OREANDA-NEWS. Fitch Ratings has assigned an implied general revenue bond rating of 'A-' to The Pines at Davidson (The Pines).

The Rating Outlook is Stable.

The Pines has three series of outstanding bonds totaling $25.9 million, which Fitch does not rate but are incorporated into the analysis.

KEY RATING DRIVERS

SOLID OPERATING PROFILE: The 'A-' rating reflects The Pines' historical operating and financial stability, driven by consistently high occupancy and entrance fee generation. Occupancy rates in the independent living units (ILUs) have been particularly strong at above 94% over the last decade, despite significant local and national economic pressures and expansion projects. The Pines has not posted an operating loss in over two-and-a-half decades.

DECREASED DEBT BURDEN: In October, The Pines defeased its series 2006 bonds using a combination of series 2015 refunding bonds and $6.5 million of initial entrance fees received from the 24-ILU expansion. Risks related to the debt portfolio were significantly mitigated as a result, with a 24% decline in total principal outstanding and 25% decrease in maximum annual debt service (MADS). Corresponding improvement to key liquidity and debt metrics such as cash-to-debt, cushion ratio, and debt-to-capitalization is significant.

HEALTHY LIQUIDITY: Unrestricted cash and investments totaled $31 million at Sept. 30, 2015, equating to 721 days cash on hand and 91.4% cash-to-debt. Following the series 2006 defeasance in October 2015, pro forma cash-to-debt improved to 120% and cushion ratio is a solid 16.7x.

LOWER CAPITAL SPENDING PLANS: The Pines recently completed several sizable capital projects including the addition of 24 ILUs and the purchase and renovation of Chartwell House (a single family residence on a 31-acre estate adjacent to The Pines). Capital spending totaled $15.5 million in the fiscal year ended Dec. 31, 2014, significantly higher than historical levels of around $2 million-$3 million. The projects were funded by a combination of unrestricted cash, temporarily restricted cash, and a $14.6 million bond issue (series 2013). Over $1 million in additional revenue generation is estimated from new ILUs, which Fitch views favorably.

RATING SENSITIVITIES
STABILITY EXPECTED: Based on management's history of prudent planning and ability to meet targeted performance, Fitch expects The Pines at Davidson to maintain historical profitability and net entrance fees receipts, leading to consistent debt service coverage metrics. Given the improvement in balance sheet, there is some cushion at the current rating to absorb unforeseen operating or financial variability.

CREDIT PROFILE
The Pines is a type-B continuing care retirement community (CCRC) located in Davidson, North Carolina, which is approximately 20 miles north of Charlotte. The Pines has 250 ILUs, 30 assisted living units (ALUs), and 51 nursing beds. In fiscal 2014, The Pines generated total revenues of $18.1 million.

Solid Operating Profile
The rating affirmation is supported by The Pines' history of solid operations and occupancy, as well as a highly competent management team with proven ability to plan and execute strategic and expansion projects. Fitch also believes The Pines benefits from its strong market position, with longstanding relationships with major local organizations including Carolinas Healthcare System, Davidson College, and Davidson College Presbyterian Church.

Reflecting its solid operating footprint, The Pines has produced excellent occupancy metrics for over a decade, despite significant regional and national economic challenges and recent addition of new ILUs. During this period, ILU occupancy remained solidly above 94% and was most recently reported at 94.8% through the nine months ended Sept. 30, 2015. Including sold units, ILU occupancy has been above 97.9% for the last 15 years. Occupancy in the ALUs and nursing facility also has been sound, and was most recently reported at 89% and 95.1%, respectively. As a result, The Pines posted positive operating margins for 25 consecutive fiscal years, and has consistently outperformed its forecast by a healthy margin.

Successful ILU Expansion
The Pines completed the construction of 24 additional villa apartments on the existing campus. As forecast, the units opened for service in January 2015, and reached 100% occupancy by mid-February. Fitch views management's ability to plan and execute the project on time and realize cash flows as budgeted positively. Approximately $6.9 million in initial entrance fees were collected, and $6.5 million was used to defease the series 2006 bonds. Monthly service fees generated by the new units should also boost cash flow going forward. Additionally, The Pines completed the renovation of Chartwell House into a luxury single-family residence adjacent to the main campus, and is in the process of marketing it to potential residents.

Decreased Debt Burden
Total long-term debt declined significantly in October 2015, as the series 2006 bonds were defeased by a combination of series 2015 bonds and initial entrance fee receipts. After the payment, long-term debt decreased to $25.9 million from $33.9 million in September 2015.

The series 2015 refunding also produced debt service savings due to lower interest rates, and MADS decreased to $1.9 million from $2.5 million one year prior. Pro forma MADS as a percentage of 2014 revenues was 10.2%, which is only slightly higher than the 'A' median of 9.2%. MADS coverage continues to trail the median of 3.1x, but improved considerably at 2.4x in 2014 and 2.7x in 2015 interim period, due to lower MADS. The Villas at Hickory Crest (opened in 2015) should generate approximately $1 million in additional annual revenues, further improving coverage metrics.

Healthy Liquidity
Liquidity metrics are very good, with days cash on hand of 721 compared to the 'A' median of 681 days. Following the series 2015 transaction, pro forma cash-to-debt of 120%, and cushion ratio of 16.7x are also sound, compared to the respective medians of 125.1%, and 18.5x. Future capital spending is budgeted at $1.9 million annually (below depreciation expense), which should continue to support liquidity growth.

DEBT PROFILE
The Pines has two series of privately placed bonds outstanding. The series 2013 bonds totaling $14.6 million are placed with a subsidiary of SunTrust Bank, with a fixed rate of 2.8% over an initial term of 15 years. The series 2015 bonds totaling $11.1 million are also placed with a subsidiary of SunTrust Bank with a fixed rate and a term to maturity of 15 years.

DISCLOSURE
The Pines does not have pubic financial reporting requirements. Disclosure to Fitch has been timely and thorough.