OREANDA-NEWS. Fitch Ratings has affirmed the 'BBB+' rating on approximately $38.5 million revenue bonds issued on behalf Presbyterian Homes Obligated Group, PA (PHOG) through the Cumberland County Municipal Authority, the Maryland Health and Higher Educational Facilities Authority, or the Philadelphia Industrial Development Authority.

The Rating Outlook is Stable.

SECURITY
Bondholders are granted a security interest in the gross revenues of the Obligated Group, a mortgage interest in certain property and facilities of the OG, and a debt service reserve fund on the series 2008A bonds.

KEY RATING DRIVERS
STABLE CREDIT PROFILE: PHOG's overall credit profile is characterized by remarkable stability in both operating and financial results. Fiscal 2015 was no exception, with steady cash flows and balance sheet metrics despite the addition of financially weaker Cathedral Village. While some ratios lag 'BBB' medians, Fitch believes management's ability to meet targeted performance while executing various strategies and transactions supports the 'BBB+' rating.

LARGE, DIVERSE REVENUE BASE: The 'BBB+' rating also reflects PHOG's large revenue base, geographic diversity, and wide array of services that help moderate the organization's overall operating risk profile. PHOG is composed of 17 separate continuing care retirement communities (CCRC)/long-term care facilities, and in aggregate, operates 1,431 independent living units (ILUs), 463 assisted living units (ALUs) and 1,096 skilled nursing facilities (SNF) beds.

SUSTAINED CASH FLOWS AND LIQUIDITY: Reflecting stable profitability, cash flows were sound and generated maximum annual debt service (MADS) coverage of 1.7x in the fiscal year ended Dec. 31, 2015 (draft audit), unchanged from prior years. Revenue-only MADS coverage has been solid and consistent at or above 1.0x in each of the last five years. Liquidity growth was on pace with expenses and liabilities, and metrics are mostly unchanged from the prior year.

STRONG OCCUPANCY: Overall occupancy remained very solid at or above 90% across the continuum of care for over five years. While there is some ongoing pressure on skilled nursing utilization due to a shift in utilization trends related to healthcare reform, Fitch believes management's proactive planning will continue to provide a stable base of operations.

HEALTHY CAPITAL SPENDING: Future capital reinvestment remains robust, with ILU/ALU expansions planned on three campuses in 2016, a portion of which will be funded with a $20 million debt issue. PHOG's strategy is to fund ongoing routine capital expenditures with cash flow and limit debt issuance to additional revenue generating projects.

RATING SENSITIVITIES
STABILITY EXPECTED: Fitch expects Presbyterian Homes Obligated Group (PHOG) to produce stable financial metrics, supported by its diverse revenue base and historically strong occupancy trends.

LIMITED DEBT CAPACITY: PHOG's debt capacity, beyond what is currently planned, is limited at the current rating level without commensurate improvement in liquidity and debt service coverage metrics.

CREDIT PROFILE
Presbyterian Homes Obligated Group is composed of 17 separate CCRCs/long-term care facilities located throughout Pennsylvania and locations in Ohio and Delaware. In aggregate, PHOG operates 1,431 ILUs, 463 ALUs and 1,096 SNF beds. The organization operates a wide variety of facilities including entrance-fee CCRCs, stand-alone skilled nursing and personal care facilities, and rental ILUs. PHOG generated total revenues of $190.6 million in fiscal 2015 (draft audit).

Excellent Credit Stability
Despite various expansion and acquisition activities, overall financial and operating profiles have historically exhibited remarkable stability, which Fitch believes is largely driven by a diverse revenue base as well as management's thorough planning and execution capabilities. Fiscal 2015 results continued this trend, closely meeting financial targets following the inclusion of Cathedral Village in the obligated group in June 2015.

ILU occupancy remained sound at 90% in 2015, though slightly lower than prior years due to some weaker occupancy at Cathedral Village and unsold units from new expansion at Ware Presbyterian Village. Occupancy rates in both ALUs and SNF were 92%, relatively unchanged from the prior year. Operating ratio of 96.1% and net operating margin - adjusted of 15.7% were in line with historical results. Fitch notes that due to PHOG's large skilled nursing component (approximately 58% total revenues), high concentration of Medicaid (around 60%) and relatively small ILU operations, certain profitability metrics compare unfavorably against the medians. However, this is reflective of PHOG's operating profile and given the organization's historical ability to manage its platform, is not a material credit concern.

Fiscal 2015 turnover entrance fee receipts were very strong, totaling $14.9 million net of refunds, compared to just over $11 million in both 2013 and 2014. An additional $6.5 million in initial entrance fees was received in 2015. As a result, overall cash flows were sound. MADS coverage was a stable 1.7x, and revenue-only coverage was 1x, in line with the 'BBB' medians of 2x and 1x, respectively.

Light Liquidity
Unrestricted cash and investments totaled $110.4 million at Dec. 31, 2015, equating to light liquidity metrics relative to Fitch's 'BBB' medians. Days cash on hand of 245, 5.3x cushion ratio, and 40.7% cash-to-debt are consistent with prior year results but are weak relative to the 'BBB' category medians of 400 days, 7.3x cushion ratio, and 60% cash-to-debt. While PHOG's weak liquidity position is a credit concern, Fitch notes that it is not uncharacteristic of its operating profile, where the majority of income is generated from skilled nursing operations, compared to the typical entrance-fee communities rated by Fitch. Further, historical stability of overall balance sheet metrics mitigates concerns.

Healthy Capital Investments
Capital spending continues to be robust, as PHOG continues to invest in its facilities and plan expansion projects on certain campuses. Kirkland Village is currently in the process of building 36 hybrid apartments, and the Quincy and Hollidaysburg campuses are planning AL/IL expansions as well. An additional $20 million of new debt is expected to be issued in 2016, but the net increase (after principal amortization) is expected to only total $8.5 million. Routine capital generally totals $10 million-$12 million annually.

DEBT PROFILE
PHOG has $230.7 million in long-term debt outstanding. In addition, there is a $14.8 million line of credit draw, $24.1 million in guaranteed debt issued for two non-obligated group facilities, and capital leases. Fitch's ratios reflect a total of $271 million in debt.

PHOG's debt portfolio now consists of 21.7% fixed-rate bonds (10% public issues and 11.7% private placements), 7.5% variable-rate loans, and 70.7% in privately placed fixed-rate loans. Over the last three years, PHOG eliminated exposure to near-term put risk under variable-rate demand bonds. Privately placed bank loans have well staggered reset dates ranging from three to 10 years. Fitch uses a MADS of $20.7 million, which includes all guaranteed debt. MADS excluding guaranteed debt is $18.9 million.