Jan 8 - Fitch Ratings has affirmed the 'BBB' rating on the following bonds
issued on behalf of Givens Estates United Methodist Retirement Community
--$65.4 million North Carolina Medical Care Commission retirement facilities
first mortgage revenue refunding bonds, series 2007.
The Rating Outlook is Stable.
The bonds are secured by pledged assets, including gross receipts, a first
mortgage lien, and a debt service reserve fund.
KEY RATING DRIVERS
STRONG OCCUPANCY: Givens benefits from strong demand as occupancy across all
levels of care is high. Through 10 months ended Oct. 31, 2012 (unaudited),
independent living unit (ILU) occupancy was 96%, assisted living unit (ALU)
occupancy was 94%, and skilled nursing was 93.2%. Fitch views Givens' strong
demand as a primary credit strength.
SOLID PROFITABILITY: Continued strong demand across all levels of care supports
Givens' solid operations, as the organization had an operating ratio of 90.8%, a
net operating margin of 18.4%, and net operating margin-adjusted of 27.6%
through October 2012. All of Givens' profitability metrics compare favorably
against Fitch's 'BBB' category medians.
STRATEGIC ACQUISITION: On Dec. 1, 2012, Givens acquired Highland Farms
Retirement Community (HF); a type-C continuing care retirement community (CCRC)
located approximately 15 miles east with 218 ILUs, 30 ALUs and 60 skilled
nursing beds on a 75-acre campus. The purchase was financed with a $14.5 million
variable-rate taxable loan from First Tennessee Bank. Overall, Fitch views the
transaction favorably, as it expands the organization's financial and strategic
capacity into a new market despite an increase to an already high debt burden.
MIXED LIQUIDITY: As of Oct. 31, 2012, Givens had $32.4 million in unrestricted
cash and investments, which translated into 549 days cash on hand, 5.2x pro
forma cushion ratio, and 35.9% pro forma cash to debt. Both cushion ratio and
cash to debt compared unfavorably against Fitch's medians of 6.6x and 50.9%,
HIGH DEBT BURDEN: Pro forma maximum annual debt service (MADS) of $6.2 million,
including the loan related to the HF transaction, represented approximately
15.6% of total revenues in fiscal 2011, which is high and compares negatively
against Fitch's median of 12.9%. Fitch believes Givens has limited debt capacity
at its current rating level.
FUTURE CAPITAL NEEDS: Management has been planning for a long-term ILU
renovation and expansion, which may cost up to $23.6 million and would likely be
financed by debt. Fitch expects that this financing would be structured as
temporary debt, with rapid pay-down of the loan as entrance fees are received.
RATING AFFIRMATION OF 'BBB'
The 'BBB' rating affirmation is supported by Givens' strong historical occupancy
across all levels of care, robust operating performance, favorable service area
characteristics, and good revenue-only MADS coverage. Key credit concerns
include the organization's high debt burden, with additional capital plans,
mixed liquidity indicators, and competitive market.
ILU occupancy through the 10-month period ending Oct. 31, 2012 (not inclusive of
HF), was a strong 96%. Further, over the past four fiscal years Givens' ILU
occupancy has averaged 96.3% and has never dropped below 95%, which illustrates
the organization's continual strong demand for service. Strong demand across all
levels of care helped support Givens' robust historical operating performance as
the organization has averaged a 90.8% operating ratio, 20.3% net operating
margin, and 26% net operating margin-adjusted over the past four years. These
metrics compare favorably against Fitch's medians, which have translated into
good revenue-only MADS coverage of 0.9x through October 2012.
In December 2012, Givens acquired Highland Farms, a type-C CCRC with
approximately $12 million in revenue in fiscal 2011 for $14.5 million. Although
Givens is budgeting for a $143,500 gain in fiscal 2013, management is confident
in beating budgeted expectations with plans to capitalize on shared savings and
efficiencies, while improving ILU occupancy which was 91% in 2012. Overall,
Fitch views the transaction favorably as Givens was able to expand into Black
Mountain, NC, which is a middle-market community while increasing the
organization's size by approximately $12 million in total revenue. According to
HF's most recent audit (fiscal 2011), HF had an operating income of $79,602 and
cash flow of $1 million.
In addition to the acquisition portion of the loan, management intends to fund
$5.5 million of capital expenditures at HF, which will consist of various campus
With the acquisition of HF, Givens' pro forma debt burden decreased slightly,
but is still high with MADS as percentage of revenue of 15.6%. Debt service
coverage was only 1.4x through the 10 months ended Oct. 31, 2012; however, Fitch
expects this to improve with the additional cash flow from HF (consolidated into
Givens' financials as of December 2012).
Fitch continues to view the organization's debt burden as a credit concern
considering management's plans to undertake a significant capital investment
program, Creekside, which is expected to last five years. This project has been
contemplated for several years and management expects the project to be
completed in phases. Fitch believes that the phased approach to the project
greatly mitigates the construction and development risk to Givens, particularly
with the organization's strong historical occupancy.
The first phase of the project, which is scheduled to begin in April 2013, is
expected to be funded from a bank construction loan ($7 million) that will be
repaid from entrance fee receipts. Management has indicated that construction
will only take place if presale demand of 70% is met. As of Jan. 7, 2013, Givens
already had 13 of the first 24 units reserved with residents putting down a 10%
deposit. Fitch expects that any financing will be subsequently repaid in a short
time from entrance fees from the new units. Additional permanent debt would
likely cause negative rating pressure.
STABLE RATING OUTLOOK
The Stable Outlook reflects Fitch's belief that Givens will continue to maintain
its strong credit fundamentals, such as solid demand for services and
operational profitability. Fitch believes the organization's recent acquisition
of HF will be accretive to the organization over the medium term.
OUTSTANDING DEBT PROFILE
Fitch views Givens' debt profile as conservative, since 72% is traditional
fixed-rate bonds and 28% is variable-rate with no outstanding swaps. In December
2012, management took out a $20 million variable-rate loan to finance the HF
acquisition ($14.5 million) as well as three years of capital investment ($5.5
million). The bank loan is with First Tennessee Bank, and has a 10-year term
amortizing over 25 years.
Operating in Ashville and Black Mountain, NC, Givens is a type C CCRC consisting
of 603 ILUs, 77 ALUs, and 144 skilled nursing beds.
Givens has covenanted to provide annual audits within 120 days of fiscal year
end and quarterly disclosure within 30 days of quarter end via the MSRB's EMMA
system. Fitch views the disclosure requirements imposed by the state of North
Carolina Department of Insurance favorably and believes the content represents
an industry best practice. Additionally, management was candid and timely in its
responses to Fitch during the credit review process.
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', dated June. 12, 2012.
'Rating Criteria for Not-for-Profit Continuing Care Retirement Communities',
July 12, 2012.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Not-for-Profit Continuing Care Retirement Communities Rating Criteria