Fitch Affirms Cathedral Village (PA) Revs at 'BBB'; Outlook Revised to Negative

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the 'BBB' rating on the following bonds issued on behalf of Cathedral Village (CV):

--$9.8 million of Philadelphia Industrial Development Authority, PA revenue bonds (Cathedral Village Project), series 2003A and 2003B.

The Rating Outlook is revised to Negative from Stable.

Security
Debt secured by a security interest in gross receipts and a first lien on and security interest in the facilities.

Key Rating Drivers

LOWER OCCUPANCY DRIVES NEGATIVE OUTLOOK: Independent living (IL) occupancy further eroded as the number of IL 'turnovers' continues to outpace 'move-ins'. In fiscal 2012 (June 30 year-end), Cathedral Village (CV) had 35 turnovers (including eight one-time transfers due to a change in permanency policy) and 23 move-ins, dropping occupancy to a five-year low of 80.1%. However, CV has revamped its marketing staff and strategy efforts, which Fitch believes should help stabilize occupancy over the near term.

LIGHT DEBT BURDEN: CV's debt burden is light as indicated by maximum annual debt service (MADS) as a percentage of revenue of just 7.6%, which is well below Fitch's 'BBB' median of 12.9%. As a result, coverage of MADS by net available CCRC (including net entrance fees) has been solid at 2.2x and 1.9x in fiscal 2011 and 2012, respectively, and consistent with the 'BBB' category median of 2.0x.

PROFITABILITY MIXED IN FY2012: CV has managed expenses well as evidenced by operating ratio improvement to 100.4% in FY 2012 from 105.3% in FY 2011. Yet, lower net entrance fees receipts lead to a decline in net operating margin-adjusted to 11.4% from 12.8% in the prior year and much lower than the 'BBB' category median of 20.3%.

LIQUIDITY REMAINS LOW: CV's liquidity metrics are significantly below 'BBB' category medians and are a key credit concern. However, CV's unrestricted cash and investment position has remained stable year over year and does not include $8 million of restricted funds that are set aside for resident assistance. These funds remove one potential draw on CV's unrestricted liquidity.

MATURING DEBT MAJOR CREDIT STRENGTH: A major credit strength that provides significant stability at the current rating is the maturing of most of CV's debt by 2015 (maximum annual debt service will drop to $805,000 from $2.2 million), which will bring many of CV's debt-related ratios to the higher end of the 'BBB' category. However, the corporation is reviewing various capital plans that could result in issuance of additional debt within the next four years.

What Could Trigger a Downgrade?

A compression in debt service coverage caused by further erosion in occupancy and/ or a decline in net entrance fees receipts could trigger a downgrade. Separately, CV has plans to renovate its health center, which includes an estimated $2 million bank borrowing over the next year and a larger borrowing in approximately four years. The scope and financing of the project, which is expected to be finalized in the next year, could also contribute to negative rating pressure should CV's financial performance weaken.

Credit Profile
Cathedral Village is a Type-A continuing care retirement community located in Philadelphia, PA. The community consists of 293 independent living units (50 of which are eligible to be utilized as assisted living) and 148 skilled nursing beds. In fiscal 2012, Cathedral Village had operating revenues of approximately $28.6 million.

The affirmation of the 'BBB' rating is supported by CV's solid debt service coverage, consistent net advanced fee revenues, and manageable debt burden. Credit concerns include declining independent living occupancy, which fell to approximately 80% as of fiscal year end 2012 (June 30 year-end) and liquidity significantly below category medians.

