OREANDA-NEWS. Fitch Ratings has affirmed the 'BBB-' rating on following Buffalo And Erie County Industrial Land Development Corporation bonds issued on behalf of Orchard Park CCRC, Inc. d/b/a Fox Run at Orchard Park (Fox Run):

--$47,255,000 revenue refunding bonds, series 2015 (Orchard Park CCRC, Inc. Project)

The Rating Outlook is Stable.

Security

Pledge of gross revenues, a mortgage, and a debt service reserve fund.

KEY RATING DRIVERS

STEADY OPERATING METRICS: Over the past four audited years, Fox Run at Orchard Park's (Fox Run) operating ratio has averaged 93.1% and its net operating margin-adjusted 32.2%, both above Fitch's 'BBB' category medians of 96.1% and 19.3%, respectively. Over this time, revenue-only coverage has averaged 1x, which is particularly strong for a Type 'A' contract facility, reflecting the good operational performance.

MIXED LIQUIDITY INDICATORS: Fox Run's unrestricted liquidity-to-expenses is strong, partially reflecting its small revenue size ($14.7 million in 2015). Unrestricted liquidity-to-long-term debt is weaker, with cash-to-debt trailing the category medians. Since 2012, Fox Run has improved its unrestricted cash and investments by an impressive 230% to $20.1 million at March 31, 2016, reflecting the strong cash flow over this time.

SOLID OCCUPANCY: At March 31, 2016, independent living (IL) occupancy was 98%, assisted living/memory care occupancy was 88%, and skilled nursing occupancy was 86%. Fox Run's current occupancy levels, especially its IL occupancy, are a credit strength.

HIGH DEBT BURDEN: Fox Run's debt burden is elevated as indicated by MADS as a percent of revenue of 21.5% at March 31, 2016, relative to a 'BBB' category medina of 12.4%. Fitch expects this figure to moderate over time.

RATING SENSITIVITIES

CONTINUED TREND IN PERFORMANCE: Fitch expects Orchard Park CCRC, Inc. d/b/a Fox Run at Orchard Park (Fox Run) to maintain its current levels of performance, with liquidity continuing to grow and its debt burden continuing to moderate.

HEALTH CENTER PROJECT: Fox Run will likely move forward on a health center renovation that will add additional beds, provide for more private skilled nursing rooms, and create a larger therapy space. Fitch believes based on the current scope of the project and a maximum project cost of $10 million that Fox Run should be able to execute it at the current rating level.

CREDIT PROFILE

Opened in 2007, Fox Run operates a not-for-profit life-care community in Orchard Park, NY, which is located just south of Buffalo. Fox Run has 180 IL units (30 patio homes and 150 apartments), 52 assisted living (AL) suites (including 18 memory care units) and 50 skilled nursing beds. Total operating revenue in 2015 wase $14.7 million.

The 'BBB-' reflects Fox Run's positive trend in IL occupancy levels, solid operating metrics, and good revenue-only coverage, which are offset by mixed liquidity indicators and a high debt burden.

Solid Operating Metrics

In 2015, Fox Run produced a 92.7% operating ratio and a 23.5% net operating margin-adjusted, both good for the rating level. Fox Run's operating ratio continues to remain strong for a Type 'A' contract facility.

Management attributes the solid operational performance in part to the early years of the facility, when fill-up was challenging, especially for the cottages, and Fox Run had to maintain an extremely tight focus on expenses. This focus has been maintained even as IL occupancy has improved. IL occupancy has averaged 92% in the last four audited years and stood at a healthy 98% at March 31, 2016, with all the cottages currently occupied. First-quarter 2016 (1Q16) results show continued strength in performance with an 87.4% operating ratio.

Fitch notes that in Fox Run's 2015 audit there was a one-time expense of $1.4 million due to a change in Fox Run's future service obligation (FSO). The charge was treated as a reduction to patient service revenue, which caused patient service revenue to be down year over year. However, as it was a non-cash item, Fitch added it back to revenue, and these funds were available for debt service for Fox Run's covenant calculation, with which Fitch was consistent.

