Fitch Rates Rogue Valley Manor (OR) Series 2013 Rev Bonds 'A-'; Stable Outlook

CHICAGO--()--Fitch Ratings assigns an 'A-' rating to the approximately $60.2 million Medford Hospital Facilities Authority, Oregon's revenue refunding bonds, series 2013 bonds, issued on behalf of Rogue Valley Manor (RVM).

In addition, Fitch downgrades the following outstanding Medford Hospital Facilities Authority debt to 'A-' from 'A':

--Approximately $60.9 million series 2007* variable rate bonds issued on behalf of RVM;

--Approximately $45.2 million, series 2012 variable rate demand bonds issued on behalf of RVM privately placed with Wells Fargo.

*This Letter of Credit is provided by Bank of America Merrill Lynch, which Fitch was not asked to rate.

The Negative Rating Watch has been revised to a Stable Outlook.

Proceeds of the series 2013 fixed rate bond issuance will be used to refund approximately $15 million of the series 2007 bonds, refund all of the outstanding series 2012 bonds privately placed with Wells Fargo, fund a debt service reserve fund and pay for certain costs of issuance. Upon closing of the series 2013 issue, RVM's capital structure will be about 53% fixed rate bonds and 43% variable rate bonds. Maximum annual debt service as calculated by the underwriter is expected to be about $6.38 million. The bonds are expected to be priced the early to mid- March through negotiated sale.

SECURITY

Bonds are secured by a gross revenue pledge, a first mortgage lien on the facilities and a debt service reserve fund.

KEY RATING DRIVERS

AMENDED GOVERNANCE STRUCTURE: A settlement agreement between Pacific Retirement Services (PRS), and Rogue Valley Manor (RVM) was reached in February 2013. This agreement is a compromise of disputed claims and is not an admission of liability. As part of this agreement, the governance structured was modified whereby PRS' level of control over RVM has been reduced and allows for greater resident involvement. The rating downgrade reflects Fitch's concern over the potential impact of PRS' reduced control and the lingering effects of this legal dispute.

HIGH DEBT BURDEN: While Fitch views the increased proportion of fixed rate debt positively, RVM's debt burden after the series 2013 financing is high with pro forma MADS equal to 14.3% of fiscal 2012 revenue compared to the 'A' category median of 8.7%. Furthermore, with approximately 43% variable rate exposure, RVM's debt structure remains highly sensitive to bank renewal, put and interest rate risk. Historical coverage of pro forma MADS of 2.3x at 2012 fiscal year-end (draft audit) is somewhat light when compared to the 'A' category median of 2.7x.

REGIONAL DRAW: Fitch views RVM's position as a 'destination' CCRC as a key credit strength as it allows the community to attract residents from a multi-state region due its climate, amenities and value proposition. Occupancy in the independent living units (ILUs) has fallen to 90.1% in fiscal 2012 from 97.8% in fiscal 2008 but is still solid for the rating category.

STRONG PROFITABILITY: Despite the difficult operating environment, RVM has been able to maintain strong historical profitability metrics with net operating margins of 13.7% in fiscal 2012 (draft audit) and 11.2% through November 30, 2012 (2-month interim period), and adjusted net operating margins of 29.9% and 38.2%,respectively, over the same periods.

LIGHT BUT IMPROVED LIQUIDITY METRICS: At Nov. 30, 2012, RVM's unrestricted cash and investments totaled $78.4 million, which is an improvement from $67.2 million at fiscal 2012 year-end (draft audit) because of the inclusion of $10.5 million in unrestricted investments from the Rogue Valley Manor Foundation, which was added to the consolidated financial statements. This cash position equates to 811.2 days cash on hand and exceeds the 'A' rated median of 494.8 days. However, RVM's pro forma cash to debt of 73.8% and pro forma cushion ratio of 12.3x are weak relative to the respective 'A' category medians of 120.2% and 14.4x.

RATING SENSITIVITIES

Deterioration in RVM's financial profile or occupancy levels could lead to negative rating pressure.

CREDIT PROFILE

In February, 2013 RVM and PRS signed a settlement agreement resolving an ongoing dispute between PRS and residents at RVM. This settlement agreement amends the RVM bylaws to have the RVM board of directors consist of nine voting directors, including two who are residents. The settlement agreement also changes the policies relating to resident involvement with the appointment of the executive director and provides for dual-reporting relationship of the executive director to the RVM Board and to PRS. This revised management and governance structure reduces the level of control PRS has over RVM, allowing for greater resident involvement. The rating downgrade reflects Fitch's concern over PRS' reduced level of control and potential residual effects of this legal dispute.

