The Rating Outlook is Stable.
The bonds are secured by gross revenue pledge, mortgage, and debt service reserve fund.
KEY RATING DRIVERS
POOR OPERATING PERFORMANCE: Atherton's operating performance has been weak with an operating ratio above 100% over the last six years, which is extremely poor especially for a Type C contract. Atherton posted operating ratios of 123.2% and 122.7% in fiscal 2012 and 2013, respectively compared to Fitch's 2013 type-C median of 92.8%. According to management, fiscal 2013 performance was challenged by an increase in workers compensation insurance expense due to its high claims experience as well as increased staffing costs in its skilled nursing facility to regain its four star designation.
WEAK MANAGEMENT PRACTICES: Fitch believes Atherton's poor operating performance reflects the organization's weak management and governance practices. Atherton has had numerous consultant engagements and a management report produced in 2012 highlighted the organization's slowness to adopt industry best practices in marketing and sales. Although Atherton has implemented the recommendations in the management report, concerns regarding the management of operations remain. The fiscal 2014 budget shows another year of a fairly sizeable bottom line loss, which Fitch believes is unsustainable.
SUCCESS IN COURTYARD SALES: Atherton's series 2010 bond issue funded the addition of 50 independent living units (ILUs) (Courtyard) and the slow rate of sales of the Courtyard units had been a credit concern. With the hiring of Greenbrier (marketing consultant) in late 2012, the separation of sales and marketing duties, and the hiring of a Director of Sales in early 2013, the number of occupied units increased to 47 in the fourth quarter 2013 from 30 in the first quarter 2013. It is expected that the Courtyard will reach 100% occupancy by
FOCUS ON INCREASING OCCUPANCY IN CLASSIC UNITS: Occupancy in the Classic ILUs (170 existing ILUs) dropped to 78.8% in the fourth quarter of 2013 from 84.7% in the first quarter of 2013 due to higher than normal attrition. The sales and marketing teams are focused on improving occupancy in the Classic units now that the Courtyard units are effectively sold. The target is to reach 91% occupancy by the end of 2014, which Fitch believes will be challenging.
WEAK LIQUIDITY: Excluding
IMPROVED PERFORMANCE NECESSARY: Atherton needs to demonstrate improved financial performance over the next two years with the testing of bond covenants, especially debt service coverage beginning in fiscal 2015. Financial projections prepared by Atherton's management consultant indicates improved cash flow and relies significantly on consistent turnover entrance fee proceeds at a much higher level than in its last six years, which Fitch views as aggressive. However, the sales team stated that they are on track with occupancy goals year to date.
Weak Financial Profile
Atherton's financial profile is characteristic of a non-investment grade credit with a high debt burden, poor profitability, and light liquidity. Fitch used maximum annual debt service (MADS) of
Historical profitability has been poor. Atherton's fiscal 2013 budget of negative
Fitch believes Atherton's management practices and governance oversight has been a contributing factor to its poor operating performance. Fitch believes the budgeting of ongoing sizeable bottom line losses is unsustainable and an inability to correct the structural imbalance of cash operating expenses in excess of cash operating revenue is viewed as a major credit weakness.
Success in Courtyard Sales
The Courtyard project was part of Atherton's campus improvement plan. The project added 50 ILUs to the existing campus and included the renovation and upgrade of existing common facilities. The total construction cost was
The series 2010B bonds are being paid down with initial entrance fees generated from the Courtyard project and the balance as of
At the time of Fitch's last review in
Focus on Improving Occupancy in Classic Units
Atherton is required to maintain occupancy in the Classic ILUs at 82.5% and failure to do so requires a consultant call in.
Weak Liquidity Metrics
Atherton reported unrestricted cash and investments of
Disclosure is excellent with monthly financials and occupancy statistics posted on EMMA. In addition, management hosts quarterly investor calls.
-- Not-for-Profit Continuing Care Retirement Communities Rating Criteria,
Not-for-Profit Continuing Care Retirement Communities Rating Criteria
Source: Fitch Ratings
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