Fitch Ratings has affirmed the following bonds issued by the Fairfax County Economic Development Authority, VA and Industrial Development Authority of the City of Alexandria, VA (on behalf of Goodwin House Incorporated) at 'BBB'.
--$133.1 million series 2007;
--$25 million series 2005.
The 'BBB' rating pertaining to the series 2005 variable rate demand bonds (VRDBs) is an underlying rating. The series 2005 bonds are supported by a letter of credit (LOC) from Wells Fargo Bank, N.A. (rated 'AA-/F1+'; Stable Outlook by Fitch) that expires in November 2013.
The Rating Outlook is Stable.
SECURITY: The series 2007 bonds are secured by mortgages on Goodwin House Incorporated's (GH) real estate, a gross receipts pledge, and a debt service reserve fund. The series 2005 bonds are equally secured by GH's real estate and gross receipts pledge, and are also secured by a LOC from Wells Fargo Bank, N.A.
KEY RATING DRIVERS
STRONG BALANCE SHEET: GH has a strong balance sheet for the 'BBB' rating category. As of March 31, 2012 (unaudited), unrestricted cash and investments totaled $127.7 million, equating to 922.2 days cash on hand (DCOH). This represents a 13.8x cushion ratio, and 75.2% cash to debt.
SOLID DEMAND CHARACTERISTICS: Across all levels of care, GH maintains solid occupancy. In fiscal 2011, independent living unit (ILU) occupancy was 93%, assisted living unit (ALU) occupancy was 90.0%, and skilled nursing facilities (SNF) occupancy was 96%.
HIGH DEBT BURDEN: Maximum annual debt service (MADS) of approximately $9.2 million represented 14.7% of GH's total revenue in fiscal 2011. This figure was relatively high compared to Fitch's 'BBB' median of 13.6%. However, GH's debt burden is down from 2009's high of 18.4%.
GOOD SERVICE AREA LOCATION: Operating in Northern Virginia, GH's markets display good service area characteristics such as low unemployment, above average wealth indicators, and relatively stable housing markets - all of which support strong ILU demand.
ADEQUATE DEBT SERVICE COVERAGE: Debt service coverage (including turnover entrance fees) is adequate at 2x in fiscal 2011 and through the six months ended March 31, 2012. Not unlike other Type A facilities, there is a reliance on entrance fees for debt service coverage. However, revenue only coverage is very low and has averaged 0.2x over the past four fiscal years, which is below the 'BBB' median of 0.8x.
WHAT COULD TRIGGER A RATING ACTION
OPERATING PROFITABILITY IMPROVEMENT: With fill-up nearly 100% complete at GH's Bailey's Crossroads new campus, management is budgeting for operating income of $3 million in fiscal 2012. Fitch may consider taking a positive rating action If GH is able to sustain its trend of improved profitability and improve debt service coverage ratios.
GH is a type A continuing care retirement community (CCRC) that operates campuses in Alexandria, VA and Bailey's Crossroads, VA. Goodwin House Alexandria (GHA) consists of 261 ILUs, 41 ALUs, and 80 SNF beds. Goodwin House Bailey's Crossroads (GHBC) consists of 335 ILUs, 42 ALUs, 69 SNF beds, and 16 memory support beds. In fiscal 2011, GH had total operating revenues of $61.5 million.
AFFIRMATION OF 'BBB' RATING
The 'BBB' rating is supported by GH's strong balance sheet, good demand indicators, moderating debt burden, good service area characteristics, and improving profitability.
GH's strong balance sheet remains a primary credit strength. As of March 31, 2012 (unaudited), GH had an all-time high of unrestricted cash and investments, which totaled $127.7 million. This translated into 922.2 days cash on hand, a 13.8x cushion ratio, and 75.2% cash to debt, which compared favorably against Fitch's 'BBB' category medians. With fill-up almost complete at GHBC, ILU occupancy through the six months ended March 31, 2012 (interim period) was 93.9%, which improved from the prior year's 89.0%.
Due to the solid fill-up of new units, GH's profitability indicators continue to improve from historical figures. Through the six-month interim period, GH recorded $1.7 million in income, which is ahead of management's planned $1.3 million. Overall, GH's operating ratio (108.2%, operating margin (5.3%), net operating margin (3.8%), and net operating margin adjusted (25.2%) are more consistent with or in some instances outperform Fitch's category medians.
GH's two CCRCs have a long history of strong occupancy and benefit from operating in the Northern Virginia service area. The primary markets of Arlington County (general obligation bonds rated 'AAA' by Fitch) and Fairfax County (GO bonds rated 'AAA' by Fitch) each have solid population growth, high wealth levels, and a diverse economic base. Additionally, local housing prices have been relatively insulated against depressed national trends, which have helped support good ILU demand.
Fitch's main credit concern centers around GH's low debt service coverage by revenue only and still high (albeit moderating) debt burden. In fiscal 2011 (Sept. 30), GH had low revenue-only coverage of 0.3x, which Fitch views unfavorably. Additionally, MADS as a percentage of revenue was 14.7%, which compared unfavorably against the 'BBB' category median of 13.6%.
The Stable Rating Outlook reflects Fitch's expectations that GH will maintain its balance sheet strength and sustain the solid occupancy across all levels of care. Fitch anticipates that operating profitability should improve since GHBC has filled 103 of its 106 ILU expansion. Fitch may consider a positive rating action if GH can sustain the organization's trend of improved profitability while still growing into its larger debt burden and producing stronger debt service coverage.
DEBT PROFILE & DISCLOSURE
Approximately 84% of GH's debt is fixed-rate and 16% is variable-rate ($25 million). GH also has an outstanding swap with Allied Irish Bank that had a negative mark-to-market valuation of $2.4 million as of March 31, 2012. However, GH has no collateral posting requirements related to the swap. The swap calls for the payment of a fixed-rate of 3.7% on a notional amount roughly equivalent to the remaining amount on the series 2005 bonds and expires in December 2015. Overall, Fitch views the organization's debt profile as relatively conservative as its composition is primarily fixed-rate.
GH provides quarterly utilization and financial information to the Municipal Securities Rulemaking Board's EMMA system. Fitch views GH's disclosure practices as excellent, since it includes management discussion and analysis and quarterly investor calls with board participation.
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.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'Rating Guidelines for Nonprofit Continuing Care Retirement Communities (July 26, 2011).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Rating Guidelines for Nonprofit Continuing Care Retirement Communities
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