Rating Action Commentary
ֳ Revises Atherton Baptist Homes, CA's Outlook to Positive; Affirms IDR at 'BBB'
Tue 06 May, 2025 - 1:55 PM ET
ֳ - San Francisco - 06 May 2025: ֳ has affirmed Atherton Baptist Homes, CA's (ABH or Atherton) Issuer Default Rating (IDR) and series 2016 revenue bonds issued by Alhambra, CA at 'BBB'.
The Rating Outlook has been revised to Positive from Stable.
The Positive Outlook is supported by Atherton's enhanced balance sheet metrics, consistently improved operating performance, and solid market position with limited competition. In fiscal 2024 (Dec. 31; audited), Atherton reported total unrestricted cash and investments of approximately $35 million, which is an increase from $30 million. ABH's unrestricted balance sheet metrics demonstrate an improvement from the prior year's sound liquidity position.
ֳ believes Atherton possesses balance sheet flexibility to support its current capital investment plans aimed at increasing assisted living unit (ALU) capacity, bolstering the 'bbb' operating risk assessment. In the medium term, ֳ anticipates Atherton will continue to make significant capital investments to maintain its facilities and strengthen its market position.
ֳ's scenario analysis, incorporating a period of elevated capex in the near term, reflects the expectation of continued growth within the 'BBB' rating category over the next several years. The 'BBB' rating affirmation is further supported by the community's consistent and strong demand in a stable market. These factors are set to maintain steady appetite for Atherton's offerings, which ֳ expects will lead to healthy occupancy rates and enhanced operational performance, supporting robust debt service coverage levels.
SECURITY
The bonds are secured by a gross revenue pledge, mortgage lien and debt service reserve fund.
KEY RATING DRIVERS
Revenue Defensibility - 'a'
Consistently Sound Demand in Stable Market
The strong revenue defensibility continues to reflect Atherton's stable market area and high degree of price flexibility. Atherton maintains a sound competitive position in its primary market area, given its well-established presence in the community and religious affiliation.
The community benefits from limited competition in the marketplace and maintains consistent and solid demand for its service offerings. ֳ believes Atherton's rates and affordability provides moderate price flexibility with rate increases that are anticipated to occur more regularly (after years of minimal increases) and are affordable relative to the service area's median home values. Management is budgeting for a larger independent living unit (ILU) entrance fee increase in 2025 for certain units (approximately 25%) which should now position entrance fees to be closer to market rate, thus further demonstrating the organization's historical pricing flexibility position.
The community's independent living (IL) occupancy rate has remained healthy averaging approximately 90% in 2024, while assisted living (AL) was approximately 87%. Skilled nursing facility (SNF) occupancy rates were at a lower 72% for the year as management begins to take SNF units offline in order to position for more ALUs over the near term. In the first three months of fiscal 2025 (March 31; unaudited), ILU occupancy was stronger at 93.5%, which ֳ views as nearly fully occupied given natural turnover. Going forward, ֳ expects Atherton's demand and occupancy rates across all levels of care to be relatively stable if not somewhat improved, which will continue to support the organization's good operational performance.
Operating Risk - 'bbb'
Continuation of Good Operating Metrics Expected; Looming Long-Term Capex Plan
ֳ's assessment of Atherton's operating risk primarily reflects the community's consistently strong and improved operating metrics, largely reflecting its predominantly Type C (fee-for-service) contract mix, coupled with increasing levels of historical capital investment. These efforts have solidified Atherton's market position while reducing its average age of plant.
In fiscal 2024, Atherton delivered another year of good performance with an operating ratio of 98.3%, an operating margin of 3.9%, and a near 23% net operating margin (NOM)-adjusted, demonstrating continued positive operating performance over the past four fiscal years. This success has enabled the organization to bolster its balance sheet reserves and reinvest in its campus, with the average age of the plant improving to approximately 13 years as of the March 31, 2025, interim period, down from a high of 19 years in 2023.
Capital spending has incrementally increased over the past four fiscal years, with capex reaching 131% of depreciation in fiscal 2024. This reflects the community's recent ILU additions, along with the initiation of its SNF repositioning and ALU enhancement projects.
Atherton is expected to take on additional leverage of approximately $10 million to $15 million over the next two fiscal years to facilitate significant updates and reposition its skilled nursing presence toward higher acuity ALUs. Overall, ֳ anticipates that the community will maintain good operating cost flexibility over the Outlook horizon. In the longer term, management may consider an ILU expansion project to add up to 50 new ILUs on its campus, which is not currently reflected in this analysis. ֳ will review and consider the credit impact of this potential project if/when details are solidified.
Financial Profile - 'bbb'
Improved Capital and Liquidity Ratios
Atherton's liquidity position in fiscal 2024 showed significant improvement from the previous year, supporting the rationale for the positive Rating Outlook following ֳ's rating upgrade last year. At fiscal year-end, Atherton had approximately 585 days cash on hand and 144% cash to adjusted debt, up from 512 days and nearly 120%, respectively. Through the March 2025 interim period, liquidity metrics continued to improve, with ABH achieving nearly 150% cash to adjusted debt. This liquidity growth has been primarily driven by Atherton's consistently positive and improved operations, which also supported strong maximum annual debt service coverage at approximately 4.1x in fiscal 2024 (per disclosure debt service covenant calculation).
ֳ's scenario analysis indicates that Atherton will maintain its trajectory of strong cash flow generation, leading to incremental strengthening of its overall financial profile over the next several years, despite planned near-term capital investments. Even under temporary operating and financial market stress, coupled with an elevated capital outlay over the next 18 months (approximately $10 million to $15 million to fund the organization's higher acuity ALU project), Atherton's forward-looking leverage metrics are expected to remain in line with ֳ's 'BBB' category expectations. ֳ's scenario analysis does not yet account for a potential longer-term capex plan to fund additional ILUs on its campus, as management notes that this project is in its early stages.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
--Failure to maintain improved operating metrics consistent with performance in 2024 could result in an Outlook revision back to Stable;
--An unexpected acceleration of capital plans or material decline in liquidity that changes the expected trajectory of Atherton's cash-to-adjusted debt could pressure the rating.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
--An upgrade will be considered over the next one to two years if there is continued improvement in liquidity levels where cash to adjusted debt is sustained at or above 150%. Also, sustained operating performance approximating current levels while continuing to make strong investments in the physical plant could lead to a stronger assessment of Atherton's operating risk.
PROFILE
Founded in 1914, Atherton is a Type C life plan community (LPC) located in Alhambra, CA. The community provides independent living, in-home care, assisted living, skilled nursing, short-term rehab and hospice services with 217 ILUs, 32 ALUs, four memory care beds for early cognitive impairment and 99 SNF beds. Total revenue as of audited fiscal year-end 2024 (Dec. 31 FYE) was approximately $25.3 million.
Sources of Information
In addition to the sources of information identified in ֳ's applicable criteria specified below, this action was informed by data from Lumesis.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. ֳ's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on ֳ's ESG Relevance Scores, visit /topics/esg/products#esg-relevance-scores.
Additional information is available on
PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.
APPLICABLE CRITERIA
APPLICABLE MODELS
Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).
- Portfolio Analysis Model (PAM), v2.0.1 (1)
ADDITIONAL DISCLOSURES
ENDORSEMENT STATUS
| Alhambra (CA) | EU Endorsed, UK Endorsed |