Fitch Ratings has affirmed the 'A' underlying rating on the $17,500,000 Arizona Health Facilities Authority's (Royal Oaks Life Care Community Project) series 2002 variable-rate demand bonds.
The Rating Outlook is Stable.
The affirmation is based on Royal Oaks Life Care Community's (ROLC) solid historical occupancy, substantial, albeit reduced liquidity position, and stable core operating performance (when adjusted for investment activity and variance in contribution income). Occupancy of ROLC's 373 independent living units (ILUs) has exceeded 95% in each of the last four years and is reported at 94.7% for the six months interim period ended Aug. 31, 2009. In addition, ROLC maintains an active wait list which currently numbers 312 potential residents. The facility recently completed the construction of a 12,000 square foot fitness center and new dining venues financed with a $12.5 million Arizona Health Facilities Authority series 2008 variable demand bond issue. Fitch was not asked to provide an underlying rating on the series 2008 bonds. Sales of ILUs have slowed over the last 18 months as a result of the depressed Sun City real estate market and the campus construction.
At Aug. 31, 2009, ROLC's unrestricted cash and investments totaled $35.1 million as compared to $34.4 million at FYE Feb. 28, 2009 and $47.6 million at FYE 2008. Investment losses and a $3 million equity contribution to the Wellness and Dining Project are the primary drivers of ROLC's lower liquidity position since FYE 2008. However, ROLC's liquidity indicators at Aug. 31, 2009 remain consistent with Fitch's 'A' rated medians with 733 days cash on hand (DCOH), a cushion ratio of 19.7 times (x) and 117% cash to debt as compared to the respective 'A' rated medians of 607, 12.8x and 96.5%. Debt service coverage in FYE 2009 was 0.8x, but when adjusted to exclude the effect of the performance of the investment portfolio increases to 2.9x. Debt service coverage as per the master trust indenture was 2.2x in FYE 2009.
Fitch's primary credit concern is ROLC's debt structure which is 100% variable rate debt supported by bank letter-of-credit, the increase operating expenses associated with the project, and a fairly aggressive investment policy. However, Fitch views ROLC's current cash to debt position in excess of 100% as a mitigating factor to the risk of letter of credit (LOC) non-renewal and/or term out provisions. In January 2008 ROLC was able to negotiate a favorable five-year term for the LOC with Bank of America, which covers both the 2002 and the 2008 series, and a 60-month repayment period for any unremarketed puts to the bank. While the new amenities funded with the 2008 debt are not revenue producing, the project was an investment with a long-term horizon and is expected to increase residents' welfare and add to marketing appeal. Although the Phoenix metropolitan area is highly competitive, Fitch views ROLC's location in Sun City positively as there is a base of qualified elderly population. Moreover, Fitch believes that ROLC is very competitively priced relative to its competitors. Finally, ROLC's current investment policy allocates roughly 75% of its portfolio to a diversified mix of equity/mutual funds which is inherently more volatile than fixed income holdings.
The Stable Outlook assumes that ROLC will maintain liquidity indicators and operating performance in line with Fitch's 'A' rated medians. It is Fitch's expectation that over time ROLC will absorb the additional costs of the recent project.
Although ROLC is not required to provide ongoing disclosure to bondholders under its 2002 variable rate indenture, disclosure to Fitch has been excellent. The disclosure package has been received on time and includes a management discussion and analysis as well as annual audited financial statements and quarterly unaudited reports.
Located in Sun City, AZ, Royal Oaks Life Care Community is a 'Type A' continuing care retirement community (Life Care) and currently operates 373 ILUs, 59 assisted living beds and 122 skilled nursing facility beds. In fiscal 2009, Royal Oaks reported total revenues of $20.7 million.
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