Fitch Affirms Rogue Valley Manor (OR) Revs at 'A-'; Outlook Stable

CHICAGO--()--Fitch Ratings affirms the 'A-' rating on the following Medford Hospital Facilities Authority, Oregon revenue bonds, issued on behalf of Rogue Valley Manor (RVM):

--Approximately $60.9 million series 2007* variable-rate bonds;
--Approximately $60.2 million series 2013A fixed-rate bonds.

*This letter of credit (LOC) is provided by Bank of America Merrill Lynch, which Fitch was not asked to rate.

The Rating Outlook is Stable.

RVM is planning on refinancing its outstanding series 2007 variable-rate demand bonds (VRDBs) with a direct placement of series 2013B with Bank of America. The total par amount will be approximately $50 million and will include approximately $5 million of new money for future capital expenditures. The final maturity on the series 2013B bonds will be Aug. 15, 2037 (same as the current maturity on the outstanding series 2007 bonds). Fitch was not asked to rate these bonds but has considered them in its analysis. The covenants in the series 2013B direct placement mirror the covenants that were in the LOC reimbursement agreement and are more onerous than those for the series 2013A fixed-rate bonds. Pro forma maximum annual debt service (MADS) as calculated by the underwriter is expected to be about $6.75 million; a slight increase from the current MADS of $6.38 million.

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
CHANGES TO BOARD AND MANAGEMENT COMPLETED: After a tumultuous year between Pacific Retirement Services (PRS; manager of RVM) and RVM, a resolution was reached and a new board and executive director of RVM are now in place. PRS' level of control over RVM has been reduced and allows for greater resident involvement and the new board includes two resident members and seven community members. The executive director has been in place since January 2013 and was an internal candidate.

REDUCED CAPITAL STRUCTURE RISK: With the series 2013B direct placement with Bank of America, RVM will refinance its remaining VRDB exposure (approximately $44.9 million outstanding), and the 10-year commitment by Bank of America reduces near-term renewal risk. Pro forma MADS at $6.75 million is a slight increase from the current MADS of $6.5 million but coverage remains adequate for the rating level at 2.6x for fiscal 2013 (Sept. 30 fiscal year end; unaudited).

REGIONAL DRAW: Fitch views RVM's position as a 'destination' continuing care retirement community (CCRC) as a key credit strength as it allows the community to attract residents from a multi-state region as a result of its climate, amenities and value proposition. Occupancy in the independent living units(ILUs) has remained steady for the past five years at over 90%.

ADEQUATE PROFITABILITY: Operating ratio of 98.8% in fiscal 2013 is up from fiscal 2012 results and unfavorable against the 'A' category median of 95.8%. The decline in profitability is mostly attributed to an increase in legal expenses related to litigation with residents, which was settled in February 2013. However, net adjusted operating margin of 31.7% for fiscal 2013 is solid against the respective 'A' category median of 23.1%, due to solid turnover entrance fee receipts.

MIXED LIQUIDITY METRICS: At Sept. 30, 2013, RVM's unrestricted cash and investments totaled $81.8 million, a significant improvement from $67.2 million at fiscal 2012 year-end, mostly reflecting the consolidation of RVM's foundation into RVM, which included $10.5 million of unrestricted cash and investments. RVM had 811.7 days cash on hand at Sept. 30, 2013, which is favorable against the 'A' category median of 494.8 days. However, RVM's pro forma cash to debt of 74.2% and pro forma cushion ratio of 12.2x during the same time period are light relative to the respective 'A' category medians of 120.2% and 14.4x.

HIGH DEBT BURDEN: RVM is highly leveraged with MADS accounting for 14.5% of total revenue in fiscal 2013 compared to the 'A' category median of 8.4%.

RATING SENSITIVITIES
MAINTAIN CURRENT FINANCIAL PERFORMANCE: Since RVM has a high debt burden for its rating level, any deterioration in RVM's financial profile or occupancy levels could lead to negative rating pressure.

CREDIT PROFILE
RVM is a type-B CCRC located in Medford, OR. RVM has 604 ILUs, 87 assisted living units (ALUs), 68 skilled nursing beds and 25 memory care beds. In the fiscal year ended Sept. 30, 2013 (interim results), RVM had total revenues of approximately $44.9 million. RVM is the only full-service retirement community in Medford, OR and also offers a variety of pricing options for ILUs. Because of the climate, location and affordability, RVM attracts residents from outside a typical CCRC's primary market area, which Fitch views favorably. Despite the litigation over the last year and resulting management and board turnover, operations at RVM have remained stable and a new board and executive director are now in place.

For additional information, please see the press release for Rogue Valley Manor dated Feb. 19, 2013 and the report for Rogue Valley Manor dated April 3, 2013, both available at www.fitchratings.com.

DISCLOSURE
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 was provided by Cain Brothers, the underwriter.

Additional information is available at www.fitchratings.com.

Applicable Criteria and Related Research:
--'Rating Guidelines for Nonprofit Continuing Care Retirement Communities' dated July 10, 2013.

Applicable Criteria and Related Research:
Rating Guidelines for Nonprofit Continuing Care Retirement Communities
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=40171

Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=807534
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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:
Dmitry Feofilaktov, +1-212-908-0345
Analyst
or
Committee Chairperson:
Emily Wong, +1-415-732-5620
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
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:
Dmitry Feofilaktov, +1-212-908-0345
Analyst
or
Committee Chairperson:
Emily Wong, +1-415-732-5620
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com