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Fitch Affirms Kendal on Hudson at 'BBB' Outlook Stable

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;