July 29, 2020
The following is a press release from Fitch Ratings: Fitch
Ratings-New York-29 July 2020:
Fitch Ratings has affirmed the ‘BBB’ rating on approximately $54.2 million
series 2013 revenue and refunding bonds issued by the Westchester County Local
Development Corporation on behalf of Kendal on Hudson (NY) (KOH).
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a gross revenue pledge, a mortgage pledge and a debt
service reserve fund.
KEY RATING DRIVERS
IMPROVED OPERATING PROFILE: KOH occupancy has continued to improve following a
restructuring of its sales process in 2018. About 91% of independent living
units (ILUs) were occupied as of May 31, 2020, which was stable compared to
occupancy levels at the end of 2019 and much improved compared to the previous
four year average of 85%. KOH experienced minimal attrition as a result of the
coronavirus pandemic and the majority of its lost revenues and increased
expenses have been offset by stimulus funding and loans under the Paycheck
Protection Program (PPP).
OPERATING METRICS IMPROVED, BUT REMAIN WEAK FOR RATING CATEGORY: As a result of
improved occupancy and tightened expense controls, KOH’s operations have
improved, with an operating ratio of 106.0% as of YE 2019 (fiscal year-end is
Dec. 31) and 101.8% as of May 31, 2020 (unaudited) and net operating margin
(NOM) of 1.9% and 4.9%, respectively. This is considerably improved over the
previous four-year averages of 111.2% and negative 3.1%, but remain weaker that
Fitch’s respective ‘BBB’ category medians of 96.5% and 5.9%. KOH’s NOMA was a
robust 38.0% in 2019, but weakened to negative 2.8% as of the five months May
31, 2020, mostly due to the coronavirus pandemic and related limitations on new
move-ins to the community. Management reports a strong pipeline of residents
who are ready to move in to the community as soon as practicable, and so Fitch
expects KOH’s cash flow margins will show some improvement through the
remainder of 2020.
STRONG BALANCE SHEET: Overall improvement in KOH’s cash flow generation have
accreted to its unrestricted cash and investments, which increased to $62.5
million as of May 31, 2020 from $49.5 million at the end of 2017, resulting in
robust 873 days cash on hand (DCOH) as of the five month interim. Consequently,
cash-to-debt has also improved to 79% as of YE 2019 and 82.7% as of May 31,
2020, comfortably exceeding Fitch’s ‘BBB’ category median of 63.6% and
providing substantial cushion to withstand the operating pressures associated
with the coronavirus. KOH’s long-term liability profile has moderated in the
last few years, as evidenced by debt-to net-available of 5.3x in 2019; however,
maximum annual debt service (MADS) still represents a sizable 19.0% of 2019
revenues.
ASSOCIATION WITH KENDAL: Fitch views KOH’s relationship with Kendal Corporation
(Kendal) as a positive credit factor. Although it does not have any control at
the board or management levels, Kendal provides assistance and guidance in the
areas of finance, purchasing, marketing and human resources, as well as a
recognizable brand name.
ASYMMETRIC RISK FACTORS: No asymmetric risk factors were incorporated into the
rating determination.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating
action/upgrade:
–As the exact depth and breadth of the coronavirus pandemic remains unknown,
higher rating activity over the two year Outlook period would be limited to
only exceptionally positive impacts to KOH’s operating performance and
liquidity, which is not expected;
–Continued improvement in operating performance coupled with liquidity
accretion could give the rating positive momentum over time.
Factors that could, individually or collectively, lead to negative rating
action/downgrade:
–Material deterioration in KOH’s operating performance, especially if it
results in material erosion of its liquidity position.
Best/Worst Case Rating Scenario
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].
CREDIT PROFILE
KOH is a type-A life plan community located in Sleepy Hollow, NY. KOH benefits
from limited competition and strong real estate values in its market.
Following a repositioning that was completed in 2016 (Project Renew), the
community now consists of 222 ILUs, 34 assisted living units (ALUs), 13 memory
care units (MCUs) and 26 skilled nursing facility (SNF) beds. Project Renew
included the renovation of common areas and added the 13 MCUs, as well as 10
ALUs, and right-sized the mix of skilled nursing and enriched housing units.
KOH residents have the option of nonrefundable, 50% or 90% refundable entrance
fee refund contracts. Refunds are payable at the earlier of 30 days after the
settlement of another residence agreement, or one year of consecutive vacancy
of the unoccupied unit.
KOH continues to maintain its relationship with Kendal. Although it does not
have any control at the board or management levels, Kendal provides assistance
and guidance in the areas of finance, purchasing, marketing and human
resources, as well as a recognizable brand name.
The recent outbreak of coronavirus and related government containment measures
has created an uncertain environment for the entire healthcare system in the
near term. While KOH’s financial performance through the most recently
available data has not indicated any impairment, material changes in revenue
and cost profiles will occur across the sector. Fitch’s ratings are
forward-looking in nature, and Fitch will monitor developments in the sector as
a result of the virus outbreak as it relates to severity and duration, and
incorporate revised expectations for future performance and assessment of key
risks.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The
principal sources of information used in the analysis are described in the
Applicable Criteria.
ESG Considerations The highest level of ESG credit relevance, if present, is a
score of 3. This means ESG issues are credit-neutral or have only a minimal
credit impact on the entity(ies), either due to their nature or to the way in
which they are being managed by the entity(ies). For more information on
Fitch’s ESG Relevance Scores, visit www.fitchratings.com/esg.
Kendal on Hudson (NY)
—-Kendal on Hudson (NY) /General Revenues/1 LT; Long Term Rating; Affirmed;
BBB;