IL occupancy at CV remains a challenge, as it has been on a steady decline since 2005 when it was at 94.9%. In fiscal 2012, CV turned over 35 units and filled 23, which dropped IL occupancy to 80%. The 35 turned-over units did include eight one-time transfers, for residents who were reclassified as permanently transferred to the skilled nursing facility due to a change in CV's policy which reduced the temporary stay limit from 12 to six months. The 23 sales did support help support net entrance fees that led to solid MADS coverage, but the entrances free receipts ($3.6 million) were 10% lower year over year. Another year of lower occupancy or lower net entrance fee receipts would pressure the rating. Currently, CV's largest units

A new CEO started at CV in late fiscal 2011, and he has significantly revamped the marketing and sales efforts. Fitch believes opportunity exists for CV's enhanced marketing efforts to positively impact occupancy and given CV's manageable debt burden a modest improvement in occupancy would materially improve CV's financial profile.

Even while the lower ILU occupancy has strained operations and pressed liquidity, debt service coverage has remained solid, reflecting CV's very manageable debt burden. In fiscal 2012, CV's coverage (including entrance fees) of its $2.2 million MADS was 1.9x, as compared to Fitch's 'BBB' median of 1.8x. A significant portion of CV's long-term debt is maturing in 2015 when CV's MADS will lower to $850,000. This will bring CV's debt-related ratios and liquidity ratios relative to debt to the higher end of Fitch's 'BBB' category. With fewer funds needed to cover debt service, cash flow should improve as well which should bolster liquidity, especially days cash on hand.

Offsetting the positive impact of the amortizing debt is a renovation project that CV is undertaking of its skilled nursing building. Project plans and financing are expected to be finalized in the next year, and a debt issuance is expected within the next four years. The financing for the project could add additional pressure to the rating. Over the next year, CV will move forward on a $2 million bank loan to begin infrastructure work for the project, specifically, a sprinkler system in the skilled nursing building with potential costs estimated at $17 million. The board has not approved the full project yet. The current rating does not fully factor in the potential for additional debt.

Additionally, CV will be taking skilled nursing beds out of service, focusing more on meeting the needs of current residents and reducing outside admissions as part of the project. This reduction in beds will lower revenue year over year, but is expected to save expenses as well. CV reduced its staff by 26 and has looked for other measures to control expenses, including outsourcing its food service, which is expected to lower costs and make the food service expenses more predictable.

Liquidity remains a major credit concern and is currently low for the rating category. As of June 30, 2012, Cathedral had $5.5 million in unrestricted cash and investments, which equated to a light 82.2 DCOH, a cushion ratio of 2.5x, and 45.2% cash to debt. (CV has a covenant of 90 DCOH, but CV's bond documents allow for access to a $1 million line of credit to be included as part of the DCOH calculation, and CV's management indicated that they manage to the calculation using the $1 million line of credit.)

Fitch believes CV's liquidity is adequate due to the organization's history of investing in its plant and a large amount of restricted funds in three different trusts (approximately $8 million total) that are set aside for resident assistance, which removes a potential draw on CV's liquidity. Historically CV has not accessed these restricted funds to reimburse itself for assistance it has been providing to residents that meet the trusts' criteria. In FY 2012, however, CV began to draw on these funds, drawing down $713,000 in entrance fee reimbursement in FY 2012, and in FY 2013, approximately $267,000 in reimbursement for interest on those entrance fees was withdrawn. Additionally, total withdrawals from the trusts for resident support in FY 2012 and YTD FY 2013 (through Aug. 31, 2012) were approximately $230,000 and $24,000 respectively. CV's liquidity has remained stable year over year and is expected to improve over the three- to five-year timeframe.

Disclosure language requires annual audit within 120 days, quarterlies within 45 days, with balance sheet, income statement, cash flows, occupancy and annual budget. However, the disclosure covenant requires that information be sent only to the Trustee, Underwriter, and Bondholders holding $1 million or more. Cathedral does disclose annual audited results on EMMA.

Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', June 12, 2012;
--'Rating Guidelines For Nonprofit Continuing Care Retirement Communities', July 23, 2012.

For information on Build America Bonds, visit www.fitchratings.com/BABs.

Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015
Rating Guidelines for Nonprofit Continuing Care Retirement Communities
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=40171

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Fitch Ratings
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Director
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Source: Fitch Ratings