NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB+' rating on the following bonds issued on behalf of United Methodist Retirement Communities, Inc. (UMRC).
--$11,000,000 Michigan Strategic Fund limited obligation revenue bonds (United Methodist Retirement Communities, Inc. Project), series 2013.
The Rating Outlook is Stable.
SECURITY
The bonds are supported by a pledge of gross revenues, a mortgage interest in property and a debt service reserve fund.
KEY RATING DRIVERS
SOLID FINANCIAL PROFILE: Most of UMRC's key financial ratios are consistent with the upper level of the 'BBB' category. UMRC's operating ratio of 86.2% and its revenue-only debt service coverage of 2.4x in 2013 are particularly strong relative to Fitch's 'BBB' category medians.
MANAGEABLE DEBT BURDEN: In 2013, UMRC's maximum annual debt service (MADS) equated to a modest 7.8% of total revenues while debt-to-net available was a moderate 5.7x; both better than Fitch's 'BBB' category medians.
GOOD OVERALL OCCUPANCY: At March 31, 2014, occupancy at Chelsea Retirement Community was mostly unchanged from the prior year period. However, Fitch views the fill up of the 60 entrance fee independent living units (ILUs) at the Cedars of Dexter positively.
AGGRESSIVE DEBT STRUCTURE: Fitch believes URMC's debt structure with 64% bank-placed variable-rate debt and 36% permanent fixed-rate bonds presents some credit risk. The bank debt is subject to renewal in 2015 and 2019. UMRC has hedged a portion of its interest rate risk with floating- to fixed-rate swaps equal to 50% of the notional value of the variable-rate debt.
RATING SENSITIVITIES
MAINTENANCE OF OCCUPANCY LEVELS: Fitch expects occupancy to remain at current levels, which should continue to drive solid operating results. Positive rating action could result if UMRC improved occupancy, resulting in improved liquidity metrics and stronger debt service coverage.
CREDIT PROFILE
UMRC consists of two facilities, Chelsea Retirement Community (CRC) and Cedars of Dexter. CRC is a rental-only CCRC, with 112 ILUs, 48 assisted living units (ALUs), 102 Alzheimer's and related dementia facility beds, and 85 skilled nursing beds located in Chelsea, MI, about nine miles west of Ann Arbor. Cedars is a 60-unit, type C, entrance fee ILU in Dexter, MI. Operating revenues in 2013 totaled $29.9 million.
Fitch considers the two bank-qualified direct placement bonds with a total outstanding amount of approximately $20.8 million at May 31, 2014 in the analysis of UMRC's credit quality.
SOLID FINANCIAL PROFILE
UMRC's overall financial performance remains consistent with the upper range of the 'BBB' category. At March 31, 2014, UMRC had $28.7 million in cash and unrestricted investments, which equates to 380.4 days cash on hand, a 11.9x cushion ratio, and cash to debt of 90.0%; each of which exceed the respective category medians.
Operating profitability is also strong. UMRC finished fiscal 2013 with an 86.2% operating ratio and net operating margin of 12.2%, consistent with the prior year's performance, and favorable to Fitch's 'BBB' category medians of 97.2% and 9.9%, respectively. Three-month interim results show a continuation of the strong performance with a 91.6% operating ratio and a 10.1% net operating margin. The solid operating performance supported MADS coverage by revenue only of 2.4x at fiscal 2013 year-end, which exceeds the 'BBB' category median of 0.9x.
MANAGEABLE DEBT BURDEN
UMRC's debt burden is manageable as measured by MADS as a percentage of revenue, which was 7.8% at Dec. 31, 2013, favorable in comparison to Fitch's 'BBB' median of 12.4%.
MADS coverage including entrance fees is the same as revenue-only coverage at 2.4x at fiscal 2013 year-end. This is due to the first generation of entrance fees at Cedars not being included in debt service coverage calculation. However, as the first generation of residents moves through the continuum of care over the next four to seven years at Cedars, UMRC's financial results and coverage should begin to reflect the benefit of the turnover entrance fee receipts.
GOOD OVERALL OCCUPANCY
The solid financial results, in total, have been driven by good occupancy at CRC, UMRC's main facility, which is a rental community. At March 31, 2014, total occupancy across all levels of care at CRC was 89%, which is above 2012's year-end occupancy of 88.6%.
Cedars, located about eight miles east of CRC and 10 miles northwest of Ann Arbor, MI, is at 100% occupancy as of June 30, 2014. During Fitch's prior review, fill-up had lagged behind schedule due mostly to the negative overall economy coupled with the timing of when Cedar's was finished and brought online to fill. In spite of the longer fill-up period, UMRC maintained a consistent financial performance throughout both the construction and fill-up. Monthly service fees have positively affected Cedar's financial profile and once turnover entrance fee receipts begin occurring in a few years, debt service coverage is expected to strengthen further. To date the Cedar's cash flow is still running at a slight negative, but Fitch believes as first generation residents begin to transition through the continuum of care and turnover entrance fees are generated, Cedar's will be accretive to UMRC's financial performance.
The contract at Cedars requires a refund of the entrance fee regardless of re-occupancy of the vacated unit, which presents a mild credit concern should UMRC have slow refill of turned-over units. While this is a concern, UMRC currently has a sufficient financial cushion and demand for services to mitigate this risk.
Cedars benefits from being located in a solid service area in Washtenaw County. Fitch rates the county's general obligation limited tax notes at 'AA+' and notes that the local economy, which is anchored by the University of Michigan, has shown resiliency, with unemployment rates consistently below state and national averages. In addition, county wealth levels are strong, above both state and national averages.
AGGRESSIVE DEBT STRUCTURE
At Dec. 31, 2013, total outstanding long-term debt for the obligated group was approximately $32.2 million. UMRC's other two series of debt are variable-rate direct bank-placed bonds, which Fitch does not rate. Each series has a mandatory tender date; one will occur in 2015, the other in 2019. UMRC has two floating- to fixed-rate swaps equal to 50% of the notional amounts of the variable-rate debt with maturities that coincide with the two mandatory put dates. There are no collateral posting requirements.
DISCLOSURE
UMRC provides annual and quarterly disclosure on EMMA.
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
--Revenue-Supported Rating Criteria, June 30, 2014
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
Rating Criteria for Not-for-Profit Continuing Care Retirement Communities - Effective July 26, 2011 to July 12, 2012
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=644895
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=843378
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.