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Fitch Affirms Emerald Heights (WA) Revs at 'A-'; Outlook StableFitch Ratings has affirmed the 'A-' rating on the approximately $28.4 million Washington State Housing Finance Commission revenue refunding bonds, series 2013 issued on behalf of Eastside Retirement Corporation d/b/a Emerald Heights. The Rating Outlook is Stable. SECURITY The bonds are secured by a gross revenue pledge, a mortgage and a debt service reserve fund. KEY RATING DRIVERS SOLID FINANCIAL PROFILE: The 'A-' rating is supported by Emerald Heights very healthy profitability, liquidity and debt metrics that all meet or exceed the respective 'A' category medians. Even contributing more than $30 million in equity over the last five years as expected for strategic initiatives, liquidity metrics remain in line with Fitch's 'A' category medians. SIGNIFICANT CAPITAL INVESTMENT: Emerald Heights has completed its five-year master plan, which was approximately $58 million in aggregate spending from 2010-2014, and all projects were on time and within budget. Management is currently reviewing other strategic investments including updates to the skilled nursing and assisted living facilities, additional independent living units (ILUs) and more parking. Fitch will monitor the impact of these projects if/when they move forward as the size and scope are determined. STRONG OCCUPANCY: Strong and consistent occupancy is a key credit strength. Emerald Heights has maintained occupancy levels above 90% over the last four years in its ILUs and assisted living units (ALUs). Because the skilled nursing facility does not allow outside admits, occupancy fluctuates somewhat but was solid at 90% as of Sept. 30, 2014 (nine-month interim). INVESTMENT OUTSIDE OBLIGATED GROUP: Heron's Key, a subsidiary of the parent Emerald Communities, is a start-up community in Gig Harbor, Washington, which is in pre-sale mode for the construction of a continuing care retirement community with 184 ILUs, 10 cottages, 36 ALUs and 45 SNF units. Although Heron's Key is outside the obligated group, there is a shared parent and management team and Emerald Heights has extended a $10 million line of credit for start-up costs and land acquisition, of which, about $7.1 million has been drawn as of Sept. 30, 2014. The master indenture currently has asset transfer provisions, but it is not management's intent to move any additional funds and management expects to be reimbursed $5 million with the bond financing and the remaining at stabilization. Fitch will continue to monitor contributions to this project. Significant equity beyond the expected $10 million may impact the rating. RATING SENSITIVITIES POTENTIAL ADDITIONAL DEBT: Management is considering issuing additional debt for possible future capital investment. However, planning is still under consideration and in the initial stages. Fitch will review the impact of these projects when the size, scale and scope are determined. Upward rating movement is precluded at this time until the impact of future projects becomes clearer. CREDIT PROFILE Located in Redmond, Washington, about 17 miles from Seattle, Emerald Heights is a type-A CCRC situated on a 38-acre campus. The community currently has 333 ILUs, 57 ALUs and 60 skilled nursing beds. Total operating revenues in fiscal 2013 (Dec. 31 year end) equaled $24.6 million. The 'A-' rating reflects Emerald Heights' strong financial profile and consistently solid occupancy. SIGNIFICANT CAPITAL INVESTMENT Emerald Heights has executed its master plan, which was approximately $58 million in aggregate spending from 2010-2014. This included a new fitness center, auditorium, dining expansion, clinic expansion and renovation of skilled nursing common areas as well as the addition of 43 independent living units with parking (Trailside). All projects were completed on time and within budget. The new Trailside apartment is filling according to expectations and has brought in $16.2 million in new entrance fees as of November 2014. The master plan incorported close to $30 million of equity and $28 million of construction loans for temporary funding to complete the renovations and expansion. HEALTHY LIQUIDITY Liquidity has historically been very strong and exceeds Fitch's 'A' category medians despite significant investment in capital. As anticipated, Emerald Heights made an equity contribution in fiscal 2014 and expects to use an additional $2 million in cash