NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A-' rating to the following bonds issued by the North Carolina Medical Care Commission on behalf of The Presbyterian Homes Obligated Group (PH):
--$30.6 million health care facilities first mortgage revenue refunding bonds, series 2016C.
Bond proceeds and a $48 million (series 2016B) direct bank placement will refund PH's series 2006 and 2006B bonds and pay issuance costs. The bonds are scheduled to sell via negotiated sale the week of Sept. 8, 2016.
The Rating Outlook is Stable.
The bonds are secured by mortgages on PH's three retirement communities and a security interest in pledged assets (including gross receipts).
KEY RATING DRIVERS
EXCELLENT OPERATING PERFORMANCE: As a result of strong occupancy trends, economies of scale from running three retirement communities and pricing flexibility, operating performance and profitability levels are very healthy. The operating ratio averaged a very good 96.1% from fiscal 2011-2015, which is in-line with Fitch's 'A' category median of 94%. In addition, PH's net operating margin-adjusted averaged 31% from fiscal 2011 through 2015, which is well above Fitch's 'A' category median of 19.3%.
FAVORABLE DEMAND TRENDS IN MULTIPLE LOCATIONS: Given its long operating history, favorable locations and attractive service offerings, PH enjoys strong demand at its three continuing care retirement communities (CCRC) in North Carolina. On an aggregate basis, independent living unit (ILU), assisted living unit (ALU) and skilled nursing facility (SNF) occupancies averaged 95.4%, 91.3% and 91.2%, respectively, from fiscal 2013 through fiscal 2015 (Sept. 30 year-end).
VERY GOOD LIQUIDITY INDICATORS: At May 31, 2016, PH's $92.4 million of unrestricted cash and investments amounted to 721 days cash on hand, 8.9x pro forma cushion ratio, and 83% of pro forma debt. These liquidity metrics are mixed verses Fitch's 'A' category medians and are more beneficial given PH's mostly fee-for-service residency contracts with non-refundable entrance fees.
MODERATELY HIGH DEBT POSITION: After the series 2016B and 2016C refunding and issuance of a $20 million direct bank purchase (series 2016A) during the second quarter of fiscal 2016, PH's long-term debt will total approximately $112.7 million. As a result, pro forma maximum annual debt service (MADS) of about $10.4 million amounts to a high 16.6% of fiscal 2015 revenues. Regardless, debt amortizes rapidly and robust cash flows produced healthy pro forma debt to net available of 4.4x as of May 31, 2016.
OPERATING PROFILE MAINTENANCE: The 'A-' rating assumes that Presbyterian Homes Obligated Group maintains its current credit profile, characterized by favorable occupancy, healthy operations and very good liquidity balances.
The Presbyterian Homes, Inc. (Parent) traces its origins to 1946 and was established by the Presbyterian Church. While the Parent enjoys close ties to the Presbyterian Church, there is no legal relationship among the parties. The Parent, either directly or through its affiliates, owns and operates three continuing care retirement communities (CCRC) in North Carolina: Glenaire, located in Cary; River Landing at Sandy Ridge (River Landing), located in Colfax; and Scotia Village, located in Laurinburg.
All three CCRCs are accredited by the Commission on Accreditation of Rehabilitation Facilities and all of PH's skilled care centers maintain five-star Center for Medicare and Medicaid Services (CMS) overall ratings. Resident agreements are mostly fee-for-service arrangements since PH only includes 14 days of health center care in its contract. While PH offers agreements with entrance fee refunds, a significant portion (over 95%) of its residents select contracts with a declining balance over 48 months, which is a positive rating factor since cash flows are enhanced.
Glenaire includes 212 ILUs, 49 ALUs, and 71 SNF rooms on 30 acres in Cary, which is adjacent to Raleigh. Glenaire is in the process of constructing a new 12-unit apartment building that is 100% pre-sold with 50% entrance fee deposits which is expected to open in December 2016. River Landing has 298 ILUs, 40 ALUs, 16 memory care units, and 60 SNF beds and is located in Colfax which is adjacent to High Point in the Piedmont Triad region. River Landing's spacious 151-acre campus also includes a nine-hole golf course which draws residents from a broader geographic region. Scotia Village is located on about 66 acres in Laurinburg, adjacent to St. Andrew's University and near the South Carolina border. Its unit mix includes 126 ILUs, 28 ALUs, 8 memory care units, and 50 SNF rooms.
PH is also affiliated with The Presbyterian Homes Foundation, Inc. (Foundation). The Foundation is combined into the Parent's financial statements and will be added to the obligated group as a part of the series 2016C bond issue. The Foundation was organized to raise endowment funds, support charitable care and provide special programs for PH's residents. The Foundation holds about $29.7 million of unrestricted investments and $2 million of restricted funds as of Sept. 30, 2015. The Parent, its affiliate Glenaire, Inc., and the Foundation are obligated group members.
The Parent's other non-obligate affiliate, PHI Management Services, LLC was formed in April 2016 to provide management and administration services for retirement communities. As of May 1, 2016, PHI Management Services entered into its first management services contract with Greensboro-based Friends Homes, Inc. The Parent is also a participant in a joint venture, Capital Towers, III, LLC to redevelop a senior affordable housing project in Raleigh that will be financed and regulated by the Low Income Housing Tax Credit Program. In fiscal 2015, the obligated group generated $56 million of operating revenues and represented 100% of total system operating revenues. In addition for fiscal 2015, the combined system totaled $254.6 million of assets, with the obligated group representing the entire amount. It is expected that the new non-obligated affiliates created during fiscal 2016 will have modest operations and limited assets.
