Fitch Affirms American Baptist Homes of the West (CA) Rev Bonds at 'BBB+'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed the 'BBB+' rating on American Baptist Homes of the West's (ABHOW) outstanding debt, which is listed at the end of the press release.
The Rating Outlook is Stable.
Gross revenue pledge and mortgage pledge of the obligated group (OG) in addition to the guaranty from American Baptist Homes Foundation of the West (Foundation). The guaranty agreement is limited to the Foundation's income earned on its unrestricted net assets; however, its unrestricted cash and investments are included as part of the OG's liquidity covenant calculations. Fitch's analysis is based on the OG.
KEY RATING DRIVERS
GEOGRAPHIC DIVERSITY AND GOOD OCCUPANCY: ABHOW's main credit strength is its revenue size with facilities that are geographically diverse, competitively priced and have a long history of providing care in each of their service areas. Occupancy across all levels of care is solid with 93.3% in independent living, 92.7% in assisted living, 94.7% in dementia care, and 88.7% in skilled nursing through the six months ended March 31, 2016.
SUSTAINED IMPROVED OPERATING PERFORMANCE: ABHOW's operating performance continues to improve and operating ratio was below 100% in fiscal 2015 (Sept. 30 year end). Fiscal 2015 and first quarter fiscal 2016 performance has been ahead of budget, mainly driven by higher than expected census in skilled nursing. MADS coverage is adequate at 1.9x in fiscal 2015 but should improve when the last phase of the Terraces of Los Altos (TLA) repositioning project opens by the end of 2016. Actual debt service coverage per bond covenant calculation was 3.1x for fiscal 2015.
EXPOSURE TO NON-OBLIGATED AFFILIATES: There are several financially weak non-obligated group affiliates that the OG has consistently supported, which Fitch has viewed as a main credit concern. The support over the years has been in the form of loans/subordinated note receivables, equity transfers for various initiatives, deferral of management fees, and liquidity support committed to various non-obligated affiliates that allowed the entities to secure its own financings/refinancings. In addition, the OG has a $30 million revolving line of credit available to provide completion or construction loan guarantees on affordable housing projects and none is currently committed. Fitch views the support to non-obligated affiliates negatively as it depresses the obligated group's performance.
MAJOR CAPITAL PROJECT UNDERWAY: TLA is undergoing a major campus transformation, which will result in a brand-new community at the end of construction. There are various phases and operating performance will be pressured over the near term until 81 new independent living units (ILUs) are available for occupancy. The project is projected to reach stabilized occupancy in fiscal 2019 and approximately $51 million of temporary debt (series 2013B1-B3) is expected to be paid down with initial entrance fees in fiscal 2017 and 2018. The project is approximately one-year behind the original schedule from delays in the first phase.
PRESSURED LIQUIDITY: ABHOW's unrestricted cash and investments (including Foundation) have been fairly stable with 352 days cash on hand and 46.3% cash to debt at Dec. 31, 2015. Liquidity will be pressured in the near term as ABHOW settles the termination of its defined benefit pension plan. However, over the longer term, liquidity metrics are projected to gradually increase.
AFFILIATION ANNOUNCEMENT: American Baptist Homes of the West and be.group (not rated by Fitch; seven senior living facilities [obligated group] in southern California) announced plans to affiliate, which is expected to receive regulatory approval in April to May of 2016. The affiliation is expected to result in common governance and management of the entire enterprise, although, each entity's respective debt will still be separately obligated. Fitch will evaluate the impact of the affiliation on the rating as more information becomes available.
CONSISTENT PERFORMANCE EXPECTED: Fitch expects stable performance in the near term and an improved financial profile over the mid term with the stabilization of the Terraces of Los Altos project. Fitch has always viewed the support to non-obligated group entities as a key credit concern and a decline in the obligated group's financial performance related to this support or from a deterioration in core operations would likely result in negative rating pressure as there is minimal cushion at the current rating level.
The ABHOW OG consists of seven continuing care retirement communities (CCRCs), which include Terraces of Los Altos in Los Altos, CA, Grand Lake Gardens in Oakland, CA, Piedmont Gardens in Oakland, CA, Plymouth Village in Redlands, CA, Valle Verde in Santa Barbara, CA, Rosewood in Bakersfield, CA, and Terraces of Los Gatos in Los Gatos, CA. ABHOW primarily offers a Type B contract and the majority of the contracts are nonrefundable.
In fiscal 2015, the ABHOW OG had total revenue of $135 million. ABHOW's sole corporate parent is Cornerstone Affiliates (Cornerstone). There were several subsidiaries under ABHOW that were moved under Cornerstone, Judson Park (a CCRC in Washington) and Seniority (sales and consulting services) in fiscal 2015. Currently, the only other subsidiaries under ABHOW are affordable housing (Beacon Communities) and the Foundation. It is expected that Beacon will also be moved under Cornerstone eventually. Fitch views this reorganization favorably as it further delineates obligated group vs non obligated group activity.
Cornerstone includes four other CCRCs - Las Ventanas Retirement Community (LVRC), Terraces of Phoenix (ToP), Terraces at San Joaquin Gardens (TSJG) and a start-up CCRC, Terraces of Boise. Cornerstone's CEO and CFO are the same as ABHOW's. Fitch did not analyze Cornerstone financials, and the analysis is based on the financial profile of the OG and the numbers referenced are for the OG (plus Foundation for liquidity metrics).