in 2015 to fully pay off its construction loan. Even with the stress of the equity contribution and transfer to the parent for the Heron's Key Development, liquidity indicators remain at or above the 'A' category medians. At Sept. 30, 2014, Emerald Heights' unrestricted cash and investments totaled $53.7 million, which equated to 986.5 days cash on hand, 189.8% cash to debt and 21.5x cushion ratio compared to the respective 'A' category medians of 494.8 days, 120.2% and 14.4x. DEBT PROFILE Fitch used MADS of $2.5 million for this analysis. Total outstanding debt as of January 2015 is about $28 million, which excludes the approximately $12.5 million in temporary debt that is expected to be paid down in 2015 with entrance fees and a $2 million cash contribution. Emerald Heights' debt burden is somewhat elevated due to its small revenue base with MADS as a percent of fiscal 2013 revenue of 9.3%, compared to the 'A' category median of 8.9%. However, MADS coverage by turnover entrance fees was strong at 7.3x in fiscal 2013. Coverage fell to 3.3x at Sept. 30, 2014 (nine-month interim period) because of lower than average turnover, but it is still adequate for the rating level. Revenue only coverage of 1.6x in fiscal 2013 and 1.9x at Sept. 30, 2014 compares favorably to the 'A' category median of 1.2x. GOOD OPERATING PERFORMANCE Emerald Heights' historical operating performance is in line with the 'A' category median. Operating ratio of 97.1% in fiscal 2013 is in line with the 'A' category median of 97.1%. Adjusted net operating margin (includes turnover entrance fees) of 47.4% in fiscal 2013 was very strong against the 'A' category median of 23.4%. Adjusted net operating margin of 18.6% is somewhat down at Sept. 30, 2014, reflecting lower turnover and more non-refundable entrance fees than normal. In addition, fiscal 2014 is somewhat of a transitional year as many Trailside units came online from October through December and are not reflected in the interim results. Management is projecting over 10% increase in revenue from the new units in fiscal 2015, which Fitch believes is achievable. Consistently strong operating results reflect Emerald Heights' solid occupancy in its ILUs and ALUs. ILU occupancy has remained above 91% over the last four years (2009-2013) and was 94.8% at Sept. 30, 2014. ALU occupancy has also been very strong at or above 94% over the last four years. Because the SNF does not allow outside admits, occupancy has fluctuated somewhat over the last three years but was a solid 90% at Sept. 30, 2014. RISK FROM AFFILIATE Fitch is concerned with potential additional financial commitments to Heron's Key. Emerald Heights has provided a $10 million financial commitment (treated as a loan) to fund pre-development costs for a second start-up CCRC at Gig Harbor, near Tacoma, Washington. Heron's Key is expected to repay $5 million of the loan with bond proceeds that will be used to fund a liquidity support agreement and the remainder to be repaid once occupancy stabilizes. The balance on the loan was about $7.1 million as of Sept. 30, 2014 and the loan is projected to reach $10 million by June 2015. The total project is expected to cost about $150 million and needs to hit pre-sales of at least 70% before moving forward. Currently pre-sales are at about 60%. Although not anticipated, Fitch believes that significant equity contributions beyond the $10 million may negatively impact the rating. DISCLOSURE Emerald Heights covenants to provide annual audits to the EMMA system within 120 days of each fiscal year's end and quarterly statements within 45 days of quarter's end. Additional information is available at 'www.fitchratings.com'. In addition to the sources of information identified in Fitch's Revenue Supported Rating Criteria, this action was informed by information from the underwriter. Applicable Criteria and Related Research: --'Revenue Supported Rating Criteria' (June 16, 2014); --'Rating Guidelines for Nonprofit Continuing Care Retirement Communities' (July 24, 2014). Applicable Criteria and Related Research: Revenue-Supported Rating Criteria http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012 Not-for-Profit Continuing Care Retirement Communities Rating Criteria http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752470 Additional Disclosure Solicitation Status http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=968675 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. |
