Fitch Rates Cadbury at Lewes, DE's Rev Bonds 'BBB'; Outlook Stable
--$21 million fixed rate refunding revenue bonds, series 2016.
The bonds are being issued to refund the outstanding 2006A and 2006B bonds, to fund a debt service reserve, and to pay costs of issuance. The bonds are expected to sell via negotiation the week of Oct. 3, 2016.
The Rating Outlook is Stable.
The bonds are secured by a pledge of gross revenues, a mortgage lien, and a debt service reserve fund.
KEY RATING DRIVERS
STRONG DEBT SERVICE COVERAGE: Solid operational performance and consistent cash flows have led to pro forma maximum annual debt service (MADS) coverage of 3.1x in fiscal 2016, 4.5x in fiscal 2015, and 4.3x in fiscal 2014 which remains higher than Fitch's 'BBB' category median of 2.0x. Furthermore, revenue-only pro forma MADS coverage was a healthy 1.6x in fiscal 2016 which is also higher than the 'BBB' category median of 1.0x.
SOLID OCCUPANCY: Cadbury at Lewes (CaL) has demonstrated strong demand for their services as evidenced by their July 2016 occupancy rates of: 92% for the independent living units (ILU), 91% for the assisted living units (ALU), and 90% for skilled nursing facility (SNF) beds. Over the last three fiscal years, occupancy rates have averaged 92% of ILUs, 90% for ALUs, and 90% for SNF beds. Furthermore, CaL has no major competitors in its primary service area which offers a competitive advantage in attracting prospective residents.
MANAGEABLE DEBT BURDEN: Pro forma MADS equates to a manageable 8.8% of fiscal 2016 operating revenues which remains lower than Fitch's 'BBB' median of 12.4%. Additionally, debt to net available was a low 4.8x in fiscal 2016 which remains lower than the 'BBB' median of 5.9x.
SUFFICIENT LIQUIDITY: As of fiscal 2016, CaL had 186 days cash on hand (DCOH) and 33.7% unrestricted cash to debt which both remain below the 'BBB' median of 400 DCOH and 60%, respectively. While lower than the medians, liquidity remains sufficient for its rating level given CaL's strong occupancy levels, healthy cash flow, and robust coverage levels.
LIQUIDITY LEVELS: While current liquidity levels are sufficient for its rating level given strong occupancy and pro forma coverage, any deterioration of current liquidity levels could result in negative pressure on the rating. Alternatively, strengthened cash balances and further debt moderation could lead to positive rating action.
Cadbury at Lewes is a continuing care retirement community (CCRC) located on approximately 38.5 acres in Lewes, DE which is in close proximity to the Atlantic Ocean and Delaware Bay. CaL's initial financing was in 2006 and the facility opened its doors in October 2007. The facility consists of 130 ILUs, 45 ALUs (15 of those are designated for memory care), and 40 SNF. CaL offers two Type-B contracts: a 90% refundable entrance fee contract and a traditional amortizing entrance fee contract. Both contracts include a total of 60 free days in CaL's ALU and SNF. As of March 31, 2016, approximately 97% of residents have chosen the 90% refundable entrance fee contract option. Favorably, CaL only pays out entrance fee refunds after re-occupancy of the ILU by a new resident, payment of the new entrance fee, and expiration of the adjustment period (60 days).
CaL is governed by a five-member board and is affiliated with the Religious Society of Friends (Quakers). CaL's sole member is Cadbury Senior Services (d/b/a Cadbury Senior Lifestyles), which provides management services to the community for an annual fee. Cadbury Senior Services' (CSS) President and CEO serves as ex-officio member on CaL's board of directors and CSS approves all of CaL's board members, any by-law changes, and its budgets. Other entities owned by CSS are: Cadbury Continuing Care at Home and Cadbury Consulting. CSS has recently sold its ownership in Cadbury at Cherry Hill (CaCH), a CCRC located in Cherry Hill, NJ. There is no obligated group structure, as each affiliate is responsible for its own financial commitments. However, transfers among CSS' affiliates have occurred in the past. CSS is currently in discussions with Springpoint Senior Living regarding a potential merger of the two organizations. These discussions and potential merger of the two organizations is not factored into rating of the series 2016 bonds. In fiscal 2016, CSS had total operating revenues of $35.0 million and CaL had total operating revenues of $15.1 million, which is much smaller than Fitch's stand-alone CCRC median of $27.2 million.
