Fitch Affirms Asbury Communities' (MD) Revs at 'BBB'; Outlook Stable

Fitch Ratings has affirmed the following Gaithersburg, MD bonds issued on behalf of the Maryland Obligated Group of Asbury Communities (Asbury-MD) at 'BBB':

--$15,760,000 (Asbury Maryland Obligated Group) refunding revenue bonds series 2014;

--$84,735,000 (Asbury Maryland Obligated Group) refunding revenue bonds series 2006A;

--$44,245,000 (Asbury Maryland Obligated Group) refunding revenue bonds series 2009B.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a pledge of gross revenues, a mortgage, and a funded debt service reserve.

KEY RATING DRIVERS

CONSISTENT OPERATING PERFORMANCE: Over the last four years, Asbury-MD's financial performance has remained very consistent, with its operating ratio averaging a 97.3% and it net operating margin - adjusted averaging a 27.6%, relative to Fitch's 'BBB' category medians of 97.4% and 20.4%, respectively. Debt service coverage has remained above 2x over this period, even as its debt service has increased by $4 million due to the impact of a swap.

HIGHER FY14 OCCUPANCY: For the Dec. 31, 2014 period, independent living (IL) occupancy (94%), assisted living (AL) occupancy (97%), and skilled nursing occupancy (94%), were all higher than the prior year period.

LIGHT LIQUIDITY: Asbury-MD's liquidity metrics remain thin for the 'BBB' category. However, both Asbury MD and Asbury-PA obligated groups have access to support from the parent, which held roughly $23.1 million of unrestricted cash and investment at Dec. 31, 2014.

INCREASE IN MADS: Asbury-MD's maximum annual debt service (MADS) increased in the current year to $13.6 million from $9.3 million, due to a forward swap that became effective in January 2013. Asbury-MD still covered MADS at a solid 2.6x in 2014. Fitch does not expect the MADS to rise much higher, and while the swap is a concern, the coverage levels mitigate concerns.

REDUCED RISK FROM AFFILIATES: Stronger liquidity at Asbury Communities (the parent) and improving operating results at the Asbury-PA affiliates, IL occupancy at the Asbury-PA sites is now above 90%, have lessened the potential for increased transfers from Asbury MD to Asbury Communities. However, Asbury-MD expects to continue to upstream funds to the parent at approximately $2 million per year and that remains a credit concern.

RATING SENSITIVITIES

STABLE PERFORMANCE: Fitch believes Asbury MD will continue to produce above median level debt service coverage. A material improvement to liquidity coupled with the further strengthening of the affiliates could lead to positive rating momentum over the medium term. The parent is focused on having the consolidated organization reach a 100% operating ratio, which Fitch would view positively. A sustained period of weaker operating performance, a deterioration in liquidity, or a sizable debt issuance could pressure the rating. Asbury is contemplating an expansion at Solomons, but it is in the development stages.

CREDIT PROFILE

The Maryland Obligated Group consists of Asbury Methodist Village (AMV) and Solomons and has a total of 1,127 IL units, 157 AL units and 305 skilled nursing beds. Asbury-MD offers a Type 'C' contract. Total operating revenue (unaudited) in 2014 was $97.8 million.

The 'BBB' affirmation reflects historically solid debt service coverage and steady operating performance. In addition, the improved financial position at the related but non-obligated affiliates, ACOMM and Asbury-PA has eased some credit concerns, and asset transfers from Asbury-MD to ACOMM has stabilized, with liquidity at ACOMM growing year over year.

SOLID FINANCIAL PERFORMANCE

Unaudited year-end financial results show a 98% operating ratio, a 30% net operating margin - adjusted, and 2.6x debt service coverage (on MADS of $13.6 million) all better than their respective 'BBB' category medians, which compare well with category medians and are in line with the performance through the historical period. Occupancy has been on a steady positive trend with IL, AL and skilled nursing occupancy all in the mid to high 90% range at Dec. 31, 2014. IL unit sales remained solid in 2014 with 143 up from 132 in 2013.

Thin Liquidity/Cash Transfers

Asbury-MD's liquidity metrics are thin compared to Fitch's 'BBB' category medians and remain a credit concern. As of Dec. 31 2014, Asbury-MD total unrestricted cash and investments of $41.4 million equated to 180 days of cash on hand (DCOH), 31.1% cash to debt, and a 3x cushion ratio, which are significantly weaker than their respective 'BBB' category medians of 408 DCOH, 60.2% cash to debt, and a 6.9x cushion ratio.

However, Fitch notes that bondholders benefit from the unconditional and unlimited support from ACOMM which held roughly $23.1 million of unrestricted cash and investments at Dec. 31, 2014, which is available for support of both the Asbury-MD and Asbury-PA obligated groups.

Under its bond documents, Asbury-MD is allowed to transfer funds to ACOMM. The transfers have moderated over last three-years and are approximately $2.5 million annually. Certain liquidity and debt service coverage tests have to be met before a transfer can be made, but the ability to transfer cash to the parent remains a credit concern and has impacted Asbury-MD's liquidity growth, in spite of its good cash flow.

Mitigating some of this concern about the transfers has been the improved operating performance at Asbury-PA. Through the 12 month period ended Dec. 31, 2014, Asbury-PA showed IL occupancy above 90%, a reduced operating losses year over year and debt service coverage of 1.7x.

DEBT PROFILE

All of Asbury-MD's long-term debt, currently at $133.4 million, is fixed rate. In January of 2013, a forward starting fixed payer swap with a notional value of $74 million became effective, with Asbury-MD paying 5.128% and receiving 67% of one month Libor. Given the low interest rate environment, the mark to market of the swap as of Dec. 31, 2014 was a negative $31.8 million and the yearly cost was an increase to Asbury-MD's debt service of approximately $3.5 million. This figure will fluctuate yearly depending on Libor, and Fitch does not expect the yearly impact on debt service to worsen any further.

Asbury-MD is seeking to refinance the swap when the mark to market improves. The increase to debt service is a credit concern but Asbury-MD has been covering the higher MADS at above the median.

In addition, Asbury-MD has a variable rate basis swap outstanding, with a notional amount of $23.3 million and a negative mark to market as of Dec. 31, 2014 of $229,825. There are currently no collateral posting requirements for the swaps and in addition the counterparty cannot terminate either swap agreement.

Disclosure

Asbury-MD has covenanted to provide annual audits and quarterly unaudited financial information through EMMA, and also provides voluntary quarterly disclosure calls for investors. Disclosure to Fitch has been very good to date with quarterly disclosure that includes detailed financial statements, utilization statistics, and a brief management discussion and analysis section.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Not-for-Profit Continuing Care Retirement Communities Rating Criteria' (July 2014);

--'Revenue-Supported Rating Criteria' (June 2014).

Applicable Criteria and Related Research:

Not-for-Profit Continuing Care Retirement Communities Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752470

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=982271

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