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Public Finance Median Ratios for Nonprofit Continuing Care Retirement Communities. - Healthcare / U.S.A. Special Report

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- Healthcare / U.S.A Median Ratios for Nonprofit Continuing Care Retirement Communities Special Report Fiscal 2013 Median Ratios: Sector Stability Maintained Medians Indicate Continued Strength:
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- Healthcare / U.S.A Median Ratios for Nonprofit Continuing Care Retirement Communities Special Report Fiscal 2013 Median Ratios: Sector Stability Maintained Medians Indicate Continued Strength: Fitch Ratings investment-grade (IG) median ratios (for the 2013 audited fiscal year) for continuing care retirement communities (CCRCs) showed a continued positive trend in performance, with most IG ratios improving or remaining stable. Medians within the individual A and BBB rating categories stayed stable or improved as well, with the A category medians showing the greater strengthening in ratios. Uptick in Debt Coverage: IG MADS coverage including turnover entrance fees improved to 2.2x from 2.1x in This marked the fourth consecutive year that the median remained above 2.0x after it had fallen to 1.7x in The IG median for revenue-only coverage improved to 1.1x from 0.9x in 2012 and has been above 1.0x in three out of the past four years after falling to 0.8x in Liquidity Growth Continues: Strong entrance fee cash flows and investment returns helped the sector further build its liquidity. IG medians for days cash on hand, cushion ratio, and cash to debt all improved. Key IG median liquidity ratios are now near or better than their pre-2008 recession levels. Related Research Fitch Ratings' Nonprofit Continuing Care Retirement Communities Interactive Peer Study (September 2014) Sector Briefing: Nonprofit Continuing Care Retirement Communities (August 2014) The Credit Outlook: Ratings Stabilise on Recovery but Diverging Monetary Policy Poses Challenges (July 2014) Residential Mortgage Market Index (July 2014) 2014 Outlook: Nonprofit Continuing Care Retirement Communities (December 2013) Analysts Emily Wadhwani Gary Sokolow James LeBuhn Below-IG Medians Added: For the first time this report includes below-ig medians (BIG). Fitch currently has 14 non-investment grade ratings, including a number of new ratings that rated initially in the BIG category and were not entities downgraded from IG. The initial BIG medians show ratios that are generally lower than BBB category medians, which indicates a thinner overall financial profile. Broader Housing Recovery: The U.S. housing market continues to recover with housing prices rising and mortgage delinquency rates continuing to decline. The housing market recovery is tempered by the sluggish recovery in the overall U.S. economy as well as Fitch s belief that the sector remains vulnerable to headline risk. Management teams of Fitch rated CCRCs have reported improved sales and for the first time since the recession many have begun to increase entrance fees. Upgrades Outpace Downgrades: Fitch upgraded five CCRCs and downgraded none through Aug. 28, Affirmation remains the most common rating action with 45. Outlooks mirror the rating actions, with three Positive Rating Outlooks, one Negative Rating Outlook, and 46 Stable Rating Outlooks through Aug. 28, Stable Sector Outlook: For the second consecutive year, Fitch s rating outlook for the sector is Stable, with the fiscal 2013 medians providing further evidence of the sector s stable credit position. Fitch sees very little changing in the sector for the remainder of the year. The largest driver of negative rating pressure in the near term is expected to be borrowings for capital projects and the associated construction and fill up risk for these projects. Longer term, Fitch continues to view the demographic trend of an aging baby boomer population as a positive credit factor that should keep the demand for services high. Portfolio Overview Fitch rates a total of 98 CCRCs (one is excluded