The Rating Outlook is Stable.
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
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
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.
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.
Harrogate is a type A continuing care retirement community (CCRC) located in
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
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
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
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
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'.
'Rating Guidelines for Nonprofit Continuing Care Retirement Communities' (
Not-for-Profit Continuing Care Retirement Communities Rating Criteria
Dmitry Feofilaktov, +1-212-908-0345
Source: Fitch Ratings
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