30.10.2015, 07:35
Fitch Affirms Greencroft Obligated Group (IN) at 'BB+'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed the 'BB+' rating on the following bonds issued by the Indiana Finance Authority on behalf of Greencroft Obligated Group (GOG):
--$43.98 million revenue bonds, series 2013A.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a mortgage on GOG's facilities, a gross revenue pledge and a debt service reserve fund.
KEY RATING DRIVERS
ENDURING OPERATING HISTORY: GOG has a long history of operating in each of its three service areas dating back to 1967, which Fitch views as a key credit strength. GOG's unit mix is composed of a higher proportion of assisted living and skilled nursing units relative to other continuing care retirement communities (CCRCs), which helps serve as a differentiator in a somewhat competitive marketplace.
RELATIONSHIP WITH GREENCROFT RETIREMENT COMMUNITIES: All three GOG entities are affiliate entities of Greencroft Retirement Communities, Inc. (GRC), which serves as their sole corporate member and manager. GRC provides various benefits such as financial planning, budgeting and management expertise. The relationship dates back to the founding of each affiliate, the first of which occurred nearly 50 years ago. Additionally, each obligated group member entered into affiliation contracts with GRC for perpetuity, which Fitch views favorably.
LIGHT, BUT STABLE CASH POSITION: At the end of fiscal 2015 (June 30 year-end), GOG had $24.7 million of unrestricted cash and investments, amounting to a modest 219 days operating expenses, 4.7 times (x) cushion ratio and 33.4% of total debt. Despite elevated capital spending over the past few years, liquidity balances remained relatively stable due to GOG's solid cash flow and receipt of contributions from its affiliated foundation.
MODEST DEBT SERVICE COVERAGE: Due to a moderate debt burden and somewhat limited net entrance fee receipts, maximum annual debt service (MADS) remains modest at 1.6x in fiscal 2015. However, revenue-only MADS coverage is solid at 1.2x given GOG's higher proportion of assisted living unit (ALU) and skilled nursing facility (SNF) service revenue.
SOLID OCCUPANCY LEVELS: As a result of focused marketing efforts and a healthy real-estate market, GOG's independent living unit (ILU) occupancy levels remain healthy and averaged 93.8% in fiscal 2015. In addition, both ALU (88.1%) and SNF (92.4%) occupancy levels improved over prior year levels.
RATING SENSITIVITIES
SUSTAINED FINANCIAL PERFORMANCE: Given Greencroft Obligated Group's (GOG) moderately high debt burden, weakened operations or cash flow that leads to lower debt service coverage ratios or liquidity metrics, could lead to negative rating pressure. While Fitch expects GOG to benefit from supplemental Medicaid funding next year, it does not anticipate positive rating movement due to this factor over the next 12-24 months.
CREDIT PROFILE
GOG consists of three separate type-C CCRCs (Greencroft Goshen - located in Goshen, IN; Southfield Village [Southfield] - located in South Bend, IN and Hamilton Grove [Hamilton] - located in New Carlisle, IN) with a total of 409 ILUs, 188 ALUs, and 341 SNFs. In fiscal 2015, GOG had total revenues of $44.3 million. Each obligated group member is a part of and managed by GRC, which also governs and provides management services for four additional retirement communities with about 2,000 residents. GOG provides very limited financial support to other non-obligated members of GRC, with only $886,530 of advances to affiliates outstanding as of June 30, 2015.
Long Operating History and Relationship with GRC
GOG has a long history of operating in each of its three northwest Indiana markets dating back to 1967, which Fitch views as a critical credit strength. Additionally, GOG's strong relationship with GRC is viewed as a positive credit factor. The close relationship dates back to the founding of each affiliate and all obligated group members have entered into perpetual affiliation contracts with GRC. To provide more financial flexibility to GOG, the management fees paid to GRC are subordinate to debt service. However, the bond documentation and Fitch do not exclude the GRC management fees from its definition of funds available for debt service, which results in lower reported MADS coverage levels.
GOG's business line diversity with a greater proportion of ALU and SNF revenues are a point of differentiation in a somewhat competitive market. Additionally, ALU and SNF resident service fees help generate relatively consistent earnings that supports good revenue-only MADS coverage. Regardless, Fitch notes GOG's heavy reliance on Medicaid (at about 44% of SNF net revenues) as a credit concern.