Although RVM's exposure to variable rate debt will be somewhat moderated with the series 2013 issuance, Fitch believes RVM has an elevated sensitivity to bank renewal, put and interest rate risk given its light liquidity position for the rating. In addition, the debt burden is high compared to the 'A' category median. Total debt outstanding after the series 2013 issuance will remain at $106.2 million and will include approximately $45.9 million variable rate bonds (series 2007) backed by a letter of credit from Bank of America (expires in 2015), and the approximately $60.2 million series 2013 bonds. As a result of this refinancing, MADS increases significantly to $6.4 million from $5.3 million (excluding LOC fee of $550,000, which is not included in the MTI definition), which is a high 14.3% of fiscal 2012 revenues (draft audit). This is significantly above the 'A' category median of 8.7%. Pro forma debt service coverage of 2.3x in fiscal 2012 (draft audit) is below the 'A' category median of 2.7x (turnover entrance fees only). Pro forma debt service coverage through the interim period ended Nov. 30, 2012 is improved at 3.4x. Fitch expects RVM to maintain debt service coverage levels in line with the 'A' category median.

Despite management and board turnover, operations at RVM have remained stable. Expense controls implemented in fiscal 2010 resulted in an improvement in profitability in fiscal 2011 that has continued through fiscal 2012. In fiscal 2012 (draft audit), operating ratio was 92.3% and 94.5% through the two-month interim ended November 30, 2012, which compares favorably to the 'A' category median of 95.2%. Net adjusted operating margin of 29.9% in fiscal 2012 (draft audit) and 38.2% through the two-month interim period also exceed the 'A' category median of 21.9%.

RVM's liquidity position is light for the 'A' category but improved at Nov. 30, 2012 from fiscal 2012 year-end (draft audit) because of the addition of $10.5 million to the balance sheet when the RVM foundation was consolidated into the financials. At Nov. 30, 2012, RVM's unrestricted cash and investments totaled approximately $78.4 million, equating to a solid 811.2 days cash on hand, comparing favorably to the 'A' category median of 494.8 days. However, pro forma cushion ratio and pro forma cash to debt of 12.3x and 73.8%, respectively, are weaker than the respective 'A' category medians of 14.4x and 120.2%. The debt structure is still a credit risk as RVM has almost 50% variable rate debt. With this issuance, though, cash to puttable debt is improved and is now about 1.71x. Fitch expects liquidity to continue to improve and become more in line with 'A' category medians.

RVM controls the market as it is the only full-service retirement community in Medford, Oregon and also offers a variety of pricing options for ILUs. Because of the climate, location and affordability, RVM attracts residents from outside its service area, which Fitch views favorably. RVM opened a new building, Manor Terrace, in the fall 2009, which added 71 units to the campus. There was a significant amount of internal transfers and then subsequent backfilling of the vacated space, which resulted in net entrance fee receipts of $13 million in fiscal 2010 compared to approximately $7.6 million annually in fiscal 2007 - 2009.

In part due to increased marketing efforts, RVM achieved $8.3 million of net entrance fees in fiscal 2012 (draft audit) up from $7.5 million in fiscal 2011. Average annual occupancy over the past three years has been around 90% for ILUs and assisted living units (ALUs). Skilled nursing facility occupancy has dropped from a high of 88% in fiscal 2008 to 66.4% as of November 30, 2012. Fitch expects RVM to maintain its current pace for filling turnover ILUs and for occupancy to remain above 90% despite the tensions between PRS and the residents.

The Stable Outlook reflects Fitch's expectation that RVM will continue to sustain or improve its current financial profile and occupancy remains strong.

RVM operates a type-B CCRC located in Medford, OR. RVM consists of 604 ILUs, 87 ALUs, 68 skilled nursing beds and 25 memory care beds. In the fiscal year ended Sept. 30, 2012 (draft audit), RVM had total revenues of approximately $44.1 million, which excludes the possible impact of the consolidation of 16 affordable senior living HUD housing facilities. RVM will provide bondholders with quarterly financial statements within 45 days of the end of each fiscal quarter, including an income statement, balance sheet and calculation of long-term debt service coverage ratio. RVM will also provide bondholders with an annual financial report within 120 days of the end of each fiscal year. RVM will provide EMMA with an annual financial report within 150 days of the end of the fiscal year.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Additional information was provided by Cain Brothers, the underwriter.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 12, 2012);

--'Rating Guidelines for Nonprofit Continuing Care Retirement Communities' (July 12, 2012).

For information on Build America Bonds, visit www.fitchratings.com/BABs.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015

Rating Guidelines for Nonprofit Continuing Care Retirement Communities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=40171

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Contacts

Fitch Ratings
Primary Analyst
Dana N. Sodikoff, +1-312-368-3215
Associate Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Jim LeBuhn, +1-312-368-2059
Senior Director
or
Committee Chairperson
Eva Thein, +1-212-908-0674
Senior Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Dana N. Sodikoff, +1-312-368-3215
Associate Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Jim LeBuhn, +1-312-368-2059
Senior Director
or
Committee Chairperson
Eva Thein, +1-212-908-0674
Senior Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com