News Column

Fitch Rates Brethren Hillcrest Homes (CA) Revs 'BBB-'; Outlook Stable

June 3, 2014

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has assigned a 'BBB-' rating to the following City of La Verne, CA certificates of participation, issued on behalf of Brethren Hillcrest Homes (Hillcrest):

--$40.8 million series 2014.

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 June 23 via negotiation.

SECURITY

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 March 31, 2014, following 2.6x coverage in fiscal 2013 (year ended June 30).Further, debt to net available was 4.2x against Fitch's 'BBB' median of 6.6x. No additional debt is planned.

IMPROVING LIQUIDITY: Hillcrest's balance sheet metrics remain light, but have evidenced consistent improvement since 2010. At March 31, 2014 Hillcrest had $11.9 million in unrestricted liquidity, equal to 248.4 days of cash on hand (DCOH) and a 3.9x cushion ratio. While well below Fitch's 'BBB' median ratios of 371.3 DCOH and 6.9x cushion ratio, this is greatly improved from the 121.3 DCOH and 1.7x cushion ratio at fiscal 2010.

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 March 31, 2014. Community-wide occupancy has been steady since 2011, and was 90% through March 2014.

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.

RATING SENSITIVITIES

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.

CREDIT PROFILE

Brethren Hillcrest Homes (Hillcrest) is a Type B (modified fee-for-service) continuing care retirement community (CCRC), established in March 1947 by a local faith community of the Church of the Brethren to provide housing and services for its retiring ministers and missionaries. Today, Hillcrest consists of 229 residential homes and apartments, 48 assisted living units, 24 dementia beds, and 74 skilled nursing beds. Hillcrest reported total revenues of $20.9 million in fiscal 2013 (year ended June 30).

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 $3.03 million. Hillcrest has no swaps. Total debt to net available has averaged 5.6x since 2010, below Fitch's 'BBB' category median of 6.6x. Further, Hillcrest's historical pro forma debt service coverage has been very consistent over time, averaging 1.1x by revenue only and 2.5x including turnover entrance fees since 2010.

SIGNIFICANT LIQUIDITY IMPROVEMENT

From a low point near $1.4 million in fiscal 2008, Hillcrest has significantly improved its unrestricted cash position to $11.9 million as of March 31, 2014. While additional incremental improvement to the balance sheet is expected, maintenance of the 'BBB-' rating will be contingent upon maintenance of liquidity against some increase in capital spending over the next two to three years.

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 $4 million, approximately 130% of depreciation expense. Heightened plant reinvestment will allow Hillcrest to preserve its competitive position against area CCRCs providing similar services.

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 March 31, 2014) against Fitch's 'BBB' medians of 97.2 and 9.9%, respectively. Further, more sophisticated sales and unit management tools have assisted Hillcrest in increased entrance fees, which equaled $5.4 million through the March 2014 interim period.

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 $5 million and $7 million in annual net turnover entrance fees, which is in line with its historical average. ILU occupancy was 90% for the nine months ended March 31, 2014 compared to 89.1% for fiscal 2013 and is budgeted to increase further to 92% by fiscal 2015.

ONGOING DISCLOSURE

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'

Applicable Criteria and Related Research:

--'Rating Guidelines for Nonprofit Continuing Care Retirement Communities' (July 10, 2013).

Applicable Criteria and Related Research:

Rating Guidelines for Nonprofit Continuing Care Retirement Communities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=40171

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=832764

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Fitch Ratings

Primary Analyst

Emily E. Wadhwani

Director

+1-312-368-3347

Fitch Ratings, Inc.

70 W. Madison Street

Chicago IL 60602

or

Secondary Analyst

Gary Sokolow

Director

+1-212-908-0555

or

Committee Chairperson

Emily Wong

Senior Director

+1-415-732-5620

or

Media Relations

Sandro Scenga, New York-+1-212-908-0278

sandro.scenga@fitchratings.com

Source: Fitch Ratings


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