ֳ

Rating Action Commentary

ֳ Upgrades Atherton Baptist Homes (CA) Revs to 'BB+'; Outlook Stable

Wed 03 Oct, 2018 - 11:23 AM ET

ֳ-Austin-03 October 2018: ֳ has upgraded the rating on the following bonds issued by Alhambra (CA) on behalf of Atherton Baptist Homes (Atherton) to 'BB+' from 'BB':

--$30,435,000 revenue refunding bonds series 2016.

The Rating Outlook is Stable.

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

KEY RATING DRIVERS
IMPROVED FINANCIAL PROFILE: The rating upgrade to 'BB+'/Stable from 'BB'/Stable from ֳ's last review in October 2018 reflects Atherton's improved liquidity position and operating performance. Atherton's $14.8 million of unrestricted cash and investments as of June 30, 2018 equated to 307 days cash on hand (DCOH), 48.3% cash to debt, and 7.1x cushion ratio, which is favorable to ֳ's below investment grade (BIG) category medians of 292, 32.1%, and 4.5x, respectively. Atherton's operating ratio of 90.9% through the six-month interim period (ended June 30, 2018) was favorable to the 101.6% BIG median, and much improved from 122.3% in 2013. In addition, solid entrance fee receipts through the interim resulted in a 24.4% net operating margin (NOM)-adjusted, above the 18.3% 'BIG' median.

STRONG OCCUPANCY: ILU occupancy was at 95% through the interim period, up significantly from 81% in 2013. Stronger occupancy has been a result of substantial sales initiatives and continued apartment enhancements upon turnover, which has improved the marketability of many of the older apartments on campus. Skilled nursing facility (SNF) occupancy has steadily been above 90% and Atherton does not have a large reliance on Medicare revenue (approximately 14% of FY 2017 SNF revenue).

MODERATE LONG-TERM LIABILITY PROFILE: Atherton's long-term liability profile is moderate with maximum annual debt service (MADS) just 9.2% of annualized revenues through the interim period, much better than the BIG median of 16.5%. Debt to net available of 5.9x in fiscal 2017 was strong due to good net entrance fee receipts and compares favorably to the BIG median of 9.8x.

RATING SENSITIVITIES

STABILITY EXPECTED: ֳ expects Atherton to maintain financial performance in line with current levels. Further upward rating movement is possible if operating performance is maintained at recent levels with further growth in liquidity. Conversely, weakened operating performance which results in lower coverage levels or a deteriorating liquidity position could lead to negative rating pressure.

POTENTIAL CAPITAL PROJECT: Atherton is in the preliminary stage of planning for redevelopment on a parcel of land owned by the community. ֳ will assess the impact of any new capital projects or related debt issuances on Atherton's credit profile will be assessed as details become more certain.

CREDIT PROFILE
Atherton Baptist Homes is a Type-C continuing care retirement community (CCRC) located in Alhambra, CA with 167 Classic ILUs, 50 Courtyard ILUs, 38 assisted living units (ALU), and 99 skilled nursing facility (SNF) beds. Total revenue in 2017 (Dec. 31 fiscal year end) was $20.4 million. Atherton restructured its pricing for the Courtyard units in 2016 and the predominant contract type for the Courtyard units is 90% refundable, while the Classic units are predominantly nonrefundable.

IMPROVED FINANCIAL PROFILE
The upgrade is driven primarily by Atherton's improving liquidity and core operations. $14.8 million of unrestricted cash and investments as of June 30, 2018 is much improved from $7.6 million as of Dec. 31, 2014 and equated to 307 days cash on hand (DCOH), 48.3% cash to debt, and 7.1x cushion ratio, which is favorable to ֳ's BIG medians of 292, 32.1%, and 4.5x. The growth in liquidity has been a direct result of stronger core operations following operational challenges including the slow fill of 50 courtyard ILUs that were added 2011 and high workers compensation claims from captive insurance. Atherton's operating ratio and NOM-adjusted were most recently 90.9% and 24.4% through the six-month interim period ended June 30, 2018, which is better than the BIG medians of 101.6% and 18.3%. In addition, MADS coverage was strong in fiscal 2017 at 2.6x and continued to be strong at 3x through the six months ended June 30, 2018 due to strong operations and good net entrance fee receipts.