CaL has demonstrated strong demand for their service lines as evidenced by their solid occupancy rates over the last few years. As of July 2016, occupancy rates were 91.7% in ILUs, 90.7% in ALUs, and 90.0% in SN beds. Furthermore, historical occupancy has been strong as CaL illustrated the following average occupancy rates over the last three fiscal years: 91.8% in ILUs, 90.2% in ALUs, and 90.0% in SNF beds.
CaL's strong occupancy rates can be attributed to its desirable location, attractive pricing options, and its limited competition for prospective residents. Located in Lewes, DE, CaL's close proximity to the Atlantic Ocean and Delaware Bay helps attract prospective residents from outside its primary service area (PSA). Currently, approximately 40% of residents come from outside CaL's PSA, with approximately 26% of residents coming from other states. Additionally, current residents have an average net worth that is over two times the weighted average entrance fee.
CaL benefits from having limited competition for prospective residents as no other CCRCs are currently located in its PSA. Additionally, CaL's SNF, which provides short-term rehabilitation and long-term skilling nursing care, is the only five-star CMS rated facility in its PSA. This has resulted in a strong outside demand for its SNF as approximately 90% of its SNF units are filled with direct admissions from outside the facility. A strong clinical relationship with the area's leading hospital, Beebe Medical Center supports SNF demand. Approximately 60% of its SNF revenues come from Medicare, with private pay equating to 30%.
ROBUST DEBT SERVICE COVERAGE
CaL furthered its strong operational performance in fiscal 2016 with a 92.6% operating ratio and 13.5% net operating margin which both remain stronger than Fitch's 'BBB' category medians of 96.1% and 8.9%, respectively. CaL's solid operational performance is attributed to its strong occupancy rates and healthy demand from outside residents for its SNF. This strong operational performance, mixed with healthy cash flows, has resulted in pro forma MADS coverage of 3.1x in fiscal 2016, 4.5x in fiscal 2015, and 4.3x in fiscal 2014 which all remain significantly higher than the 'BBB' category median of 2.0x. Furthermore, pro forma revenue-only coverage was a robust 1.6x in fiscal 2016 which also is higher than the 'BBB' category median of 1.0x.
While coverage and operational ratios remain in excess of 'BBB' category medians, CaL's liquidity remains below the medians. In fiscal 2016, $6.7 million of unrestricted cash and investments amounted to DCOH of 186, cash to debt of 33.7%, and cushion ratio of 5.1x which are all below the 'BBB' medians of 400 DCOH, 60%, and 7.3x, respectively. Note that Fitch includes CaL's operating reserve fund in its unrestricted cash and investments figure and in the calculation of its liquidity ratios. CaL's solid occupancy rates and robust coverage ratios help mitigate concerns over its relatively weak cash position which is mostly attributed to prior ongoing intercompany advances to other CSS affiliates.
Following fiscal 2016, CaL has repaid its last development fee payment of $826 thousand, purchased an undeveloped parcel of land for $1.25 million, and received all money owed from CaCH which has altered its cash position. As of Aug. 31, 2016, Fitch estimates CaL's unrestricted cash and investments position to be approximately $8.4 million which translates into DCOH of 282, cash to debt of 41.4%, and a cushion ratio of 6.4x.
ADVANCES TO AFFILIATES
At the end of fiscal 2016, CaL had approximately $5.9 million which was due from CSS or various CSS affiliates. Following CSS's sale of CaCH, this $5.9 million due to CaL has since been reduced to approximately $2.4 million as of Aug. 31, 2016. Ongoing advances to affiliates are not a credit concern following the sale of CaCH, since the remaining affiliates have small operations with adequate performance.
The $21 million series 2016 fixed rate refunding revenue bonds are expected to be used to refund CaL's outstanding 2006A and 2006B bonds, to fund a debt service reserve, and to pay costs of issuance. The 2006A and 2006B bond proceeds were used to develop and construct CaL's CCRC campus which opened in 2007. After the refunding, the series 2016 bonds will be the only outstanding long-term debt of CaL. The series 2016 bonds are projected to offer significant debt service savings on CaL's already manageable debt burden. In fiscal 2016, pro forma MADS equated to 8.8% of total operating revenues which remains lower than Fitch's 'BBB' category median of 12.4%. Additionally, CaL has no exposure to derivative instruments which is viewed favorably.
CaL covenants to provide audited financial information and occupancy statistics within 150 days of fiscal year end and quarterly statements and occupancy statistics within 45 days of quarter end. All information will be provided via the Electronic Municipal Market Access System which is maintained by the Municipal Securities Rulemaking Board.