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Fitch Rates Asbury Maryland Obligated Group's 2018 Revs 'BBB'; Outlook Stable.

New York: Fitch Ratings has assigned a 'BBB' rating to the following City of Gaithersburg (Maryland) Economic Development bonds that are expected to be issued on behalf of the Asbury Maryland Obligated Group (ASMOG):

--$85,070,000 project and refunding revenue bonds (Asbury Maryland Obligated Group) series 2018A;

--$13,575,000 refunding revenue bonds (Asbury Maryland Obligated Group) series 2018B.

Fitch also affirms at 'BBB' the following Gaithersburg,

MD bonds issued on behalf of ASMOG:

--$14,370,000 (Asbury Maryland Obligated Group) refunding revenue bonds series 2014;

--$19,450,000 (Asbury Maryland Obligated Group) refunding revenue bonds series 2009B;

--$82,780,000 (Asbury Maryland Obligated Group) refunding revenue bonds series 2006A.

The Rating Outlook is Stable.

The two series of bonds will be issued as fixed rate. Proceeds of the bonds, plus other funds, will refund the series 2006A and 2014 bonds, pay for capital expenditures, fund a debt service reserve fund, and pay the costs of issuance. Bonds are expected to sell via negotiation the week of Sept. 14.

SECURITY

The bonds are secured by a gross revenue pledge, mortgage on the facility and a debt service reserve fund for the 2018A bonds only. Additional security is provided by an operating support agreement (OSA) in place between ASMOG and Asbury Communities, Inc. (ACOMM), ASMOG's parent, whereby ACOMM contributes to ASMOG an amount of cash or defers its management fees in an amount that is necessary to enable ASMOG to comply with both its debt service coverage ratio covenant of 1.2x and its liquidity covenant of 110 days cash on hand set forth in the Master Trust Indenture.

KEY RATING DRIVERS

STEADY OPERATING PROFILE: The 'BBB' rating reflects ASMOG's consistently strong operating performance. Over the past four years, ASMOG's has averaged a 96.4% operating ratio and a 29.6% net operating margin - adjusted, better than Fitch's 'BBB' median 97.4% and 21.2%, respectively. Six month 2018 interims are consistent with this level of performance.

OSA OFFSETS LIGHT LIQUIDITY: The OSA provides added security for the bonds that offset ASMOG's thin liquidity metrics for the rating level. At June 30, 2018, ASMOG had 172 days cash on hand and 35.3% cash to debt, both well below category medians 396 days and 61.5%, respectively. AC holds approximately $25 million of unrestricted cash and investment at June 30, 2018 that were available to support the OSA.

STRONG DEMAND FOR SERVICES: At June 30, 2018, the occupancy across all three levels of care was above 90%, which is also consistent with the prior four audited years. Fitch views the steady operating performance and high occupancy as key credit strengths that support the rating.

GOOD LONG TERM LIABILITY PROFILE: Debt metrics are consistent the rating level. Maximum annual debt service (MADS) of approximately $11.5 million equated 10.42% of 2018 revenues, better than Fitch's 'BBB' median of 12.4%. Debt-to-net-available of 2.9x was also better than the 6.2x median. ASMOG's debt service is frontloaded, with MADS dropping to $8.9 million in 2023. Fitch expects ASMOG's capital needs to be manageable over the next two years.

RATING SENSITIVITIES

STABLE PERFORMANCE: Over the next two years, Fitch expects the Asbury Maryland Obligated Group (ASMOG) to continue to produce above 'BBB' median level financial results and debt service coverage, with capital needs remaining manageable. A material drop in performance or a decline in liquidity could lead to negative rating action. Continued strong performance, coupled with improved liquidity that brings cash to debt to the 'BBB' median could lead to positive rating action.

OPERATING SUPPORT AGREEMENT: Although not expected in the near term, the termination of the operating support agreement (OSA) would likely lead to a downgrade.

PARENT LIQUIDITY: A drop in the cash and investment at Asbury Communities, Inc. that are available to support the OSA (ACOMM) or a return to higher levels of equity transfers up to ACOMM from ASMOG could also lead to a downgrade.

CREDIT PROFILE

The Maryland Obligated Group consists of Asbury Methodist Village (AMV) and Asbury Solomons and has a total of 1,127 IL units, 157 assisted living units and 305 skilled nursing beds. Asbury-MD offers a Type 'C' contract. The majority of current residents have traditional amortizing contracts, although Asbury-MDs offers 90% and 100% refundable contracts.

