NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BB+' rating on the following bonds:
--$30.68 million Michigan State Hospital Finance Authority revenue and refunding bonds series 2005 (Presbyterian Villages of Michigan Obligated Group).
The Rating Outlook is Stable.
The series 2005 bonds are secured by a pledge of the obligated group's (OG) gross revenues, a first mortgage on the OG's facilities, and a debt service reserve fund.
KEY RATING DRIVERS
STABLE DEBT SERVICE COVERAGE: Presbyterian Villages of Michigan Obligated Group's (PVM or OG) coverage has been stable, generally in the 1.4x to 1.5x range. Due to a one-time $2.1 million tax credit, debt service coverage was a strong 2.6x in the nine month 2013 interim period. Backing out the one-time tax credit from revenues, lowers coverage to 1.5x, which is consistent with PVM's historical performance.
ADEQUATE LIQUIDITY FOR RATING LEVEL: PVM had 107.2 days cash on hand, a 4.5x cushion ratio, and 31.7% cash to debt as of September 30, 2013, all slightly improved over the prior year and adequate for the rating level.
OCCUPANCY CONSISTENT YOY: Overall occupancy is good at 87.2% as of September 2013, which is very stable year over year. Occupancy has been supported by continued marketing efforts, reconfiguration of units to meet local consumer demand, and the addition of services. The largest drag on occupancy remains independent living (IL) occupancy at the Village of Westland, which was at 78%.
CONTINUE TO STRENGTHEN OG FINANCES: PVM continues to focus on improving the financial profile of the OG. These efforts include shedding weaker performing service lines and units, or adding ones that are more accretive to PVM's financial profile, as well as strong expense management. Currently, PVM is finalizing due diligence to move 63 older cottages at the Village of Redford outside the OG to a non-OG affordable housing affiliate.
STABLE FINANCIAL PERFORMANCE: Fitch expects the main drivers of PVM's performance to remain stable over the next year, with liquidity staying level and debt service returning to historical levels at approximately 1.5x.
Headquartered in Southfield, MI, PVM consists of PVM Corporate, a foundation, three rental continuing care retirement communities located in Redford, Westland and Chesterfield Township, MI, and a PVM entity that is a general partner in a PVM non-OG affordable housing campus. Currently, the three campuses total 347 independent rental units, 190 assisted living units, and 178 skilled nursing beds. PVM had approximately $36.1 million in operating revenue in 2012. In addition, PVM owns or manages approximately 1,250 independent living and 28 assisted living units through non-obligated entities.
The 'BB+' rating affirmation and stable outlook reflect PVM's stable financial profile at the current rating level characterized by adequate liquidity, consistent debt service coverage, tight expense control, and stable occupancy. The 2005 bonds are all fixed rate and PVM has no swaps.
GOOD EXPENSE MANAGEMENT
Expenses rose just 1.2% from 2011 to 2012 and were down slightly year over in the 2013 nine month interim period. PVM continues to flex staff based on occupancy levels and look for ways to reduce administrative costs. Revenue growth has been flat as total occupancy has remained below 90%, so the strong expense controls have helped PVM sustain its operating performance.
PVM has implemented a number of initiatives to help increase occupancy. The Village of Westland campus has been a particular challenge, and PVM expanded fee-based services to the IL units to meet consumer preference. IL occupancy at Westland was 78% at Sept. 30, 2013. IL occupancy remains stronger at The Village of Redford (90% in the interim period). PVM is finalizing due diligence to move 63 older cottages at the Village of Redford outside the OG to a non-OG affordable housing affiliate. This would allow PVM to realize a gain on sale, generate an annual management fee, secure potential development fees, and have substantially renovated units.
PVM regularly advances funds for programs and capital projects outside the OG. At Sept. 30, 2013, PVM had $11.4 million of advancements and receivables up from $9 million at Sept. 30, 2012. PVM has a formal written policy in place for these advances and Fitch believes that the advances support important strategic programs of the larger organization. Additionally, the commitments are manageable at the current rating level.
However, the advances dilute the financial profile of PVM, especially liquidity, which is thin, but adequate for the rating level. At Sept. 30, 2013, PVM's level of unrestricted cash and investments was $10.3 million, which equated to 107.2 DCOH, a 4.5x cushion ratio, and 31.7% cash to debt. Cash and unrestricted investments did increase from $9.5 million in the prior year period, even though the advances to outside the OG increased by $2.4 million.
The main reason for the sustaining of liquidity in spite of the increase in advances was PVM's receipt of $2.1 million of Brownfield Tax Credits related to its Rivertown Neighborhood project. The funds were then forwarded to the PVM affiliate of the project. As a result the advance did not come off PVM's balance sheet. The tax credit funds were included as revenue in the nine month interim period, which gave a one-time lift to PVM's financial performance and debt service coverage. Moving forward, Fitch expects PVM's debt service coverage to return to historical levels.
PVM is in the middle of a state-wide fundraising campaign which has increased donations (system-wide the campaign has netted $11.1 million in unrestricted, temporarily restricted, and permanently restricted donations as of Sept. 30, 2013). PVM has increased its goal to $27.5 million, with a considerable portion to be invested in the OG.
PVM provides annual audited financial statements and quarterly unaudited financials, including an extensive MD&A, to the to the Municipal Securities Rulemaking Board's EMMA system.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating Criteria for Not-for-Profit Continuing Care Retirement Communities' (July 10, 2013).
Applicable Criteria and Related Research:
Not-for-Profit Continuing Care Retirement Communities Rating Criteria -- Effective July 12, 2012 to July 10, 2013