Fitch Affirms Evangelical Homes of Michigan (MI) at 'BB+'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed the 'BB+' rating on the following bonds issued on behalf of Evangelical Homes of Michigan (EHM).

--$23,910,000 Michigan Strategic Fund series 2013;

--$10,470,000 Economic Development Corporation of the City of Saline (MI) series 2013.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a pledge of unrestricted receivables of the Obligated Group, a mortgage on the revenue-generating property and structures on the three campuses, and two separate debt service reserve funds.

KEY RATING DRIVERS

CONSISTENT OPERATING PROFITABILITY: Operating profitability has been consistent since fiscal 2012 with operating ratio averaging 97.6% and net operating margin averaging 5.6%, respectively, and equal to 97.8% and 5.5% in fiscal 2015.

LIGHT DEBT BURDEN: EHM's debt burden, with maximum annual debt service (MADS) equal to 4.6% of fiscal 2015 revenue, remains light relative to Fitch's 'BBB' category median of 12.4%. The light debt burden allowed for solid MADS coverage of 2.0x in fiscal 2015.

ADEQUATE LIQUIDITY: Liquidity metrics remain mixed relative to 'BB+' peers but are adequate for the rating category with a solid 5.6x cushion ratio and a light 38% cash to debt.

CONSISTENTLY STRONG OCCUPANCY: Strong and consistent occupancy is a key credit strength. Independent living unit (ILU), assisted living unit (ALU), and skilled nursing facilities (SNF) occupancy has averaged 92%, 93%, and 95%, respectively, since fiscal 2010.

HIGH EXPOSURE TO SKILLED NURSING: With over 70% of revenue generated from SNF services, Fitch believes EHM is more vulnerable to occupancy fluctuations and reimbursement changes than communities with higher proportions of ALUs and ILUs.

RATING SENSITIVITIES

SUSTAINED OPERATING PERFORMANCE: Fitch expects that Evangelical Homes of Michigan occupancy levels and operating performance will be sustained, providing consistent cash flow and coverage metrics while supporting capital projects without materially impacting unrestricted liquidity.

CREDIT PROFILE

Headquartered in Farmington, MI, EHM provides home care and home support, senior housing, skilled healthcare, rehabilitation, hospice care and memory support services in southeastern Michigan with primary operations located in Saline, Sterling Heights, Ann Arbor and Farmington, MI. Total operating revenues equaled $53 million in fiscal 2015.

CONSISTENT OPERATING PROFITABILITY

Operating profitability has been generally consistent since fiscal 2012 with operating ratio and net operating margin averaging 97.6% and 5.6%, respectively, and equal to 97.8% and 5.5% in fiscal 2015. Profitability in fiscal 2015 was adversely impacted by increased expenses related to an influenza outbreak, an electronic medical record conversion and recruitment of a new CFO as well as below budget SNF occupancy. Fitch expects operating profitability to remain at levels consistent with historical performance.

LIGHT DEBT BURDEN

EHM's light debt burden, with MADS equal to 4.6% of fiscal 2015 operating revenues, allows for solid MADS coverage. Revenue-only MADS coverage of 2.0x and 1.5x in fiscal 2015 and 2014, respectively, compare favorably to Fitch's 'BBB' category median of 1.0x and is strong relative to 'BB+' category peers. EHM may incur additional debt to fund certain capital projects. Fitch will assess the credit impact, if any, to EHM's credit profile as plans become more certain.

ADEQUATE LIQUIDITY METRICS

With $14.2 million of unrestricted cash and investments at July 31, 2015, liquidity metrics are mixed but remain adequate for the rating category. Cushion ratio remains solid for the rating category at 5.6x. However, both 38% cash to debt and 100 days cash on hand are weak for the rating category. Management is currently updating EHM's capital plans; however, capital projects are not expected to materially impact unrestricted liquidity.

CONSISTENTLY STRONG OCCUPANCY

Occupancy levels have been consistently strong. ILU, ALU (including memory care) and SNF occupancy averaged 92%, 93% and 95% since fiscal 2010, respectively and equaled 96%, 98% and 94% at Oct. 31, 2015. The consistently strong occupancy reflects EHM's solid reputation and the benefits derived from being the only rental community in its service area which is beneficial given the service area's demographics.

HIGH EXPOSURE TO SKILLED NURSING

Skilled nursing services accounts for approximately 75% of consolidated revenues. Fitch believes EHM's relatively high exposure to skilled nursing makes it inherently more vulnerable to Medicare and Medicaid reimbursement changes, and to relatively higher rates of attrition relative to communities with higher proportions of assisted and independent living units.

DEBT PROFILE

EHM had approximately $37.2 million of total debt outstanding at July 31, 2015, including the series 2013 bonds and a term loan. The debt is 100% fixed rate and EHM is not counterparty to any swaps. MADS is level and equal to approximately $2.5 million. Additionally, EHM maintains a $2.8 million line of credit of which $800,000 was drawn at Sept. 30, 2015.

DISCLOSURE

EHM covenants to provide quarterly disclosure within 45 days of each fiscal quarter end and annual disclosure within 120 days of fiscal year-end. Disclosure is provided through the Municipal Securities Rulemaking Board's EMMA website.

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

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Nonprofit Hospitals and Health Systems Rating Criteria (pub. 09 Jun 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=866807

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=994436

Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=994436

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

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Contacts

Fitch Ratings
Primary Analyst:
Adam Kates, +1-312-368-3180
Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Stephen Friday, +1-212-908-0384
Associate Director
or
Committee Chairperson:
James LeBuhn, +1-312-368-2059
Senior Director
or
Media Relations:
Sandro Scenga, +1-212-908-0278
New York
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Adam Kates, +1-312-368-3180
Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Stephen Friday, +1-212-908-0384
Associate Director
or
Committee Chairperson:
James LeBuhn, +1-312-368-2059
Senior Director
or
Media Relations:
Sandro Scenga, +1-212-908-0278
New York
sandro.scenga@fitchratings.com