Supplemental Medicaid Payments
On a positive note, as of Jan. 1, 2016, GOG expects to benefit from participation in the state of Indiana's intergovernmental transfer payment (IGT) program. To leverage the supplemental payments, GOG plans to lease its three SNFs to a government owned healthcare provider, Woodlawn Hospital (located in Rochester, IN). Woodlawn Hospital will own the SNF's operating licenses and be a party to GOG's Medicaid provider agreements. GOG would remain the manager of the facilities through a management services agreement. This will allow GOG to share the additional upper payment limit funds with Woodlawn Hospital. The estimated annual benefit for GOG from the IGT program is $2 million. It is not expected that this funding mechanism will change in the near term despite the fact that either party has the ability to terminate the agreement without cause with 90 days written notice. Fitch views the expected payment receipts positively, but would include the funds as a non-operating income source. However, Fitch does not expect the IGT payments to result in positive rating pressure over the next 12-24 months.
Construction Update
The series 2013 bonds were used fund a two-story addition to the SNF at Greencroft Goshen, which can accommodate up to 66 residents and created more private rooms. Along with the SNF construction, GOG made parking lot renovations and created a new entryway to the campus. Management noted there was a slight construction delay but the project came in about $500,000 below budget. The expanded and renovated SNF was completed in July and received its certificate of occupancy in September. The final part of the project is to renovate another 32 rooms to create more private accommodations. While GOG contributed $4 million of its equity for the project in fiscal 2015, its unrestricted cash position remained relatively stable due to solid cash flow and contributions from its affiliated foundation.
Debt Position
GOG's debt position is moderately high with MADS representing 11.8% of revenues in fiscal 2015. Adjusted debt to capitalization of 95% and debt to net available of 8.9x are unfavorable to Fitch's 'BBB' category medians of 58.8% and 5.9x, respectively for fiscal 2015. Management does not anticipate any capital plans that will result in additional debt issues over the next two years.
DISCLOSURE
GOG covenants to provide annual and quarterly occupancy and financial statements through the MSRB's EMMA system.
--$43.98 million revenue bonds, series 2013A.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a mortgage on GOG's facilities, a gross revenue pledge and a debt service reserve fund.
KEY RATING DRIVERS
ENDURING OPERATING HISTORY: GOG has a long history of operating in each of its three service areas dating back to 1967, which Fitch views as a key credit strength. GOG's unit mix is composed of a higher proportion of assisted living and skilled nursing units relative to other continuing care retirement communities (CCRCs), which helps serve as a differentiator in a somewhat competitive marketplace.
RELATIONSHIP WITH GREENCROFT RETIREMENT COMMUNITIES: All three GOG entities are affiliate entities of Greencroft Retirement Communities, Inc. (GRC), which serves as their sole corporate member and manager. GRC provides various benefits such as financial planning, budgeting and management expertise. The relationship dates back to the founding of each affiliate, the first of which occurred nearly 50 years ago. Additionally, each obligated group member entered into affiliation contracts with GRC for perpetuity, which Fitch views favorably.
LIGHT, BUT STABLE CASH POSITION: At the end of fiscal 2015 (June 30 year-end), GOG had $24.7 million of unrestricted cash and investments, amounting to a modest 219 days operating expenses, 4.7 times (x) cushion ratio and 33.4% of total debt. Despite elevated capital spending over the past few years, liquidity balances remained relatively stable due to GOG's solid cash flow and receipt of contributions from its affiliated foundation.
MODEST DEBT SERVICE COVERAGE: Due to a moderate debt burden and somewhat limited net entrance fee receipts, maximum annual debt service (MADS) remains modest at 1.6x in fiscal 2015. However, revenue-only MADS coverage is solid at 1.2x given GOG's higher proportion of assisted living unit (ALU) and skilled nursing facility (SNF) service revenue.
SOLID OCCUPANCY LEVELS: As a result of focused marketing efforts and a healthy real-estate market, GOG's independent living unit (ILU) occupancy levels remain healthy and averaged 93.8% in fiscal 2015. In addition, both ALU (88.1%) and SNF (92.4%) occupancy levels improved over prior year levels.
