Fitch Ratings has assigned an 'A-' rating to the approximately $30.4 million Washington State Housing Finance Commission revenue refunding bonds, series 2013 issued on behalf of Eastside Retirement Corporation d/b/a Emerald Heights.
Proceeds of the series 2013 fixed rate bonds will be used to refund the outstanding series 2003 bonds and pay costs of issuance. A debt service reserve fund will be funded from equity. The bonds are expected to sell the week of Feb. 4.
The Rating Outlook is Stable.
The bonds will be secured by a gross revenue pledge and a mortgage. A debt service reserve fund will provide additional security.
KEY RATING DRIVERS
SOLID FINANCIAL PROFILE: Emerald Heights' financial profile is strong for its rating level and all metrics exceed Fitch's 'A' category median ratios. However, this community is embarking on several strategic initiatives that will impact its financial profile. Despite this, Fitch expects Emerald Heights' profile to remain in line with the 'A' category median ratios even with the planned capital spending.
SIGNIFICANT NEAR-TERM CAPITAL SPENDING: Emerald Heights is currently executing on a sizable $60 million master facility plan. This includes a new fitness center, auditorium, dining expansion and renovation and renovation of skilled nursing common areas as well as the addition of 43 independent living units (ILUs). The total capital plan will be funded by approximately $25 million of equity and $35 million of constructions loans, which are expected to be mostly repaid with the entrance fees from the new ILUs.
STRONG OCCUPANCY: Strong and consistent occupancy is a key credit strength. Emerald Heights has maintained occupancy levels above 90% over the last three years in its ILUs and assisted living units (ALUs).
RISK FROM NEW AFFILIATE: Emerald Heights has extended a $10 million line of credit to Gig Harbor, LLC (Gig Harbor) for start-up costs and land acquisition, of which, $1 million has been drawn. Gig Harbor, a subsidiary of the parent Emerald Communities, is a start-up community, which is in pre-sale mode for the construction of a continuing care retirement community (CCRC) with 180 ILUs, 10 cottages, 12 ALUs and 45 SNF units. Although Gig Harbor is outside the obligated group, there is a shared parent and management team with Emerald Heights. Management indicates that it does not intend to provide any additional financial support to Gig Harbor. Fitch will monitor the amount of transfers out of the obligated group to support non-obligated entities, which could place downward pressure on the rating.
Located in Redmond, Washington, about 17 miles from Seattle, Emerald Heights is a type-A CCRC situated on a 38-acre campus. The community currently has 290 independent living units (266 apartments and 24 cottages), 56 assisted living units and 55 skilled nursing beds. Total operating revenues in fiscal 2011 (Dec. 31 year end) equaled $23.3 million.
The 'A-' rating reflects Emerald Heights' strong financial profile and consistently good occupancy. This rating incorporates its significant capital spending over the next few years and a $10 million commitment for start-up costs for Gig Harbor. The capital spending incorporates $25 million of equity ($13 remaining to be spent) and $35 million of construction loans ($20 million existing and $15 million to be secured). Total debt is expected to increase to a maximum of $66 million in fiscal 2014 as the construction loans are drawn down for the construction project and then subsequently reduced to approximately $35 million of total debt in fiscal 2015 as the outstanding construction loans are paid down with entrance fees from the new units. Fitch used MADS of $3.225 million, which includes interest on the construction loans.
Emerald Heights' debt burden is elevated due to its small revenue base with pro forma MADS as a percent of fiscal 2011 revenue of 13.8%, which is high compared to the 'A' category median of 8.7%. However, pro forma MADS coverage by turnover entrance fees (including construction loan interest) is strong at 5x at Nov. 30, 2012. Fitch expects debt service coverage ratios to continue to exceed the 'A' category medians. The use of temporary debt (construction loans) introduces a potential risk of needing to refinance the debt with permanent debt; Fitch believes Emerald Heights has some additional debt capacity as long as debt service coverage ratios remain solid.
Liquidity has historically been very strong and exceeds Fitch's 'A' category medians. At Nov. 30, 2012, Emerald Heights' unrestricted cash and investments totaled $60.2 million, which equated to 1,253.2 days cash on hand, 115.7% cash to debt and 18.5x cushion ratio compared to the respective 'A' category medians of 494.8 days, 120.2% and 14.4x. After adjusting the balance sheet to account for the remaining $9 million commitment to Gig Harbor, $13.2 million in equity contributions for master plan projects and $2.4 million to fund the series 2013 debt service reserve fund, liquidity remains in line with the 'A' category medians. Including these reductions, days cash on hand, cash to debt, and the cushion ratio would drop to 741.6 days, 70.7%, and 10.9x, respectively. Fitch does not expect cash to decline below this stress case as equity contributions will be spread out over the next few years.
Emerald Heights' historical operating performance is in line with the 'A' category median. Operating ratio of 92.6% in fiscal 2011 was good compared to the 'A' category median of 95.2%. Adjusted net operating margin (includes turnover entrance fees) of 35.2% in fiscal 2011 was also strong compared to the 'A' category median of 21.9%.
Emerald Heights' occupancy levels have been consistent over the past three years (2009-2011) averaging 92.1% for ILUs and 95.8% for ALUs. Because the SNF does not allow outside admits, occupancy has fluctuated somewhat over the last three years but has averaged 93.6%. Currently occupancy in the SNF is 83.6%.
Credit concerns include the execution risk related to Emerald Heights' sizable master facility plan and potential additional financial pressures from Gig Harbor. The $60 million master plan comprises construction and renovation projects including a new fitness center, dining room expansion, SNF renovations and the addition of 43 ILUs. The master plan is underway and management expects to contribute up to $13 million in equity over the next few years, in addition to the $12 million already spent. To complete its funding sources, Emerald Heights has secured a $20 million construction loan from Bank of America for its renovation projects. Currently, about $5 million has been drawn on this loan. Emerald Heights expects to pursue an additional $15 million construction loan, which, in combination with current cash and loans, will be sufficient to finance the 43 ILU expansion on its existing campus. Pre-sales for these new ILUs reached 75% in November 2012 after an 11-month sale period, and construction is expected to commence in the spring of 2013. The new ILUs are expected to generate an entrance fee pool of approximately $27 million, which will be used to pay off a portion of the construction loans.
As aforementioned, Fitch is concerned with potential additional financial commitments to Gig Harbor. Emerald Heights has provided a $10 million financial commitment (treated as a loan) to fund pre-development costs for a second start-up CCRC at Gig Harbor, near Tacoma, Washington. Gig Harbor is expected to repay this loan once occupancy stabilizes. Approximately $1 million of this loan has already been funded out of cash and is reflected in the November interims. An additional approximately $9 million is expected to be loaned to Gig Harbor over the next few years. The master indenture currently has asset transfer provisions, but Emerald Heights' management team has indicated that it has no intent to provide any additional financial support to Gig Harbor. Fitch believes that significant equity contributions beyond the $10 million may negatively impact the rating.
The Stable Outlook reflects Fitch's expectation that Emerald Heights will maintain its favorable financial profile as it successfully executes its master facility plan.
Emerald Heights covenants to provide annual audits to the EMMA system within 120 days of each fiscal year's end and quarterly statements within 45 days of quarter's end.
Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in the Revenue Supported Rating Criteria, this action was informed by information from the underwriter.
Applicable Criteria and Related Research:
--'Revenue Supported Rating Criteria' (June 12, 2012);
--'Rating Guidelines for Nonprofit Continuing Care Retirement Communities' (July 12, 2012).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Rating Guidelines for Nonprofit Continuing Care Retirement Communities
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