OREANDA-NEWS. Fitch Ratings has affirmed the 'BBB-' rating on the following bonds issued by the City of Lakeland on behalf of Carpenter's Home Estates (Carpenter's):

--$22.45 million revenue and refunding bonds series 2008.

The Rating Outlook is Stable.


The bonds are secured by a mortgage on Carpenter's land and buildings, a gross revenue pledge, and a debt service reserve fund.


SOFT INDEPENDENT LIVING UNIT (ILU) OCCUPANCY: Despite the use of a marketing consultant and continued facility renovations and upgrades, ILU occupancy remains soft. ILU occupancy averaged 70% for the nine month period ending Sept. 30, 2015 down from 75% in fiscal 2014 (Dec. 31 year-end).Despite the light ILU occupancy levels over the last five years, management has adjusted expenses well and the financial profile remains adequate for the rating level.

SOLID DEBT SERVICE COVERAGE: Notwithstanding the weak ILU occupancy, debt service coverage remains solid and was 1.6x in fiscal 2014 and 1.9x for the nine month interim period ended Sept. 30, 2015. Debt service coverage is supported by adequate operating profitability and solid receipt of net entrance fees. In addition, revenue-only coverage of 0.8x in fiscal 2014 and the interim fiscal 2015 period is acceptable for a Type-A continuing care retirement community (CCRC). Fitch notes that Carpenter's debt service payments are front loaded, with current MADS of $2.13 million decreasing to $1.46 million after 2019 through final maturity.

GOOD OPERATING PERFORMANCE: Despite low occupancy in the ILUs, Carpenter's has produced good operating performance with an adjusted net operating margin of 19.2% in fiscal 2014 and 22.4% for the nine month period ending Sept. 30, 2015, which are in line with Fitch's 'BBB' category median of 19.3%. Moreover, Carpenter's operating ratio favorably remained below 100% during the last three fiscal years and the nine month interim period of fiscal 2015.

ADEQUATE LIQUIDITY METRICS: Liquidity remains solid and mostly in line with Fitch's 'BBB' category medians, but still a bit light for a Type-A CCRC. At Sept. 30, 2015 Carpenter's holds $13.3 million of unrestricted cash and investments amounting to 320 days operating expenses, 59% of debt and 6.1x cushion ratio which is consistent with 'BBB' category medians.

MODEST OPERATING PROFILE: Carpenter's relatively small revenue base inherently subjects the CCRC to more operating volatility since modest occupancy modifications or unit turnover could potentially alter profitability and debt service coverage. Management reports that the local community hospital recently opened its own short-term skilled care center and reduced the amount of patients it refers to Carpenter's which is having a negative effect on its skilled nursing facility (SNF) occupancy and revenues.


EFFECT OF ILU OCCUPANCY IMPROVEMENT: Carpenter's Home Estates has been able to maintain its 'BBB-' rating and stable financial performance despite weak ILU occupancy as a result of good expense control and a modest leverage position. Should ILU occupancy increase to higher levels, debt service coverage and liquidity metrics should improve, which could lead to upward rating movement. Conversely, Carpenter's Home Estates challenged occupancy levels leaves little room for further erosion at the current rating level.


Established in 1986, Carpenter's is a Type-A CCRC located in Lakeland, Florida, which is approximately 35 miles east of Tampa. The community consists of 372 ILUs, 49 assisted living units (ALU), and 72 SNFs. In fiscal 2014, Carpenter's had total revenues of $17.7 million.

Carpenter's continues to struggle to boost ILU occupancy even though it has used a marketing consultant in an effort to improve its advertising and sales strategies. While the marketing consultant provided a redesigned website and updated advertising materials, management notes that other sales strategies have not been effective. As a result, Carpenter's discontinued the marketing consultant's services and hired a new marketing director with extensive industry experience. Preliminary results have been positive, with management reporting accelerating ILU deposits and move-ins over the past few months.

While Carpenter's has been diligently renovating and upgrading the community's facilities, ILU occupancy remains soft mostly as a result of above average unit turnover, lackluster, but improving real-estate market, and difficulty filling a 32-unit expansion that opened during the last recession. Transfers to other levels of care and deaths accelerated over the past few years, causing an increasing number of ILUs to become available. While local real-estate values have increased over the past year, the market remains soft with home prices remaining below pre-recession levels, a high percentage of homes with negative equity, and above average mortgage delinquency rates. ALU and SNF occupancies remain healthy, averaging 91% and 92%, respectively for the nine month period ending Sept. 30, 2015. However, SNF occupancy is currently being pressured due to a newly opened short-term skilled care center that is increasing competition for Carpenter's directly admitted nursing services.


Carpenter's covenants to deliver to EMMA annual financial statements, calculation of compliance with the debt service coverage ratio and liquidity covenants, and occupancy information within 120 days of fiscal year end and quarterly financial and covenant compliance statements within 45 days after the end of each fiscal quarter.