from median data), 83 of which are IG ratings and 14 which are BIG ratings. The number of ratings has grown steadily as there were 59 IG ratings and nine BIG ratings in The median rating is BBB and BBB category ratings remain the most common rating by far at 55, which is nearly double the 27 A category ratings. The most common contract type remains the Type A LifeCare contract, with 46% of the total rated portfolio Type A, 24% Type B, and 29% Type C. In addition, stand-alone facilities are the predominate type of rated entity, with 76 ratings on stand-alone facilities and 21 on systems. Both contract type and facility type include BIG rated entities for the first time. However, within the BIG category the contract mix is markedly different and weighted more heavily to Type C at 36%, with Type A at 28%, Type B at 21%, as well as two rental CCRCs. Liquidity Metrics All major IG liquidity ratios showed improvement from prior-year levels, reflecting continued strength in entrance fee receipts, and another solid year of investment returns. IG median ratios for days cash on hand (DCOH) and cash to debt were days and 75.1%, respectively, up from days and 65.6%, respectively. Liquidity medians in both the A and BBB category improved in 2014, reflecting the stability across Fitch s IG credits. The A category balance sheet metrics in fiscal 2013, showed DCOH of 692.4, a cushion ratio of 15.8x, and cash to debt of 127.2%, all incrementally better than the 563.7, 15.3x, and 125.2%, respectively, in fiscal Days Cash on Hand by Rating Category (Days) Cash-to-Debt Ratios by Rating Category (%) Related Criteria Rating Criteria for Not-for-Profit Continuing Care Retirement Communities Rating Criteria (July 2014) Revenue-Supported Rating Criteria (June 2014) The widest gap between the A and BBB category medians continues to be liquidity, which provides the A credits with more of a financial cushion and a lower overall risk profile. While 2014 Median Ratios for Nonprofit Continuing Care Retirement Communities 2 BBB category medians did show improvement year over year, the DCOH of 407.6, cushion ratio of 6.9x, and cash-to-debt of 60.2% remain much lower relative to the A medians. The initial set of BIG medians show an even thinner balance sheet, with DCOH of 233.3, a cushion ratio of 4.9, and 36.7% cash-to-debt. Operating Ratio by Rating Category (%) Net Operating Margin-Adjusted by Rating Category (%) Operational Metrics Median profitability ratios were largely stable across all rated borrowers in fiscal The IG median for net operating margin adjusted improved to 21.7% from 21.4% and the operating ratio weakened slightly to 97.3% from 96.9%. The IG net operating margin also fell slightly in fiscal 2013 to 6.9% from 7.1% perhaps reflecting lower interest and dividend income (which Fitch includes in operating income), the effect of monthly service fee incentive programs and reduced reimbursement from Medicare, especially within the BBB category, which represent a larger proportion of the median data. The A category median for net operating margin adjusted (NOM-adjusted) and net operating margin (NOM) both improved with median NOM-adjusted improving to 23.4% from 23.1% and median NOM improving to 6.2% from 5.6% from Fitch believes the strengthening in the A category medians reflect better turnover entrance fee receipts, higher occupancy, and the reduced use of incentive programs within the category. Furthermore, Fitch has seen communities beginning to increase entrance fee prices for first time in several years. Median profitability metrics in the BBB category lowered, with NOM-adjusted falling to 20.4% from 21.3% and median NOM falling to 9.2% from 9.9% in Median Ratios for Nonprofit Continuing Care Retirement Communities 3 MADS Coverage Turnover Entrance Fees by Rating Category (x) MADS Coverage Revenue Only by Rating Category (x) As would be expected, the BIG medians all trail their respective IG medians, with the operating ratio of 98.4%, NOM of 5.3%, and NOM-adjusted of 14.5%, thinner than the IG medians of 97.3%, 6.9%, and 21.7%, respectively. The