Fitch Ratings has affirmed the underlying 'BBB+' rating on approximately $52.7 million ABAG Finance Authority for Non Profit Corporations Insured Revenue Bonds, series 2010 issued on behalf of Casa de las Campanas, Inc (Casa).
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a gross revenue pledge, first mortgage, and debt service reserve fund.
KEY RATING DRIVERS
SOLID LIQUIDITY GROWTH: Casa's liquidity indicators have improved since hitting a low in fiscal 2009. Days cash on hand of 574.8, cash to debt of 77.6% and cushion ratio of 10.5x at April 30, 2012 all compare favorably to the respective 'BBB' category medians of 361.4 days, 51% and 5.9x.
GOOD DEBT SERVICE COVERAGE: Maximum annual debt service (MADS) coverage has improved significantly since 2009 due to improved sales activity and strong generation of entrance fee receipts. Debt service coverage was 3.6x in fiscal 2011 and 2.4x in fiscal 2010 compared to the 'BBB' category median of 2x.
MIXED PROFITABILITY INDICATORS: Operating ratio of 100.3% in fiscal 2011 is below the 'BBB' category median of 97.4%, however, adjusted net operating margin (includes turnover entrance fees) is strong at 35.4% during the same time period.
STABLE OCCUPANCY: Although occupancy levels remain below historical highs, independent living unit (ILU) occupancy has been relatively stable at 82.4% in fiscal 2011 and 84.7% through the nine months ended April 30, 2012. Management projects ILU occupancy to be 87.5% for the full year fiscal 2012.
CREDIT PROFILE
The 'BBB+' rating is supported by Casa's solid balance sheet, strong debt service coverage and adequate profitability. The primary credit concerns include Casa's inconsistent performance over the last four years and lower than average occupancy rates.
At April 30, 2012, Casa's unrestricted cash and investments totaled $42.1 million, which equals 574.8 days cash on hand, 77.6% cash to debt and 10.5x cushion ratio, which all compare favorably to the respective 'BBB' category medians of 361.4 days, 51% and 5.9x. However, Casa's investment portfolio is relatively aggressive with about 57% equities, 20% alternative and other assets and only 23% fixed income and cash.
Capital spending over the last few years has been adequate, averaging 88.7% compared to the 'BBB' category median of 101.4%. Casa has budgeted $4 million for routine capital spending in fiscal 2012 and $5 million in fiscal 2013. Casa is in the process of developing a long-term strategic plan with potential repositioning and expansion initiatives, but no definitive plans are in place. No new debt is expected in the near term.
Casa has about $54 million in debt outstanding; all fixed rate. MADS equates to a moderate 12.3% of fiscal 2011 revenues, which is in line with the 'BBB' category median of 13.6%. Debt service coverage of 3.6x in fiscal 2011 compares favorably to the 'BBB' category median of 2x. Not unlike other type A facilities, Casa is reliant on entrance fees for debt service coverage. Debt service coverage by revenue-only was 0.9x in fiscal 2011 compared to the 'BBB' category median of 0.8x.
Operating ratio of 100.3% in fiscal 2011 is up from 94.5% in fiscal 2010 and above the 'BBB' category median of 97.4%. Management continues cost-cutting initiatives implemented in fiscal 2009, including flex staffing in the skilled nursing facility, elimination of lunch service in the formal dining room, and contract with Shell Oil to purchase electricity (up for renewal but expected to be renegotiated at favorable rates).
Net adjusted operating margin (includes turnover entrance fees), however, is a strong 35.4%, improved from 31.1% in fiscal 2010 and favorable compared to the 'BBB' category median of 17.6% due to a ramp up in sales activity that has generated $7.6 million in turnover entrance fees in fiscal 2010, $10.9 million in fiscal 2011, and $10.7 million through the nine months ended April 30, 2012.
Casa benefits from modest competition in its service area with one rental continuing care retirement community (CCRC) facility located six miles away, and four entrance fee facilities between 19 and 26 miles away. In addition, Fitch views Casa's management contract with Life Care Services (LCS) positively. In an effort to address lower than normal ILU occupancy rates, Casa initiated several marketing efforts designed to speed up move-ins and shore up occupancy. These initiatives resulted in 34 move-ins through the nine months ended April 30, 2012 compared to 40 in fiscal 2011 and 26 in fiscal 2010.
The Stable Outlook is based on Fitch's expectation that Casa will maintain its current balance sheet and debt service coverage levels. Positive rating action may be warranted if Casa further improves ILU occupancy, which should continue to generate strong turnover entrance fee receipts resulting in the continued improvement to liquidity indicators and debt service coverage levels.
Casa de las Campanas is a type-A CCRC located in Rancho Bernardo, CA (approximately 25 miles north of San Diego). The community consists of 372 independent living units, 56 assisted living units, 27 assisted living dementia care units and 86 skilled nursing beds. In fiscal 2011, Casa had total revenues of approximately $31.6 million. Casa provides annual audits within 150 days of each fiscal year end, and quarterly, unaudited financials within 45 days of each quarter end through the Municipal Securities Rule Making Board's EMMA system.
Additional information is available at 'www.fitchratings.com'. This action was informed by the sources of information identified in Fitch's Revenue-Supported Rating Criteria.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 12, 2012);
--'Rating Guidelines for Non-Profit Continuing Care Retirement Communities' (July 26, 2011).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015
Rating Guidelines for Nonprofit Continuing Care Retirement Communities
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=40171
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