The Rating Outlook is Stable.
KEY RATING DRIVERS
BENEFITS OF GEOGRAPHIC DIVERSITY: CRC is a multi-state continuing care retirement community system. Fitch believes the system's overall operating risk profile is reduced due to the size of its operations and the geographic dispersion of its communities. CRC operates 13 communities in eight states with no single one community accounting for more than 11% of obligated group revenues.
STRONG ENTRANCE FEE RECEIPTS: In fiscal 2014 (
IMPROVING OCCUPANCY: Strong unit sales in the 4Q of FY 2014 translated into higher independent living unit (ILU) occupancy. At the end of the 1Q fiscal 2015, (quarter-ended
ADEQUATE LIQUIDITY POSITION: CRC's liquidity metrics are adequate when compared to Fitch's 'BBB' category medians. At
MODERATE DEBT BURDEN: Maximum annual debt service (MADS) of
SUSTAINED IMPROVED CASH FLOW: Fitch expects CRC's improved financial performance to be sustained and debt service coverage is budgeted to remain above 2x in FY2015. Profitability from core operations should improve as the system benefits from higher ILU occupancy and a focus on improving the payor mix in the SNF should add to improved profitability.
The bonds are secured by a pledge of gross revenue, a mortgage on certain property and a debt service reserve fund.
Covenant Retirement Communities is a type B continuing care retirement community (CCRC) system that operates 13 facilities in eight different states. In fiscal 2014, the
Geographic Diversity a
The 'BBB+' rating reflects CRC's lower overall operating risk profile due to the size and geographic diversity of its operations and adequate liquidity position. CRC is composed of 13 communities in eight states with no single facility accounting for more than 11% of total obligated group revenues. With communities in
Improving Occupancy and Profitability
CRC's core operating profitability (excluding turnover entrance fee receipts) improved in FY 2014 reflecting improving occupancy across in the ILUs and further payor mix improvement in the SNFs. While average annual occupancy in the ILUs showed mild improvement in 2014 (84%) compared to the prior year (83%), strong sales in the fourth quarter allowed occupancy in the ILUs to jump to 88.4% at FYE 2014. Eleven of CRC's 12 communities showed higher ILU occupancy at FYE 2014 compared to the prior year end. Only one community has an occupancy rate below rate 80% at FYE 2014 compared to five at FYE 2013.
The new marketing programs and personnel changes made over the last 12-18 months gained traction during FY 2014 as evidenced by the strong sales and net entrance fee receipts generated in FY 2014. Net operating margin (NOM) of 4.1% is an improvement over the prior two years but lags the 'BBB' category median of 9.5%. In FY 2014, CRC recorded the highest number of re-occupancies in its history at 452 which is a substantial improvement from the 252 and 249 re-occupancies generated in the fiscal 2013 and 2012, respectively. As a result, net entrance fee receipts jumped to
Management is budgeting for 342 re-occupancies in fiscal 2015 which will result in lower level of net entrance fee receipts compared to fiscal 2014. However, debt service coverage is expected to remain above 2x in fiscal 2015.
Modest Debt Burden
CRC's debt burden remains moderate with MADS of
Proceeds from the series 2013 bonds are being used primarily to fund construction of 54 ILU apartments at
Consolidated results include the operations of non-obligated Covenant Retirement Services (CRS) which includes a home health company, a management service company and senior rental facilities. At fiscal year-end 2014, CRS had total assets of
CRC's disclosure requirements under its bond documents include the submission of annual audited statements within 120 days of fiscal year end and quarterly unaudited statements on a GAAP basis within 45 days of quarter end to the Municipal Securities Rulemaking Board's EMMA system.
Additional information is available at 'www.fitchratings.com' .
--'Revenue-Supported Rating Criteria' (
--'Rating Criteria for Not-for-Profit Continuing Care Retirement Communities' (
Revenue-Supported Rating Criteria
Not-for-Profit Continuing Care Retirement Communities Rating Criteria
Source: Fitch Ratings
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