News Column

Fitch Rates Presbyterian Retirement Communities' (FL) 2014 Revs 'A-'; Outlook Revised to Positive

May 28, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'A-' rating to the $46 million Orange County Health Facilities revenue bonds (Presbyterian Retirement Communities Project), series 2014, that are expected to be issued on behalf of Presbyterian Retirement Communities (PRC).

In addition, Fitch affirms at 'A-' the following parity bonds issued by St. Johns County Industrial Development Authority, FL also on behalf of PRC:

--$113,000,000 revenue bonds (Presbyterian Retirement Communities Project), series 2010A;

--$25,000,000 revenue bonds (Presbyterian Retirement Communities Project), series 2010B;

--$31,590,000 (Presbyterian Retirement Communities Obligated Group) fixed-rate revenue bonds series 2004A.

The Rating Outlook is revised to Positive from Stable.

The series 2014 bonds will be issued as fixed rate. Proceeds from the bonds will be used to refund the 2004A bonds, fund future and prior capital projects, fund a debt service reserve fund, and pay for costs of issuance. In addition, over the next year, Fitch expects PRC to refund from cash flow its series 2004B bonds, which Fitch does not rate, and a $7.2 million outstanding line of credit that was used to fund capital projects. Maximum annual debt service (MADS), which was provided by the underwriter, is expected to be $12.1 million. The bonds are expected to sell via negotiation the week of June 9, 2014.

SECURITY

Debt payments are secured by a pledge of the gross revenues, mortgages on PRC's communities, and debt service reserve funds.

KEY RATING DRIVERS

STRENGTHENING CREDIT PROFILE: The Positive Outlook reflects PRC's improving financial performance, coupled with its underlying credit strengths, which include a large and diversified revenue base, a continued investment in plant, modest entrance fee pricing, and reduced entrance fee and health care risks, as over 95% of its current residents have a fully amortizing, Type 'B' contract.

SOLID ENTRANCE FEE YEAR: Total entrance fees (including proceeds from initial units) totaled $49.8 million in fiscal 2014 (March 31 year end), a 32% increase over fiscal 2013. Pro forma MADS coverage including only turnover entrance fees was 3.1 times (x), which compares well to Fitch's 'A' category median of 3x.

WEST COASTFLORIDA OCCUPANCY UP: IL occupancy in the St. Petersburg and Bradenton regions, which was at 61% at Fitch's last rating action in 2012, improved to 82% in May 2014. Fill up at the Palm View in St. Petersburg, which PRC purchased in 2009 out of bankruptcy and fully renovated, is up to 65%.

IMPROVING LIQUIDITY: The strong entrance fee receipts and good investment returns helped PRC grow its unrestricted cash and investments by 14% to $136.8 million at fiscal year end March 31, 2014 (unaudited figure). PRC's major liquidity ratios improved as well; however, they still trail Fitch's 'A' category medians.

RATING SENSITIVITIES

CONTINUATION OF POSITIVE TRENDS: Over the next two years, should operations and coverage remain stable and PRC's occupancy and liquidity continue to strengthen, an upgrade would be likely.

CREDIT PROFILE

Founded in 1954, PRC is a Florida not-for-profit organization focused on residential and health care communities for older adults. The obligated group (OG) consists of seven members, five of which own and operate nine continuing care retirement communities (CCRC) in Jacksonville, Orlando, Winter Park, Bradenton, St. Petersburg, and Tallahassee, FL.Westminster Services, Inc., a management company, and Westminster Retirement Communities Foundation, Inc. are also in the OG. HUD housing comprises most of the non-OG entities. PRC has 10 HUD rental facilities.

As of May 2014, the OG consisted of 3,311 total units including 2,093 IL units, 467 assisted living (AL) units and 751 skilled nursing beds. PRC offers type-B residency contracts at all of its CCRCs. Fitch's analysis is based on the OG financials. Financial figures quoted in this press release for year end fiscal 2014 are unaudited. Total operating revenues for the OG were $150.9 million in fiscal 2014.

OCCUPANCY DRIVING FINANCIAL GAINS

IL occupancy, which had been below 80% for the last three fiscal years, rose to 87.1% at year end 2014. The lower occupancy was driven largely by challenges at PRC's west coast communities in St. Petersburg and Bradenton, as well as the ongoing fill up at Palm View. PRC acquired Palm View in 2009 out of bankruptcy for $9.7 million. Formerly a retirement community and located next door to PRC's Palm Shores campus in St. Petersburg, Palm View was vacant at the time of purchase. PRC renamed the community and completely refurbished it, reopening it in October 2010, with 86 IL units. Palm View continues to fill, and PRC plans to reach 90% occupancy by 2016. Occupancy was at 65% at March 31, 2014.

