OREANDA-NEWS. Fitch Ratings has assigned an implied general revenue bond rating of 'BBB-' on Odd Fellows Home of California (Odd Fellows). Odd Fellows is planning on issuing approximately $71 million series 2016 A&B bonds, which will be a direct bank loan with Compass Bank. Odd Fellows also has approximately $100 million of series 2012 Cal Mortgage insured revenue bonds outstanding.

The Rating Outlook is Stable.

SECURITY

The series 2012 and 2016A&B bonds are secured by a gross revenue pledge and mortgage pledge of Odd Fellows.

KEY RATING DRIVERS

SOLID FINANCIAL PROFILE FOR RATING LEVEL: Odd Fellows' financial profile is solid for the rating level with good liquidity, consistent profitability and healthy debt service coverage especially on a revenue only basis. The improved performance has been driven by savings from a debt refinancing in 2012 and the conversion of the Meadows of Napa Valley (Meadows) to a CCRC from a rental community, which started to collect entrance fees beginning in FY 2013.

LOCATION IN FAVORABLE MARKETS: Odd Fellows includes two CCRCs located in very desirable locations with little competition - Saratoga Retirement Community in Saratoga, CA and Meadows in Napa, CA. Saratoga benefits from its affluent service area while the Meadows is the only CCRC in Napa County.

GOOD OCCUPANCY: Occupancy has been solid in ILUs for the last few years. Health center occupancy has fluctuated due to the smaller number of units and labor pressures. As of May 31, 2016, Saratoga had 95.2% occupancy in ILU, 79.1% in ALU, 95.3% in memory care, and 90.5% in SNF. Meadows had 94.3% occupancy in ILU, 89.8% in ALU, 74.5% in memory care, and 74.3% in SNF.

ELEVATED DEBT BURDEN: Pro-forma maximum annual debt service (MADS) is a high 16.7% of fiscal 2016 total revenues as compared to the 'BBB' category median of 12.4%. However, historical pro-forma coverage is strong at 2.2x in FY 2016. "Revenue only" coverage has been around 1x over last five years compared to the 'BBB' category of 1x.

LARGE EXPANSION PROJECT: The Meadows is about to start an expansion project, which will add 92 ILUs, a fitness center with an indoor pool, underground parking, and expand its dining facility and renovate its physical therapy space. The majority of the financing is projected to be temporary debt that will be repaid with initial entrance fees. Fitch views the project favorably, which should generate at least an additional $6 million of annual revenue.

RATING SENSITIVITIES

EXECUTION OF EXPANSION PROJECT: The 'BBB-' rating assumes that Odd Fellows Home of California will successfully construct and fill the expansion project at The Meadows. A material delay or cost overrun of the project, prolonged fill up, or inability to pay down temporary debt as scheduled could result in a negative rating action.

CREDIT PROFILE

Odd Fellows was originally established in 1893 by the Grand Lodge of California, Independent Order of Odd Fellows. Odd Fellows currently owns and operates two CCRCs: Saratoga Retirement Community (Saratoga) and The Meadows of Napa Valley (Meadows) and is managed by Pacific Retirement Services. Saratoga and Meadows offer Type B residency contracts. Saratoga opened in 1912 and has 143 independent living units (ILUs), 90 assisted living units (ALUs), 18 memory care units, and 94 skilled nursing facility (SNF) beds. Saratoga offers a non-refundable or 90% refundable plan. The Meadows has 151 ILUs, 40 ALUs, 20 memory care units, and 69 SNF beds. The Meadows will continue to offer rental contracts but on a limited basis. Entrance fee plans include non-refundable, 50% refundable, and 90% refundable. 95% refundable contracts will only be offered to charter members of the expansion project. Odd Fellows' total operating revenue in fiscal 2016 (March 31 fiscal year end) was $50 million.

Plan of Finance

The $11 million series 2016A bonds and $60 million series 2016B bonds are structured as uninsured draw down tax exempt indexed floating rate direct bank loans. The series 2016A bonds have a 15-year term through the final maturity of the bonds and the series 2016B bonds will be temporary debt and expected to be repaid with initial entrance fees. The mandatory tender date on the series 2016B bonds is in 2021.

