Fitch Upgrades University Retirement Community at Davis (CA) to 'A-'; Outlook Stable

Fitch Ratings has upgraded the rating on implied general revenue bonds of University Retirement Community at Davis, CA (URCAD) to 'A-' from 'BBB+'. URCAD has $33 million of series 2013 bonds outstanding, which is a direct bank loan with Bank of America and not rated by Fitch.

The Rating Outlook is Stable.

SECURITY

The series 2013 bonds are secured by a gross revenue pledge and a first mortgage lien on the facility.

KEY RATING DRIVERS

IMPROVED LIQUIDITY: The rating upgrade to 'A-' from 'BBB+' reflects the significant improvement in URCAD's liquidity with cash to debt of 99% at June 30, 2014. Liquidity growth has been driven by continued solid operating cash flow, modest capital spending, as well as the release of a debt service reserve fund with the debt restructuring in 2013. URCAD has consistently maintained strong operating performance and good revenue growth and expense management has resulted in revenue only debt service coverage of 1.1x in fiscal 2013 (Sept. 30 fiscal year end). The majority of URCAD's financial ratios exceed the 'A' category medians.

FAVORABLE MARKET POSITION: URCAD is the only full-service retirement community in the city of Davis with the nearest comparable competition approximately 20 miles away. Good market characteristics in Davis, combined with its mix of product offerings, competitive pricing, and affiliation with the university have led to historically strong occupancy rates. Through the nine months ended June 30, 2014, occupancy was 97.4% in ILUs, 96.8% in ALUs, 90.1% in dementia care and 90% in the skilled nursing facility.

REDUCTION IN DEBT PROFILE RISK: URCAD has historically had a risky debt profile with 100% variable rate demand bonds with less than 1x cash to debt. The organization has been in the process of reducing the debt profile risk, which included paying down $25 million of debt. In 2013, URCAD refinanced 100% of its outstanding debt with a direct bank loan from Bank of America that has an initial 10-year term. Fitch views the restructuring positively; however, the debt structure is still 100% uncommitted capital. Fitch believes keeping at least 1x cash to debt will be key to maintaining the rating.

POTENTIAL CAPITAL PLANS: URCAD's projected capital spending is moderate however there are several projects that are being considered. Fitch believes these projects are in the longer term and will evaluate them when plans are finalized.

RATING SENSITIVITIES

MAINTENANCE OF STRONG OPERATING CASH FLOW: Fitch expects URCAD to continue to maintain its strong operating cash flow, which should support further liquidity growth and continued solid revenue only debt service coverage.

Credit Profile

University Retirement Community at Davis is a Type B continuing care retirement community that consists of 205 ILUs, 50 ALUs (including 14 memory care), and 37 skilled nursing beds. URCAD only offers non-refundable contracts. In fiscal 2013, URCAD had total revenue of $21.9 million.

Improved Liquidity

URCAD's liquidity has significantly improved since Fitch's last rating review in 2013. Unrestricted cash and investments at June 30, 2014 was $32.8 million compared to $17 million at fiscal year end 2011. URCAD had 719 days cash on hand and 99% cash to debt at June 30, 2014 compared to the A category median of 563.7 and 125.2%, respectively. Liquidity growth has been driven by good operating cash flow, modest capital spending the last two years after a significant investment in adding amenities to the community, release of a $2.1 million debt service reserve fund, and no collateral posting on its swap. URCAD had $2.2 million of collateral posted at Sept. 30, 2012 and zero at Sept. 30, 2013.

Consistent Profitability

Profitability has been stable and solid, driven by good occupancy, steady rate increases, and strong growth in health center revenue. Net operating margin was 12.4% in fiscal 2013 compared to 11.9% in fiscal 2012 and 12.2% in fiscal 2011. Profitability remained strong through the nine months ended June 30, 2014 with 16.4% net operating margin. Strong profitability and cash flow has resulted in good revenue only coverage of 1.1x in fiscal 2013 and 1.5x through the nine months ended June 30, 2014 compared to the A category median of 1.2x.

Good Market Position

URCAD's strong occupancy levels reflect its strong market characteristics and limited competition in the region. In addition, the affiliation with the University of California at Davis remains a major draw. The nearest comparable provider is approximately 20 miles away. There was an unusually high amount of turnover in 2013 and combined with strong sales activity resulted in higher than normal turnover entrance fees. In 2013, turnover entrance fees totaled $10.6 million compared to $4.9 million in 2012 and $2.7 million in fiscal 2011. Management expects turnover entrance fees to approximate $6 million going forward. Debt service coverage was very strong in 2013 because of the unusually high amount of turnover entrance fees and was 5.3x compared to 2.9x in fiscal 2012 and was 2.9x through the nine months ended June 30, 2014.

ILU occupancy has improved to 97.4% through the nine months ended June 30, 2014 from 93.2% in fiscal 2013 and 91.5% in fiscal 2012. ALU occupancy was 96.8% through the nine months ended June 30, 2014 compared to 97.6% in fiscal 2013 and 95.1% in fiscal 2012. SNF occupancy was 90% through the nine months ended June 30, 2014 compared to 85.5% in fiscal 2013 and 85.4% in fiscal 2012.

Potential Capital Plans

URCAD's capital expenditures as a percentage of depreciation was very high in fiscal 2010 and 2011 as the community invested in an expansion project that included an additional 11 ILUs, 6 ALUs, an indoor pool and fitness center and an underground parking garage. Capital expenditures have moderated in fiscal 2012 ($1.7 million) and fiscal 2013 ($1.5 million) and is projected to be $2.6 million in fiscal 2014 and $3.6 million in fiscal 2015. The uptick in spending reflects various building improvements as well as renovating the lobby. There are various projects that are being considered in the longer term, however, these are still preliminary and any additional major capital expenditures will be evaluated when plans are finalized.

Reduced Risk in Debt Profile

Total long-term debt decreased from $55.6 million at fiscal year end 2009 to $33 million at June 30, 2014. The rapid paydown in principal was necessitated by an agreement with Bank of America. In 2013, URCAD completed a debt restructuring that resulted in 100% direct bank loan financing (series 2013) with Bank of America that has an initial 10-year term. The direct bank loan is at an indexed floating rate and is subject to mandatory tender on Aug. 29, 2023. MADS is calculated at $2.5 million.

URCAD has a floating- to fixed-rate swap with Bank of America/Merrill Lynch, with a current mark-to-market value of negative $4.1 million. No collateral is currently being posted and the collateral posting threshold increased to $7.5 million at the A- rating level from $5 million at a BBB+ rating.

Disclosure

URCAD is not required to post public disclosure since all the debt is privately held.

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

Applicable Criteria and Related Research:

--Not-for-Profit Continuing Care Retirement Communities Rating Criteria, July 24, 2014.

Applicable Criteria and Related Research:

Median Ratios for Not-for-Profit Continuing Care Retirement Communities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=717436

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=854814

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