Sept 10 - Fitch Ratings has affirmed the 'BBB-' rating on the following
bonds issued on behalf of Peconic Landing at Southold, Inc.
--$28,825,000 Suffolk County Development Corporation revenue refunding bonds
series 2010 (Peconic Landing at Southold, Inc. project).
The Rating Outlook is Stable.
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
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,
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
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
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
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
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