVS' debt burden remains elevated with MADS equating to 15.3% of fiscal 2016 revenues. However, FVS' revenue growth over the last four fiscal years (16% overall growth) has resulted in incremental moderation of the debt burden over the time period. MADS as a percent of revenue improved from 17.4% in fiscal 2013, while debt to net available improved from 10.6x to 7.7x in fiscal 2016, in line with Fitch's median of 7.6x.
Greenfields has met all of its occupancy requirements to date, and is currently at 95% occupancy in its ILUs. Greenfields' first financial covenant test is scheduled for June of 2016 and management reports that they are not likely to meet the covenant requirements (debt service coverage and cash to debt tests). Management is considering a debt refinancing or restructuring to address the issue. Fitch does not expect the developments at Greenfields to have a negative impact on FVS' operations or financial profile. Currently, FVS does not have the financial flexibility to transfer funds to Greenfields without violating its own liquidity covenants. The only liquidity exposure that FVS has to date is a $2 million transfer to FSO in 2010 as part of a liquidity support agreement for Greenfields.
As of March 31, 2016, FVS had $104.1 million in total long-term debt. Its debt structure is 100% fixed rate, and includes $5 million in extendable-rate adjustable securities (EXTRAS). These bonds were remarketed and reset on Feb. 15, 2014 for 5% on a five year term (through Feb. 15, 2019). FVS has no swaps outstanding.
Under its Continuing Disclosure Agreement, FVS is required to provide annual audited financial statements within 150 days of each fiscal years end and quarterly unaudited financial statements with 45 days of each fiscal quarter-end. Disclosure to Fitch has been excellent and includes regularly scheduled investor calls.