The Rating Outlook is Stable.
The series 2014 certificates are expected to be fixed rate, and will be used primarily to refund Hillcrest's existing series 2003 bonds, fund a debt service reserve, and pay costs of issuance. The certificates will price the week of
Gross revenue pledge, a first deed of trust on certain property, and a debt service reserve fund.
KEY RATING DRIVERS
HEALTHY DEBT METRICS: The 'BBB-' rating reflects Hillcrest's consistent debt service coverage and manageable debt burden. The series 2014 certificates will refund all existing debt, and Hillcrest covered pro forma maximum annual debt service at 3.1 times (x) through the 9-month interim period ended
IMPROVING LIQUIDITY: Hillcrest's balance sheet metrics remain light, but have evidenced consistent improvement since 2010. At
CONSISTENT PROFITABILITY: Hillcrest's net operating margin (NOM) and NOM-adjusted margin have been above Fitch's 'BBB' median ratios since fiscal 2010, and were 11.7% and 38.4%, respectively, through
SOLID SENIOR LEADERSHIP: Fitch views positively the significant turnaround of the organization since senior leadership took the helm in 2009. Implementing more sophisticated marketing and sales efforts, clear unit inventory controls, and sharp focus on sustaining operating cash flow has provided dramatic improvement in Hillcrest's financial and operating profile from a bottom in 2007, after significant decline driven by difficulties with an earlier expansion project.
LIQUIDITY PRESERVATION: Hillcrest's balance sheet is Fitch's primary credit concern, given relatively weak levels of liquidity against its debt burden and expense base. The 'BBB-' rating reflects the expectation of balance sheet preservation against capital needs, with incremental growth over the medium term. Unexpected declines in unrestricted cash would likely prompt negative rating pressure.
MANAGEABLE DEBT LEVEL
With the issuance of the series 2014 bonds to refund all existing debt, Hillcrest will maintain a conservative capital structure and a manageable debt burden. Debt service on the fixed rate issuance will be level, with pro forma maximum annual debt service (MADS) estimated at
SIGNIFICANT LIQUIDITY IMPROVEMENT
From a low point near
Steady entrance fee receipts coupled with continued attention to operating profitability and expense management should allow for this. Hillcrest's capital budget for fiscal 2014 and 2015 is near
CONSISTENT OPERATING CASH FLOW
With new leadership in 2009, Hillcrest has consistently improved its operations from a high 107.7% operating ratio and -2.4% NOM in 2007 to current performance of 101.3% operating ratio and 11.7% NOM (through
The majority of Hillcrest's entrance fee contracts are a 50-month declining balance, which limits its refund liability. Going forward, Hillcrest expects to generate between
Hillcrest is expected to covenant to provide routine annual disclosure within 120 days and quarterly disclosure within 45 days to bondholders. Disclosure will include financial statements, occupancy levels, payor mix data, material events, and covenant performance. Disclosure to Fitch has been timely, with good access to management.
Additional information is available at 'www.fitchratings.com'
--'Rating Guidelines for Nonprofit Continuing Care Retirement Communities' (
Rating Guidelines for Nonprofit Continuing Care Retirement Communities
Source: Fitch Ratings
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