Fitch Affirms University Retirement Community at Davis (CA) at 'A-'; Outlook Stable
The Rating Outlook is Stable.
The series 2013 bonds are secured by a gross revenue pledge and a first mortgage lien on the facility.
KEY RATING DRIVERS
SOLID FINANCIAL PROFILE: The rating affirmation of 'A-' reflects URC's continued solid overall financial profile with good liquidity, solid operating performance, and sound debt service coverage. Debt service coverage has been volatile due to variability in net turnover entrance fees but revenue-only coverage has been at least 1x due to favorable operating performance.
FAVORABLE MARKET POSITION: URC is the only full-service retirement community in the city of Davis with the nearest comparable competition approximately 20 miles away. Good market characteristics in Davis, combined with its mix of product offerings and competitive pricing have led to solid occupancy. Through the nine months ended June 30, 2016, occupancy was 95.6% in independent living units (ILUs), 94.4% in assisted living units (ALUs), 92.8% in memory care and 91.9% in the skilled nursing facility (SNF).
UNCOMMITTED CAPITAL: URC's debt profile is 100% uncommitted capital with a variable-rate direct bank loan (mandatory tender in 2023) that is swapped to fixed rate. However, the debt profile has improved after a restructuring in 2010, and cash-to-debt is now above 1x.
INCREASED CAPITAL SPENDING: The community is planning on converting most of its SNF to private rooms in addition to enhancing its dining options. The total project cost is $7 million and will be funded from operating cash flow. This will be spent primarily in fiscal 2017 (Sept 30 year-end) and cash-to-debt is projected to remain above 1x.
MAINTAIN FINANCIAL PERFORMANCE: Fitch expects University Retirement Community to maintain its solid financial profile due to its market position and continued investment in its facility.
University Retirement Community at Davis is a Type B continuing care retirement community (CCRC) that consists of 205 ILUs (18 cottages and 187 apartments), 36 ALUs, 14 memory care units, and 37-bed SNF. URC only offers non-refundable contracts. In fiscal 2015 (Sept. 30 year-end), URC had total revenue of $23.1 million. URC is an affiliate of and managed by Pacific Retirement Services (PRS). PRS includes eight CCRCs and 24 affordable senior housing communities in Oregon, Washington, California, Texas, and Wisconsin. Each community is separately obligated on its own respective debt. Fitch maintains ratings on two other PRS communities and one other organization (two CCRCs) that is managed by a management and consulting subsidiary of PRS.
URC's liquidity has continued to grow since Fitch's last rating review in 2014 and significantly improved over Fitch's history with the organization. Unrestricted cash and investments at June 30, 2016 was $36.3 million compared to $16 million at fiscal year-end 2012. Over this period, liquidity growth has been driven by the fill of expanded units brought on line in October 2011, release of a debt service reserve fund and collateral posting on the swap, as well as ongoing solid cash flow. URC had 729 days cash on hand and 117.5% cash-to-debt at June 30, 2016 compared to the 'A' category medians of 681 and 125.1%, respectively. Net operating margin - adjusted has been around 30% the last two years compared to the 'A' category median of 22.2%.
Profitability has been stable and solid, driven by a favorable payor mix in its SNF, good occupancy, and steady rate increases to cover core operating expenses. Outside admits to the SNF contribute to approximately 50% of SNF revenue.
Operating ratio has been consistently under 100% and was 93.8% in fiscal 2015 and 90.6% through the nine months ended June 30, 2016. Rate increases were generally 3% across all levels of care in fiscal 2015. Revenue-only coverage is sound due to favorable operating performance and was 1.4x in fiscal 2014, 1.1x in fiscal 2015, and 1x through the nine months ended June 30, 2016 compared to the A category median of 1.5x.
Good Market Position
URC's solid occupancy levels reflect its strong market characteristics and limited competition in the region. In addition, the affiliation with the University of California at Davis remains a major draw. The nearest comparable provider is approximately 20 miles away. There have been no financial incentives offered to date and sales initiatives include providing an allowance for apartment remodels.
ILU occupancy was 95.6% through the nine months ended June 30, 2016 compared to 94.6% in fiscal 2015, 97% in fiscal 2014 and 93.2% in fiscal 2013. ALU occupancy was 94.4% through the nine months ended June 30, 2016 compared to 93.6% in fiscal 2015, 96.4% in fiscal 2014 and 97.6% in fiscal 2013. Memory care occupancy was 92.8% through the nine months ended June 30, 2016 compared to 96.6% in fiscal 2015, 90.1% in fiscal 2014 and 88.4% in fiscal 2013. SNF occupancy was 91.9% through the nine months ended June 30, 2016 compared to 89.9% in fiscal 2015, 88.7% in fiscal 2014 and 84.7% in fiscal 2013.
There has been variability in net turnover entrance fee receipts with a larger amount in fiscal 2013 as there were more vacancies to fill and then, subsequently, net entrance fees dropped in fiscal 2014 due to lower inventory for sale. Net turnover entrance fees totaled $3.4 million through the nine months ended June 30, 2016, $6.6 million in fiscal 2015, $3.5 million in fiscal 2014 and $10.6 million in fiscal 2013. Management expects turnover entrance fees to be approximately $6 million going forward and net entrance fees are targeted to be $5.5 million for fiscal 2016.
Debt service coverage (including turnover entrance fees) has been volatile at 2.8x through the nine months ended June 30, 2016, 3.8x in fiscal 2015, 2.7x in fiscal 2014 and 5.2x in fiscal 2013 compared to the 'A' category median of 3.1x.
URC has been investing in its plant and the next major capital project is converting most of its SNF to private rooms. Of the 37 beds, 8 will remain semiprivate. This project is expected to be complete by early fiscal 2018. The other major capital item is renovating its bistro to offer additional dining options to residents. Fitch views the continued investment in plant favorably and believes the current project will further enhance the marketability of the community.
The project is expected to cost $7 million compared to $3 million in capital expenditures in fiscal 2015 and $2.2 million in fiscal 2014. Pro forma liquidity metrics after the majority of spending in fiscal 2017 is 683 days cash on hand and 124% cash-to-debt.
URC's debt profile is 100% uncommitted capital; however, cash-to-debt above 1x is key to maintaining the rating. URC has a $31 million series 2013 direct bank loan with Bank of America that has an initial 10-year term. The direct bank loan is at an indexed floating rate and is subject to mandatory tender on Aug. 29, 2023. Maximum annual debt service is calculated at $2.5 million.
URC has a floating - to fixed-rate swap with Bank of America/Merrill Lynch, with a current mark-to-market value of negative $5.7 million. No collateral is currently being posted and the collateral posting threshold is $7.5 million at the 'A-' rating level.
URC is not required to post public disclosure, since all the debt is privately held. URC provides annual and quarterly disclosure to Fitch on a timely basis.