OREANDA-NEWS. Fitch Ratings has assigned a 'BBB+' rating on the following New Hampshire Health and Education Facilities Authority bonds expected to be issued on behalf of Kendal at Hanover (KaH):

--$18,500,000 Revenue Bonds, Kendal at Hanover Issue, Series 2016

The Rating Outlook is Stable.

The debt will be issued as fixed rate. Bond proceeds, the series 2004A principal fund, and the release of the series 2004A debt service reserve fund will be used to refund the series 2004A bonds ($3.8 million), provide new money of approximately $17 million to refinance the 2013B capital notes ($7 million) and fund remaining construction costs of a Wellness-Fitness center and the renovation of a Gathering Room, and pay capitalized interest and the costs of issuance. The series 2016 bonds will sell via negotiation the week of April 5.

SECURITY

Bonds are secured by a mortgage lien on the facility and a security interest in the gross receipts. There will be no debt service reserve fund.

KEY RATING DRIVERS

STEADY OPERATING PROFILE: KaH's operating profile is characterized by high occupancy, with independent living (IL) occupancy at 96% at year-end 2015, consistent operating margins, and favorable debt service coverage ratios above the BBB category median.

SOLID LIQUIDITY: Currently all of KaH's main liquidity ratios exceed Fitch's 'BBB' category medians. KaH had $37.5 million in unrestricted cash and investments (inclusive of state mandated operating and capital reserve funds) at Dec. 31, 2015, which equated to 659 days cash on hand, a 10.4x pro forma cushion ratio, and 113.7% cash to debt. Liquidity growth has been flat through the historical period, but that is offset by elevated capital spending, which has averaged approximately 200% of depreciation over this time and funded largely through cash flow.

STRONG MARKET POSITION: Fitch views KaH's market position as a credit strength with competition manageable, as KaH is the only Type 'A' facility in its primary service area, and entrance fees that are comparable to the local area real estate. In addition, KaH's relationships with Dartmouth College and Dartmouth-Hitchcock Medical Center (DHMC; Revenue Bonds rated 'A+') allow it to provide enhanced services and activities for its residents.

KENDAL ASSOCIATION: Fitch views KaH's relationship with The Kendal Corporation as a positive credit factor. Kendal provides assistance and guidance in the areas of finance, purchasing, marketing and human resources, as well as a recognizable brand name.

CAPITAL PROJECTS: Phase I of a three phase master facilities plan is being funded with the current debt issuance. KaH will seek voter approval for certain components of the other Phases of the plan from the Town of Hanover in May 2017. The projects in the second phases, which will include a Health Center renovation and IL expansion, have an estimated cost of between $50 million and $60 million. Fitch has not incorporated a Phase II and III financing into the current rating and will review any debt issuance closer to the time of issuance.

RATING SENSITIVITIES

CONTINUED OPERATIONAL STRENGTH: Fitch expects Kendal at Hanover's (KaH) high occupancy to continue to drive steady operating performance.

MASTER FACILITY PLAN: The effect of the master facility plan on KaH's rating will be determined by the final timing, scope, and financing of the Phase II and III projects. Fitch believes that KaH has some additional debt capacity at the current rating level given its strong demand for services, consistent cash flow and liquidity levels, and front-loaded debt service schedule.

CREDIT PROFILE

Kendal at Hanover is a Type 'A' life care senior living facility, located in Hanover, NH. KaH operates 250 independent living apartments, 82 assisted living (AL) apartments, and five skilled nursing beds. In fiscal 2015, KaH had $25.9 million in total operating revenue.

In 2014, KaH changed its fiscal year end to December from March. Audited fiscal year 2015 has the full 12 month period, but fiscal 2014 audited results is a nine month period from April to December (some of the figures quoted in this press release are from this nine month period). The fiscal years prior to that ended March 31St.

STEADY OPERATIONAL PERFORMANCE

In FY 2015, KaH had an operating ratio of 103.4%, a 25.5% net operating margin - adjusted, and 2.1x pro forma maximum annual debt service. These figures were consistent with results through the historical period. The net operating margin - adjusted and the debt coverage compared well to Fitch's 'BBB' category medians of 19.3% and 2x, respectively. The operating ratio was weaker than the median of 96.1%; however, an operating ratio above 100% for a Type 'A' Life care facility is not unusual.

KaH has solid levels of entrance fee receipts. Most of KaH's contracts are fully amortizing. As a result, KaH yearly refunds are low. In FY2015, net entrance fee receipts were $7.6 million consistent with prior two 12 month audited periods.

The steady performance and entrance fee receipts are supported by high occupancy, especially IL occupancy which has been above 96% through the four year historical period. Assisted living (AL) occupancy was solid as well, consistently around 90%. KaH has two levels of AL and a memory care unit.

KaH is unusual for a continuing care retirement community (CCRC) as it currently has only five skilled nursing beds. KaH is able to provide more acute level services in its Level 2 AL, which reduces the need for skilled nursing beds. KaH also has a close relationship with Dartmouth-Hitchcock, with a Dartmouth-Hitchcock clinic and 24/7 physician coverage on campus. Most KaH residents utilize one of the campus primary care practitioners as their primary care physician. This level of care management and integration of Dartmouth-Hitchcock physicians on the KaH campus has also reduced the use of skilled nursing services.

Fitch views KaH's strong liquidity as a major credit strength at the current rating level. KaH had $37.5 million in unrestricted cash and investments (inclusive of state mandated operating and capital reserve funds) at Dec. 31, 2015, which equated to 659 days cash on hand, a 10.4x pro forma cushion ratio, and 113.7% cash to debt, relative to Fitch's 'BBB' medians of 400 days, 7.3x cushion ratio, and 60% cash to debt.

The strong liquidity provides a measure of financial cushion for KaH, and while it will weaken as additional debt is issued, Fitch believes it will remain good for the category.

Debt Profile/Master Facility Plan

After issuance, KaH will have approximately $41 million in long term debt. Approximately 80% of that debt will be fixed rate. Approximately 57% of the debt will have bank exposure through a letter of credit (LOC) on $8.7 million of variable rate demand bonds (series 2004B) and a $14.5 million direct placement. Both the LOC and the bank placement are with Citizens Bank (Rated 'BBB+'/'F2'). The LOC expires in 2023, as does the term on the direct placement. The level of bank debt is aggressive but mitigated by KaH's liquidity position. KaH has no swaps.

Providing additional cushion is that the pro forma MADS of $3.6 million is front loaded and will drop to $2.4 million in 2019 and $2 million in 2031.

The current debt issuance is funding phase I of KaH's master facility plan. Phase I is expected to cost around $10 million. Projects included in Phase I are a new Wellness-Fitness Center, the renovation and expansion of KaH's Gathering Room, and other projects around the campus, including installation of a new elevator. Phase I construction will begin in June and take about a year to complete.

Phase II and III projects are expected to include renovation of the Health Center and AL areas and a 30 unit IL expansion. Given the high level of IL occupancy and KaH's wait list, which currently has 408 applicants, the expansion is not a concern. However, town zoning restricts the number of IL units on a CCRC campus to 250, and KaH is at the maximum. As a result, the IL expansion needs a voter approved amendment from the Town of Hanover to enable KaH to add the 30 IL units above 250. The vote is expected to happen in May 2017.

Fitch will evaluate the project and its financing after the results of the vote and closer to the time of the debt issuance. The IL expansion is an important part of the Master Facility Plan, as it will add critical revenue to support the debt service and ongoing operations for the Health Center and AL renovations.