NEW YORK, December 12 (Fitch) Fitch Ratings has affirmed the 'A-' rating on
$26,250,000 series 2010 bonds issued by the City of Pompano Beach, FL, on behalf
of John Knox Village of Florida, Inc. (JKV). The bonds are privately placed with
The Rating Outlook is Positive.
The bonds are secured by a gross revenue pledge and a security interest in
certain mortgaged property of the obligated group.
KEY RATING DRIVERS
CONTINUED FINANCIAL STRENGHTENING: The Positive Outlook reflects JKV's favorable
operating and financial profiles, as well as sustained improvements in occupancy
and entrance fee generation in its independent living units (ILUs). An upgrade
is precluded at this time due to the likely issuance of additional debt in 2014.
EXCELLENT BALANCE SHEET: Unrestricted cash and investments continued to grow,
totaling $59.6 million at Sept. 30, 2013. Combined with a low debt burden, most
liquidity and debt metrics comfortably exceed the 'A' medians. However, a debt
issuance of approximately $35 million is being planned, which would dilute
related financial metrics.
WEAK BUT STABLE PROFITABILITY: Certain profitability ratios have historically
been weak against Fitch's 'A' category medians, but have remained consistent for
many years. However, JKV's improving liquidity and strong debt service coverage
GOOD MARKET POSITION: JKV is the only continuing care retirement community
(CCRC) within a five mile radius of its location in Pompano Beach, FL with 85%
of its residents originating within eight miles.
FUTURE DEBT AND CAPITAL PLANS: JVK plans to borrow approximately $35 million in
2014 to fund the construction of its health care center, which would more than
double the existing debt load. Fitch will evaluate the full financial impact of
the debt when plans are finalized, but notes that there is debt capacity at the
IMPROVEMENT IN OCCUPANCY: Fitch believes there remains potential room for JKV
to improve its revenues and cash flow, given remaining supply and market
position. Despite significant planned increase in debt, upward rating movement
is possible should ILU occupancy trend closer to its pre-recession levels at
above 90%, leading to pro forma metrics in excess of the 'A' category medians.
JKV is a Type A CCRC located in Pompano Beach, FL, approximately eight miles
north of downtown Fort Lauderdale with 731 ILUs, 64 assisted living units
(ALUs), and 155 skilled nursing beds. Total operating revenues equaled $44.2
million in fiscal year ended (FYE) Dec. 31, 2012.
Favorable Operating and Financial Profile
As one of the largest single site communities in the nation and the only CCRC
within a five mile radius of its location in Pompano Beach, FL, JKV enjoys a
favorable market position that has led to occupancy levels higher than state
averages. Aided by facility updates and enhanced marketing initiatives, ILU
sales and occupancy has improved and stabilized at roughly 86% in fiscal 2011,
2012 and year to date 2013 from 82.7% in fiscal 2010. As a result, net entrance
fee receipts increased from $5.7 million in 2010 to $12.3 million in 2011 and
$10.8 million in 2012. Through the nine months ended Sept. 30, 2013, net
entrance fee receipts totaled $7.7 million. While JKV's size and position
provides a level of financial flexibility, Fitch believes it remains exposed to
more operating risk relative to many of its multi-state peers in the 'A'
category as a single site CCRC.
Operating ratio has exceeded 100% in four of the past five years and was 103.2%
in 2012 compared to the 'A' rating category median of 95.8% and the Type A
median of 98.8%. This primarily reflects JKV's type A contract as well as
management's strategy of maintaining affordable monthly service fees. While
certain profitability metrics lag the 'A' category medians, strong net turnover
entrance fees produced improved net operating margin-adjusted of 24% in 2011 and
19.9% in 2012 compared to 14.3% in 2010 and the median of 23.1%.
At Sept. 30, 2013, unrestricted cash and investments totaled $59.6 million, up
from $55.5 million one year prior and $49.2 million at FYE 2010. Liquidity
metrics of 596.8 days cash on hand, 227% cash to debt, and 34x cushion ratio
well exceeded Fitch's respective medians of 563.7 days, 125.2%, and 15.3x.
Significant Capital Plans Ahead
JVK is finalizing plans related to the construction of a replacement health
center, and is expected to secure funding and begin construction around July
2014. The goal is to complete the project by November 2015. The project will
be constructed on a currently undeveloped part of JKV's existing property, and
will increase skilled nursing capacity by 17 beds. JKV expects to fund the
project with an approximately $35 million bank loan. Fitch was aware of this
project at the time of our last review, albeit timing is slightly ahead of
expectations. Upon completion, the new health center should be accretive to the
organization, with increasing industry focus on long-term acute care facilities
and potential opportunity to diversify payor mix.
Low Debt Burden Expected to Increase in the Near Term
JKV has $26.3 million of long-term debt outstanding, which is 100% variable rate
and directly placed with PNC through 2017. The direct placement mitigates
typical concerns related to variable rate debt including remarketing, renewal
and put risk. However, a degree of renewal risk will arise as the direct
placement term date approaches.
JKV's debt burden is light with maximum annual debt service (MADS) equating to
3.9% of 2012 revenues compared to the median of 8.4%. Coverage of MADS was
robust at 7.2x in 2011 and 6.3x in 2012 compared to the 'A' category median of
3x. However, coverage remains reliant on entrance fee generation as reflected
in light revenue-only coverage of 0.2x in 2011 and 2012, compared to the median
The planned 2014 issuance estimated at $35 million will more than double JKV's
current debt load. Fitch will evaluate the full impact of the debt issuance
closer to the financing date.
JKV covenants to provide the direct placement bank annual disclosure within 150
days of each fiscal year end and quarterly disclosure within 45 days of the end
of the first three fiscal quarters and within 60 days of the fourth fiscal
Fitch Ratings, Inc.
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