Fitch Affirms Friendship Village of Chesterfield's (MO) Revs at 'BBB-'; Outlook Stable
--$23.5 million series 2012;
--$19.9 million series 2007A.
The Rating Outlook is Stable.
The bonds are supported by a pledge of revenues, mortgage, and debt service reserve.
KEY RATING DRIVERS
SOLID OCCUPANCY LEVELS: FVC's occupancy is solid at 92% in independent living units (ILUs) and 93% in its health center in 2015 and has held steady in the three-month interim through September 30. FVC will continue to renovate and expand its existing units to support demand and ensure steady occupancy going forward. FVC has been successful in marketing its type-A contract as a differentiating characteristic to prospective residents.
ADEQUATE LIQUIDITY: Liquidity has improved over the past four years, with FVC reporting $20 million in unrestricted cash and investments as of Sept. 30, 2015 (interim period), representing 394 days cash. Cash-to-debt (46.9%) and cushion ratios (6.3x) have improved but remain shy of 'BBB' category medians. Interim cash was augmented by the release from escrow of a portion of initial entrance fees on now-occupied units. Fitch expects FVC's moderate capital plans of $2 million to $2.7 million through 2018 will not materially erode liquidity.
SIZEABLE DEBT BURDEN: FVC remains significantly leveraged, and no additional debt is currently planned. Debt service coverage was adequate for the rating level at 1.5x fiscal year (FY) 2015. Coverage was more in line with Fitch's long-term expectations for FVC than in 2014, when coverage was inflated by investment returns to 2.4x. FVC's covenant calculation, based on actual annual debt service over a rolling 12-month period, was 1.83x for fiscal 2015.
STEADY CASH FLOW: Consistent occupancy and turnover entrance fee levels will be necessary for FVC to meet its high debt service requirements and preserve liquidity against capital expenditures. Over the intermediate term, FVC may proceed with further campus repositioning which this rating does not incorporate.
ADDITIONAL DEBT: Fitch believes FVC has little- to no-additional debt capacity at the current rating level, absent meaningful improvement in current leverage metrics.
Friendship Village of West County (d/b/a Friendship Village of Chesterfield) is a Type-A continuing care retirement community with 270 ILUs, 39 villa apartment units, 22 residential care beds and 99 skilled nursing beds and is managed by Life Care Services (LCS). LCS manages more than 100 long-term care properties in the U.S. FVC is located on 34 acres of land in Chesterfield, MO, approximately 25 miles west of St. Louis. Total revenues in fiscal 2015 (June 30 year-end) were $18.5 million.
HIGH DEBT BURDEN
FVC is significantly leveraged, with ratios largely unfavorable to Fitch's 'BBB' category medians. Annual debt service is $3.2 million through 2028 and declines thereafter, and represented a high 16.6% of total revenues in fiscal 2015. Debt service coverage in 2015 was 1.5x, consistent with Fitch's longer-term expectations.
Fitch believes there is little room for operating volatility given FVC's high debt burden. FVC is budgeting for steady operating results in fiscal 2016, supported by consistent occupancy and turnover. Results to date show performance consistent with budget.
FCV's total debt equaled $42.5 million as of Sept. 30, 2015, which is 100% fixed rate. FVC has no swaps, and no current plans for additional debt issuance. Maximum annual debt service (MADS) equals $3.2 million, which is level through 2028, declining to $2.3 million through maturity in 2042.
FVC completed phase one of a two-phase campus restructuring in early 2014 with the opening of a $13.5 million 30-unit ILU expansion. The larger units are highly desirable; completely filled on opening, FVC maintains a robust waitlist. Conversion of some smaller units into larger combined units will occur over the intermediate term, depending on attrition and demand. Three of those units were sold during 2015.
Fitch expects routine capital expenditures to remain between $2 million and $2.7 million annually through 2018, which should be supported by cash flow. No bond proceeds remain from the 2102 offering. A second phase of FVC's campus repositioning/expansion plan is contemplated, though that phase is still not yet finalized and will depend on market conditions.
FVC covenants to provide both annual disclosure (within 150 days) and quarterly disclosure (within 45 days) to bondholders, including both financial and occupancy data. FVC has consistently provided Fitch with routine disclosure and good access to management.