NOM-adjusted of 14.5% reflects the higher levels of Type C and rental contracts and a group of entities with a larger skilled nursing component relative to independent units within the BIG category. Capital-Related Metrics Median capital-related ratios for the IG rated portfolio in fiscal 2013 were largely steady against prior-year results as debt levels were only slightly increased against more robust liquidity and steady operating profitability. Median coverage of MADS including turnover entrance fees and on a revenue-only basis both increased just slightly to 2.2x and 1.1x, respectively from 2.1x and 0.9 in fiscal Debt to net available decreased to 5.4x from 5.8x versus an increase in adjusted debt to capitalization to 55% from 53%. For A category borrowers, median coverage of MADS including turnover entrance fee receipts improved significantly to 3.7x in 2012 from 3.0x, though they were flat on a revenue-only basis at 1.2x. Median MADS as a percentage of revenue and median-adjusted debt to capitalization worsened slightly, to 8.9% and 46%, respectively. Still, the A category median capital expenditures as a percentage of depreciation increased in fiscal 2013 to 107.9%, up from 104.4% in fiscal 2012 and a very low 68.9% in fiscal 2010, likely the result of pent up demand. As a result, average age of plant for the A category median fell for the second year in a row to 10.3 years. Median capital-related ratios were flatter within the BBB category. MADS coverage including turnover entrance fees increased slightly to 2.0x in fiscal 2013 compared to 1.9x in the prior year while median revenue-only MADS coverage was flat at 0.9x. Median MADS as a percentage of revenue fell again to 12.3% from 12.4%. In contrast to A category rated median, 2014 Median Ratios for Nonprofit Continuing Care Retirement Communities 4 capital spending within the BBB category actually decreased to 79.7% from 85.3% in fiscal 2012 and below the 101.4% in fiscal As a result, average age of plant increased significantly to 11.7 years from a low 10 years in fiscal For the BIG borrowers, median ratios were relatively steady against prior years. Median coverage including turnover entrance fees was 1.6x, up slightly from 1.5x in fiscal Median revenue-only MADS coverage increased significantly to 1.2x, which is likely due to the addition of several Type C BIG-rated borrowers in fiscal 2013 and generally produces stronger revenue-only results. Despite an increase in capital spending to 84.2% of depreciation, Fitch believes BIG borrowers are more likely to have to have deferred capital investment relative to the IG borrowers as evidenced by a high 15.7-year median in average age of plant for BIG borrowers in fiscal 2013 versus a 10.9-year median for IG-rated borrowers. Debt Issuance The capital markets were accessible and interest rates were favorable in fiscal 2013, yet new money borrowing remained somewhat light for the sector. This ongoing trend is reflected in the steady to declining leverage against a flat level of capital expenditures at 86.4% of depreciation for IG borrowers in fiscal Fitch notes that many borrowers benefitted from the better lending environment, including BIG borrowers which have historically had difficulty accessing capital markets. Average age of plant continues to increase, particularly for those credits below the A rated category, and this delay in necessary plant reinvestment may pose some concern. over the medium term. Debt to Net Available by Rating Category (x) Capital Expenditures as % of Depreciation Expense by Rating Category (%) Median Ratios for Nonprofit Continuing Care Retirement Communities 5 Average Age of Plant by Rating Category (Years) Year-to-Date Outlook Through Aug. 28, 2014, rating actions within the Fitch-rated CCRCs portfolio included five upgrades, 45 rating affirmations, and perhaps most notably, zero downgrades. The most frequent key rating driver of positive rating action was healthy operating performance supported by strong occupancy, as well as strengthened liquidity. Through Aug. 28, there were three Positive