PRC addressed other occupancy challenges on the west coast with a revamped marketing strategy that included new marketing leadership, a better alignment of incentives for PRC sales employees, the offering of a rental contract, and the use of marketing consultants. In May 2014, IL occupancy on the west coast improved to 82%, after being at 61% in 2012. Occupancy at PRC's other communities in Jacksonville, Orlando, Winter Park, and Tallahassee continued to remain very strong at approximately 95% at March 31, 2014.

Overall, PRC had 482 move-ins in fiscal 2014, over 100 more than in fiscal 2013 and more than double the 221 IL units filled in 2012. As a result, PRC had $49.8 million in net entrance fees (including entrance fees for initial units), and its net operating margin - adjusted was 20.5%, the highest it's been over the last five fiscal years.

PRC management follows a budgeting philosophy that uses monthly service fees to cover operating expenses and the net entrance fee receipts to cover debt service, fund capital improvements and build reserves. Investment income and contributions are not included for budgeting purposes. Using this philosophy, PRC has produced a relatively stable positive net operating margin, which has ranged from 3.1% to 4.5% and stood at 3.6% at year end 2014. Fitch's 'A' median is 5.6%.

PRC's yearly net entrance fee receipts have provided good coverage of debt service. In its weakest entrance fee year in 2012, when PRC had net entrance fee receipts of $15.6 million, pro forma MADS coverage was 2.2x. PRC's master trust indenture does not explicitly restrict entrance fees on initial units from the calculation of debt service coverage. Adding the initial entrance fees in 2012 ($4.5 million) to funds available for debt service would have raised MADS coverage to 2.6x in 2012. In 2014, pro forma MADS coverage including all entrance fees was a robust 4.7x. At any given time, PRC will have modest expansions going on at various sites across its campuses and tries to add 30 to 40 new units a year, which should continue to produce a steady flow of initial entrance fees.

Strong Capital Spending Offsets Liquidity

PRC's liquidity figures trail Fitch's 'A' category medians. At March 31, 2014, PRC had 375.9 days cash on hand, an 11.3x cushion ratio, and 76% cash to debt, compared to Fitch 'A' category medians of 563.7, 15.3, and 125.2, respectively. PRC has shown solid cash growth, with cash and unrestricted investments improving 16% to $136.8 million at March 31, 2014, from $118.3 million at March 31, 2013. Fitch expects PRC's liquidity to continue to grow over the next two years

Offsetting the below median liquidity figures is PRC's strong capital spending out of cash flow. PRC's age of plant is at the category median of 10.4 years and its capital spending as a percentage of depreciation has averaged 158% a year over the last five fiscal years, significantly above Fitch's 'A' category median of 104.4%. This equates to approximately $60 million in capital spending above depreciation over this time. Most of which was funded out of cash flow, which has suppressed liquidity growth.

PRC expects to continue to invest in its plant. Among the expansion projects expected to be undertaken are the building of 25 IL units for $7.25 million at Westminster Woods on Julington Creek and a 50 IL unit expansion for $12 million at Westminster Shores. In addition, PRC is planning a $10 million project to create a 40 bed skilled nursing facility focused on short-term, Medicare rehabilitation services, at Winter Park Towers.

Debt Profile

The high level of capital spending out of cash flow has helped to keep PRC's debt burden manageable. At March 31, 2014, PRC's MADS as a percentage was 7.9%, below the category median of 8.4%. In addition, PRC's debt to net available of 4.8x, compared well to the category median of 4.7x.

With this debt issuance and the refunding of debt that is expected in the next year, including the repaying of 2004B bonds which are currently supported by a bank letter of credit, PRC will have all but 14% of its debt as fixed rate. This continues a restructuring of PRC's debt portfolio from mostly variable rate debt to fixed rate that began with the 2010 debt issuance. The refunding of the 2004B bonds will also eliminate PRC's exposure to bank letters of credit. Fitch views PRC's current debt structure positively, believing it provides stability to PRC's overall credit profile.

PRC has one fixed-payor swap with Bank of America on a notional amount of $33.4 million. PRC receives 66% of Libor and pays 4.78%. As of March 31, 2014 the mark to market valuation on the swap was negative $6.3 million; there is no collateral posting required.

Disclosure

PRC covenants to provide annual audited financial statements, quarterly un-audited financial statements, and occupancy statistics to the Municipal Securities Rulemaking Board's EMMA system and to bondholders.

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

Applicable Criteria and Related Research:

--'Rating Guidelines for Nonprofit Continuing Care Retirement Communities', dated 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

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=832014

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Fitch Ratings

Primary Analyst

Gary Sokolow

Director

+1-212-908-9186

Fitch Ratings, Inc.

33 Whitehall St.

New York, NY 10004

or

Secondary Analyst

Dmitry Feofilaktov

Analyst

+1-212-908-0345

or

Committee Chairperson

Eva Thein

Senior Director

+1-212-908-0674

or

Media Relations

Elizabeth Fogerty, +1-212-908-0526

elizabeth.fogerty@fitchratings.com


Source: Fitch Ratings


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