The series 2016A and B bonds in addition to approximately $14 million of equity will fund the cost of the expansion project at Meadows. Uses of funds include $82 million of project costs, $1.5 million for capitalized interest and debt service reserve fund, and the remainder for costs of issuance.

Expansion Project

The Meadows expansion project includes 92 new and larger ILUs in addition to added and enhanced amenities including an expanding dining area, new indoor pool and wellness center, underground parking, and renovated physical therapy space. The total cost of the project is $82 million which includes $62 million for construction and land, $13 million for FF&E, development, marketing and other related costs and a $7 million owner's contingency. Odd Fellows has executed a guaranteed maximum price contract.

The new units will be larger than the existing inventory at approximately 1,600 square feet compared to the average of the current units at 720 square feet. A market study indicated strong demand and to date there are 55 (60%) pre sales (10% depositors), or 60%. The weighted average entrance fee is $694,000. Fitch views the project favorably as it will elevate the marketability of the community, generate additional revenue, and enhance services while the majority of debt issued to fund to the project will be paid down with initial entrance fees.

The construction is expected to take 21 months and financial forecast projects initial entrance fees of $60 million to be received by fiscal year end 2020, which provides sufficient cushion related to the temporary debt mandatory tender in 2021. The units are expected to be filled in 12 months.

Financial Profile

Odd Fellows financial profile is solid and provides cushion for the near-term risk related to the execution of the expansion project. Liquidity is strong for the rating level with $71.7 million of unrestricted cash and investments at May 31, 2016, which equated to 620 days cash on hand and 66% cash to pro-forma permanent debt (excluding series 2016B temporary debt) and compares favorably to the respective 'BBB' category median ratios of 400 and 60%. Odd Fellows has experienced a sharp improvement in liquidity since the Meadows converted to an entrance fee model CCRC with unrestricted cash and investments growing from $31.6 million at FYE 2012 to $71.7 million at May 31, 2016.

Profitability has been consistent and driven by good occupancy at both CCRCs. Saratoga is a strong performer driven by its desirable location. From FY 2012 - 2016, average ILU occupancy was 95.3% and SNF occupancy was 86.9%. Average ILU and SNF occupancy over the last five years was 87% and 79% for Meadows. Softer occupancy figures at Meadows relates to its transition to a CCRC and labor pressures in its SNF. Odd Fellows' operating ratio has been consistently below 100% and debt service savings from the series 2012 financing has also attributed to improved profitability.

Fitch used pro-forma MADS of $8.5 million (which assumes a payoff of the series 2016B temporary debt from initial entrance fees) which is a slight increase from current MADS of $7.4 million. Historical coverage of pro-forma MADS including entrance fee receipts was a very solid 2.8x and 2.2x in fiscal 2015 and 2016, respectively, while revenue only is in line with the median at 1.4x and 0.9x over the same periods.

Debt Profile

Odd Fellows' currently has approximately $100 million of outstanding fixed rate series 2012 bonds that are insured under the California Construction Loan Mortgage Insurance Program. The series 2012 and 2016A and B bonds are parity indebtedness. The financial covenants under the series 2012 and 2016 bonds are identical and include maintaining at least 1.25x MADS coverage, 1.5x current ratio, and 250 days cash on hand. There is also a covenant to maintain at least a 'BBB-' rating; however, the remedies for violating this covenant does not include acceleration (like the financial covenants). The only remedies allowed related to violation of the rating covenant is under the regulatory agreement with the insurer and includes replacement of management, a consultant call in, or refinancing of series 2016A&B bonds.

Under an intercreditor and collateral agent agreement, there is an equal lien on all the collateral (except the initial entrance fees for the expansion project) if any remedies were exercised by the insurer or bank under an event of default scenario.

Disclosure

Under the 2012 bonds, Odd Fellows has been providing annual and quarterly disclosure on EMMA.