Fitch Ratings has assigned a 'BBB-' rating to the series 2014 bonds
issued by Mesquite Health Facilities Development Corporation on behalf
of Christian Care Centers (Christian Care), Texas for approximately
In addition, Fitch affirms the 'BBB-' rating on approximately $30.8
million in outstanding Mesquite Health Facilities Development
Corporation retirement facilities revenue bonds, series 2005, issued on
behalf of Christian Care.
The Rating Outlook is Stable.
Bond proceeds will be used to refund the approximately $8.1 million
outstanding series 2000B&C bonds, finance a portion of the construction,
acquisition and equipping of a new, 22 unit independent living unit
facility, 68 assisted living units and common space, fund 18 months of
capitalized interest, establish a debt service reserve fund and pay
certain costs of issuance. Maximum annual debt service is estimated at
$4.48 million, up from $3.14 million. The series 2014 bonds are expected
to be fixed rate and price the week of Aug. 25 or Sept. 1 via
The bonds are secured by a gross revenue pledge, a mortgage lien on
Christian Care's property, and a debt service reserve fund.
KEY RATING DRIVERS
CONSISTENT OPERATING RESULTS: The affirmation of the 'BBB-' reflects
Christian Care's consistently stable and strong operating profitability.
Although liquidity and debt service coverage metrics will be somewhat
stressed in the near term from the additional debt associated with the
Allen Project, Fitch believes Christian Care's pro forma liquidity and
coverage levels will be adequate and the strategic and financial
benefits that the new independent living units (ILUs) and assisted
living units (ALUs) will provide to the community supports the current
rating. Although not expected, significant deterioration to the
financial profile could result in negative rating pressure.
GOOD UTILIZATION: Due to its location and religious affiliation,
Christian Care has continued to maintain solid utilization with over 86%
occupancy across the continuum of care for the last five years. Because
of the high demand and interest in the Allen service area, Fitch views
the additional ILUs and ALUs favorably and expects the new units to fill
within the projected time period.
MANAGEABLE DEBT BURDEN: With the series 2014 issuance, Christian Care's
pro forma debt burden remains manageable for the category with maximum
annual debt service (MADS; expected to be about $4.5 million) equal to
12.1% of total fiscal 2013 revenue (Dec. 31 year-end) compared with the
'BBB' category of 12.4%. Pro forma MADS coverage of 2.1x through the six
month interim period ended June 30, 2014 is favorable against the 'BBB'
category median of 1.9x. Revenue only coverage was solid at 1.9x at June
30, 2014. The feasibility study by Clifton Larson Allen forecasts 1.75x
debt service coverage in 2018, the year the project reaches full
occupancy, which Fitch expects Christian Care to at least achieve.
LIGHT LIQUIDITY: Christian Care's balance sheet metrics are light for
the rating category but are expected to improve as the new units come
REDUCED EXPOSURE TO GOVERNMENT PAYORS: Christian Care has significantly
reduced its exposure to governmental payors with the sale of a nursing
home in 2013. Approximately 35% of Christian Care's 2013 resident
service revenue is now from government payors (down from 37% in 2012),
and the new facility in Allen is expected to be all private pay, which
will further lower Christian Care's exposure to government payors.
EXECUTION OF CONSTRUCTION PROJECT: Christian Care has commenced the
construction on a satellite campus in Allen, Texas. Although various
risks inherent in executing a major capital project are present and
capital metrics may be stressed in the near term, Fitch expects
Christian Care's overall operational and financial profile to rebound
once new units come online.
NO ADDITIONAL DEBT CAPACITY: After this debt issuance, Fitch believes
that without improvement to debt service coverage levels, additional
debt cannot be supported at the current rating level.
Located around the Dallas-Ft. Worth Metroplex, Christian Care consists
of two senior living campuses, with a total of 386 independent living
units (ILUs), 139 ALUs, and 223 skilled nursing facility (SNF) beds.
Total operating revenue in fiscal 2013 was $35.6 million. Christian Care
closed the operations at the Hilltop Haven Health Care Center and Howard
Independent Living Apartments divisions located in Gunter, Texas in 2013
as renovations to bring this facility to current standards were cost
prohibitive. Although this reduced Christian Care's revenue base, the
financial impact was positive since the facility was operating at a loss
and had a high exposure to governmental payors. The affirmation at
'BBB-' reflects Christian Care's consistent financial profile, good
occupancy and manageable pro forma debt burden.
