News Column

Fitch Upgrades Casa de las Campanas (CA) Revs to 'A-'; Outlook Revised to Stable

June 17, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has upgraded to 'A-' from 'BBB+' the rating on $50,655,000ABAG Finance Authority for Nonprofit Corporations Insured Revenue Bonds, Series 2010 issued on behalf of Casa de las Campanas, Inc. (Casa).

The Rating Outlook is revised to Stable from Positive.

SECURITY

The bonds are secured by a gross revenue pledge, first mortgage, and a debt service reserve fund.

KEY RATING DRIVERS

FINANCIAL STRENGTHENING DRIVES UPGRADE: Positive momentum in Casa's operational and financial performance continued in fiscal 2013 and in the 2014 interim period, producing solid financial metrics now consistent with an 'A-' rating. Top-line revenues also grew in 2012 and 2013 following several years of stagnation, as units filled up and rate increases were implemented.

SUSTAINED OCCUPANCY GROWTH: Occupancy in the independent living units (ILUs) has consistently improved since 2012, following four years of declines. Through the nine-month interim period ended April 30, 2014, Casa reported ILU occupancy of 95.1%, up from a recent low of 82.4% in fiscal 2011.

LARGE CAPITAL PLANS: Casa plans to spend approximately $15 million in fiscal years 2015 - 2016 to reposition 20 ILUs and 15 memory care units and renovate parts of the campus. The projects are in addition to routine capital budgeted at $4 million annually and are expected to be funded by a bank loan.

STRONG PRO FORMA METRICS: Despite a 20% planned increase in long-term debt, pro forma balance sheet metrics are strong, and remain consistent with the higher rating.

AGGRESSIVE INVESTMENT ALLOCATION: Casa has approximately 80% of its investments in either equities or alternative investments, which Fitch believes is an aggressive investment allocation. While market risk has historically been a key credit concern, Fitch believes Casa's current investment portfolio size relative to need provides increased room for short-term market volatility.

RATING SENSITIVITIES

STABILITY EXPECTED: Fitch expects Casa to continue generating healthy cash flows during a period of heightened capital spending. While deterioration in cash flow or balance sheet is not expected, significant negative variance current levels may lead to negative rating pressure.

CREDIT PROFILE

Casa de las Campanas is a type-A continuing care retirement community (CCRC) located in Rancho Bernardo, CA (approximately 25 miles north of San Diego). The community consists of 376 ILUs, 45 assisted living units (ALUs), 27 assisted living dementia care units and 99 skilled nursing beds. Under a management contract, Casa has been managed by Life Care Services since 1997. In fiscal year ended (FYE) July 31, 2013, Casa generated total operating revenues of approximately $35 million.

Sustained Occupancy Growth and Good Market Position

Following four years of declines, ILU occupancy began recovering in 2012, supported by a rebound in the local real estate market. Compared to a low of 82.4% in 2011, ILU occupancy was reported at 95.1% for the nine month interim period ended April 30, 2014. Casa additionally benefits from its strong reputation and service offerings, as well as a manageable competitive environment with only one rental CCRC located six miles away and four entrance fee facilities between 19 and 26 miles away. While there have been no new entrants into the market in the last few years, a new CCRC is in its early stages of planning, to be located approximately 14 miles from Casa. Given the extensive approvals process required by the state, completion of the project will likely be at least five years away, and does not pose a credit concern in the near to medium term.

Improved Underlying Operations

Due to weak occupancy and low rate increase, total operating revenues were stagnant at $31.5 million from 2009-2011 and the lack of growth was a key credit concern. With the rebound in operating performance, however, revenues have exhibited good growth since 2012.

Profitability metrics remain mixed, reflecting Casa's Type A structure. In fiscal 2013, operating ratio was 100.2% and net operating margin was 5.6%, compared to the 'A' medians of 95.8% and 5.6%, respectively. However, net operating margin-adjusted was very strong at 45.8% compared to the median of 23.1%.

Excellent Liquidity

Supported by strong sales and investment performance, unrestricted cash and investments grew to $81.2 million at April 30, 2014, compared to $65.3 million just one year ago and almost tripled from FYE 2009. Liquidity metrics of 1,032 days cash on hand, 160.9% cash to debt, and 20.2x cushion ratio at April 30, 2014 all compare favorably against Fitch's 'A' medians of 564 days, 125.2%, and 15.3x.

A large part of liquidity growth was due to solid net entrance fee receipts, which reached a high of $19.1 million in fiscal 2013. While net entrance fee receipts will likely moderate due to lower inventory, Fitch expects ILU turnover to continue generating strong cash flows. Fitch notes that the rapid growth in liquidity also continues to be supported by a very aggressive investment portfolio with about 54% equities, 23% alternative investments, and 22% fixed income. The market risk is reflected in historical unrealized gains and losses, which has ranged from negative $8.7 million to a positive $5.1 million over the last five fiscal years. However, Fitch believes the sheer size of Casa's current investment portfolio relative to need provides increased cushion to weather short-term volatility.

Large Capital Plans Expected

Casa is entering Phase I of its master facility plan, to be executed in fiscal years 2015-2016. This phase entails repositioning 20 ILUs and 15 memory care units, as well as renovating various parts of the campus including the wellness and fitness facilities. Casa expects to issue up to $15 million in bank loans later this calendar year to finance this project, the proceeds of which will be drawn down over two years. Routine capital is budgeted at an additional $4 million annually.

Phase II and III are expected in the medium to long term, and would involve building a new skilled nursing facility and potential addition of more ILU units. Only the impact of Phase I is incorporated into this analysis, given the uncertain timing and scope of the later phases.

Conservative Debt Profile

At April 31, 2014, long-term debt totaled $50.5 million, which is all fixed rate. Maximum annual debt service (MADS) of $4 million was 11.4% of fiscal 2013 revenues, which is unfavorable against the 'A' median of 8.4%. However, coverage of MADS was very good at 5.5x in 2013 and 4.5x through the interim period. Similar to other type A facilities, Casa relies on entrance fee receipts for debt service coverage and has historically produced light revenue-only coverage metrics. Revenue-only coverage of 0.8x in fiscal 2013 and 0.9x in the interim period are below the 'A' median of 1.2x. Casa does not have any swaps outstanding.

Strong Pro Forma Ratios

Given Casa's strong cash flows and balance sheet position, debt metrics are expected to remain solid at the 'A-' rating after the issuance of $15 million in new debt. Assuming a full $15 million impact, which is not likely given the two-year draw schedule, balance sheet metrics fall to 124% cash to pro forma debt and 16.8x cushion ratio, still consistent with the respective medians. Debt service is estimated to increase $820,000 annually, approximately a 20% increase from current levels. Pro forma MADS coverage of 3.7x (based on 2014 interim results) also remains very good for the rating.

DISCLOSURE

Casa provides annual audits within 150 days of each fiscal year end, and quarterly, unaudited financials within 45 days of each quarter end through the Municipal Securities Rule Making Board's EMMA system.

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

Applicable Criteria and Related Research:

--'Revenue Supported Rating Criteria', June 3, 2013

--'Not-for-profit Continuing Care Retirement Communities Rating Criteria' (July 10, 2013).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

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=835062

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

Jennifer Kim, +1 212-908-0740

Associate Director

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Gary Sokolow, +1 212-908-9186

Director

or

Committee Chairperson

Eva Thein, +1 212-908-0674

Senior Director

or

Media Relations:

Elizabeth Fogerty, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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