TEXT-Fitch affirms Ridgecrest Village, Iowa revs at 'BBB-'
Jan 9 - Fitch Ratings has affirmed the 'BBB-' rating on the following bonds issued on behalf of Ridgecrest Village (Ridgecrest): --$13.82 million Scott County, IA revenue refunding bonds, series 2006; --$5.95 million Scott County, IA revenue refunding bonds, series 2004. The Rating Outlook is Stable. SECURITY The bonds are secured by a pledge of gross revenues, a mortgage on real and personal property subject to permitted encumbrances, and a debt service reserve fund. KEY RATING DRIVERS RETURN TO EXPECTED FINANCIAL PERFORMANCE: After several years of weaker debt service coverage, financial performance returned to levels more consistent for the rating level. Profitability and debt service coverage improved in fiscal 2012 primarily due to improved assisted living (ALU) and skilled nursing (SNF) occupancy, increased private pay in the ALU and improved entrance fee receipts. Net operating margin adjusted increased to 17.5% while maximum annual debt service (MADS) coverage increased to 1.5 times (x) in fiscal 2012. ADEQUATE LIQUIDITY METRICS: Liquidity remains modest for the 'BBB-' rating with 48.4% cash to debt and 4.9x cushion ratio. However, modest liquidity metrics are partially mitigated by Ridgecrest's conservative investment portfolio and 100% fixed rate debt portfolio. LOW ILU OCCUPANCY: Independent Living (ILU) occupancy remains relatively low, averaging 86% since fiscal 2008 and equal to 84.5% at Sept. 30, 2012 reflecting challenges with marketing units located away from the center of Ridgecrest's campus. In addition, Ridgecrest was challenged with higher than normal turnover in fiscal 2012. SOLID MARKET POSITION: Ridgecrest has a good competitive position as the only Type 'A' continuing care retirement community (CCRC) in its primary service area (PSA) and with entrance fees that are well priced relative to the local housing market. CREDIT PROFILE The rating affirmation reflects Ridgecrest's return to operating performance in fiscal 2012 that is more consistent for the rating level, increased debt service coverage, and favorable market position. Fitch's primary credit concerns continue to include Ridgecrest's challenge in improving ILU occupancy and modest liquidity metrics. Operating performance improved in fiscal 2012 with net operating margin adjusted increasing to 17.5% from 11.3% in fiscal 2011. Additionally, operating ratio declined to 98.8% in fiscal 2012 from 105.8% in fiscal 2011. The improvement was primarily due to increased occupancy in Ridgecrest's ALU and SNF, increased private pay in ALU and improved entrance fee generation. Net entrance fee generation increased to $1.6 million in fiscal 2012 from $1.1 million in fiscal 2011. The improved operations strengthened MADS coverage to 1.5x in fiscal 2012 which is adequate for the rating category. This performance is more in line for the rating level after several years of weaker debt service coverage. Fitch expects this level of performance to be sustained. Liquidity is modest for a Type 'A' CCRC, but related concerns are mitigated by Ridgecrest's conservative balance sheet. Unrestricted cash and investments was $9.7 million at Sept. 30, 2012 compared to $10.2 million at fiscal year-end 2012 (June 30). While days cash on hand remains light for the rating category at 287.3 days, liquidity relative to debt remains adequate for the 'BBB-' rating with 48.4% cash to debt and 4.9x cushion ratio. Lending further strength to Ridgecrest's liquidity is its overall conservative financial profile with all fixed-rate debt, no swaps, and a relatively conservative investment portfolio. Ridgecrest's debt position remains elevated as evidenced by MADS equal to 14.5% of revenue and 70% adjusted debt to capitalization. Capital plans over the next few years are manageable and are expected to be funded out of cash flow. No new debt is expected to be issued in the next 24 months. Fitch's primary credit concern continues to be Ridgecrest's continued low ILU occupancy levels. ILU occupancy averaged 86.1% since fiscal 2008 and equaled 84.5% at Sept. 30, 2012. Management attributes the lower ILU occupancy levels since fiscal 2008 to challenges marketing certain units located away from the center of campus. Ridgecrest upgraded the units, added amenities to the building, including a new community room and increased the marketing emphasis on the units to increase demand. Additionally, ILU occupancy was negatively impacted in fiscal 2012 by a higher than average number of transfers to ALU, which offset the benefit from an above average number of move-ins. Despite the improved operations in fiscal 2012, Fitch is concerned that continued low ILU occupancy could negatively impact operations going forward, similar to the negative impact in fiscal 2011. Management's efforts to increase occupancy should be aided by Ridgecrest's favorable market position. Ridgecrest remains the only Type 'A' life care CCRC in the service area and there is limited competition in the broader area. The Stable Outlook reflects Fitch's belief that occupancy rates and entrance fee generation will remain sufficient to maintain debt service coverage while liquidity metrics remain stable. Given Ridgecrest's weaker financial performance in the prior three years, Fitch expects the financial performance exhibited in fiscal 2012 to be sustained. Located in Davenport, Iowa, Ridgecrest Village is a Type 'A' CCRC with 157 independent living units, 60 assisted living units (including 15 Alzheimer's units), and 137 skilled nursing beds. Total revenues equaled $13.6 million in fiscal 2012. Ridgecrest covenants to provide annual disclosure within 150 days of the end of each fiscal year and quarterly disclosure within 60 days of the end of each fiscal quarter. Disclosure is provided through the Municipal Securities Rulemaking Board's EMMA system. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable Criteria and Related Research: --'Revenue-Supported Rating Criteria' (June 12, 2012); --'Not-for-Profit Continuing Care Retirement Communities Rating Criteria' (July 12, 2012). Applicable Criteria and Related Research: Revenue-Supported Rating Criteria Not-for-Profit Continuing Care Retirement Communities Rating Criteria