CAPITAL PROJECT MOVING FORWARD
Christian Care is undertaking a sizable capital project on approximately
five acres of land on a satellite campus in Allen, Texas, which will be
funded mostly from series 2014 bond proceeds. Allen is a growing service
area where there is currently no faith-based non-profit CCRC. Christian
Care received land as a donation from the church (which is located
adjacent to the new campus), on which they will build the new facility.
The project will include 22 cottages (with 11 duplexes), 36 memory care
units (including 2 respite units) and 32 assisted living units. There
will be space for outpatient therapy, hospice and personal care.
Construction is starting this summer and is expected to take about 12
months. Management is forecasting that the fill-up of the ILUs will take
approximately 14 months, fill-up of the ALUs will take about 15 months
and fill-up of the memory support units will take about 24 months. Fitch
views this project positively as it is in a good service area with solid
STABLE OPERATING PROFILE
Christian Care's financial performance is characterized by a solid
history of good operating performance and steady debt service coverage.
Through the six months ending June 30, 2014, operating ratio and net
operating margin were strong and improved from fiscal 2013 at 91% and
13.3%, respectively, against the 'BBB' category medians of 97.2% and
9.9%. In fiscal 2013 operating ratio was 93.8% and net operating margin
was 10.2%. Adjusted net operating margin was only 15.3% in fiscal at
June 30, 2014, reflecting the significant percentage of rental ILUs
(about 80%) compared to entrance fee (about 20%). Christian Care is
budgeting about $1 million net income from consolidated operations in
fiscal 2014, which Fitch expects it to meet.
STABLE HISTORICAL OCCUPANCY
Historical occupancy across each level of care has been relatively
consistent over the past three years (2011 - 2013), averaging 88.4% for
ILUs, 90.6% for ALUs and 91.4% for the SNF units. At June 30, 2014,
occupancy in the ILUs, ALUs and SNF were 92.9%, 87.7% and 93.1%,
respectively. Christian Care invigorated its marketing campaign to
include targeted radio and television advertising, direct mailings and
additional sales staff as well as a super heroes marketing campaign
featuring stories of residents.
MANAGEABLE DEBT BURDEN
Total pro forma debt after this issuance will be about $61.8 million,
which will be all fixed rate. In addition to the series 2014 new issue,
Christian Care will have approximately $30.8 million fixed rate series
2005 debt outstanding. Even with the series 2014 new money Christian
Care is taking on to finance the Allen Project, its leverage position
will remain manageable with pro forma MADS as a percent of total revenue
at 12.1% in fiscal 2013, which remains favorable to the 'BBB' category
median of 12.4%.
Pro forma MADS coverage by turnover entrance fees of 2.1x at June 30,
2014 (six month interim) is in line with the 'BBB' category median of
1.9x. Revenue only pro forma coverage during the six month interim
period was strong at 1.9x compared to the 'BBB' category median of 0.9x
and is expected to remain at a healthy level given its unit mix and
residency type. Pro forma debt service coverage is projected to be 1.75
in 2018 (first year of full occupancy at the Allen campus) according to
the feasibility prepared by Clifton Larson Allen, which Fitch expects
Christian Care to at least achieve.
LIGHT PRO FORMA LIQUIDITY METRICS
Pro forma liquidity metrics are mixed. At June 30, 2014, Christian
Care's unrestricted cash and investments totaled $22.5 million, which
equates to a relatively light 216.6 days cash on hand, pro forma cash to
debt of 36.5% and pro forma cushion ratio of 5x; light compared to the
respective 'BBB' category median of 371.3, 58.1% and 6.9x. Fitch
believes that the lower-than-average days cash on hand position is
somewhat mitigated by the fact that Christian Care does not offer
lifecare or modified lifecare contracts. Liquidity ratios will be
pressured over the near term as Christian Care grows into this project,
but Fitch believes the Allen project will be accretive to the financial
profile upon stabilization. Christian Care may have some other capital
projects in the long term and Fitch does not believe Christian Care has
room at the current rating level for additional debt without a
commensurate increase to revenue size and improvement in capital-related
Christian Care currently covenants to provide routine annual disclosure
within 150 days and quarterly disclosure within 45 days to bondholders.
Disclosure covenants will be the same for the series 2014 bonds.
Disclosure will include financial statements, material events and
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
-- 'Revenue-Supported Rating Criteria' (June 16, 2014);
-- 'Rating Guidelines for Nonprofit Continuing Care Retirement
Communities' (July 24, 2014).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Rating Guidelines for Nonprofit Continuing Care Retirement Communities
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Source: Fitch Ratings