Fitch Ratings - Chicago - 10 Mar 2023: Fitch Ratings affirmed the rating on $82 million series 2017A and B revenue refunding bonds and $35 million series 2023 bonds issued by the Colorado Health Facilities Authority on behalf of Frasier Meadows Manor, Inc. (Frasier) at 'BBB-'. Fitch has also affirmed Frasier's Issuer Default Rating at 'BBB-'.
The Rating Outlook is Stable
Frasier Meadows Manor, Inc. (CO)
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Payment on the bonds is secured by a gross revenue pledge and first mortgage lien. There is a debt service reserve fund associated with the bonds.
The affirmation of the 'BBB-' rating reflects Frasier's stable operating risk profile and expectations for balance sheet growth. Frasier's strong revenue defensibility with limited competition in a favorable market balances against its elevated leverage profile with an average cash-to-adjusted debt of 40% over the past four years compared to days cash on hand (DCOH) exceeding 600 over the same time frame.
Revenue Defensibility: 'a'
Single Site LPC with Strong Demand and Pricing Characteristics
Frasier is a single-site provider with limited competition. Substantial barriers to entry prevent additional life plan communities (LPCs) from entering the Boulder, CO service area. Utilization has been consistently strong, generally in the mid to upper 90% range over the past several years. Frasier's waitlist includes nearly 500 households. Frasier has a history of regular fee increases and weighted average entrance fees are substantially below prevailing housing prices in the market supporting the strong revenue defensibility assessment.
Operating Risk: 'bbb'
Midrange Profitability and Modest Capital Expenditures
Fitch's assessment of Frasier's operating risk is midrange based on profitability ratios that have consistently fallen within the midrange assessment since FY 2021 (June YE). For 2021 and 2022, Frasier's operating ratio, net operating margin (NOM) and NOM-adjusted averaged 98%, 14.7% and 44.2%; with consistent results in the second quarter of 2023 of 94.8%, 16.2% and 41.9% respectively. Fitch expects Frasier to sustain these levels over the next several years.
Due to extensive capital investment between 2018 and 2020, Frasier's capital expenditures averaged about 550% of depreciation over the past five years, with depreciation moderating in the past two years closer to depreciation expense. The resulting average age of plant is low at 6.8 years. Management is budgeting for modest routine capital expenditures over the next several years at about 75% of depreciation. Given Frasier's strong demand, management is considering an expansion plan. However, planning will not begin in earnest until a successor CEO has been selected and acclimated to the role. Frasier's CEO Tim Johnson announced his plans to retire at the end of June, 2023 and the board has begun searching for a successor CEO.
Frasier's capital-related metrics are consistent with the midrange operating risk assessment. For 2021 and 2022, Frasier's revenue-only maximum annual debt service coverage (MADS), debt-to-net available, and MADS as a percentage of revenues averaged 1.1x, 5.7x and 19.4%, with consistent results in the second quarter of 2023 of 1.2x, 5.2x and 17.8%, respectively.
Frasier's contract type is predominantly type B (modified fee-for-service). Fitch considers this contract type to have moderate actuarial and future service liability risk.
Financial Profile: 'bbb'
Growing Liquidity Balanced Against Elevated Leverage
As of YE 2022, Frasier had unrestricted cash and investments of approximately $55.9 million. This represented about 49.6% of total adjusted debt, which includes about $128 million of long-term debt. Liquidity has grown from $42 million in 2019 and is expected to incrementally improve over the next several years and build the balance sheet.
Through Fitch's baseline scenario, or Fitch's estimate of financial performance over the next five years given current economic expectations, Fitch expects that Frasier will see MADS coverage near 2.0x. Despite the business stress and economic stress assumed in Fitch's stress case scenario, Frasier maintains cash-to-adjusted debt levels that are consistent with the 'BBB-' rating. Frasier had 646 DCOH as of June 30, 2022, resulting in a liquidity profile assessment that is neutral to the rating outcome.
No asymmetric risk considerations were relevant to the rating determination.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
--Frasier's financial profile remains stable through Fitch's stress case scenario. However, a decrease in cash-to-adjusted debt below 35% could pressure the current rating;
--Additionally, the rating could be pressured if operating performance deteriorates such that revenue-only MADS coverage falls below 0x or if the NOM falls below 3%.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
--Continued balance sheet accretion such that cash-to-adjusted debt levels are expected to improve and be sustained at levels approaching 80%.
International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Established in 1956, Frasier owns and operates a single-site LPC with 302 independent living units (ILUs), 19 assisted living units, 19 memory care units and 54 skilled nursing facilities beds on a 20-acre campus in Boulder, CO. Frasier currently offers a type B modified-fee-for-service contract, with 50% refundable or nonrefundable entrance fee residency agreements. Nonrefundable entrance fees are approximately 25% lower than the refundable entrance fees. All agreements provide a modest discount for health care benefits as well as 30 free health care days per ILU per year in a semiprivate room. Entrance fees for ILUs range from $87,000 to $1,174,000. Monthly service fees range from $2,121 to $5,708.
In addition to the sources of information identified in Fitch's applicable criteria specified below, this action was informed by information from Lumesis.
The principal sources of information used in the analysis are described in the Applicable Criteria.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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| Colorado Health Facilities Authority (CO) || EU Endorsed, UK Endorsed |
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