Fox Run now has a $1.4 million FSO liability on its balance sheet. It is not a credit concern as a separate actuarial study showed that future cash flow will be adequate to meet the health care needs of current residents.

MADS coverage including entrance fees was lower in 2015 at 1.4x, compared to 1.6x in 2014, and that drop was largely due to the timing of entrance fee receipts. Fox Run had a cluster of turnovers in the last quarter of 2015 and ended up paying out refunds (Fox Run offers a 90% refundable contact as well as a fully amortizing contract), with the year ending before Fox Run was able to receive the entrance fees for the turned-over units. Subsequently, Fox Run received the entrances fees in 1Q16, which led to unusually strong results for the quarter, with debt service coverage at 3.3x and the net operating margin-adjusted at 50.6%. Fitch expects the entrance fee receipts to normalize over the course of the rest of the year and total performance more in line with historical performance.

Overall sales remained fairly consistent from 2014 to 2015, with 23 move-ins in 2014 and 21 in 2015. In last year's initial rating, Fitch commented that since Fox Run is a younger facility, inconsistency in the level of near-term turnover would be a concern and could impact coverage. In addition, the 90% refundable contract could also add volatility as to the timing of entrance fees.

However, partially mitigating these concerns is Fox Run's strong revenue-only coverage, which at 1x in 2015 was consistent with the prior four years and reduced Fox Run's reliance on entrance fees to pay debt service.

Continued Liquidity Growth

At year-end 2011, Fox Run had unrestricted cash and investments of only $4 million, which equated to a very thin 126 DCOH, a 1.2x pro forma cushion ratio, and 9% cash-to-debt. At March 31, 2016, unrestricted cash and investments had grown to $20.1 million, equating to 600 DCOH and 42% cash-to-debt, which are mixed relative to the 'BBB' category medians. With initial units filled and the upcoming health center project starting, Fitch does not expect Fox Run's unrestricted liquidity to continue to grow at the current pace, but even modest cash growth would be accretive to Fox Run's credit profile.

Good Market Position

Fitch views Fox Run's current market position as a credit positive. In 2015, Fitch visited the site and found an attractive campus, with an appealing layout and entryway. The campus has larger IL units, a dementia unit, a pool, and a sizable casual bistro off the main entrance, all items many older CCRCs have had to invest in in recent years.

The service area demographics are mixed, but Fox Run is in a demographically stronger part of the larger service area of Erie County (GO bonds rated 'A+'/Stable Outlook) and housing prices in Fox Run's primary service area are generally higher than the rest of market. Erie County's rating had been as low as 'BBB-' through 2007 and 2008, reflecting the stress in the local economy at that time.

Competitively, there is only one other CCRC, Canterbury Woods, located approximately 17 miles away from Fox Run. Canterbury Woods is expanding with a new campus under construction in downtown Buffalo, but Fitch does not believe that expansion will impact Fox Run. A handful of other facilities in the area provide some senior living services but none offer the full continuum of care or a Type 'A' lifecare contract.

Fitch believes Fox Run's strong management team, young campus, manageable competition, and location in the better part of the service area add up to a good current market position.

Debt Profile/Capital Spending

The 2015 bonds are all of Fox Run's current long-term debt and are all fixed-rate, making for a conservative debt structure.

Fox Run's elevated debt burden is a credit concern. Fox Run's MADS equated to a high 22.2% of revenues in 2015 and debt-to-net available of 10.6x was higher than the 'BBB' median of 5.9x. Fitch expects these to moderate over time, but the elevated debt burden will require management to maintain strong operating performance.

Fitch anticipates that Fox Run will move forward on a health center project in the current year. The project is not expected to cost more than $10 million, and Fitch believes Fox Run will be able to fund the project at the current level.

Disclosure

Fox Run covenants to post annual reports no later than 150 days after fiscal year-end and quarterly reports no later than 60 days after quarter-end on EMMA.