News Column

Fitch Rates Harrogate, Inc. (NJ) Revs 'BB+'; Outlook Stable

April 28, 2014

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed the 'BB+' rating on the following bonds issued on behalf of Harrogate, Inc. (Harrogate):

--$11,360,000 of New Jersey Economic Development Authority revenue refunding bonds, series 1997.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by mortgage on certain property and equipment and a debt service reserve fund.

KEY RATING DRIVERS

SOLID LIQUIDITY: Harrogate's liquidity metrics of 327.3 days cash on hand (DCOH), 119% cash to debt and 10.5x cushion ratio at Dec. 31, 2013 are very strong for the rating level and is a key credit strength. Liquidity has remained steady since 2009, and Fitch expects ongoing stability in liquidity over the near term.

LIGHT OPERATING PROFITABILITY: Harrogate's operating profitability remains light, reflecting soft occupancy and a competitive service area which has limited pricing power. Despite improvement in 2013 (to -2.1%) from (-7.1%) in 2012, net operating margin (NOM) remains light. Further, Harrogate's operating ratio of 104.2% is elevated even in light of its Type-A contract.

MANAGEABLE DEBT BURDEN: Harrogate's debt burden remains manageable with maximum annual debt service (MADS) as a percent of revenue of 6.6%. While MADS coverage by turnover entrance fees was solid at 3.1x in 2013, it reflects the benefit of a $2 million contribution. Excluding the contribution, Harrogate's coverage per its debt service covenant calculation was 1.75x, reflecting lower net entrance fee receipts and light operating profitability.

FUTURE CAPITAL PLANS: Harrogate's high average age of plant of 22.3 years in 2013 is indicative of deferred capital spending and is a credit concern. Management continues to review a possible renovation/replacement of its health care center although no time frame has been developed.

SUPPRESSED ILU OCCUPANCY: Independent living unit (ILU) occupancy, while improved from 75.1% in 2011, remained stressed at 77.5% in 2013. Although Harrogate had a solid 43 move-ins in 2013, high attrition rates continued to suppress overall occupancy. Management is budgeting to reach 85% occupancy by 2015 with an approximate 46 move-ins annually in the near to medium term.

RATING SENSITIVITIES

CORE OPERATING STABILITY: While Harrogate's balance sheet provides a strong financial cushion for payment of debt service, Harrogate will need to sustain core operating profitability to meet its debt service coverage requirements based on expected net entrance fee receipts.

CREDIT PROFILE

Harrogate is a type A continuing care retirement community (CCRC) located in Lakewood, New Jersey with 273 ILUs and 68 skilled nursing facility (SNF) beds. Total revenues in 2013 were $17.7 million.

SOLID LIQUIDITY

Harrogate's $14.2 million in unrestricted cash and investments at Dec. 31, 2013 equated to solid liquidity metrics of 327.3 DCOH, 119% cash to debt and 10.5x cushion ratio. Liquidity has remained largely stable since 2009 and Fitch considers Harrogate's liquidity position a key credit strength at the 'BB+' rating level, providing a strong financial cushion against poor operating profitability. Fitch anticipates ongoing stability in Harrogate's liquidity position over the near term.

WEAK OPERATING PROFITABILITY

Harrogate's somewhat weak operating profitability over the last few years reflects soft occupancy, a competitive service area and the continued impacts from the recession. NOM-adjusted has been erratic at 6.8% in 2011, 14.8% in 2012 and 7.4% in 2013. Historical entrance fee discounting has resulted in volatile net entrance fee receipts and the soft occupancy has negatively impacted core profitability. In 2013, Harrogate generated MADS coverage by revenue only of 3.1x in 2013 which was improved from 2.2x in the prior year. However, coverage reflects the benefit of a $2 million in contributions received in 2013, without which coverage would have declined from prior year.

MANAGEABLE DEBT BURDEN

Harrogate's debt is fixed rate with level debt service through maturity. The debt burden is manageable with MADS as a percent of revenue of 6.6% and debt to net available of 2.9x, both low for the rating level. However, Fitch notes that the $2 million in contributions masked weaker entrance fee levels of $1.5 million in net entrance fees in 2013, weaker than the $3.6 million received in 2012. Still, debt to net available was 2.9x, improved from 8.2x in 2011 and indicative of moderate leverage. No additional debt is expected over the near term.

FUTURE CAPITAL PLANS

Harrogate's deferred capital needs remain a credit concern, supported by a high average age of plant of 22.3 years in 2013. Harrogate's capital budget for 2014 is increased from prior years at $3.3 million, compared to $926,000 spent in 2013, and includes sidewalk and asphalt renovations, an installation of an integrated electronic medical record and video surveillance software, as well as some carry-over from 2013. Additional future capital plans in the medium to long term could include the construction of a new health center and the expansion and renovation of current ILUs. Harrogate's medium to long term plans are not incorporated in the current rating and will be reviewed when more clarity and certainty about the size and scope of the projects becomes available.

SUPPRESSED ILU OCCUPANCY

Although the number of move-ins increased to 43 in 2013 from 40 in 2012 and 25 in 2011, Harrogate's ILU occupancy remained modest at 77.5%, largely due to elevated attrition rates (45 in 2013). Despite the higher number of units sold in 2013, Harrogate collected just $1.5 million in net entrance fee receipts compared to $3.6 million in net entrance fee receipts in 2012. Management is budgeting for 46 move-ins against a more normalized 36 vacancies annually over the medium term, supported by a larger sales team and focused discounting on certain units, which should help improve occupancy to 85% by 2015. In order to support the 'BB+' rating Fitch expects Harrogate to generate adequate debt service coverage from operations, which will require improved net entrance fee receipts and steady operating cash flow going forward.

DISCLOSURE

Harrogate provides its annual financial statements to the Municipal Securities Rulemaking Board's EMMA system, along with regularly scheduled disclosure calls to bondholders. Fitch reports that disclosure has been timely and complete, with good access to management.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

'Rating Guidelines for Nonprofit Continuing Care Retirement Communities' (July 10, 2013).

Applicable Criteria and Related Research:

Not-for-Profit Continuing Care Retirement Communities Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=712401

Additional Disclosure

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Emily E. Wadhwani, +1-312-368-3347

Director

Fitch Ratings, Inc.

70 W. Madison Street

Chicago, IL 60602

or

Secondary Analyst

Dmitry Feofilaktov, +1-212-908-0345

Analyst

or

Committee Chairperson

James LeBuhn, +1-312-368-2059

Senior Director

or

Media Relations

Elizabeth Fogerty, New York, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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