OREANDA-NEWS. Fitch Ratings has assigned an 'A' rating to the following East Hempfield Township Industrial Development Authority bonds expected to be issued on behalf of Willow Valley Communities (WVC):

--$42.3 million Health Center Revenue and Refunding Bonds Series 2016 (Willow Valley Communities Project) issue.

The bonds are expected to be issued as fixed rate. Proceeds from the bonds will refund a portion of the series 2009 A and B bonds, fund a 53 unit independent living (IL) expansion, and pay for cost of issuance. Bonds are expected to sell via negotiation the week of January 19.

The Rating Outlook is Stable.

SECURITY

Mortgage lien on, and security interest in, the WVC's facilities and a first lien and security interest in all its gross revenues.

KEY RATING DRIVERS

UNIQUE MARKET POSITION: The 'A' rating reflects WVC's ability to draw residents from a broad geographic area. Current residents come from 37 different states, unique among continuing care retirement communities (CCRCs), which typically draw residents from within a 10 to 15 mile radius. Fitch believes the geographic diversity of WVC's residents helps insulate it from potential stress in the local economy or housing market. Out of area residents are drawn to WVC's high level of amenities relative to its modest IL pricing.

SOLID FINANCIAL PROFILE: Further supporting the rating is WVC's solid financial profile, which is characterized by a large revenue base ($65.6 million in resident service revenues in 2014), strong net entrance fee receipts, good operating ratios for a Type 'A' Lifecare community, steady growth in liquidity, and a manageable debt burden. The majority of WVC's financial ratios are in line with Fitch's 'A' category medians.

STRONG DEMAND FOR IL UNITS: IL occupancy has been consistent at approximately 90% over the historical period. WVC management reports lower occupancy (approximately 80%) in its smaller units, with the occupancy in its larger units, those with at least two bedrooms, in the mid 90% range. WVC looks to combine smaller units when available. The good demand for the larger units supports the current expansion project.

EXPANSION PROJECT: WVC is moving forward on a 53-unit expansion to be funded by $24 million from the current bond issue. Fitch does not view the project as a credit concern given the fill-up of WVC's recent projects, the strong pre-sale velocity (40 units have been reserved with a 10% deposit), and the above median pro forma debt service coverage without the inclusion of the revenue from the new units.

RATING SENSITIVITIES

STABILITY EXPECTED: Over the next two years, Fitch expects Willow Valley Communities financial profile to remain stable, as the expansion project is built and filled.

CREDIT PROFILE

WVC is a Lifecare, Type 'A' CCRC that operates two main campuses, Willow Valley Manor/Manor North and Lakes Manor, both located in Lancaster, PA. The two campuses operate a total of 1,496 independent living units, 262 personal care units, and 283 skilled nursing units. Total operating revenue for audited 2014 was $88.5 million.

Unique Market Position

WVC markets itself as a higher end amenity facility that offers a competitive price point for a Type 'A' contract, and draws residents from a geographic region broader than its primary service area of Lancaster County. As part of this strategy, WVC has continuously invested in its plant (average age of plant is very good at 9.7 years) and continues to expand and update its service offerings.

In the last few years, WVC opened a new community center with a swimming pool, bowling alley, multi-purpose sports center, and restaurant, with the strategy to market WVC to adult children and grandchildren as an active community where they can visit and spend the day. WVC's most recent villa expansion, which had entrance fees ranging from $370,000 to $405,000 for a fully amortizing contract, filled quickly with an average age of the incoming resident in the low-70s, below the industry average of approximately 80 years.

WVC has been successful in drawing residents from outside its primary service area. Currently 50% of WVC's residents come from outside of PA, primarily from New Jersey, Maryland, and Virginia; another 29% come from other parts of PA, and only 21% come from Lancaster County.

Fitch believes WVC's ability to draw residents from a geographically broad area insulates it from potential stress in the local economy or housing market. In addition, Pennsylvania and Lancaster County are competitive CCRC markets, but Fitch believes WVC's pricing and Type 'A' Lifecare contract (most other Lancaster area CCRCs offer a Type 'C' contract) keep WVC competitive in its local service area as well.