RATING SENSITIVITIES
SUSTAINED FINANCIAL PERFORMANCE: Given Greencroft Obligated Group's (GOG) moderately high debt burden, weakened operations or cash flow that leads to lower debt service coverage ratios or liquidity metrics, could lead to negative rating pressure. While Fitch expects GOG to benefit from supplemental Medicaid funding next year, it does not anticipate positive rating movement due to this factor over the next 12-24 months.
CREDIT PROFILE
GOG consists of three separate type-C CCRCs (Greencroft Goshen - located in Goshen, IN; Southfield Village [Southfield] - located in South Bend, IN and Hamilton Grove [Hamilton] - located in New Carlisle, IN) with a total of 409 ILUs, 188 ALUs, and 341 SNFs. In fiscal 2015, GOG had total revenues of $44.3 million. Each obligated group member is a part of and managed by GRC, which also governs and provides management services for four additional retirement communities with about 2,000 residents. GOG provides very limited financial support to other non-obligated members of GRC, with only $886,530 of advances to affiliates outstanding as of June 30, 2015.
Long Operating History and Relationship with GRC
GOG has a long history of operating in each of its three northwest Indiana markets dating back to 1967, which Fitch views as a critical credit strength. Additionally, GOG's strong relationship with GRC is viewed as a positive credit factor. The close relationship dates back to the founding of each affiliate and all obligated group members have entered into perpetual affiliation contracts with GRC. To provide more financial flexibility to GOG, the management fees paid to GRC are subordinate to debt service. However, the bond documentation and Fitch do not exclude the GRC management fees from its definition of funds available for debt service, which results in lower reported MADS coverage levels.
GOG's business line diversity with a greater proportion of ALU and SNF revenues are a point of differentiation in a somewhat competitive market. Additionally, ALU and SNF resident service fees help generate relatively consistent earnings that supports good revenue-only MADS coverage. Regardless, Fitch notes GOG's heavy reliance on Medicaid (at about 44% of SNF net revenues) as a credit concern.
Supplemental Medicaid Payments
On a positive note, as of Jan. 1, 2016, GOG expects to benefit from participation in the state of Indiana's intergovernmental transfer payment (IGT) program. To leverage the supplemental payments, GOG plans to lease its three SNFs to a government owned healthcare provider, Woodlawn Hospital (located in Rochester, IN). Woodlawn Hospital will own the SNF's operating licenses and be a party to GOG's Medicaid provider agreements. GOG would remain the manager of the facilities through a management services agreement. This will allow GOG to share the additional upper payment limit funds with Woodlawn Hospital. The estimated annual benefit for GOG from the IGT program is $2 million. It is not expected that this funding mechanism will change in the near term despite the fact that either party has the ability to terminate the agreement without cause with 90 days written notice. Fitch views the expected payment receipts positively, but would include the funds as a non-operating income source. However, Fitch does not expect the IGT payments to result in positive rating pressure over the next 12-24 months.
Construction Update
The series 2013 bonds were used fund a two-story addition to the SNF at Greencroft Goshen, which can accommodate up to 66 residents and created more private rooms. Along with the SNF construction, GOG made parking lot renovations and created a new entryway to the campus. Management noted there was a slight construction delay but the project came in about $500,000 below budget. The expanded and renovated SNF was completed in July and received its certificate of occupancy in September. The final part of the project is to renovate another 32 rooms to create more private accommodations. While GOG contributed $4 million of its equity for the project in fiscal 2015, its unrestricted cash position remained relatively stable due to solid cash flow and contributions from its affiliated foundation.
Debt Position
GOG's debt position is moderately high with MADS representing 11.8% of revenues in fiscal 2015. Adjusted debt to capitalization of 95% and debt to net available of 8.9x are unfavorable to Fitch's 'BBB' category medians of 58.8% and 5.9x, respectively for fiscal 2015. Management does not anticipate any capital plans that will result in additional debt issues over the next two years.
DISCLOSURE
GOG covenants to provide annual and quarterly occupancy and financial statements through the MSRB's EMMA system.
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