Fitch Downgrades Ridgecrest Village (IA) Revs to 'BB+'; Outlook Stable

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has downgraded to 'BB+' from 'BBB-' the ratings on the following revenue refunding bonds issued by Scott County (IA) on behalf of Ridgecrest Village (Ridgecrest):

--$13.82 million series 2006;

--$4.18 million series 2004*

The Rating Outlook is Stable.

* The series 2004 bonds are expected to be refunded on or about Dec. 21st with a direct bank placement.

SECURITY

The bonds are secured by a pledge of gross revenues, a mortgage, and a debt service reserve fund.

KEY RATING DRIVERS

CONTINUED WEAK OPERATING PERFORMANCE: The downgrade to 'BB+' from 'BBB-' is driven by the lack of operating improvement in fiscal 2015 as expected in Fitch last rating action. In fiscal 2015, net operating margin-adjusted (NOM-adjusted) slipped to 10.5% from 13.2% in the prior year due to lower net entrance fee receipts. As result, coverage of maximum annual debt service (MADS) by Fitch's calculation was a weak 1.1x compared to 1.3x in fiscal 2014. Fitch notes management reported coverage in fiscal 2015 of 1.35x.

EROSION IN LIQUIDITY: At Sept. 30, 2015, Ridgecrest reported unrestricted cash and investments of $7.5 million which is down from $9.7 million at fiscal year-end (FYE) 2015 and $11.5 million at FYE 2014. Thus, key liquidity metrics are no longer consistent with 'BBB' category medians. At Sept 30th, Ridgecrest's days cash on hand (DCOH) of 218, cushion ratio of 3.8 times (x) and cash to debt of 41.6% compared unfavorably to the respective 'BBB' category medians of 400 DCOH, 7.3x and 60%.

OCCUPANCY CHALLENGED: Occupancy remained challenged in fiscal 2015. Occupancy in Ridgecrest's 157 independent living units (ILUs) was 84% in fiscal 2015 which is slightly better than the 82% reported in the prior year. However, occupancy in the 100 skilled nursing beds (SNFs) slipped to 85% from 89% in fiscal 2014. Fitch was expecting to see an improvement in occupancy in 2015 due the engagement of an outside marketing consultant and a higher level of capital spending during the year.

GOOD MARKET POSITION: A key credit strength at the current rating level is Ridgecrest's market position. It is the only type-A life care continuing care retirement community (CCRC) in its primary service area and its entrance fees are relatively modest, with prices in 2014 ranging from $42,000 to $174,000, for a fully amortizing contract.

RATING SENSITIVITIES

STABILITY AT CURRENT RATING LEVEL: Fitch believes Ridgecrest Village has financial cushion at the current rating level to address its operating challenges and expects liquidity, operations, and coverage to remain fairly stable. However, a further deterioration in liquidity or coverage could lead to further negative pressure.

CREDIT PROFILE

Located in Davenport, Iowa, Ridgecrest Village is a Type 'A' CCRC with 157 ILUs, 60 assisted living units (ALUs; including 15 Alzheimer's units), and 100 skilled nursing facility (SNF) beds. Total operating revenues were $12.8 million in fiscal 2015.

WEAK OPERATING PERFORMANCE

The downgrade is in response to another year of weak operating performance. While improved from the prior year, Ridgecrest operating ratio was a high 109% (compared to 113.6% in fiscal 2014. Occupancy remained challenged across the continuum in 2015. Average occupancy in the ILU, ALU and SNF in fiscal 2015 was 84%, 85% and 83%, respectively, compared to 82%, 89% and 81% in 2014. The payor mix in the SNF was stable to slightly improved in 2015 compared to the prior year. Fitch believes improving occupancy is key to improving core operating performance and profitability going forward.

EROSION IN LIQUIDITY

The downgrade also reflects the erosion in liquidity since Fitch's last rating review. At Sept. 30, 2015, Ridgecrest's unrestricted cash and investments position had declined to $7.5 million from $9.9 million at Sept. 30, 2014. As a result, DCOH slipped to 218 at Sept 30th from 300 in the prior year period while cash to debt fell to 41.6% from 52.6%. The decline in Ridgecrest's liquidity position reflects weaker entrance fee receipts, higher capital spending in fiscal 2015 and impact poor investment returns in the third quarter of 2015 (3Q15).

Concerns related to Ridgecrest's liquidity metrics are tempered by a conservative balance sheet with 100% fixed-rate debt, no swaps, and a relatively conservative investment portfolio.

WEAK DEBT SERVICE COVERAGE

Ridgecrest's debt burden remains slightly elevated for the rating category. Fitch used MADS of $1.95 million which equates to 14.4% of fiscal 2015 revenues. Coverage of MADS as calculated by Fitch was a weak 1.1x in 2015 compared to 1.3x in fiscal 2014. While core operations were improved year-over-year, net entrance fee receipts fell to $1.5 million in fiscal 2015 from $2.3 million in fiscal 2014. Fitch notes that management reported coverage of MADS at 1.35x in fiscal 2015 compared to 1.29x in fiscal 2014.

DISCLOSURE

Ridgecrest covenants to provide annual disclosure within 150 days of the end of each fiscal year and quarterly disclosure within 60 days of the end of each fiscal quarter. Fitch notes that management availability and interaction during the rating process was limited.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Not-for-Profit Continuing Care Retirement Communities Rating Criteria (pub. 04 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=868824

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=996995

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=996995

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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 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.

View source version on businesswire.com: http://www.businesswire.com/news/home/20151217006587/en/

Fitch Ratings
Primary Analyst
Jim LeBuhn
Senior Director
+1-312-368-2059
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Gary Sokolow
Director
+1-212-908-9186
or
Committee Chairperson
Emily Wong
Senior Director
+1-415-732-5620
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: [email protected]

Source: Fitch Ratings

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