Fitch Affirms Cypress Cove (FL) at 'BB '; Outlook Stable
--\\$19.5 million series 2014;
--\\$66 million series 2012.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a pledge of gross revenues, an assignment of the obligor's interest in a ground lease on land on which the community is located, and a debt service reserve fund.
KEY RATING DRIVERS
SOLID CASH FLOWS AND OCCUPANCY: Cypress Cove's net entrance fee receipts of \\$6 million were solid through the nine-month interim period (ended June 30, 2015). In addition, independent living unit (ILU) occupancy improved to 95% through the interim, which resulted in incremental top-line revenue growth and an overall operating improvement through the period.
HIGH DEBT BURDEN: Cypress Cove's debt burden remains high, as evidenced by maximum annual debt service (MADS), at 17.2% of annualized revenues through the interim. Offsetting the high debt burden is Cypress Cove's debt service coverage, which has been strong over the last three years and was a solid 2.1x through the interim period.
LIGHT LIQUIDITY: Cypress Cove's \\$20.7 million in unrestricted cash and investments equated to a light 260 days cash on hand (DCOH), 24.2% cash-to-debt and a 3.6x cushion ratio at June 30, 2015. Management is expecting to fund certain community renovations out of cash over the next few years, and is projecting unrestricted liquidity to decline as a result, hitting a low of \\$17.2 million in 2017. Cash is expected to increase starting in 2018.
LEE MEMORIAL HEALTH SYSTEM AFFILIATION: The sole corporate member of Cypress Cove is Lee Healthcare Resources (LHR), a support organization for both Cypress Cove and Lee Memorial Health System (LMHS), a four-hospital system located in Lee County, FL. While Cypress Cove is not part of LMHS, Fitch believes the two organizations have a close working relationship that benefits Cypress Cove both strategically and financially. Cypress Cove is located on land owned by LHR for which it pays an annual ground lease payment, of approximately \\$1 million which is subordinate to debt service payments.
COMPETITIVE SERVICE AREA: Cypress Cove is located approximately seven miles away from Shell Point Retirement Communities, a 1,204 ILU continuing care retirement community (CCRC). While Shell Point is Cypress Cove's largest competitor it does not offer a dedicated Memory Care facility, which should help Cypress Cove's marketing and sales efforts going forward.
RATING SENSITIVITIES
ADHERENCE TO PROJECTED LIQUIDITY: Cypress Cove projects its unrestricted liquidity position will decline over the medium term, with a low point in 2017. Given Cypress Cove's already weak liquidity position, any significant deviation from projections may lead to negative rating pressure.
SUCCESSFUL COMPLETION OF CAPITAL PROJECT: Fitch expects Cypress Cove to complete its Memory Care expansion project on time and on budget. Any material deviation from the proposed project scope that impacts Cypress Cove's financial position may lead to negative rating pressure.
CREDIT PROFILE
Cypress Cove is a type-A CCRC located in Fort Myers, FL. The community currently consists of 333 ILU apartments, 30 ILU villas, 44 ALU apartments and a 64-bed skilled nursing facility (SNF). Cypress Cove opened in 1999 and is situated on a 48-acre parcel of land that is part of 402-acre master development called HealthPark Florida, which also features the HealthPark Medical Center (a 368-bed acute care hospital), part of LMHS. In fiscal 2014 Cypress Cove generated total revenues of \\$28.5 million.
SOLID CASH FLOWS AND OCCUPANCY
Cypress Cove's net entrance fee receipts have improved significantly over the last four fiscal years, increasing from \\$4.7 million in 2011 to \\$15.4 million in 2014. The robust improvement is attributed to improved occupancy over the time period, as ILU occupancy increased from 75% in 2011 to 89% in 2014. Occupancy improved to 95% through the nine-month interim, driven by a healthy real estate market and enhanced marketing initiatives. Cypress Cove maintains an active waiting list, which currently consists of 102 prospective residents, and management is expecting occupancy to remain at around 95% going forward. Additionally, assisted living and skilled nursing occupancies have both been strong at over 90% over the last four years.
Management is projecting a leveling out of cash flows over the next few years, now that the facility is almost fully occupied. Cypress Cove is projecting to generate approximately \\$10 million in annual net entrance fee receipts going forward, which should support stable debt service coverage over the medium term.
HIGH DEBT BURDEN
Cypress Cove's \\$85 million in total debt outstanding equated to a low 24.2% of total unrestricted cash at June 30, 2015, while maximum annual debt service (MADS) of \\$5.8 million made up a high 17.2% of annualized revenues through the interim, both unfavorable to category peers. Under the bond documents, Cypress Cove is allowed to use a lower MADS of \\$4.5 million for its covenant calculations through the Memory Care project stabilization period (through 2017).
According to Fitch's calculations, Cypress Cove's debt service coverage has averaged 2.5x from 2012 through 2014 and was a solid 2.1x through the interim period. Management is projecting debt service coverage to be at around 2x over the medium term. Annual ground lease expense has been added back to net available for the purpose of debt service coverage calculations, as ground lease payments are subordinate to debt service on the bonds.
Ground Lease payments were deferred when Cypress Cove was facing occupancy challenges and in a weaker financial position. The ground lease liability was at \\$6.7 million at June 30, 2015, and management expects lease payments to become current by 2022. The ground lease cannot be terminated as long as Cypress Cove's debt is outstanding.
LIGHT LIQUIDITY
Cypress Cove's \\$20.7 million in unrestricted cash and investments at June 30, 2015 produced light liquidity metrics when compared to category peers. Management is projecting liquidity to decline further over the next three years, as certain capital projects are funded out of cash and expected net entrance fee receipts stabilize at a lower level. Cypress Cove is expecting to renovate its SNF in 2016, which will put additional stress on revenues and liquidity as beds are taken out of service throughout the process.
Management is projecting unrestricted cash to decline to \\$17.2 million, or 187 DCOH, in 2017 and to improve to \\$20.3 million by 2020. While the projections are slightly lower than what was expected at Fitch's last review, Fitch believes that Cypress Cove's continued reinvestment in its facilities will be beneficial in maintaining the community's marketability in the long run. Fitch will continue to closely monitor Cypress Cove's liquidity position, and any large deviations from projections will likely lead to downward rating action.
MIXED PROFITABILITY
Cypress Cove's operating ratio and net operating margin (NOM) have averaged 126% and negative 7%, respectively, over the last four fiscal years, both unfavorable compared to category peers. While both operating ratio and NOM improved through the interim period, management is not projecting any significant operating improvements over the medium term. Fitch notes that operating ratio and NOM reflect the impact of Cypress Cove's fully amortizing lifecare contracts, higher expenses related to improving occupancy of the ILUs, and ground lease and management fee expenses.
Cypress Cove's NOM-adjusted has improved from 13.4% in fiscal 2011 to a very strong 36% in fiscal 2014, reflecting the improved entrance fee receipts. Given management's expectation of lower net entrance fee receipts going forward, Fitch would expect NOM-adjusted to normalize at approximately 25% over the medium term.
DEBT PROFILE
All of Cypress Cove's debt is fixed rate. Cypress Cove does not have any swaps outstanding.
DISCLOSURE
Cypress Cove is expected to provide audited financials within 150 days of its fiscal year-end and quarterly unaudited financials within 45 days of its fiscal quarter-end to the EMMA system, which includes balance sheet, income statement and statement of cash flow, covenant performance, and occupancy statistics.
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