Atherton maintains a defined benefit pension plan that is only 30% funded with a $2.7 million unfunded status as of Dec. 31, 2017. The pension plan is not subject to ERISA requirements. The board made a decision in 2017 to fund the plan over a 15 year period, which amounts to a manageable $270 thousand payment per year.

STRONGER OCCUPANCY AND OPERATIONS
Atherton added 50 Courtyard ILUs in June 2011 and suffered after the slow fill of these units, which reached 90% occupancy by third quarter 2013 and have since maintained high occupancy. The slow fill temporarily diverted attention from sales and marketing of the older part of the campus (Classic units - 170 ILUs). Management has since focused on increasing capital investment in the Classic units, which has aided marketability of these units and resulted in faster and consistent turnover. Overall ILU occupancy averaged 95% through the six month interim, compared to just 81% in 2013. Despite a somewhat competitive environment, ֳ views Atherton's pricing as supportive of a strong demand profile and believes they afford the community a good degree of pricing flexibility as average house prices are well above the classic and courtyard entrance fees.

Though investment into the campus has increased recently, total average age of plant as of June 30, 2018 of 14.1 years compares unfavorably to the 11.9 years BIG median as a result of five year capital expenditures averaging only 58.4% of depreciation through fiscal 2017. Management is in the preliminary planning stages regarding redevelopment of a parcel of land owned by the community. If undertaken, the combination of the project and routine unit renovations / capital expenditures should lower the average age of plant to levels more in line with the BIG median.

Consistently strong occupancy in Atherton's SNF, above 90% over the past few years, has also supported the turn-around in operations and profitability. SNF revenues accounted for 53% of fiscal 2017 net resident service revenues and are not highly reliant on Medicare revenue (only accounted for 14% of revenues in fiscal 2017), shielding Atherton from industry pressures on average length of stay. The majority of SNF revenues are private pay (57% of net revenues in fiscal 2017), but the community also accepts Medi-Cal patients (14.4% of net revenues in fiscal 2017), exposing the community to potential reimbursement pressure.

Management has also been successful in controlling expenses by managing wages and staffing levels, refinancing the 2010 bonds in 2016 and closing its captive insurance company in 2014 and moving to a commercial vendor for its workers compensation insurance. These efforts have resulted in a 5% decrease in total expenses from fiscal year-end 2013 to 2017 compared to a 21% increase in operating revenue over the same period.

MODERATE LONG-TERM LIABILITY PROFILE
The series 2016 bonds are fixed rate and are insured by Cal Mortgage. Bond covenants include 1.25x MADS coverage, 150 days cash on hand, and 1.5x current ratio. MADS is $2.1 million and the debt service schedule is level. Atherton's long-term liabilities are moderate as evidenced by maximum annual debt service (MADS) equating to 10% of fiscal 2017 revenues, which is favorable to ֳ's BIG median of 16.5%. Additionally, Atherton's debt to net available of 5.9x in fiscal 2017 was low compared to the BIG median of 9.8x.

Contact:

Primary Analyst
Richard Park
Director
+1-212-908-0289
ֳ, Inc.
111 Congress Avenue
Austin, TX 78701

Secondary Analyst
Ryan J. Pami, CFA
Associate Director
+1-212-908-0803

Committee Chairperson
Kevin Holloran
Senior Director
+1-512-813-5700

Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: sandro.scenga@fitchratings.com

Additional information is available on
Applicable Criteria
Rating Criteria for Public-Sector, Revenue-Supported Debt (pub. 26 Feb 2018)
U.S. Public Finance Not-For-Profit Continuing Care Retirement Community Rating Criteria (pub. 30 Mar 2018)

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