DEMAND FOR SERVICES AND OCCUPANCY
Given its long operating history, favorable locations and demographics in North Carolina, and attractive service offerings, PH enjoys strong demand at its three CCRCs. Another driver of PH's demand, particularly at Scotia Village and River Landing, is the attraction of residents from outside the immediate market areas. For Scotia Village, its appeal to outside residents reflects its relative value to comparable CCRCs and location nearby Fort Bragg for persons with military affiliations. River Landing's central location in the Piedmont Triad and availability of on campus golf attracts residents from a broader geographic region.
Demand indicators at PH's three CCRC are as follows: (1) At Glenaire, ILU, ALU and SNF occupancies averaged 98.3%, 86.5% and 91.1%, respectively, from fiscal 2013 through the interim period ending May 31, 2016. (2) River Landing's ILU, ALU and SNF occupancies averaged 96%, 94.1% and 91.6%, respectively, over the last four years. (3) Scotia Village's average occupancies during the last four fiscal years for ILUs (92.3%), ALUs (89%) and SNFs (89.7%) were also very good.
FINANCIAL PERFORMANCE AND POSITION
Due to the strong occupancies, economies of scale from running three communities and favorable residency agreement pricing, operating performance and profitability levels are strong. The operating ratio averaged a very solid 96.1% from fiscal 2011-2015 and is mostly in line with Fitch's 'A' category medians. Furthermore, PH's net operating margin (14%) and net operating margin-adjusted (31%) averages during the last five fiscal years are some of most robust ratios for Fitch's 'A' category rated CCRCs. Consistently strong net entrance fee receipts that averaged nearly $12 million from fiscal 2012-2015 provide financial flexibility given PH's mostly fully amortizing resident agreements. As a result, despite a high debt burden, pro forma MADS coverage is healthy at 2.6x in fiscal 2014, 2.3x in fiscal 2015, and 2.5x for the eight-month period ending May 31, 2016. Pro forma revenue only MADS coverage is also solid at 1.4x and 1.2x, respectively during the last two fiscal years.
After the reimbursement from the series 2016A direct bank purchase, PH's $92.3 million of unrestricted cash and investments amounted to 721 days cash on hand, 8.5x pro forma cushion ratio, and 83% of pro forma debt as of May 31, 2016. These liquidity metrics are mixed versus Fitch's 'A' category medians of 681 days cash on hand, 18.5x cushion ratio, and 125% cash to debt. Nonetheless, PH's liquidity metrics are satisfactory for the rating category given that they do not have any exposure to life care residency agreements and traditionally provide very limited entrance fee refunds.
PH recently closed on a $20 million direct bank loan to finance about 80% of its capital projects over the next several years. While PH originally anticipated funding the capital plans with reserves and cash flow, the attractive cost of capital led to the increased borrowing. The main projects include the 12-unit apartment building and total renovation of the SNF and ALU areas to household models of care ($10.8 million) at Glenaire, common space renovation at River Landing ($3.25 million), and total renovation of the SNF rooms and ALU space to household model of care ($5.4 million) at Scotia Village. Fitch views the capital planning and projects favorably since they are manageable and address ILU demand and facility limitations for its health care programs.
After the series 2016 refunding and issuance of a $20 million direct bank loan during the second quarter of fiscal 2016, PH's total long-term debt will be approximately $112.7 million. $1 million of the new direct bank loan is expected to be repaid with initial entrance fees from the aforementioned 12-unit apartment building project. PH's long-term debt is reduced from $132 million as a result of the release of debt service reserve funds and the use of premium refunding bonds. Only the $30.6 million series 2016C bonds will be traditional fixed rate bonds. The $14 million series 2015 bonds are fully amortizing fixed rate direct bank purchases that mature in 2031. The $48 million series 2016B direct bank purchase is expected to be fully amortizing floating rate obligations that are swapped to fixed rate and mature in 2027. The new $20 million series 2016A direct bank purchase is also a fully amortizing floating rate loan that is swapped to fixed rate and matures in 2028. All of PH's direct bank debt is provided by BB&T.
Additionally, all of PH's variable rate bank debt ($68 million) is hedged with fixed payor interest rates swaps (with BB&T as the counterparty). The bonds, bank debt and swaps are secured on a parity basis and generally have the same financial covenants. However, the bank covenants include a 70% debt to capitalization ratio requirement. In addition, the swaps do not have any collateral posting requirements. While this level of bank held and floating rate debt with a single provider is a high, PH's interest rate hedge and avoidance of put risk prior to maturity are offsetting factors.
Pro forma MADS as a percent of revenues is high at 16.6% in fiscal 2015 and is above Fitch 'A' category median of 9.2%. Nonetheless, PH's debt service schedule amortizes quickly and is relatively front-loaded with most debt maturing within 15 years (by the year 2031). For the eight-month period ending May 31, 2016, pro forma debt to net available (4.4x) is very good due to robust cash flows and is in line with Fitch's 'A' category median of 4.3x. Pro forma adjusted debt to capital is manageable at 52.1%, but above the 'A' category median of 45.5%.
PH covenants to disclose annual operating statistics and audited financial statements within 120 days and quarterly statistics and financial statements within 45 days, to the Municipal Securities Board's EMMA system.
Additional information is available at 'www.fitchratings.com'.
Not-for-Profit Continuing Care Retirement Communities Rating Criteria (pub. 04 Aug 2015)
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
Dodd-Frank Rating Information Disclosure Form