Rating Outlooks and one Negative Rating Outlook. As expected, the clear majority (over 90%) of rating actions and Outlooks continue to be affirmations at Stable, reflecting continued consistency of performance within Fitch s rated portfolio. Fitch s rated borrowers have been able to produce stable financial results due to a continued focus on developing marketing strategies to increase sales and sustain or improve occupancy. Fitch continues to believe that the stability seen to date in its portfolio is a reflection of the mature nature of many of the rated borrowers. Despite some improvement, occupancy and housing challenges remain paramount, and Fitch believes ongoing stable financial performance will depend on a community s ability to control expenses in light of depressed occupancy and maintain steady cash flow through generation of consistent turnover entrance fees to cover debt service and reinvest in its facilities. A total of 97 rated CCRCs were included in these median ratio results for fiscal 2013, the total inclusive of 14 non-investment-grade (NIG) credits, which now equal over 14% of Fitch s rated portfolio. This is the first-year NIG-rated credits were included in Fitch s median analysis. Fitch s current (as of Aug. 28, 2014) rated portfolio consists of 98 CCRCs in total. Ratings Distribution over Time 'AA' Rated 'A' Rated 'BBB' Rated BIG (%) Year-to-Date Aug. 28, 2014 BIG Below investment grade. Source: Fitch Ratings Median Ratios for Nonprofit Continuing Care Retirement Communities 6 CCRC Medians by Rating Category Year-to-Date Rating Actions and Outlooks (Through Aug. 28, 2014) Affirmed Rating Upgraded Rating Downgraded Rating Source: Fitch Ratings. Stable Outlook Positive Outlook Negative Outlook Investment-Grade Medians A Medians BBB Medians BIG Medians Sample Size Investment-Grade Credits Liquidity Ratios Days Cash on Hand Cushion Ratio (x) Cash to Debt (%) Profitability Ratios Operating Ratio (%) Net Operating Margin (%) Net Operating Margin Adjusted (%) Excess Margin (%) (0.2) (0.9) (2.6) 1.5 Investment Income as a % of Total Revenue Resident Service Revenue as % of Total Revenue Capital and Cash Flow Ratios MADS Coverage Ratio Turnover Entrance Fees Only (x) MADS Coverage Ratio Revenue Only (x) MADS as % of Revenue Capital Expenditures as % of Depreciation Expense Debt to Net Available (x) Adjusted Debt to Capitalization (%) Average Age of Plant (Years) CCRC Continuing care retirement community. BIG Below-investment grade Median Ratios for Nonprofit Continuing Care Retirement Communities 7 CCRC Medians by Type Stand-Alone Medians System Medians Sample Size Investment-Grade Credits Median Operating Revenue ($) Total Operating Revenue 20,940 22,211 24,331 23,652 91,714 89,005 91, ,375 Liquidity Ratios Days Cash on Hand Cushion Ratio (x) Cash to Debt (%) Profitability Ratios Operating Ratio (%) Net Operating Margin (%) Net Operating Margin Adjusted (%) Excess Margin (%) Investment Income as a % of Total Revenue Resident Service Revenue as % of Total Revenue Capital and Cash Flow Ratios MADS Coverage Ratio Turnover Entrance Fees Only (x) MADS Coverage Ratio Revenue Only (x) MADS as % of Revenue Capital Expenditures as % of Depreciation Expense Adjusted Debt to Capitalization (%) Average Age of Plant (Years) CCRC Continuing care retirement community. CCRC Medians by Contract Type Type-A Type-B Type-C Sample Size Investment-Grade Credits Liquidity Ratios Days Cash on Hand Cushion Ratio (x) Cash to Debt (%) Profitability Ratios Operating Ratio (%) Net Operating Margin (%) Net Operating Margin Adjusted (%) Excess Margin (%) Investment Income as a % of Total Revenue Resident Service Revenue as % of Total Revenue Capital and Cash Flow Ratios MADS Coverage Ratio Turnover Entrance Fees Only (x) MADS Coverage Ratio Revenue Only (x) MADS as % of Revenue Capital Expenditures as % of Depreciation Expense Debt to Net Available (x) Adjusted Debt to Capitalization (%) Average Age of Plant (Years) CCRC Continuing care retirement community Median Ratios for Nonprofit Continuing Care Retirement Communities 8 Year-to-Date CCRC Rating