Fitch Affirms Baywood Court (CA) COPs at 'BBB+'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed the 'BBB+' rating on $16,805,000 certificates of participation (COPs) (2010) issued by Eden Township HealthCare District, CA on behalf of Baywood Court (BWC).
The Rating Outlook is Stable.
The bonds are secured by a pledge of the gross revenues of the obligated group, a debt service reserve fund, and a lien and security interest in BWC's property.
KEY RATING DRIVERS
FAVORABLE FINANCIAL PROFILE: BWC's financial profile is characterized by robust profitability, sound liquidity, and consistent debt service coverage metrics. In the fiscal year ended June 30, 2015 and through the six-month interim ended Dec. 31, 2015, the majority of key metrics exceed Fitch's 'BBB' medians.
HIGH IL AND AL OCCUPANCY: Favorable financial performance is supported by consistently strong occupancy rates in independent living (IL) and assisted living (AL), at 98% and 96%, respectively, in 2015. Skilled nursing occupancy dipped to 82% in the six-month interim period ended Dec. 31, 2015, due to various factors including higher competition and changes in referral patterns. However, overall profitability has been good due to sound expense control practices.
SOLID LIQUIDITY: Liquidity metrics are very good, with 436 days cash on hand, 106.4% cash to debt, and 12.2x cushion ratio, all stronger than the 'BBB' medians. Given healthy cash flows and modest future capital plans, stable-to-increasing liquidity levels are expected.
LOW DEBT BURDEN: Maximum annual debt service (MADS) coverage was a robust 3x in both 2015 and 2014, compared to the 'BBB' median of 2x. All debt is fixed rate and no additional debt is expected in the near term, which adds further stability at the current rating.
MAINTENANCE OF CURRENT FINANCIAL TREND: Given BWC's rental structure, strong operating ratios and debt service coverage in excess of the median are essential. Fitch expects BWC to navigate shifts in skilled nursing utilization and continue yielding steady financial results.
BWC (fka Eden Hospital Health Services) is a rental retirement facility located in Castro Valley, CA. The facility operates 170 ILUs, 49 ALUs and 56 skilled nursing beds. Total operating revenue in the fiscal year ended June 30, 2015 was $18.5 million. BWC historically received administrative support from Life Care Services and the contract ended on Feb. 28, 2015. As expected during our last review in April 2015, this transition did not negatively affect BWC's operations.
Solid Financial Profile
BWC's financial profile is characterized by strong and stable profitability, liquidity and debt metrics. Over the last four fiscal years, BWC's operating performance was consistently strong, with operating ratio averaging 82.7% and net operating margin averaging 21.6% compared to Fitch's 'BBB' medians of 96.1% and 8.9%, respectively. Sound profitability also continued through the six-month interim period ended Dec. 31, 2015, despite the recent hike in minimum hourly wage rates.
Strong operating profitability reflects BWC's rental-only model, which differs from the entrance-fee model utilized by the majority of continuing care retirement communities (CCRCs) in Fitch's rated portfolio. While BWC may face a greater potential for census volatility due to lower financial commitments required for residents, historical occupancy has been very stable. Solid profitability results are essential, given that the underlying operations drive debt service coverage entirely compared to an entrance fee structure. Conversely, BWC is not exposed to future healthcare liabilities as would a lifecare model.
Strong IL and AL Occupancy
ILU occupancy is at or near full capacity with occupancy maintained above 98% since fiscal 2012. ALU occupancy has also been steady, averaging 92.7% over the last three fiscal years despite the steady increase in the number of units to 49 units from 30 in 2011. Skilled nursing occupancy has experienced some recent headwinds, with increasing competition and changing referral patterns related to healthcare reform. Further, staffing changes at BWC's major referral hospital affected the skilled nursing census. However, Fitch notes fluctuations in skilled nursing census have not materially affected financial results to date.
Unrestricted cash and investments totaled $17.9 million at Dec. 31, 2015, reflecting steady improvement since 2009. DCOH of 436, 106% cash to debt, and 12.2 x cushion ratio represent steady year-over-year growth, and exceed respective category medians of 60% and 7.3x. Capital plans are modest and are budgeted at $1.4 million - $1.6 million annually from fiscal years 2016 to 2018 (at or below 2015 depreciation of $1.6 million). Given manageable capital needs and consistent projected cash flows, modest growth in liquidity is expected to continue for the near term.
BWC has $16.8 million in long-term fixed-rate debt outstanding with level debt service requirements around $1.5 million annually. MADS coverage of 3x in both 2014 and 2015 was very good against the 'BBB' median of 2x. However, MADS coverage declined through the six months ended Dec. 31, 2015 to 2.4x due to realized losses on investments. MADS equated to 7.8% of 2015 revenues, which is also favorable compared to the median of 12.4%. BWC currently has no new debt plans.