CHICAGO--(BUSINESS WIRE)--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.
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
IMPROVING OPERATING PROFITABILITY: Operating performance has consistently improved since 2010 due to effective strategic planning, revenue maximization and expense management. Net operating margin improved to 6% in fiscal year ended April 30, 2014 from 5.4% in fiscal 2013.
LIGHT DEBT BURDEN: EHM's debt burden remains light with maximum annual debt service (MADS) equal to 4.8% of fiscal 2014 operating revenue relative to Fitch's 'BBB' category median of 12.3%. The light debt burden allowed for solid MADS coverage of 1.5x in fiscal 2014.
ADEQUATE LIQUIDITY: Unrestricted cash and investments increased 12.4% since July 31, 2013 to $14 million at July 31, 2014 due to decreased capital spending and improved profitability. Liquidity metrics remain mixed relative to 'BB+' peers with a solid 5.6x cushion ratio and a light 37.2% cash to debt.
CONSISTENTLY STRONG OCCUPANCY: Strong and consistent occupancy is a key credit strength. EHM has maintained solid occupancy levels, with independent living unit (ILU), assisted living unit (ALU), and skilled nursing facilities (SNF) occupancy averaging 90.9%, 91.9%, and 94.5%, respectively, since fiscal 2010.
HIGH EXPOSURE TO SKILLED NURSING: With over 70% of total consolidated revenues generated from SNF, Fitch believes EHM is more vulnerable to reimbursement changes and to relatively higher rates of attrition than communities with higher proportions of assisted and independent living units.
SUSTAINED OPERATING PERFORMANCE: Fitch expects that occupancy levels will be maintained and that operating performance will continue at current levels, providing consistent cash flow to maintain strong debt service coverage and to support capital projects without materially impacting unrestricted liquidity.
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 $52 million in fiscal 2014. Fitch's analysis is based upon consolidated financial statements. The obligated group accounted for 100% of total assets and 98% of total operating revenues in fiscal 2014.
IMPROVING OPERATING PROFITABILITY
EHM's operating performance has continued to improve since 2010 due to effective strategic planning, expense management and consistently strong occupancy rates. Operating ratio improved to 97.3% in fiscal 2014 from 97.9% in fiscal 2012 while net operating margin increased to 6% from 5.5%. Management expects consolidated operating performance in fiscal 2015 to equal or exceed levels achieved in fiscal 2014.
LIGHT DEBT BURDEN
EHM's light debt burden, with MADS equal to 4.8% of fiscal 2014 operating revenues, allows for solid MADS coverage of debt service. Revenue-only MADS coverage of 1.5x and 1.3x in fiscal 2014 and 2013, respectively, compare favorably to Fitch's 'BBB' category median of 0.9x and is strong relative to 'BB+' category peers. Management does not currently expect to issue additional debt in the next 12 to 24 months.
ADEQUATE LIQUIDITY METRICS
Unrestricted cash and investments increased 12.4% since July 31, 2013 to $14 million at July 31, 2014. The increase is due to decreased capital spending in fiscal 2014 and the improving operating profitability. Cushion ratio is solid for the rating category at 5.6x while both cash to debt and days cash on hand of 37.2% and 102.7 days, respectively, 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
EHM has maintained consistently strong occupancy levels. ILU, ALU (including memory care) and SNF occupancy averaged 90.9%, 91.9% and 94.5% since fiscal 2010, respectively and equaled 96.5%, 97.4% and 94.8% at July 31, 2014. ALU occupancy decreased to 77% at April 30, 2011 due to the addition of 34 memory care units. ALU occupancy rebounded to 95.2% at April 30, 2012 reflecting the successful execution and fill up of the memory care units. The memory care units were 99.5% occupied at July 31, 2014. The fill up of the ALU expansion and 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
Fitch's primary credit concern continues to be EHM's reliance on skilled nursing services which accounted for approximately 76% of total consolidated revenues in fiscal 2014. Fitch believes EHM's relatively high proportion of skilled nursing units to total units (342 units out of a total of 488 units) make it inherently more vulnerable to Medicare and Medicaid reimbursement changes, and to relatively higher rates of attrition.
EHM has approximately $37.8 million of total debt outstanding at July 31, 2014, 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 $825,000 was drawn at Sept. 30, 2014.
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 and Related Research:
--'Rating Criteria for Not-for-Profit Continuing Care Retirement Communities' (July 24, 2014).
Applicable Criteria and Related Research:
Not-for-Profit Continuing Care Retirement Communities Rating Criteria