Rating Action Commentary
ֳ Upgrades Atherton Baptist Homes' (CA) Revs to 'BBB'; Outlook Stable
Mon 13 May, 2024 - 10:50 AM ET
ֳ - San Francisco - 13 May 2024: ֳ has upgraded Atherton Baptist Homes' Issuer Default Rating (IDR) and series 2016 revenue bonds issued by Alhambra (CA) to 'BBB' from 'BBB-'.
The Rating Outlook is Stable.
The 'BBB' rating reflects Atherton's sound and improved balance sheet metrics, consistently positive operating performance, and solid market position. In fiscal 2023 (Dec. 31; audited), Atherton had total unrestricted cash and investments of approximately $30.1 million, which translated into approximately 512 days cash on hand and cash-to-adjusted debt of nearly 119.5%. These metrics are improved from the prior year's 457 days cash and 102% cash to adjusted debt position, respectively.
ֳ believes Atherton has some balance sheet flexibility to support its capital investment plans, which buttresses the 'bbb' operating risk assessment. In the medium-term, ֳ expects that Atherton will continue to make meaningful capital investments in order to maintain its facilities and solidify the organization's long-term market position.
ֳ's scenario analysis, which factors in a period of elevated (but manageable) capex, supports the expectation of rating stability at the 'BBB' rating level over the next several years. The rating also reflects the community's stable and solid market position, and its economically stable service area. These factors are poised to support consistent demand for its offerings, which ֳ views will continue to support healthy occupancy rates.
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 is a Type C community (offering fee for service contracts) and maintains sound brand awareness in its primary service area, given its well established presence in the community and religious affiliation.
The community benefits from limited Type C competition and maintains consistent and solid demand for its service offerings. ֳ believes Atherton's rates and affordability provides moderate price flexibility with rate increases that occur regularly, and are affordable relative to the service area's median home values.
The community's independent living (IL) occupancy rate has remained healthy at approximately 91.4% in 2023, while assisted living (AL) improved to approximately 91%, and skilled nursing facility (SNF) occupancy rates were consistent at 82% for the year. Going forward, ֳ expects Atherton's demand and occupancy rates across all levels of care to be relatively stable at current levels (if not somewhat improved), which will continue to support the organization's good operational performance.
Operating Risk - bbb
Continuation of Good Operating Metrics Expected
The 'bbb' operating risk assessment primarily reflects Atherton's consistent and good operating metrics. This is coupled with the organization's increasing levels of historical capital investment, which has further helped solidify Atherton's market position. In fiscal 2023, Atherton generated an improved operating margin of 3.9% and 97.2% operating ratio, and maintained a consistent 16.4% net operating margin (NOM)-adjusted, which demonstrates continued good operating performance. This has enabled the organization to build its balance sheet reserves, while reinvesting in its campus.
Over the past four fiscal years, Atherton's operating metrics have been very consistent and positive, which ֳ believes is a primary credit strength.
Capital spending has incrementally increased over the past four fiscal years, with Atherton's capex reaching a high 102.5% of depreciation in fiscal 2023. In part, this reflects the community's duplex addition, which was successfully completed in 2023. ֳ believes the community will continue to make meaningful capital investments in order to maintain its market position over the longer term.
Atherton is expected to incur some additional leverage over the next two fiscal years (approximately $10.5 million) as the organization plans to make significant updates and reposition its skilled nursing presence to higher acuity assisted living units. Overall, ֳ expects the community will continue to maintain a good operating cost flexibility over the Outlook horizon.
Financial Profile - bbb
ֳ's Scenario Analysis Supports Rating Stability at 'BBB' Rating Category
Atherton's liquidity position in fiscal 2023 was improved from the prior year, which supports the rationale for positive rating movement. At fiscal year-end, Atherton had days-cash-on-hand of approximately 512 days and 119.5% cash to adjusted debt, which was up from 457 days and 102%, respectively. With Atherton's consistently positive operations, MADS coverage was good at 2.8x in fiscal 2023 (per disclosure debt service covenant calculation).
ֳ's scenario analysis indicates Atherton will maintain the trajectory of good cash flow generation, which should lead to incremental strengthening of its overall financial profile over the next several years, despite planned capital investment. Even under a temporary operating and financial market stress, coupled with an elevated (but manageable) capital outlay, Atherton's forward-looking leverage metrics would remain in line with ֳ's 'BBB' category expectations. ֳ's scenario analysis indicates cash-to-adjusted debt metrics would return to north of 100% toward the out years of the scenario analysis.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
--Significant deterioration in operating performance where NOM and NOM adjusted are sustained below 0% and 11%, respectively;
--Material incurrence of additional debt to address Atherton's long-term capex needs resulting in decline of liquidity levels and cash to adjusted debt falling below 75% for a sustained period.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
--Given the rating upgrade, positive rating movement over the near-term is unlikely. However, a substantial improvement in liquidity levels where cash to adjusted debt is sustained at or above 150%;
--Improved and sustained operating performance from current levels while reinvesting in physical plant, which leads to a higher operating risk profile assessment.
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 169 Classic independent living units (ILU), 50 Courtyard ILUs, 32 assisted living units (ALU), four memory care beds for early cognitive impairment and 99 skilled nursing facility (SNF) beds. Total revenue as of audited fiscal year-end 2023 (Dec. 31 FYE) was approximately $25 million.
Sources of Information
In addition to the sources of information identified in ֳ's applicable criteria specified below, this action was informed by information 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), v2.0.0 (1)
ADDITIONAL DISCLOSURES
ENDORSEMENT STATUS
| Alhambra (CA) | EU Endorsed, UK Endorsed |