Actions a (Through Aug. 28, 2014) Borrower Date Rating Action Rating Outlook ACTS Retirement-Life Communities Inc. (PA) 6/13/14 Affirmed A Stable American Baptist Homes of the West (CA) 1/7/14 Affirmed BBB+ Negative Appalachian Christian Village (TN) 1/8/14 Affirmed BBB Stable Army Retirement Residence Foundation (The) (TX) 4/22/14 Affirmed BBB Stable Asbury Communities, Inc. (MD) 4/4/14 Affirmed BBB Stable Atherton Baptist Homes (CA) 2/27/14 Affirmed B+ Stable Baywood Court Retirement (CA) 6/4/14 Affirmed BBB+ Stable Bethesda Health Group, Inc. (MO) 4/4/14 Assigned A Stable BHI Senior Living (IN) 7/30/14 Affirmed BBB+ Stable Bishop Gadsden Retirement Community (SC) 6/4/14 Affirmed BBB Stable Brethren Hillcrest Homes (CA) 6/3/14 Assigned BBB Stable Buckner Retirement Services, Inc. (TX) 6/16/14 Affirmed A Stable Carpenter's Home Estates, Inc. (FL) 1/8/14 Affirmed BBB Stable Casa de las Campanas (CA) 6/17/14 Upgraded A Stable Cathedral Village (PA) 4/30/14 Affirmed BBB Stable Christian Care Centers, Inc. (TX) 5/1/14 Affirmed BBB Stable Christian Care Centers, Inc. (TX) 8/8/14 Affirmed BBB Stable Christian Homes, Inc. (IL) 6/9/14 Affirmed BBB Stable Covenant Retirement Communities, Inc. (IL) 6/17/14 Affirmed BBB+ Stable Diakon Lutheran Social Ministries (PA) 6/26/14 Affirmed BBB+ Stable Duncaster, Inc. (CT) 8/19/14 Assigned BBB Stable East Ridge Retirement Village (FL) 1/31/14 Assigned BB Stable Fellowship Senior Living (NJ) 2/6/14 Assigned BBB+ Stable Forest at Duke, Inc. (The) (NC) 6/2/14 Affirmed BBB+ Stable Franciscan Communities, Inc. (IL) 1/23/14 Affirmed BBB Stable Friendship Village of Columbus, Ohio, Inc. (OH) 5/6/14 Affirmed BB Stable Friendship Village of Schaumburg (IL) 5/28/14 Affirmed BB Stable Givens Estates (NC) 1/6/14 Affirmed BBB Stable Goodwin House (VA) 6/20/14 Affirmed BBB Stable Harrogate, Inc. (NJ) 4/28/14 Affirmed BB+ Stable Holland Home Obligated Group (MI) 5/19/14 Affirmed BB+ Positive John Knox Village (MO) 7/7/14 Affirmed BBB Stable Kahala Senior Living Community, Inc. (HI) 5/16/14 Upgraded BBB Stable Kendal on Hudson (NY) 3/11/14 Affirmed BBB Stable Life Care Ponte Vedra, Inc. (FL) 8/5/14 Affirmed BBB Stable Lutheran Senior Services (MO) 5/6/14 Affirmed BBB+ Stable Maine Life Care Retirement Community, Inc. 7/8/14 Assigned A Stable Marquette Manor (IN) 5/2/14 Affirmed BBB Stable Mayflower Retirement Center, Inc. (FL) 3/27/14 Affirmed A Stable Miriam Osborn Memorial Home (NY) 7/30/14 Affirmed A Stable Morningside Ministries and Subsidiary (TX) 8/8/14 Affirmed BBB Stable Nazareth Living Center (MO) 1/22/14 Affirmed BB Stable Oakcrest Village (MD) 8/7/14 Upgraded A Stable Pines at Davidson, Inc. (The) (NC) 7/30/14 Affirmed A Stable Presbyterian Homes Obligated Group (PA) 4/14/14 Affirmed BBB+ Stable Presbyterian Retirement Communities Obligated Group (FL) 5/28/14 Affirmed A Positive Royal Oaks Life Care Center (AZ) 5/20/14 Affirmed A Stable Springpoint Senior Living (NJ) 7/28/14 Affirmed BBB+ Stable The Blakeford at Green Hills (TN) 6/13/14 Affirmed BBB Stable United Methodist Homes of New Jersey (NJ) 4/29/14 Affirmed BBB Stable United Methodist Homes of New Jersey (NJ) 8/22/14 Affirmed BBB Stable United Methodist Retirement Communities, Inc. (MI) 7/31/14 Affirmed BBB+ Stable Village on the Isle (FL) 6/17/14 Affirmed BBB+ Positive Westminster Manor (TX) 6/6/14 Affirmed BB+ Stable Winchester Gardens at Ward Homestead (NJ) 3/11/14 Upgraded BBB Stable a Public ratings only, no private ratings or opinions. CCRC Continuing care retirement community Median Ratios for Nonprofit Continuing Care Retirement Communities 9 All CCRC Ratings (As of Aug. 26, 2014) Borrower State Rating Outlook ACTS Retirement-Life Communities Inc. (PA) PA A Stable Air Force Village Foundation (TX) TX BBB- Stable American Baptist Homes of the West (CA) CA BBB+ Negative Appalachian Christian Village (TN) TN BBB Stable Arbor Acres United Methodist (NC) NC A Negative Army Retirement Residence Foundation (The) (TX) TX BBB- Stable Asbury Communities, Inc. (MD) MD BBB Stable Atherton Bapti
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