As part of its ongoing surveillance efforts, Fitch Ratings has affirmed the 'BBB' rating on the following revenue bonds issued on behalf of Air Force Villages, Inc. (AFV), TX:
--$47,810,000 Tarrant County Cultural Education Facilities Finance Corporation (TX) (Air Force Village Obligated Group Project) fixed-rate revenue bonds series 2009;
--$64,410,000 Tarrant County Cultural Education Facilities Finance Corporation (TX) (Air Force Village Obligated Group Project) retirement facilities revenue bonds series 2007.
The Rating Outlook is revised to Negative from Stable.
SECURITY
Debt payments are secured by a pledge of the gross revenues of the obligated group. A first mortgage and a fully funded debt service provide additional security for the bonds.
KEY RATING DRIVERS
PRESSURED OPERATIONS: The revision in Outlook to Negative reflects Fitch's concerns that the slow pace of new independent living unit (ILU) sales, coupled with elevated debt metrics, will pressurize operations and further hamper profitability.
DECLINING PROFITABILITY: Despite management success at curbing expenses, softening occupancy rates have blunted revenue growth and profitability.
ELEVATED DEBT BURDEN: Additional private borrowings through two lines of credit further
exacerbated Air Force Village's leverage position and debt service coverage ratios.
ADEQUATE LIQUIDITY: Liquidity metrics remain in line for the rating category.
WHAT COULD TRIGGER A RATING ACTION
MATERIAL DECLINE IN PROFITABILITY: A rating downgrade is likely should operations continue to be hampered by slow pace of fill-up at the Hill Residences, leading to further declines in profitability and debt service coverage.
ERODING LIQUIDITY: Further sizable erosion to Air Force Village's balance sheet may lead to a rating downgrade.
CREDIT PROFILE
The Outlook revision to Negative reflects Fitch's concerns that Air Force Village's operations are likely to be negatively affected by the slow pace of fill-up at its new 36-unit ILU building. As of Sept. 30, 2011, only 10 units have been sold despite construction completion in December 2010. Fitch believes that this, along with higher turnover rates, are likely to further blunt revenue growth, compress profitability, and depress debt service coverage.
Air Force Villages, Inc. currently operates two type-B continuing care retirement communities located in San Antonio, TX. The communities combined consist of 758 ILUs, 59 assisted living units, 72 Alzheimer's beds, and 172 skilled nursing beds. In the fiscal year ended June 30, 2011, Air Force Villages, Inc. had total revenues of approximately $42.2 million.
Pressured Operations
Occupancy at Air Force Village's new 36-unit independent living campus (Hill Residences) has been hampered by the ongoing economy, with only 10 units currently occupied. In addition, delayed state licensing of AFV's new 80-bed skilled nursing facility had a further impact on occupancy and operations. Occupancy rates at AFV's other offerings (skilled nursing, Alzheimer, and assisted living) have softened somewhat though they remain stable.
Management has undertaken aggressive marketing efforts to shore up occupancy and counteract attrition rates at its other independent living complex. Through the interim period, AFV received $730 thousand in net turnover entrance fees, though management believes that it will still achieve its fiscal 2012 target of $6.5 million as it expects to ramp-up fill-up at its Hill Residence and its other existing facilities.
Declining Profitability
As a result of the low occupancy, revenue growth has failed to materialize and is currently tracking under budget. Further, turnover and new entrance fee receipts have lagged as well. Despite management's cost saving measures, profitability has been pressured in the year to date period, reversing gains achieved in fiscal 2011.
Profitability improved in fiscal 2011 due to increased contributions, better cost control measures, and higher returns on investments. Interim results, however, were pressured by lower than budgeted revenue growth as AFV struggles to fill up its Hill Residences and saw softening volume at one of its existing ILU campuses. At Sept. 30, 2011, AFV had an unfavorable operating ratio of 104.6%, compared to Fitch's median of 97.4%. A reversal in investment performance further eroded overall profitability as AFV reported an excess margin of negative 6.6%, compared to the 2.8% reported at fiscal year-end 2011 and well below Fitch's median of 2.5%.
Increased Debt Burden
AFV's debt burden elevated materially in fiscal 2011 and in the interim period as it increased its borrowing from two separate lines of credit to a total of $21.7 million. These borrowings helped complete financing needs at Hill Residences and AFV's other strategic investment - a healthcare center at one of the organization's two campuses. Management expects AFV to repay the line of credits from entrance fee receipts.
As of Sept. 30, 2011, AFV had $134.4 million in long-term debt outstanding. AFV's two series of revenue bonds total $112.2 million and are in fixed-rate mode. The two revolving lines of credit are in variable-rate mode (prime rate plus a spread) and begin amortizing in February 2013. With the added debt, maximum annual debt service (MADS) jumped to $7.2 million from $4.9 million. Further affected by lower-than-budgeted net entrance fee receipts in the interim period, MADS coverage ratio by net revenues available was weakened in the interim period, measuring 1.1 times (x), compared to Fitch's 'BBB' median of 2.0x.
Adequate Liquidity
Liquidity fell in the interim period but remains sound. Cash spending on AFV's Hill Residences and the healthcare center, as well as $2.5 million in unrealized losses on investments, led to a sizable drop in days cash on hand (DCOH) to 383 days at Sept. 30, 2011, from 460 at fiscal year-end 2011. While weaker, the DCOH remains above Fitch's 'BBB' median of 361. AFV's interim period cushion ratio of 5.8x is in line with Fitch's 'BBB' median of 5.9x; however, its cash to debt position is weak, measuring 31% compared to Fitch's median of 51%.
Rating Outlook
Fitch expects AFV to continue its aggressive marketing plans to speed up occupancy at its Hill Residences; maintain cost control vigilance, and shore up liquidity. Failure to improve revenue growth and profitability without marked improvement to liquidity may result in a rating downgrade.
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.
This action was informed by the sources of information identified in the Revenue-Supported Rating Criteria.
Applicable Criteria and Related Research:
'Revenue-Supported Rating Criteria', dated June 20, 2011.
'Rating Guidelines for Nonprofit Continuing Care Retirement Communities' dated July 26, 2011.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130
Rating Guidelines for Nonprofit Continuing Care Retirement Communities
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=40171
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