Strong Recent Performance

Audited 2014 figures show WVC's best financial results over the four-year historical period. WVC posted a 95.3% operating ratio, a 24.9% net operating margin - adjusted, and pro forma maximum annual debt service (MADS) coverage of 3.8x in 2014. Ten-month 2015 interim results show this performance being sustained. A 42-villa expansion completed in 2014 and another 12-unit expansion completed in 2015 have added cash flow supporting the strong financial performance.

Fitch believes the 53-unit IL expansion being funded with the 2016 bonds will be equally accretive once the units fill. Construction is expected to start in March of 2016, with a target date of June 2017 for move ins. Seventy-five percent of the units have a 10% deposit and an additional 25% will be required 60 days after construction begins.

STEADY OCCUPANCY

Occupancy has been solid across all levels of care. IL occupancy has been consistent at approximately 90% over the historical period. WVC management reports lower occupancy (approximately 80%) in its smaller units, with the occupancy in its larger units, those with at least two bedrooms, in the mid 90% range. WVC looks to combine smaller units when available.

Skilled nursing occupancy is consistently above 90%. WVC has a good payor mix, composed of Lifecare/Private Pay and Medicare, with no exposure to Medicaid. Occupancy in the personal care units has been slightly lower, ranging from between 80 and 85%. Management reports that the lower occupancy in personal care is due to a soft local market and the need to keep units available for its own residents. Fitch does not view the lower personal care occupancy as a credit concern.

Debt Profile

WVC's debt structure will be much more conservative after
issuance. Currently, WVC has 58% variable rate debt in a
weekly mode, the remaining 42% of debt (Series 2010 and Series 2012) is fixed for seven years then converts to variable rate debt thereafter. This debt includes three series of variable rate demand bonds enhanced by a letter of credit (LOC) from PNC Bank and two bank qualified loans also from PNC Bank. The issuance will reduce bank renewal risk by refunding over 20% of WVC's debt that is enhanced by a PNC letter of credit.

While still aggressive in terms of exposure to bank debt and variable rate debt, WVC will have more than 1x cash to the $68 million of total bank and variable exposure. In addition, the expiration and/or term dates for the variable rate debt and bank debt are staggered across three years (2017 through 2019) with the maximum amount coming due on any given date -- $38.3 million for the LOC enhanced debt in July 2018.

WVC has one outstanding swap with PNC Bank. The fixed payor swap has a notional value of $10 million, hedges the 2009C bond, and expires on Dec. 1, 2018.

After issuance, WVC will have approximately $117 million in long-term debt (inclusive of a $6.2 million line of credit). A pro forma analysis shows WVC's debt burden will remain relatively manageable, with most of WVC's metrics comparing well to the 'A' medians. In the 10-month 2015 interim period, WVC had pro forma MADS coverage of 3.4x, MADS as a percent of revenue of 7.6%, and debt to net available of 4.7x, relative to medians of 3.1x, 9.2% and 4.3x, respectively.

Cash to debt will fall to 86.4% from nearly 100%, but Fitch expects that figure to recover as the pool of entrance fees from the IL expansion, expected to be approximately $18 million, will go onto the balance sheet.

WVC's unrestricted liquidity at the current rating level is solid, with days cash on hand of 506, a pro forma cushion ratio of 13.9x, and cash to debt of 101.6% (inclusive of the line of credit), relative to the 'A' medians of 506 days, 18.5x, and 125.1%. WVC has steadily grown its cash in spite of continuing to spend on capital. Capital expenditures as a percentage of revenue averaged 141.7% of depreciation over the last four audited years, relative to a median of 124.7%. Over this time, unrestricted cash and investments grew to $92.9 million from $80.4 million.

Disclosure

WVC agrees to provide annual disclosure within 180 days of each fiscal year end and quarterly disclosure within 45 days of each fiscal quarter end. Disclosure is provided through the Municipal Securities Rulemaking Board's EMMA system. Interim disclosure will include an income statement, balance sheet, cash flow statement and utilization statistics.