TEXT-Fitch affirms Peconic Landing at Southold Inc, NY revs
Sept 10 - Fitch Ratings has affirmed the 'BBB-' rating on the following bonds issued on behalf of Peconic Landing at Southold, Inc. (Peconic): --$28,825,000 Suffolk County Development Corporation revenue refunding bonds series 2010 (Peconic Landing at Southold, Inc. project). The Rating Outlook is Stable. SECURITY The debt is secured by a pledge of Peconic's gross revenues, a mortgage on the land, all buildings except the Co-op units, and equipment, and a debt service reserve fund. KEY RATING DRIVERS HIGH OCCUPANCY: Independent living (IL) occupancy remains strong at 96.3%, as of June 30, 2012. Occupancy in its cottages, which had been a challenge and are Peconic's most expensive units, has been strong in 2012, with only two cottages currently available, but both are in contract. Skilled nursing occupancy remained good at 92.3%, with lower year-over-year occupancy, reflecting higher turnover from Medicare census, which has increased. Assisted living occupancy was at 65.4%, but is not a concern given Peconic has only 26 units. IMPROVED INTERIM DEBT COVERAGE: Higher occupancy has led to solid net entrance fee receipts ($2.3 million) in the six-month interim period and that in turn has produced very strong maximum annual debt service coverage of 4x at June 30, 2012. GOOD OPERATING RESULTS: In 2011, Peconic's operating ratio was 94.2%, its net operating margin 9.5%, and net operating margin adjusted 14.9%, all of which compare well to Fitch's 'BBB' category medians (97.4%, 9.9%, 17.6%, respectively). Solid operations have produced strong revenue-only coverage which has remained above 1.5x over the last four audited years and through the six-month interim period. Peconic does have negative excess margins but that is largely due to the size of its depreciation ($5.1 million in 2011) relative to its revenues ($21.6 million in 2011), which negatively affects the metrics that include depreciation, such as the excess margin. STRONG LIQUIDITY: At June 30, 2012, Peconic had $26.7 million in unrestricted cash and investments, which equated to 524.6 days cash on hand, a 12.7x cushion ratio, and 92.6% cash to debt, all better than their respective 'BBB' category medians. ATTRACTIVE LOCATION: Peconic's large and attractive campus, which includes a private beach, located on the North Fork of eastern Long Island is a marketing strength. CREDIT PROFILE Peconic is located on the North Fork of Long Island and consists of 111 single-story cottages, 139 apartments, 26 enriched housing units (assisted living units), and 44 skilled nursing beds. In 2011, Peconic had total operating revenues of $21.6 million. The 'BBB-' rating reflects Peconic's strong occupancy, solid liquidity, desirable location, and good debt service coverage. Peconic's capital plans and associated debt issuance, expected in early 2014, is the largest credit concern. Peconic has plans to renovate its health center and to build additional IL units. Current project estimates show costs of $36 million. Financing plans include $12 million in permanent debt and $19 million in short-term loans that would be paid back by entrance fees on the new ILUs; however, this plan of finance is subject to change. The potential for the additional debt is limiting the positive momentum in the current rating, as the rating remains at 'BBB-' even though most of Peconic's ratios are near the middle of the 'BBB' category. Fitch will incorporate the debt into the rating closer to the time of issuance. Over the past few years, Peconic has been challenged in keeping its cottages fully occupied, which was a credit concern. New York State requires that Peconic refund entrance fees for units that it has been unable to remarket after a year. Fewer sales, coupled with having to repurchase a few of the cottages that were available for over a year, equated to low net entrance fee receipts in 2010 and 2011. But demand for the cottages in 2012 has improved, which is reflected in the strong net entrance fees through the six-month interim period, which has eased concerns. Peconic has a conservative debt and investment profile. All of Peconic's $28.8 million in long-term debt is fixed and Peconic has no swaps. Peconic's investment allocation is 75% fixed income, with no alternative investments or hedge funds currently allowed. The Stable Outlook reflects Fitch's belief that Peconic will continue to maintain strong occupancy levels which should in turn generate adequate debt service coverage. Peconic covenants to provide to the Municipal Securities Rulemaking Board's Electronic Municipal Market Access System (EMMA) audited financial statements within 120 days after the end of each fiscal year and quarterly financials within 45 days after the end of each quarter. To date, Peconic's disclosure has been good and has included cash flow statements and occupancy figures but no MD&A.
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