The Rating Outlook is Stable.
The series 2014 bonds are expected to be issued as fixed rate. Bond proceeds will be used to fund most of the costs of an expansion project on Duncaster's campus and pay for funded interest, a debt service reserve fund and costs of issuance. The remaining costs for the expansion project are expected to be funded by a
The bonds will be secured by a pledge of Duncaster's gross revenues, a mortgage, a debt service reserve fund and a foundation guarantee not to let debt service fall below the 1.2 times (x) covenant.
KEY RATING DRIVERS
SOFT OPERATING PERFORMANCE: Duncaster's operating ratio of 99.3% and its net operating margin adjusted of 16.9% at year-end 2013 were both weaker than Fitch's 'BBB' category medians of 97.2% and 21.3%, respectively. Duncaster had solid net entrance fee receipts of
IMPROVING OCCUPANCY: After IL occupancy fell below 80% in 2012, Duncaster has improved IL occupancy to 93.4% at
MIXED DEBT SERVICE COVERAGE INDICATORS: At year end 2013, Duncaster had pro forma MADS coverage including turnover entrance fees of 1.8 times (x), which compares well to Fitch's median of 1.9x. Revenue only coverage was weaker at 0.5x relative to a median of 0.9x. Historically revenue only coverage has been low for Duncaster, but Fitch believes revenue only coverage will improve driven by the improving IL occupancy and the additional revenue that will be generated by the capital projects being funded with this debt issuance. Interim 2014 debt coverage reflects the improved performance with coverage of 2.4x with entrance fees and revenue only coverage of 0.7x.
SOLID LIQUIDITY METRICS: Duncaster's liquidity is solid for the rating level with 439 days cash on hand (DCOH), a pro forma cushion ratio of 8.4x and pro forma cash to debt of 70.4%, all of which are better than their respective 'BBB' medians.
UPCOMING EXPANSION PROJECT: Duncaster is moving forward on an expansion project to build 12 IL units and 12 AL Memory Care units on its existing campus. Approximately
PROJECT COMPLETION: The expansion project brings with it the usual construction and fill-up risks, which will remain in place until stable occupancy is reached. Fitch expects the project to be finished in
OPERATIONAL IMPROVEMENT: Fitch expects Duncaster's operations to remain stable over the construction period. Once the expansion project is completed and occupancy of the new units stabilized, there could be positive pressure on the rating should Duncaster's IL occupancy remain above 90% and revenue only coverage improve with the help of the additional IL and AL revenues.
Duncaster operates a not-for-profit life-care community in
The 'BBB-' rating reflects Duncaster's strong liquidity, solid pro forma coverage (including entrance fees), and a good market position. These are offset by weaker revenue only coverage and the risks associated with the current expansion project.
Improving Financial Profile
Over the last four audited years, Duncaster's operating ratio and net operating margin - adjusted has averaged 102.4% and 14.6%, weaker than Fitch's 'BBB' medians of 97.2% and 21.3%. Over this time, net entrance fee receipts have remained solid and relative stable averaging
Duncaster's underlying operational performance has been challenged by a wave of turnover in 2010. The community began 2010 with IL occupancy at 90% and by year end it had fallen to below 80%. In 2011, Duncaster also had a slower year for sales and as a result coverage was very weak, falling to 1.3x with entrance fees and a 0.5x with revenue only on a pro forma basis. In response, management implemented a number of initiatives to improve performance, including a restructuring of its marketing and sales and a focus on cost reduction. Operations and occupancy have been slowly improving since then, with the operating ratio climbing to high 103.7% in 2012, but steadily coming down since then. Interim 2014 results are the strongest through the four year historical, with costs remaining manageable and IL occupancy climbing back above 90%.
Duncaster has also improved the census mix of its skilled nursing unit. In 2010, nearly 70% of the skilled nursing payor mix was composed of lifecare residents. At
Duncaster's liquidity at the current rating is a credit strength, with all of its pro forma liquidity metrics comparing well to the category medians. As operations have improved, Duncaster has shown modest growth in unrestricted cash and investments. At
Good Market Position
Fitch believes Duncaster's overall credit profile benefits from a good market position which is supported by a relatively affluent service area, entrance fee pricing competitive with area housing prices, and an attractive campus.
Fitch visited the campus and found it very marketable with an attractive layout and landscape. While opened in 1984, the campus looks updated, has good amenities, including a large pool, and a recent dining room renovation has added to the campus' marketability. The memory care AL and skilled nursing are located in a separate building on the campus. Duncaster's skilled nursing center,
Debt Profile/Capital Plans
In spite of the additional debt, most of Duncaster's financial ratios remain comfortably within the 'BBB' category. At
The project involves the construction of 12 IL units and 12 AL Memory Care units. Both will be built as additions to current buildings. Duncaster is in the final stages of signing a GMP and Fitch does not expect the financing structure or amounts to change. Overall, while there is construction and fill up risk for the project, Fitch believes the expansion is modest and the timing and cost reasonable. Fitch also believes that there is ample financial flexibility at the current rating should the project run into unexpected challenges.
After issuance, Duncaster will have approximately
Duncaster covenants to post annual reports no later than 150 days after fiscal year-end and quarterly reports no later than 45 days after quarter-end on EMMA.
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
Dmitry Feofilaktov, +1 212-908-0345
Source: Fitch Ratings
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