Fitch Affirms Christian Care Center, Inc.'s (TX) Revenue Bonds at 'BBB-'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'BBB-' rating on the following bonds issued by Mesquite Health Facilities Development Corporation on behalf of Christian Care Center, Inc. (Christian Care):

--$30.65 million series 2014 fixed-rate bonds; and

--$29.19 million series 2005 fixed-rate bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a gross revenue pledge, mortgage liens on Christian Care's property, and debt service reserve funds.

KEY RATING DRIVERS

FAVORABLE OCCUPANCY TRENDS: Due to its desirable locations, religious affiliation, and reputation for quality care, Christian Care maintains strong occupancy in all levels of service. Independent living unit (ILU), assisted living unit (ALU) and skilled nursing facility (SNF) occupancies averaged 90.0%, 90.4%, and 91.2%, respectively from fiscal year 2011 to fiscal year 2014. Total system wide occupancy improved to 92.0% in fiscal year 2014, from 88.4% three years earlier. For the first quarter of fiscal year 2015, total system wide occupancy was stable at 91.9%.

STEADY FINANCIAL PERFORMANCE: Christian Care enjoys a history of solid financial performance, especially at its Mesquite and Ft. Worth campuses. While the operating ratio ticked up to 95.7% in fiscal year 2014, it remains better than Fitch's 97.4% 'BBB' category median.

MANAGEABLE, BUT INCREASED DEBT POSITION: Despite a $20 million increase in long-term debt last year, Christian Care's debt position is manageable for the rating category with maximum annual debt service (MADS) at 11.8% of revenues in fiscal year 2014. In addition, Christian Care's solid historical cash flow produced 1.7x MADS coverage in 2014. However, future capital projects could continue to pressure debt metrics.

MODEST LIQUIDITY METRICS: Unrestricted cash and investments grew slightly over the past several years and amount to 277 days operating expenses or 41.3% of total debt in fiscal year 2014. Even though these levels are below the 'BBB' category medians, Fitch believes that these amounts are adequate for its fee-for-service and rental residency agreements.

REDUCED GOVERNMENTAL PAYOR EXPOSURE: With the closure of a stand-alone skilled nursing facility in early 2013, Christian Care lowered its exposure to governmental payors to about 33% of resident service revenue in fiscal year 2014 from 37% two years earlier. Furthermore, its new campus in Allen, Texas is planned to be entirely private pay, which is expected to continue reducing its reliance on the more restrictive governmental reimbursement programs.

RATING SENSITIVITIES

CAPITAL PROJECT MANAGEMENT: Construction and fill-up risks from Christian Care's new campus expansion project in Allen, Texas could potentially cause negative rating pressure due to costs overruns, higher than expected start-up expenses, and occupancy levels that lag projections.

NO DEBT CAPACITY AT CURRENT RATING: As a result of last year's bond issue and its corresponding effect on Christian Care's capital-related metrics, Fitch believes that additional debt cannot be supported at the current rating level absent cash flow growth, financial resource improvement, and stabilized operations at the new campus project.

CREDIT PROFILE

Located around the Dallas-Ft. Worth Metroplex, Christian Care consists of two senior living campuses, with a total of 386 ILU's, 139 ALU's, and 223 SNF beds. Total operating revenue in fiscal year 2014 was $34.7 million. Christian Care closed its operations located in Gunter, Texas during early 2013 since potential capital expenses to reposition the community were cost prohibitive. Fitch views this action positively because the facility produced financial losses and endured a high concentration of governmental payors. During September 2014, Christian Care embarked on the construction of a new campus in Allen, Texas that will include 22 cottage ILU's with rental agreements and 68 ALU's. Fitch also views this management action favorably given the location's good demographics and limited service offerings.

STEADY FINANCIAL PERFORMANCE

Christian Care enjoys a history of solid financial performance with management proactively monitoring operations and adjusting accordingly to meet targets. The operating ratio ticked up to 95.7% in FY 2014 from 93.8% a year earlier, but remains better than Fitch's 97.4% 'BBB' category median. The net operating margin fell to 9.0% in fiscal year 2014 from 10.2% in fiscal year 2013 and remains near the 'BBB' category median of 9.2%. Through the first quarter of fiscal year 2015, the operating ratio and net operating margin were 92.9% and 11.1%, respectively. Despite last year's increase in debt for the expansion project, Christian Care's adequate historical cash flow produced MADS coverage of 1.7x in fiscal 2014.

MODEST BALANCE SHEET MEASURES

Christian Care's balance sheet is characterized by modest, but adequate liquidity balances and a relatively high leverage position. Unrestricted cash and investments of $25.1 million amounts to 277 days operating expenses or 41.3% of total debt in fiscal year 2014. For the interim three month period of fiscal year 2015, unrestricted cash moderated to $23 million mostly from typical revenue cycle issues. Even though these levels are below the BBB category medians, the lesser cash balances reflect Christian Care's lower risk fee-for-service and rental residency agreements. Leverage is moderately high with adjusted debt to capital at 74.2% in fiscal year 2014, which above Fitch's 56% BBB category median. Debt to net available of 8.10x is unfavorably above the BBB category median of 6.30x in fiscal year 2014 as well.

CONSTRUCTION PROJECT UPDATE

About ten months ago Christian Care began construction on its new campus in Allen, Texas. Earlier this spring, the Dallas area received substantial amounts of rain that caused flooding and resulted in project delays. According to management, the project is expected to be delayed about 60 days, pushing the substantially complete date to March 2016. So far, management reports that construction costs are within budgeted parameters, but the delay is likely to result in some additional consulting expenses. It is expected that these extra costs are covered by contingency amounts. The project's marketing push is accelerating with the establishment of a fully-staffed sales office and steady increases to a waiting list of potential residents.

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

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=988572

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=988572

Endorsement Policy

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

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Contacts

Fitch Ratings
Primary Analyst
Paul Rizzo
Director
+1-212-612-7875
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Stephen Friday
Associate Director
+1-212-908-0834
or
Committee Chairperson
Emily Wong
Senior Director
+1-415-732-5620
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
Email: alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Paul Rizzo
Director
+1-212-612-7875
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Stephen Friday
Associate Director
+1-212-908-0834
or
Committee Chairperson
Emily Wong
Senior Director
+1-415-732-5620
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
Email: alyssa.castelli@fitchratings.com