OREANDA-NEWS. July 28, 2015. Fitch Ratings has affirmed the 'BBB+' rating on the following bonds issued on behalf of BHI Senior Living (BHI):

--\\$22,015,000 Indiana Finance Authority revenue bonds, series 2013A;
--\\$29,000,000 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.

KEY RATING DRIVERS

CONSISTENT FINANCIAL PERFORMANCE: Over the last four audited years, BHI Senior Living's operating metrics have exceeded Fitch's 'BBB' category medians, with the operating ratio and the net operating margin - adjusted averaging 93% and 22.4%, respectively, over this time. This performance has been in spite of BHI undertaking a large capital plan, with projects at all three of its campuses over this time.

SIZABLE CAPITAL PLAN PROGRESSING: BHI is nearing completion of a sizable capital plan begun in 2011. The largest project was a repositioning and expansion at Hoosier Village. Other projects include new dementia buildings at The Towne House and Four Seasons, and a cottage expansion at Hoosier Village. Most of the projects have been completed, with the dementia building and apartment expansion both at The Town House expected to be completed by year's end. Over the last four audited years, BHI's capital spending as a percentage of depreciation has averaged 371.1% and was 109% in the three month 2015 interim period.

SOLID LIQUIDITY FOR RATING LEVEL: At March 31, 2015, BHI had \\$59.7 million in unrestricted cash and investments (not including approximately \\$6 million of funds outside the obligated group), which equated to a strong days cash on hand of 580, a 10x cushion ratio and cash to debt of 71%, all above Fitch's 'BBB' category medians.

IL/RESIDENTIAL OCCUPANCY ABOVE 90%: At March 31, 2015, independent living (IL)/residential occupancy was at 98%. BHI has added approximately 60 units since 2010 and has had strong fill-up of the new units, including a 16 cottage expansion at Hoosier Village. Heath center occupancy remained stable at 88.3% at March 31, 2015.

MODERATING DEBT BURDEN: BHI has already begun to grow into its debt burden from the borrowings in 2011 and 2013. Maximum annual debt service (MADS) as a percent of revenue was 12.2% at year end 2014, down from 15.3% in 2012 and relative to a median of 12.4%. BHI refinanced its 2005 bonds in 2014 with a private placement (not rated by Fitch) that lowered MADS by approximately \\$600,000, further easing BHI's debt burden. Coverage of the lower MADS was solid in 2014 at 2.2x (backing out a one-time loss on bond defeasance).

RATING SENSITIVITIES

STABLE OPERATING PERFORMANCE: Fitch expects BHI's operating performance to remain stable over the rating cycle. A rebuilding of the balance sheet and stronger cash flow leading to higher debt service coverage could lead to positive pressure on the rating over the longer term. A sustained fall off from the current operating performance could pressure the rating.

CREDIT PROFILE
BHI is a Type B provider with three campuses: Hoosier Village in Indianapolis, IN with 279 independent/residential units and 77 health center beds; Towne House in Fort Wayne, IN with 180 independent/residential units and 76 health center beds; and Four Seasons in Columbus, IN with 111 independent/residential units and 72 health center beds. BHI had total operating revenues of \\$44.8 million in fiscal 2014.

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

STABLE FINANCIAL PROFILE
BHI's operating results over the last four audited years and through the 2015 three month interim period have been consistent and solid. BHI's operating ratio and net operation margin - adjusted averaged 93% and 22.4%, respectively, over the last four audited years, which compare well to Fitch's 'BBB' category medians of 97.4% and 20.4%. Through the three months ended March 31, 2015, the operating performance remained stable with an operating ratio of 93.8% and net operating margin-adjusted of 16.9%.

The softer net operating margin - adjusted in the interim reflects the timing on entrance fee receipts and is not a credit concern, as occupancy levels have remained high. Over the past two years, net entrance fee receipts have been over \\$5 million after a weaker year in 2012. BHI management's increased focus on sales lifted the entrance fee receipts and the additional units that have filled up as part of the capital plan, including the 100 unit IL/residency building at Hoosier Village, should keep net entrance fees strong.

BHI has steadily grown its unrestricted cash and investments through the historical period. At March 31, 2015, BHI had \\$60 million in unrestricted cash and investments, a 32% increase from Dec. 31, 2012, when unrestricted cash and investments was at \\$45.3 million. These figures don't include additional funds available outside the obligated group, which were approximately \\$6 million at March 31, 2015. All of BHI's liquidity metrics compare well to Fitch's 'BBB' category medians.

CAPITAL SPENDING CONTINUES
Since 2011, BHI has issued approximately \\$40 million in debt to fund various projects across its campuses, and this cycle of capital spending is nearing completion. The largest project was a repositioning and expansion at Hoosier Village. BHI is in the last stages of connecting the existing building with the new building and renovated ILU/residency units affected by this piece of construction.

The new 100 unit residence hall has 26 more units than the building it replaced, a 36 unit all private memory care support center, a new dining center, and community center that contains an expanded exercise room, fitness center, and indoor swimming pool. The new residence hall is fully occupied, and BHI built and filled a separate 16 cottage expansion on the Hoosier Village campus as well.

With the capital projects at Hoosier Village nearly complete, the largest remaining project is a 34 apartment expansion at The town house, which is expected to be completed by year's end. An 18-unit memory care unit was already built and opened on that campus in December 2014.

Fitch continues to views these projects as strategically critical for BHI, and BHI has begun to benefit from the additional revenue from these projects.

DEBT PROFILE
In 2014, BHI issued \\$34 million in debt to refund its series 2005 bonds. The bonds are fixed rate and were privately placed for a 10-year term. The private placement has a higher debt service covenant at 1.3x, relative to the MTI covenant of 1.1x. In addition, the 2014 bond holders can accelerate amortization for a covenant violation. The refinancing increases the risk of BHI's debt profile (prior to the 2014 issuance all of BHI's debt was fixed rate, public debt). BHI does have over 1x cash to debt for the bank placement and the refinancing lowered MADS to \\$6 million, helping to ease BHI's elevated debt burden.

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.