Fitch Affirms Carpenter's Home Estates (FL) Revs at 'BBB-'; Outlook Stable

Fitch Ratings has affirmed the 'BBB-' rating on approximately $24 million City of Lakeland, Florida, fixed-rate revenue bonds, series 2008, issued on behalf of Carpenter's Home Estates (Carpenter's).

The Rating Outlook is Stable.

SECURITY
Debt payments are secured by a pledge of the gross revenues of the obligated group. In addition, a fully funded debt service fund provides additional security for the bond issue.

KEY RATING DRIVERS

NEW ILU UNITS SLOWLY FILLING: Carpenter's completed a 32 independent living unit (ILU) ILU expansion in 2009, which has had slow fill up in addition to a deterioration in occupancy in its existing ILUs. However, sales are up, and occupancy in the new ILUs is now at approximately 50% and total ILU occupancy was 78% as of Oct. 31, 2013. However, assisted living unit (ALU) and skilled nursing facility (SNF) occupancy is good and has remained consistently above 90%.

IMPROVED DEBT SERVICE COVERAGE IN 2012: Debt service coverage improved year-over- year and was 1.6x in fiscal 2012 (Dec. 31 year-end) compared to 1.3x in fiscal 2011. Coverage has continued to improve for the interim period ended Oct. 31, 2013 at 2.2x. All bonds are fixed rate and there are no swaps associated with the debt.

SOLID OPERATIONS: Despite low occupancy in the ILUs Carpenter's has shown good operating performance with adjusted net operating margin of 20.8% in fiscal 2012, which is in line with the 'BBB' category median of 21.3%.

ADEQUATE LIQUIDITY: Liquidity, which has historically been on the low-end of the 'BBB' category, has continued to improve and is now more in line with category medians but still light for a Type A Continuing Care Retirement Communities (CCRC).

SMALL REVENUE BASE: Carpenter's relatively small revenue base inherently subjects the organization to higher debt service coverage volatility as small changes in occupancy or turnover may impact coverage.

RATING SENSITIVITIES:

SUSTAINED FINANCIAL PROFILE: Fitch expects Carpenter to maintain its current financial profile and that ILU occupancy will gradually continue to progress. A deterioration in debt service coverage would likely result in downward rating pressure.

CREDIT PROFILE
Established in 1986, Carpenter's Home Estates is a type A continuing care retirement community located in Lakeland, FL, which is approximately 35 miles east of Tampa. The facility consists of 372 ILUs, 49 ALUs, and 72 SNFs. In fiscal 2012, Carpenter's had total revenues of $16.8 million. It completed an expansion project (32 additional ILUs and 12 skilled nursing facility units) with the new units available for occupancy in 2009. Although Fitch views the project favorably, slow fill-up and housing and economic challenges in the service area impacted sales and occupancy still remains below expectations. However, the housing market has started to turn and new units are now 50% occupied, which is an improvement from 34% at last review.

The 'BBB-' rating reflects the organization's good operating performance, manageable debt burden with adequate debt service coverage, and improving liquidity. The primary credit concern continues to be the low ILU occupancy, which was challenged by the 32 unit expansion that was brought on line in 2009.

ILU OCCUPANCY IMPROVING
Overall ILU occupancy is still low but slowly improving and was 78% at Oct. 31, 2013 compared to 76% in fiscal 2012 and 74.5% in fiscal 2011. Carpenter's has a new marketing campaign, realtor referral incentive program, marketing events outside the service area and has offered promotions for the new units, which have all helped to improve sales. The economy in the service area has started to rebound as reflected by an unemployment rate in the Lakeland-Winter Haven metropolitan service area of 7.5%, the lowest it has been since July 2008. ALU and SNF occupancy remain strong at 91.1% and 91%, respectively at Oct. 31, 2013.

GOOD OPERATING PERFORMANCE
Despite the low occupancy, Carpenter's financial profile remains in line with 'BBB' category medians. In fiscal 2012, Carpenter's posted a net operating margin of 10.5% and an adjusted net operating margin of 20.8%, both in line with the respective 'BBB' category medians of 9.6% and 21.3%. Carpenter's operating performance has supported adequate debt service coverage, which was 1.6x in fiscal 2012 and 2.2x through the 10-month interim period, compared to a 'BBB' category median of 1.9x. Fitch notes that Carpenter's bond covenant debt service coverage calculation allows for the inclusion of initial entrance fees, which would increase debt service coverage to 1.7x for fiscal 2012.

MANAGEABLE DEBT BURDEN
Carpenter's debt burden is manageable with MADS equating to 12.9% of total revenue in fiscal 2012, which is in line with the 'BBB' category median of 12.4%. Furthermore, its debt profile is conservative, which is expected for its rating level with 100% fixed rate debt and no swaps. Carpenter's purchased and redeemed about $650,000 of its outstanding debt in 2011 and will purchase more debt as the opportunity arises.

IMPROVING LIQUIDITY
Liquidity, which has historically been on the low-end of the 'BBB' category, has been improving and is now more in line with category medians. Total unrestricted cash and investments at Oct. 31, 2013 (10-month interim) was $13.4 million, which equals 331.2 days cash on hand, 56.3% cash to debt and 6.2x cushion ratio compared to the respective 'BBB' category medians of 371.3 days, 58.9% and 6.9x.

DISCLOSURE
Carpenter's covenants to deliver to EMMA annual financial statements, calculation of compliance with debt service coverage ratio covenant and liquidity covenant and occupancy information within 120 days of fiscal year end and quarterly financial and covenant compliance statements within 45 days after the end of each fiscal quarter.

Additional information is available at www.fitchratings.com.

Applicable Criteria and Related Research:
--'Rating Guidelines for Nonprofit Continuing Care Retirement Communities' (July 10, 2013).

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

Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=813794
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