OREANDA-NEWS. Fitch Ratings has affirmed the 'BBB+' rating on approximately $312 million of bonds issued by the Colorado Health Facilities Authority and California Statewide Communities Development Authority on behalf of Covenant Retirement Communities (CRC).

The Rating Outlook is revised to Positive from Stable.

The bonds are secured by a pledge of CRC obligated group's gross revenues, a mortgage interest in certain property, and debt service reserve funds.


STRONG CASH FLOWS AND DEBT SERVICE COVERAGE: The Positive Rating Outlook reflects improved and consistent cash flow growth driven by increasing net entrance fee receipts and improving operations. For the past three years, net entrance fees from reoccupied units exceeded $50 million leading to maximum annual debt service (MADS) coverage of about 3x.

IMPROVING DEMAND INDICATORS: The Positive Rating Outlook is also based on very good improvement in independent living unit (ILU) occupancy. Through Dec. 31, 2015, (11 month fiscal year 2016 interim), average occupancy in CRC's 3,127 ILUs improved to 91% from 83% in fiscal 2013. Average aggregate occupancy in the assisted living units (ALU) and skilled nursing facility (SNF) through the 11 months ended Dec. 31, 2015 remained solid at 90% and 87%, respectively.

BENEFITS OF SIZE AND GEOGRAPHIC DIVERSITY: Fitch believes that CRC's operating risk profile is moderated due to the size and diversity of its enterprise and the geographic dispersion of its continuing care retirement communities (CCRC). The CRC obligated group operates 12 CCRCs and two other senior care providers in eight states with no single community accounting for more than 11% of revenues.

SATISFACTORY CASH POSITION: Despite unrestricted cash levels that slightly lag Fitch's 'BBB' category medians, CRC's liquidity metrics are considered adequate given the benefits of its large business base and geographic diversity. At Oct. 31, 2015, CRC's unrestricted cash and investments totaled $221 million which equates to 347 days cash on hand, a 7.7x cushion ratio, and cash to long-term debt of 54.3%.

MANAGEABLE DEBT BURDEN: MADS of $28.5 million amounts to a very manageable 10.1% of unaudited fiscal 2016 revenues while adjusted debt to capitalization at Oct. 31, 2015 of 53.9% is below the 'BBB' category median of 58.8%. Additionally, debt to net available improved in each of the past three years and amounts to a favorable 4.6x for the nine month period ending Oct. 31, 2015.


SUSTAINED OPERATING AND CASH FLOW IMPROVEMENTS: Upward rating movement is possible if Covenant Retirement Communities maintains its healthy operating performance and debt service coverage trends so long as liquidity and other debt-related metrics remain at or around current levels.

STABLE LIQUIDITY: Positive rating pressure also assumes that Covenant Retirement Communities' cash position remains in-line with current metrics even at the higher rating level given the benefits of its large size and geographic diversity.


CRC is a type B CCRC system that owns and operates 14 senior living and care providers in eight different states with a total of 3,127 ILUs, 694 ALUs and 950 SNFs. CRC operates as an affiliate of Covenant Ministries of Benevolence (CMB) which is administered by the Board of Benevolence of the Evangelical Covenant Church. CMB also serves as the parent company of Swedish Covenant Hospital (rated 'BBB+'/Outlook Stable by Fitch) and a variety of other senior care and social service organizations. CMB also oversees the investment portfolio management of CRC and its related entities, which Fitch views favorably. In fiscal 2015, the CRC obligated group generated total operating revenues of $249 million. Fitch's analysis and financial ratios are based on the obligated group's operations and results. The obligated group represented 91.3% of total system revenues and 98.3% of total system assets in fiscal 2015.

Consolidated results include the operations of non-obligated Covenant Retirement Services (CRS), which comprises a home health company, a management service organization, and several rental retirement communities. In fiscal 2015, CRS reported a $2.4 million operating loss, which is improved from the $4.2 million operating loss two years earlier. CRC is in the process of restructuring several of its non-obligated affiliates which will result in non-cash write-offs of prior advances of about $7 million in fiscal 2016. As a result, CRC's advances ($28.7 million as of Oct. 31, 2015) to non-obligated entities will be reduced. Fitch views these management actions favorably as it should reduce financial support to non-obligated entities and provide more focus and resources to core operations.


CRC's enjoys a lower overall risk profile than single-site CCRCs due its large scale, multiple locations, and revenue and cash flow diversity of its operations. CRC is composed of 14 campuses in eight states with no single community accounting for more than 11% of total obligated group revenues. In addition, net operating income and net entrance fee receipts are fairly dispersed throughout the system. With communities in Florida, Connecticut, Minnesota, Colorado, Illinois, California, Michigan and Washington, Fitch believes the geographic diversity helps reduce overall operating volatility from adverse economic, demographic or competitive changes in a particular service area or community. Despite some concentration in Illinois, Fitch views CRC's scope and geographic diversity as a primary credit strength.


Driven by consistently rising occupancy levels over the last five years, particularly in its ILUs, CRC has generated robust net entrance fee receipts. Enhanced marketing programs, staffing changes and rebounding real-estate markets has resulted in strong ILU sales performance. Given these positive factors and much lower use of sales incentives (entrance fee discounts), CRC generated net entrance fee receipts in excess of $50 million for the past three fiscal years. As result, the net operating margin-adjusted of 26.5% in fiscal 2015 and 25% for the nine month period ending Oct. 31, 2015 are greatly improved from prior year levels and in excess of Fitch's 'BBB' category median of 19.3%.

Higher system-wide occupancy, expanded Medicare short stay census in the SNFs, and performance improvement initiatives has resulted in improved core operating profitability. Through the nine month interim period of fiscal 2016, the net operating margin increased to 6.6% from 3.3% in fiscal 2013. In addition, the operating ratio improved in each of the past five years and amounted to an adequate 99.5% for the nine month period ending Oct. 31, 2015.


The series 2015 refunding provided good cash flow savings and reduced the par amount of debt outstanding. MADS of $28.5 million is down from prior MADS of $30.5 million and equates to 10.1% of fiscal 2016 total revenues, which is lower than the 'BBB' category median of 12.4%. Debt to net available improved in each of the past three years and amounts to a very solid 4.6x for the nine month period ending Oct. 31, 2015. This level is also more favorable than the 'BBB' category median of 5.9x.

Adjusted debt to capitalization of 53.9% at Oct. 31, 2015 is also below the 'BBB' category median of 58.8%. Historical coverage of MADS including net entrance fee receipts in fiscal 2015 and through the nine month interim period for fiscal 2016 has been strong at 3.0x and 3.1x, respectively and exceeds the 'BBB' category median of 2.0x. Further, revenue-only coverage of MADS at 1.1x through Oct. 31, 2015 is a sharp improvement from 0.5x in fiscal 2013, reflecting the healthier core profitability.


CRC's capital structure is somewhat conservative with 81% fixed rate bonds and 19% variable rate direct bank placements. In addition, CRC is counter-party to three floating-to-fixed rate interest rate swaps with a total notional amount of $89 million. At Jan. 26, 2016, the aggregate mark-to-market value on the swaps was negative $14.17 million. Collateral posting requirements are very limited and the counterparty has termination rights if CRC's rating falls below 'BBB-'. CRC also provides guarantees on the debt of its non-obligated rental retirement communities in the amount of roughly $32 million. This level of guaranteed debt is not a negative factor at the current rating level but could become burdensome if these obligations or other financial support for non-obligated entities grows.