Fitch Affirms Charlestown Retirement Community, Maryland's Series 1998 Bonds at 'A'; Outlook Stable

NEW YORK-(Business Wire)-September 28, 2009 - Fitch Ratings affirms the underlying 'A' rating on the following:

—$40.96 million Maryland Health and Higher Educational Facilities Authority, tax-exempt revenue bonds (Charlestown Community Issue) series 1998A;

—$25.285 million Maryland Health and Higher Educational Facilities Authority, taxable revenue bonds (Charlestown Community Issue) series 1998B.

The Rating Outlook is Stable.

The affirmation is supported by consistently solid occupancy, management by Erickson Retirement Communities (ERC) properties, low leverage, and historically strong debt service coverage. Occupancy levels for Charlestown Community, Inc. (Charlestown) have stayed in the mid 90% for all levels of care over the past four years, and remain strong through July 31, 2009, with occupancy at 94.6% for independent living units (ILUs), 93.9% for assisted living units (ALUs), and 93.1% for skilled nursing facility (SNF) beds. Charlestown greatly benefits from ERC's marketing and operations expertise, which has been proven by the success of other ERC-managed communities and by Charlestown's current occupancy levels. Charlestown maintains a waiting list of over 1,000 applicants, which should keep occupancy high. Maximum annual debt service (MADS) as a percent of revenues is low at only 5.2% through the seven months of 2009, which compares to Fitch's 2007 'A' category median of 9.2%.

Fitch's main credit concern is the expiration of Charlestown's letter of credit (LOC) with Bank of America (BoA) on March 1, 2011. All of Charlestown's debt is currently variable-rate supported by the BoA LOC. If the LOC is not renewed, which is a likely scenario, all the debt will be due immediately. Fitch believes that at the current rating level, Charlestown should be able either to secure another LOC or access the fixed-rate market. Additionally, Charlestown has adequate liquidity relative to its debt as its cash-to-debt was 105% as of July 31, 2009. Charlestown has no swaps. Management is in the process of exploring its options. However, until the expiring LOC is resolved, it will remain a credit concern.

A second credit concern is the marketing challenges due to Charlestown's large size and high number of units. This contains the inherent risk of significant unit turnover, and maintaining high occupancy remains an ongoing challenge for management. Charlestown has been using a promissory note program to allow residents to move in while trying to sell their homes. Charlestown evaluates the property before allowing a resident to access the program, provides staging assistance to sell the home, and the note is interest free for the first 30 days. Currently, 38 residents are in the program and Charlestown has approximately $6.5 million in promissory notes outstanding. Management indicated that it plans to lower the outstanding amount of promissory notes to approximately $4.5 million by year's end. Charlestown's total number of settled apartments as of July 31, 2009, was 119. As long as the promissory note program represents a small part of Charlestown's resettled apartments, Fitch does not believe it is a credit concern, and, to date, it has facilitated more residents moving in, which has supported occupancy.

While debt service coverage has historically been a credit strength for Charlestown (coverage in 2007 was 4.4 times [x], 3.3x without entrance fees), Charlestown had a covenant violation in 2008 as $15 million in realized investment losses brought coverage below the 1.15x covenant. The realized losses were due to the financial market's decline and Charlestown's decision to modify its investment approach. In the final quarter of 2008, Charlestown's investment committee of the Board had a reorganization which ultimately led to the hiring of an outside investment firm to help manage its investment portfolio.

Through the first seven months of 2009, Charlestown's investments have shown some recovery, and with no new realized losses, its debt service coverage has returned to historical levels, at 6.7x and 3.1x without entrance fees. However, the covenant violation provided an opportunity for BoA, to renegotiate the terms of the LOC. As a result, the fee for the LOC will be increasing, and certain covenants are being made more stringent, with the debt service covenant increasing to 1.65x and a new occupancy covenant of 90%.

The Stable Rating Outlook reflects the expectation that Charlestown will continue to exhibit stable financial performance over the near term supported by its high occupancy levels. It also reflects Fitch's belief that Charlestown currently possesses the liquidity and capital market access to mitigate the risks of its variable-rate debt exposure. However, a change to Charlestown's credit profile, by either a weakening of its occupancy levels or another significant decline in its investments, may put negative pressure on the rating.

Charlestown Community, Inc. is located on a 110-acre site in Catonsville, MD, just west of Baltimore. Charlestown is a type-C continuing care retirement community (CCRC) with 1,594 ILUs, 132 ALUs and 260 SNF beds. Charlestown had total revenues of approximately $75 million in 2008.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 'www.fitchratings.com'. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

Send this news item to a friend.

Print This Page