The Rating Outlook is Stable.
The bonds are secured by a revenue pledge, first mortgage, and debt service reserve fund.
KEY RATING DRIVERS
WEAK HISTORICAL DEBT SERVICE COVERAGE: Although FVC's debt burden is moderate with maximum annual debt service (MADS) equal to 8.4% of revenues in fiscal 2013, historical coverage of MADS has been weak. Weak profitability and high entrance fee refunds resulted in a rate covenant violation (0.9x) that required FVC to hire a consultant.
IMPROVED INTERIM PROFITABILITY: FVC replaced the executive director in
INCREMENTALLY IMPROVING OCCUPANCY: Independent living unit (ILU) occupancy remains low but continued to improve to 79.3% at
LIGHT LIQUIDITY: Unrestricted liquidity remains light with 31.6% cash to debt and 3.3x cushion ratio at
CONSISTENT OPERATING PROFITABILITY: Fitch expects the recently implemented operating improvement initiatives will be sustained through the full fiscal year resulting in stronger cash flow and coverage.
FVC operates a type-A CCRC located in
WEAK HISTORICAL DEBT SERVICE COVERAGE
FVC violated its rate covenant in fiscal 2013 resulting in a mandatory consultant call-in. The rate covenant requires MADS coverage equal to or greater than 1.15x. So long as FVC continues to follow the consultant's recommendations, violation of the rate covenant will not result in an event of default.
Fitch's last rating action stated that failure to meet FVC's rate covenant would likely result in negative rating pressure. However, negative rating action is precluded at this time due to the improved operating performance and coverage in the interim period. Fitch expects that operating improvements will be sustained resulting in coverage levels compliant with the rate covenant.
IMPROVED INTERIM PROFITABILITY
Operating profitability improved marginally in fiscal 2013 but remained weak before demonstrating significant improvement in the interim period.
Operating revenue increased a moderate 5.9% in fiscal 2013 from the prior year while cost management initiatives limited expense growth to 2.4%. Continued cost management efforts decreased operating expenses 7% through the six month interim period. Consequently, operating ratio decreased to 107.1% in fiscal 2013 and 95% in the interim period from 109.4% in fiscal 2012. Net operating margin improved to 8.7% in the interim period from negative 2.8% in fiscal 2013 and negative 4.9% in fiscal 2012.
In addition to expense management, the improved operations reflect labor productivity initiatives and improved occupancy rates. Despite the improved operations, net operating margin adjusted decreased to 5.7% in fiscal 2013 from 14% in fiscal 2012 before rebounding to 18.2% in the interim period. The decline in fiscal 2013 was primarily due to increased entrance fee refunds.
INCREMENTALLY IMPROVING OCCUPANCY
ILU occupancy continues to improve but remains low, increasing to 79.3% at
Unrestricted liquidity metrics remain light but are consistent with the 'BB' category. FVC had
FVC covenants to provide annual disclosure within 150 days of the end of each fiscal year and quarterly disclosure within 50 days of the end of each quarter. Disclosure is provided through the
Additional information is available at 'www.fitchratings.com'.
--'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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