Fitch Affirms Greencroft Obligated Group, IN Revs at 'BB+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'BB+' rating on the following bonds issued by the Indiana Finance Authority on behalf of Greencroft Obligated Group (GOG):

--$43.98 million revenue bonds, series 2013A.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a mortgage on GOG's facilities, a gross revenue pledge and a debt service reserve fund.

KEY RATING DRIVERS

LIGHT, BUT STABLE CASH POSITION: The 'BB+' rating reflects GOG's light liquidity metrics. At the end of fiscal 2016 (June 30 year-end), GOG had $23.7 million of unrestricted cash and investments, amounting to a modest 241 days operating expenses, 4.5 times (x) cushion ratio and 32.3% of total debt. Despite elevated capital spending over the past few years, liquidity balances remained relatively stable due to GOG's solid cash flow and receipt of contributions from its affiliated foundation.

MODEST DEBT SERVICE COVERAGE: GOG's moderately high debt burden combined with limited net entrance fee receipts results in modest coverage of maximum annual debt service (MADS) of 1.7x and 1.6x in fiscal 2016 and 2015, respectively. However, revenue-only MADS coverage is solid at 1.3x in fiscal 2016 given GOG's higher proportion of ALU and SNF service revenue.

ENDURING OPERATING HISTORY: GOG has a long history of operating in each of its three service areas dating back to 1967, which Fitch views as a key credit strength. GOG's unit mix is composed of a higher proportion of assisted living unit (ALU) and skilled nursing facility (SNF) beds relative to other continuing care retirement communities (CCRCs), which helps serve as a differentiator in a somewhat competitive marketplace.

RELATIONSHIP WITH GREENCROFT RETIREMENT COMMUNITIES: All three GOG entities are affiliate entities of Greencroft Retirement Communities, Inc. (GRC), which serves as their sole corporate member and manager. GRC provides various benefits such as financial planning, budgeting and management expertise. The relationship dates back to the founding of each affiliate, the first of which occurred nearly 50 years ago. Additionally, each obligated group member entered into affiliation contracts with GRC for perpetuity, which Fitch views favorably.

SOLID OCCUPANCY LEVELS: As a result of focused marketing efforts and a healthy real-estate market, GOG's independent living unit (ILU) occupancy levels remain healthy and averaged 92.8% in fiscal 2016. In addition, ALU occupancy of 92.8% improved over the prior year levels as a result a new tiered pricing strategy based on level of service that made COG's services more competitive. In addition, SNF occupancy remains very good and averaged 91.2% during fiscal 2016.

RATING SENSITIVITIES

SUSTAINED FINANCIAL PERFORMANCE: Given Greencroft Obligated Group's moderately high debt burden, weakened operations or cash flow that leads to lower debt service coverage ratios or liquidity metrics, could lead to negative rating pressure.

CREDIT PROFILE

GOG consists of three separate type-C CCRCs (Greencroft Goshen - located in Goshen, IN; Southfield Village [Southfield] - located in South Bend, IN and Hamilton Grove [Hamilton] - located in New Carlisle, IN) with a total of 412 ILUs, 188 ALUs, and 341 SNFs. In fiscal 2016, GOG had total revenues of $39.6 million. Each obligated group member is a part of and managed by GRC, which also governs and provides management services for four additional retirement communities with about 2,000 residents. GOG provides very limited financial support to other non-obligated members of GRC, with only $848,829 of advances to affiliates outstanding as of June 30, 2016.

Long Operating History and Relationship with GRC

GOG has a long history of operating in each of its three northwest Indiana markets dating back to 1967, which Fitch views as a critical credit strength. Additionally, GOG's strong relationship with GRC is viewed as a positive credit factor. The close relationship dates back to the founding of each affiliate and all obligated group members have entered into perpetual affiliation contracts with GRC. To provide more financial flexibility to GOG, the management fees paid to GRC are subordinate to debt service. However, the bond documentation and Fitch do not exclude the GRC management fees from their definitions of funds available for debt service, which results in lower reported MADS coverage levels.

GOG's business line diversity with a greater proportion of ALU and SNF revenues are a point of differentiation in a somewhat competitive market. Additionally, ALU and SNF resident service fees help generate relatively consistent earnings that supports good revenue-only MADS coverage. Regardless, Fitch views GOG's heavy reliance on SNF revenues and its Medicaid concentration (at about 48% of SNF net revenues) as credit concerns given the reimbursement and care management pressures from governmental payors, particularly for short-stay Medicare rehabilitation residents.

Supplemental Medicaid Payments

As of Nov. 1, 2015, GOG started to benefit from participation in the state of Indiana's intergovernmental transfer payment (IGT) program. To leverage the supplemental payments, GOG leased its three SNFs to a government owned healthcare provider, Woodlawn Hospital (located in Rochester, IN). Woodlawn Hospital now owns the SNF's operating licenses and is a party to GOG's Medicaid provider agreements. GOG remains the manager of the facilities through a management services agreement.

This structure allows GOG to share the additional upper payment limit funds with Woodlawn Hospital. The annual benefit for GOG from the IGT program is about $2.1 million. This funding mechanism is not expected to change in the near term, although either party has the ability to terminate the agreement without cause with 90 days written notice. While Fitch expects GOG to continue to benefit from supplemental Medicaid funding, it does not anticipate positive rating movement due to this factor during the next 12 months. Accounting for the new structure somewhat depresses operating revenue and expenses, thereby effecting certain financial ratios and making comparability to prior periods and other CCRCs a challenge.

Facilities Update

The series 2013 bonds were used fund a two-story addition to the SNF at Greencroft Goshen, which accommodates up to 66 residents and created more private rooms. Along with the SNF construction, GOG made parking lot renovations and created a new entryway to the campus. The expanded and renovated SNF received its certificate of occupancy in September 2015. The final part of the project included the renovation of another 32 rooms to create more private accommodations, which was recently completed. Even though the project increased the number of licensed SNF units at Greencroft Goshen in fiscal 2016, the community is still operating with the same 196 units prior to the completion of construction, maintaining an occupancy ratio of 90.5%.

Debt Position

GOG's debt position is moderately high with MADS representing 13.3% of revenues in fiscal 2016. Adjusted debt to capitalization of 96% and debt to net available of 8.2x are somewhat unfavorable to Fitch's below investment grade medians of 78.4% and 7.6x, respectively in fiscal 2016. Management does not anticipate any capital plans that will result in additional debt issues over the next two years.

DISCLOSURE

GOG covenants to provide annual and quarterly occupancy and financial statements through the MSRB's EMMA system.

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

Applicable Criteria

Not-for-Profit Continuing Care Retirement Communities Rating Criteria (pub. 04 Aug 2015)
https://www.fitchratings.com/site/re/868824

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/site/re/750012

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013004

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https://www.fitchratings.com/regulatory

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or
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Contacts

Fitch Ratings
Primary Analyst:
Paul Rizzo, +1-212-612-7875
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Mark Pascaris, +1-312-368-3135
Director
or
Committee Chairperson:
Jim LeBuhn, +1-312-368-2059
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com