Fitch Rates BHI Sr Living, IN, 2016 Revs 'BBB+'; Affs Outstanding; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned a 'BBB+' rating on the expected issuance of the following Indiana Finance Authority bonds issued on behalf of BHI Senior Living (BHI or obligated group [OG]):

-- $34,000,000 revenue bonds, series 2016A (BHI Senior Living).

The bonds will be issued as fixed rate. Proceeds from the bonds will be used to fund an expansion project at the Hoosier Village campus, fund other capital projects, and pay for the cost of issuance. The bonds are expected sell via negotiation the week of Nov. 28.

In addition Fitch affirms the 'BBB+' rating on the following parity bonds also issued on behalf of BHI:

--$22,015,000 Indiana Finance Authority revenue bonds, series 2013A;

--$28,455,000 Indiana Finance Authority revenue bonds, series 2011.

The Rating Outlook is Stable.

SECURITY

Bonds are secured by a gross revenue pledge, a mortgage lien on certain property and a debt service reserve fund (DSRF) on the 2011 and 2013A bonds. The 2016A bonds will have a springing DSRF, should days cash on hand fall below 250 days.

KEY RATING DRIVERS

INDEPENDENT LIVING (IL) EXPANSION: The 2016 debt issuance will fund a $35 million, 70-unit duplex IL expansion at BHI's Hoosier Village campus. The project is starting sooner than Fitch expected, but Hoosier Village's high IL occupancy and recent fill-up of another IL expansion on that campus provide support for undertaking the project.

NEAR-TERM STRESS ON RATIOS: The additional debt will put near-term stress on BHI's leverage metrics. Pro forma maximum annual debt service (MADS) coverage of 1.5.x and pro forma MADS as a percent of revenues at 17.6% at July 31, 2016 are below their respective 'BBB' category medians. However, Fitch would expect coverage to return to median levels once the IL expansion fills and stable occupancy is achieved, which is expected to occur in 2020.

POSITIVE PERFORMANCE TREND: Core operating metrics have strengthened over the last 2 1/2 years. Revenues from recently completed capital projects have affected performance positively. BHI's operating ratio and net operating margin in fiscal 2015 were 89.9% and 14.7%, respectively, relative to 95.2% and 10.1% in fiscal 2013. Seven-month 2016 results are consistent with the 2015 results. Fitch notes as a credit positive that BHI is covering pro forma MADS at over 1x both in 2015 and the seven-month 2016 interim period.

GOOD DEMAND FOR SERVICES: High occupancy, which has been consistently at or above 90% across all levels of care, has supported the operating results. BHI has shown the ability to build and fill expansion projects, and the demand for units has been particularly strong on its Hoosier Village campus.

STABLE LIQUIDITY: At July 31, 2016, BHI had $57.7 million in unrestricted cash and investments (not including approximately $5 million of funds outside the obligated group), which equated to days cash on hand of 546 and cash-to-debt of 69.2%, respectively, both above Fitch's 'BBB' category medians of 400 and 60%. However, cash-to-debt will fall below the median after the debt issuance but should recover as entrance fees from the sale of the new units are added back to the balance sheet.

PRIOR CAPITAL SPENDING CYCLE COMPLETE: BHI has completed all of the projects of a large capital plan begun in 2011. The last large project was a 34-unit IL apartment expansion at Towne House. Over the last four audited years, BHI's capital spending as a percentage of depreciation has averaged 379.8%.

RATING SENSITIVITIES

EXPANSION COMPLETION AND FILL-UP: Fitch expects BHI Senior Living's operating performance to remain stable over the Outlook horizon, with coverage improving once the expansion project fills and occupancy stabilizes in 2020. A weakening in performance or liquidity or challenges filling the expansion could pressure the rating.

CREDIT PROFILE

BHI is a Type B provider with three campuses: Hoosier Village in Indianapolis, IN with 290 independent/residential units and 77 health center beds; Towne House in Fort Wayne, IN with 213 independent/residential units and 76 health center beds; and Four Seasons in Columbus, IN with 109 independent/residential units and 72 health center beds. BHI had total operating revenues of $46.9 million in fiscal 2015.

The financial results reflect the consolidated entity; however, the OG, which consists of the three campuses, accounts for the overwhelming majority of revenue and most of the assets of the consolidated entity.

EXPANSION PROJECT

The 2016 debt issuance will fund a $35 million, 70-unit duplex IL expansion at BHI's Hoosier Village campus. Construction is expected to occur in two phases. The first phase will have 30 units and construction on these units is currently underway. Fill-up for the first phase is expected to begin in August 2017, with stable occupancy reached in February 2018. BHI will then begin the second phase, construction of 40 duplexes and those are expected to be built 10 at a time. BHI has pre-sold 20 of the first 30 units for phase one.

Fitch expects the entrance fees generated from the expansion project to go on the balance sheet, which will help BHI's cash-to-debt return to median levels. The entrance fee pool is expected to be between $27.5 million - $32.5 million and that will depend on whether a resident chooses the lower priced fully amortizing plan or the higher priced refund plan. BHI has indicated they may use these entrance fees to fund other capital projects across the system. BHI will have very little additional debt capacity at the current rating level after the 2016 issuance.

STABLE FINANCIAL PROFILE

BHI has consistently posted solid operating results. Nine-month 2016 interim results show an 88.3% operating ratio and a 22.9% net operating margin-adjusted, both above their respective 'BBB' category medians. Pro forma MADS coverage was adequate at 1.5x.

Performance in recent years has been helped by good revenue growth, attributed to recently completed expansion projects. BHI finished a 100-unit IL/residency building at Hoosier Village in 2014 and is filling up a 34-IL unit expansion at Towne House. Even while adding additional units, BHI has maintained high occupancy.

The strong demand for services coupled with BHI's history of building and filling units offset some of the concerns regarding the current duplex expansion. However, given the size of the debt issuance, BHI will have less financial flexibility until the units are built and occupancy stabilizes.

DEBT PROFILE

After the 2016 issuance, BHI will have approximately $117 million in long-term debt. BHI's debt profile is relatively conservative, with all fixed-rate debt and no swaps. Approximately $34 million of the debt (the series 2014 bonds) is privately placed bonds with a bank. The private placement term lasts through 2024 and has a higher debt service covenant of 1.35x, compared to the MTI covenant of 1.1x.

In addition, the 2014 bondholders can accelerate amortization for a covenant violation. The bank placement increases the risk of BHI's debt profile (prior to 2014 all of BHI's debt was public debt). However, BHI does have over 1x cash-to-debt for the bank placement.

MADS is expected to increase to $8.2 million from $6.6 million. BHI will not be tested on the additional debt service until principal payments begin in 2019.

DISCLOSURE

BHI covenants to disclose on EMMA annual audited financial reports within 150 days of the fiscal year end and financial reports 45 days after the end of each fiscal quarter. MD&A is provided for the quarterly disclosure, and a days cash on hand and debt service coverage calculation are provided for the yearly disclosure.

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

Additional Disclosures

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https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1014987

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014987

Endorsement Policy

https://www.fitchratings.com/regulatory

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Fitch Ratings
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Gary Sokolow
Director
+1-212-908-9186
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
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Director
+1-312-368-3135
or
Committee Chairperson
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+1-312-368-2059
or
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Email: elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Gary Sokolow
Director
+1-212-908-9186
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Mark Pascaris
Director
+1-312-368-3135
or
Committee Chairperson
James LeBuhn
Senior Director
+1-312-368-2059
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com