Fitch Affirms Brethren Hillcrest Homes, CA's Revs at 'BBB-'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed the 'BBB-' rating on the following City of La Verne, CA certificates of participation, issued on behalf of Brethren Hillcrest Homes (Hillcrest):

--$39.2 million series 2014.

The Rating Outlook is Stable.

SECURITY

Gross revenue pledge, a first deed of trust on certain property, and a debt service reserve fund.

KEY RATING DRIVERS

SOLID PROFITABILITY: Hillcrest's net operating margin (NOM) and NOM-adjusted margins remain in line with Fitch's 'BBB' category median ratios. While NOM has fallen some to 9.7% in 2014 (vs the 'BBB' median 9.2%) strong sales supported strong 34.6% NOM-adjusted. Softer occupancy in the skilled nursing facility (SNF) and assisted living unit (ALU) occupancy (86.4% and 63.7% respectively at March 31, 2015) has impacted NOM. However, Fitch expects that ongoing renovation will have a positive impact on occupancy and service fees going forward.

HEALTHY DEBT METRICS: Hillcrest has maintained consistent debt service coverage and has a manageable debt burden. For fiscal 2014, Hillcrest covered maximum annual debt service at 3.1 times (x), which remained healthy through the 9-month interim period ended March 31, 2015 at 2.6x. Further, debt to net available through the interim was 5.1x and MADS was 12.8% of revenue which are in line with Fitch's 'BBB' medians of 6.3x and 12.3%, respectively.

SOLID ILU SALES: During 2014 Hillcrest recorded 29 net unit sales generating $6.6 million in net entrance fee receipts, well ahead of the 20 sales budgeted. The strong sales pace has been sustained through the nine month interim period, with 31 sales and $5.2 million in net entrance fee receipts. Fitch expects Hillcrest to collect almost $7 million in net entrance fees in fiscal 2015 generating approximately 3x debt service coverage.

MIXED SERVICE AREA: Fitch believes BHH's service area is mixed, with solid housing values and incomes against its entrance and monthly fees, coupled with a competitive environment for senior living and services. While Hillcrest has maintained steady occupancy near 90% campus-wide, its exposure to Medi-Cal (38% of census at April 30, 2015) presents some concern. In addition, its somewhat high average age of plant of 12.5 years underscores Hillcrest's efforts at unit renovation and refurbishment. Its capital plans (near $5.1 million in 2016) include ongoing unit renovations in AL and other areas, which Fitch believes is necessary to maintain its competitive position.

RATING SENSITIVITIES

CAPITAL PLANS: Brethren Hillcrest Homes (Hillcrest) is undergoing a master plan analysis, which may result in a nominal level of debt financing for capital projects within the next 12-24 months. While Fitch does not anticipate rating pressure, it notes that Hillcrest has only limited room for additional debt at the current rating level. A significant increase in debt, or outlay of cash for capital needs would likely prompt rating pressure.

INCREMENTAL LIQUIDITY GROWTH: Hillcrest's balance sheet remains light for the rating level, particularly against its debt burden and expense base. However, further growth and sustained levels more reflective of the 'BBB' category median could prompt positive rating pressure over the medium term. Unexpected declines in unrestricted cash would likely prompt negative rating pressure.

CREDIT PROFILE

Brethren Hillcrest Homes (Hillcrest) is a Type B (modified fee-for-service) continuing care retirement community (CCRC), established in March 1947 by a local faith community of the Church of the Brethren to provide housing and services for its retiring ministers and missionaries. Today, Hillcrest consists of 229 residential homes and apartments, 48 assisted living units, 24 dementia beds, and 74 skilled nursing beds. Hillcrest reported total revenues of $22.2 million in fiscal 2014 (year ended June 30).

DEBT PROFILE

Total debt equals $38.7 million of series 2014 bonds are fixed rate, tax exempt certificates, comprised of both serial and term bonds with a 10-year call provision. The 2014 certificates mature in 2036, fully amortize, and have level debt service. Maximum annual debt service (MADS) is $2.9 million. Hillcrest has no swaps.

ONGOING DISCLOSURE

Hillcrest is expected to covenant to provide routine annual disclosure within 120 days and quarterly disclosure within 60 days to bondholders. Disclosure will include financial statements, occupancy levels, payor mix data, material events, and covenant performance. Disclosure to Fitch has been timely, with good access to management.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Not-for-Profit Continuing Care Retirement Communities Rating Criteria (pub. 24 Jul 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752470

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985684

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Emily E. Wadhwani
Director
+1-312-368-3347
Fitch Ratings, Inc.
70 W. Madison Street
Chicago IL 60602
or
Secondary Analyst
Gary Sokolow
Director
+1-212-908-9186
or
Committee Chairperson
James LeBuhn
Senior Director
+1-312-368-2059
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Emily E. Wadhwani
Director
+1-312-368-3347
Fitch Ratings, Inc.
70 W. Madison Street
Chicago IL 60602
or
Secondary Analyst
Gary Sokolow
Director
+1-212-908-9186
or
Committee Chairperson
James LeBuhn
Senior Director
+1-312-368-2059
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com