Total operating revenue in 2017 was $106 million. The Asbury-MD's parent corporation is ACOMM, which includes a second obligated group in Pennsylvania, with two senior living campuses, as well other non-obligated entities. Fitch's analysis is based on the financials of the Asbury-MD OG.

SOLID FINANCIAL PERFORMANCE

Fiscal 2017 financial results show a 95.5% operating ratio, a 28.8% net operating margin - adjusted, and pro forma maximum annual debt service (MADS) coverage of 3.2x. The operating performance compares well to Fitch's 'BBB' medians and is in line with ASMOG historical performance. Six-month 2018 interim results show ASMOG maintain this performance.

Net entrance fee receipts remained solid as well and have been very steady over the last three years averaging approximately $19 million a year. Management reports that the sales of homes in the local real estate markets surrounding both Solomons and Gaithersburg remain steady.

The solid financial performance is also supported by the continued strength of Asbury-MD's occupancy across all levels of care, with IL, AL and skilled nursing occupancies having stabilized in the mid-to-high 90% range at Dec. 31, 2017. At June 30, 2018 ASMOG had IL occupancy of 92%, AL occupancy of 99%, and skilled nursing occupancy of 90%.

Larger IL units (1,300 square feet and larger) continue to have strong demand on both campuses. Management continues to increase its marketing efforts for smaller units, which have seen a decrease in sales over the last few years. The drop is not a concern given the strength of ASMOG's operating performance and its strong occupancy in the cottages, which are a larger driver of cash flow. Fitch expects this level of performance to be maintained over the next year.

ASMOG currently has no major capital plans. A floor by floor renovation of AMV's skilled nursing center is almost complete and that is the largest current project with approximately $5 million more to spend. Over the outlook period Fitch expects ASMOG's capital needs to remains manageable.

Thin Liquidity/OSA

Asbury-MD's liquidity metrics are thin compared to Fitch's 'BBB' category medians. At June 30, 2018, ASMOG's total unrestricted cash and investments of $41.2 million equated to 172 DCOH and 35.3% cash to debt. While improved, year over year the liquidity metrics remain weaker than their respective 'BBB' category medians of 396 DCOH and 61.5% cash to debt.

Under its bond documents, Asbury-MD is allowed to transfer funds to ACOMM. The transfers have moderated over the last three-years and were approximately $2.4 million in 2015 and 2016, and that lowered to $580,000 in 2017. 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 ASMOG liquidity growth, in spite of its good cash flow. ACOMM management has indicated it a commitment to reduce the transfers moving forward.

The 'BBB' rating in spite of the thin liquidity reflects the unconditional and unlimited support from ACOMM under the OSA, guaranteeing ASMOG makes it DCOH and debt service covenants. ACOMM had approximately $25 million of unrestricted cash and investments at June 30, 2018, which is available for support of both ASMOG and the Asbury-PA obligated group. With the 2018 bond issue, ASMOG is amending the OSA to eliminate covenants currently in place at the ACOMM. This includes the DCOH covenant and other negative covenants. Maintenance of the 'BBB' rating in spite of the elimination of the parent level covenants reflects the good liquidity at ACOMM available to support the OSA. There could be negative rating pressure if that level of unrestricted liquidity goes down or should the OSA be terminated.

Further mitigating the concern regarding the upstreaming of funds to ACOMM has been the improved operating performance at Asbury-PA. Bond documents show that Asbury-PA had IL occupancy above 90%, DCOH of 142, and debt service coverage of 1.9x through the 12 month period ended Dec. 31, 2017.

DEBT PROFILE

All of Asbury-MD's long-term debt, currently $116 million, is fixed rate, and the debt will remain all fixed rate after the 2018 debt issuance.

Previously, Fitch has noted ASMOG's forward starting fixed payer swap with a notional value of $74 million and its effect on ASMOG's debt service, which climbed to over $13 million over the previous few years. ASMOG terminated that swap with a $14.3 million payment. Fitch views the elimination of the swap positively. The swap payment was funded by a $13.5 million term loan, which is currently being amended and refinanced. The pro forma MADS and the 'BBB' rating reflect the effect of the refinanced loan.

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.
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Publication:Daily the Pak Banker (Lahore, Pakistan)
Geographic Code:1U5MD
Date:Dec 5, 2018
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