Fitch Ratings has affirmed the ‘BBB’ rating on the following bonds issued on behalf of Givens Estates United Methodist Retirement Community (Givens):
–$65.4 million North Carolina Medical Care Commission retirement facilities first mortgage revenue refunding bonds, series 2007.
The Rating Outlook is Stable.
The bonds are secured by pledged assets, including gross receipts, a first mortgage lien, and a debt service reserve fund.
KEY RATING DRIVERS
STRONG OCCUPANCY: Givens benefits from strong demand as occupancy across all levels of care is high. Through 10 months ended Oct. 31, 2012 (unaudited), independent living unit (ILU) occupancy was 96%, assisted living unit (ALU) occupancy was 94%, and skilled nursing was 93.2%. Fitch views Givens’ strong demand as a primary credit strength.
SOLID PROFITABILITY: Continued strong demand across all levels of care supports Givens’ solid operations, as the organization had an operating ratio of 90.8%, a net operating margin of 18.4%, and net operating margin-adjusted of 27.6% through October 2012. All of Givens’ profitability metrics compare favorably against Fitch’s ‘BBB’ category medians.
STRATEGIC ACQUISITION: On Dec. 1, 2012, Givens acquired Highland Farms Retirement Community (HF); a type-C continuing care retirement community (CCRC) located approximately 15 miles east with 218 ILUs, 30 ALUs and 60 skilled nursing beds on a 75-acre campus. The purchase was financed with a $14.5 million variable-rate taxable loan from First Tennessee Bank. Overall, Fitch views the transaction favorably, as it expands the organization’s financial and strategic capacity into a new market despite an increase to an already high debt burden.
MIXED LIQUIDITY: As of Oct. 31, 2012, Givens had $32.4 million in unrestricted cash and investments, which translated into 549 days cash on hand, 5.2x pro forma cushion ratio, and 35.9% pro forma cash to debt. Both cushion ratio and cash to debt compared unfavorably against Fitch’s medians of 6.6x and 50.9%, respectively.
HIGH DEBT BURDEN: Pro forma maximum annual debt service (MADS) of $6.2 million, including the loan related to the HF transaction, represented approximately 15.6% of total revenues in fiscal 2011, which is high and compares negatively against Fitch’s median of 12.9%. Fitch believes Givens has limited debt capacity at its current rating level.
FUTURE CAPITAL NEEDS: Management has been planning for a long-term ILU renovation and expansion, which may cost up to $23.6 million and would likely be financed by debt. Fitch expects that this financing would be structured as temporary debt, with rapid pay-down of the loan as entrance fees are received.
RATING AFFIRMATION OF ‘BBB’
The ‘BBB’ rating affirmation is supported by Givens’ strong historical occupancy across all levels of care, robust operating performance, favorable service area characteristics, and good revenue-only MADS coverage. Key credit concerns include the organization’s high debt burden, with additional capital plans, mixed liquidity indicators, and competitive market.
ILU occupancy through the 10-month period ending Oct. 31, 2012 (not inclusive of HF), was a strong 96%. Further, over the past four fiscal years Givens’ ILU occupancy has averaged 96.3% and has never dropped below 95%, which illustrates the organization’s continual strong demand for service. Strong demand across all levels of care helped support Givens’ robust historical operating performance as the organization has averaged a 90.8% operating ratio, 20.3% net operating margin, and 26% net operating margin-adjusted over the past four years. These metrics compare favorably against Fitch’s medians, which have translated into good revenue-only MADS coverage of 0.9x through October 2012.
In December 2012, Givens acquired Highland Farms, a type-C CCRC with approximately $12 million in revenue in fiscal 2011 for $14.5 million. Although Givens is budgeting for a $143,500 gain in fiscal 2013, management is confident in beating budgeted expectations with plans to capitalize on shared savings and efficiencies, while improving ILU occupancy which was 91% in 2012. Overall, Fitch views the transaction favorably as Givens was able to expand into Black Mountain, NC, which is a middle-market community while increasing the organization’s size by approximately $12 million in total revenue. According to HF’s most recent audit (fiscal 2011), HF had an operating income of $79,602 and cash flow of $1 million.
In addition to the acquisition portion of the loan, management intends to fund $5.5 million of capital expenditures at HF, which will consist of various campus renovations.
With the acquisition of HF, Givens’ pro forma debt burden decreased slightly, but is still high with MADS as percentage of revenue of 15.6%. Debt service coverage was only 1.4x through the 10 months ended Oct. 31, 2012; however, Fitch expects this to improve with the additional cash flow from HF (consolidated into Givens’ financials as of December 2012).
Fitch continues to view the organization’s debt burden as a credit concern considering management’s plans to undertake a significant capital investment program, Creekside, which is expected to last five years. This project has been contemplated for several years and management expects the project to be completed in phases. Fitch believes that the phased approach to the project greatly mitigates the construction and development risk to Givens, particularly with the organization’s strong historical occupancy.
The first phase of the project, which is scheduled to begin in April 2013, is expected to be funded from a bank construction loan ($7 million) that will be repaid from entrance fee receipts. Management has indicated that construction will only take place if presale demand of 70% is met. As of Jan. 7, 2013, Givens already had 13 of the first 24 units reserved with residents putting down a 10% deposit. Fitch expects that any financing will be subsequently repaid in a short time from entrance fees from the new units. Additional permanent debt would likely cause negative rating pressure.
STABLE RATING OUTLOOK
The Stable Outlook reflects Fitch’s belief that Givens will continue to maintain its strong credit fundamentals, such as solid demand for services and operational profitability. Fitch believes the organization’s recent acquisition of HF will be accretive to the organization over the medium term.
OUTSTANDING DEBT PROFILE
Fitch views Givens’ debt profile as conservative, since 72% is traditional fixed-rate bonds and 28% is variable-rate with no outstanding swaps. In December 2012, management took out a $20 million variable-rate loan to finance the HF acquisition ($14.5 million) as well as three years of capital investment ($5.5 million). The bank loan is with First Tennessee Bank, and has a 10-year term amortizing over 25 years.
Operating in Ashville and Black Mountain, NC, Givens is a type C CCRC consisting of 603 ILUs, 77 ALUs, and 144 skilled nursing beds.
Givens has covenanted to provide annual audits within 120 days of fiscal year end and quarterly disclosure within 30 days of quarter end via the MSRB’s EMMA system. Fitch views the disclosure requirements imposed by the state of North Carolina Department of Insurance favorably and believes the content represents an industry best practice. Additionally, management was candid and timely in its responses to Fitch during the credit review process.
Applicable Criteria and Related Research:
‘Revenue-Supported Rating Criteria’, dated June. 12, 2012.
‘Rating Criteria for Not-for-Profit Continuing Care Retirement Communities’, July 12, 2012.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Not-for-Profit Continuing Care Retirement Communities Rating Criteria