ABHOW and be.group (fka Southern California Presbyterian Homes) announced its intent to affiliate, which is awaiting regulatory approval. The goal of the affiliation is to provide greater scale while streamlining processes for efficiency. Fitch will evaluate the impact of the affiliation on ABHOW OG's rating as more information becomes available.
Solid Financial Profile
ABHOW's operating performance continued to improve since Fitch's last rating review in April 2015 with a 98.2% operating ratio in fiscal 2015 compared to 101.4% in fiscal 2014 and 101.7% in fiscal 2013. Performance was sustained through the three months ended Dec. 31, 2015 with a 99.3% operating ratio. One of management's strategic focuses is improving SNF census and has been working on developing local hospital relationships. SNF occupancy improved to 88.8% in fiscal 2015 from 84.4% the prior year.
Net turnover entrance fees were slightly lower in fiscal 2015 at $16.8 million compared to approximately $18 million a year for the prior two years. Through the three months ended Dec. 31, 2015, net entrance fees received were much stronger at $4.8 million but MADS coverage remained at 1.9x due to weaker investment performance.
ABHOW's unrestricted cash and investments (including Foundation) was $116 million at Dec. 31, 2015, which equated to 352 days cash on hand and 46.3% cash to debt compared to the 'BBB' category median of 400 days and 60% cash to debt. Cash to debt should improve by 2019 as initial entrance fees from the TLA project are used to pay down the temporary debt.
TLA originally consisted of 73 ILUs, 14 ALUs and 65 SNF beds. After the three phases of construction, the campus will be expanded from 121,000 square feet (sf) to roughly 180,000 sf with only 21,000 sf of current space retained and will consist of 105 ILU apartments, 30 ALUs, 16 memory support suites and 30 SNF beds. The total project cost is $118 million and funded primarily from debt. As of March 31, 2016, the remaining amount to be spent is $31 million with $27.7 million of bond project funds available.
The 81 new ILU apartments will generate an entrance fee pool of approximately $72 million, which will be used to pay down $51 million of temporary debt (series 2013 B1-B3 bonds), which mature in 2019, 2020 and 2021. As of April 21, 2016, 75 of the 81 (92.6%) apartments have been reserved with a 10% deposit. The existing 23 ILUs are now also being marketed with 20 occupied. The skilled nursing and memory care building opened in April 2014 and the assisted living opened in January 2015. The ILUs are expected to open by the end of 2016.
Additional Capital Expenditures
ABHOW's average age of plant is high at 16.8 years but four (including TLA) of the communities have undergone major repositioning projects. There are ongoing capital needs but no other large scale projects in the near term. The capital budget for fiscal 2016 totals $19.4 million and is slightly above depreciation expense with $6 million targeted for apartment remodels. ABHOW has also self-restricted cash for future projects and $10 million was designated as 'restricted cash' as of Dec. 31, 2015 and not included in Fitch's liquidity calculations.
Non-Obligated Group Activity
The OG has provided support in the past to its non-obligated affiliates in the form of loans/subordinated note receivables, equity transfers for various initiatives, and deferral of management fees. In addition, there is a finite amount of liquidity support extended to non-obligated group affiliates, which were mainly committed to secure financings at the non-obligated entity level. Judson Park, LVRC, ToP, and Boise each have its own debt outstanding and are all currently in compliance with their covenants. The total amount of liquidity that could be drawn by these facilities is $6.7 million.
The OG has $47 million of subordinated and other note receivables owed from non-obligated affiliates and these primarily include TSJG ($30 million), which withdrew from the ABHOW OG in 2012 to complete a repositioning project, and $10 million related to ToP to complete its debt refinancing in December 2015. Due to missed financial performance targets, TSJG currently owes the OG $3 million related to payment on its subordinated debt.
Other equity transfers include the support of international activities (approximately $1 million a year the last few years) and $2 million in fiscal 2016 to Cornerstone to help fund affiliation expenses.
The OG maintains a $30 million revolving line of credit to provide completion or construction loan guarantees on affordable housing projects and none is currently committed. It is expected that these construction completion guarantees will be provided by Beacon in the future once Beacon has sufficient capital to do so.
Total OG debt is approximately $246 million and is 92.3% fixed rate and 7.7% indexed floating rate. OG debt includes the series 2015, 2013 and 2010 bonds and a $19 million direct bank loan (series 2012) with PNC Bank that is at an indexed floating rate. The direct bank loan had an initial term of five years and ABHOW is in the process of extending for another five year term (2021).The OG does not have any swaps outstanding.
ABHOW's financial disclosure practices are excellent and include annual and quarterly financial statements, utilization statistics, management discussion and analysis and quarterly investor calls.
--$52,080,000 California Statewide Communities Development Authority (CA) (American Baptist Homes of the West) revenue bonds series 2015;
--$103,685,000 California Statewide Communities Development Authority (CA) (American Baptist Homes of the West) revenue bonds series 2010;
$71,250,000 California Statewide Communities Development Authority (CA) (American Baptist Homes of the West) revenue bonds series 2013A, B1-B3.