Fitch Rates Presbyterian Villages of Michigan Obligated Group Revs ‘BB+’; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned a 'BB+' rating to the following Presbyterian Villages of Michigan Obligated Group (PVM OG) bonds:

--$30.5 million Michigan Finance Authority Hospital revenue and refunding bonds (Presbyterian Villages of Michigan) (PVM), series 2015.

Simultaneously, Fitch affirms approximately $28 million Michigan State Hospital Finance Authority (Presbyterian Villages of Michigan Obligated Group) revenue and refunding bonds series 2005 at 'BB+'.

The Rating Outlook is Stable.

The series 2015 bonds are expected to be issued as fixed rate debt. Proceeds will be used to refund the outstanding series 2005 bonds, provide $2.0 million for projects at PVM OG's East Harbor campus, fund a debt service reserve fund and pay costs of issuance.

SECURITY

Bonds are secured by a pledge of unrestricted receivables, a mortgage on certain properties, and debt service reserve fund.

KEY RATING DRIVERS

STRATEGIC DIVESTITURE AND OG RESTRUCTURING: PVM is restructuring its obligated group (OG), as part of the series 2015 financing, to exclude the 56 110 assisted living (AL) units, of which 56 are staffed, and 88 skilled nursing (SN) units at its Redford campus. The transaction is expected to close in Sept. 2015. Fitch believes the sale should result in improved operations and debt service coverage.

ADEQUATE LIQUIDITY: Fitch believes that PVM OG's liquidity is adequate for the rating level for a rental-only contract community.

MODEST COVERAGE: Presbyterian Villages of Michigan Obligated Group's (PVM or OG's) coverage of pro forma maximum annual debt service reported was strong debt service coverage in 2013 and 2014 at 2.7x and 2.0x, respectively. However, coverage metrics were enhanced by one-time items including the receipt of $2.3 million tax credit in 2013 and a $1.6 4 million gain on sale of independent living (IL) units in 2014 to a related entity. Excluding one-times, debt service coverage of pro forma MADS was a modest 1.5x and 1.3x in 2013 and 2014, respectively, consistent with years prior.

OCCUPANCY UNCHANGED: Current occupancy is improved, with 88% occupancy in PVM's independent living units at the interim March 31, 2015, up from 8483% year prior. However, Fitch notes that improvement is partially a result of units at Westland campus being taken offline in 2015. Occupancy remains stronger at East Harbor campus.

RATING SENSITIVITIES

ORGANIC GROWTH IN LIQUIDITY: Presbyterian Villages of Michigan Obligated Group's cash growth over the last two years has been driven by one-time items. A demonstrated ability to grow liquidity from operations could lead to positive rating movement over the medium term.

EXECUTION RISKS: Presbyterian Villages of Michigan Obligated Group's ability to divest successfully its Redford operations, invest in East Harbor and improve overall profitability may lead to positive rating momentum.

LIMITED DEBT CAPACITY: Presbyterian Villages of Michigan Obligated Group has limited capacity for additional debt without a commensurate improvement in profitability. The financing will be reviewed at time of issuance and, if beyond Fitch's expectations of a moderate increase in indebtedness, may negatively affect the rating.

CREDIT PROFILE

Headquartered in Southfield, MI, PVM OG consists of PVM Corporate, a foundation, and rental continuing care retirement communities in Westland and Chesterfield Township, MI, and an entity that is a general partner in a PVM non-OG affordable housing campus. Additionally, PVM has rental continuing care units at Redford which are excluded property from the OG and for which a purchase agreement has been executed, discussed below. Fitch's analysis is based on PVM's historic obligated entity, which contained the Redford property.

Currently, the two OG campuses total 289 independent rental units, 126 assisted living units, and 90 skilled nursing beds. PVM obligated group reported $39 million in operating revenue in 2014. In addition, PVM has an ownership interest in approximately 1,700 independent living and assisted living units through non-obligated entities, most of which it manages.

PLAN OF FINANCE

The series 2015 financing is expected to refund PVM OG's outstanding series 2005 bonds and provide funds for construction of a rehabilitation center, renovation of memory loss units, and reimbursement for routine capital expenditures at PVM OG's East Harbor campus. Simultaneous to the current offering, PVM OG is refinancing its bank debt with a $2.87 million one-year bank loan with Huntington National Bank, which is expected to hold a mortgage and first lien on unrestricted receivable on certain non-OG property at East Harbor and Thome River Neighborhood.

Expected key financial covenants are 100 DCOH, tested semiannually, and 1.2x debt service coverage, tested annually. PVM OG covenants to provide quarterly financial and utilization data within 45 days of Q1 through Q3 close and 90 days of year end.

SALE OF REDFORD PROPERTY

Concurrently, PVM is selling its AL, memory care, and SN units in Redford to a strategic buyer, Advantage Management Group. After the sale, Presbyterian Villages of Michigan will continue to operate non-OG affordable housing on the Redford campus. The sale process has entered due diligence phase and will require certificate of need approval by the state of Michigan. Management expects to close on the sale in September 2015. Management intends to use $6.5 million of sale proceeds for renovations to common areas, existing AL and memory loss units, and general improvements to East Harbor campus. Additional project funds are anticipated from PVM's strong philanthropic efforts. If the sale is not completed by June 2016, Redford will become a mortgaged property.

Management estimates that Redford required approximately $400,000 annually in subsidy, including unpaid management fees, which will help enhance coverage going forward. Overall, Fitch views the divestiture of Redford as a credit positive and believes that April 2015 results show some indication that estimates savings are achievable.

ONE-TIMES DRIVE STRONG COVERAGE IN 2013 & 2014

Debt service coverage in 2013 and 2014 was abnormally strong, driven by one-time revenue sources. In 2013, PVM recorded a $2.3 million tax credit as other income while in 2014 PVM booked a $1.4 million realized gain from the sale to a related party of 65 independent living units on the Redford campus into non-operating revenues. The sale of the 65 ILUs totaled $6.3 million with PVM taking a seller's note for $4.7 million which will be paid over 30 years. Excluding these one-time items, PVM generated coverage of pro forma MADS by EBITDA of 1.5x and 1.3x in 2013 and 2014, respectively.

NON-OBLIGATED GROUP ACTIVITIES DEPRESS LIQUIDITY

PVM OG's liquidity is adequate for the rating category, having grown to $12.5 million from $10 million in 2012, now representing 128 days cash on hand (DCOH). Cash growth is a result of one-time revenues over the period. Cushion ratio for pro forma debt was 6.7%, just shy of Fitch's 'BBB' category median of 6.9%. Fitch expects that days cash on hand will be materially improved with PVM's changes to its obligated group structure. PVM'S ability to organically grow its liquidity over the medium term will be key to upward rating movement.

Fitch views positively management's recent efforts to reduce non-OG subsidies and advances. PVM OG's practice of substantial related party transactions has weighed on its balance sheet, with $11.1 million in advances and notes receivable depressing liquidity in 2014. Fitch views positively work to restructure loans to non-OG entities; which has been accomplished in 2014 and will continue; these obligations were subsidized previously by PVM OG and increased OG debt service requirements. PVM's restructured obligated group will also include the contribution of a wholly owned real estate company (PVM EJNP Realty Estate Company, LLC), which reported $3.9 million in equity in 2014.

OCCUPANCY UNCHANGED

Overall occupancy is largely unchanged from year prior, held stable by continued marketing efforts. Overall occupancy as of March 31, 2015, was 89% in IL units, 88% in AL units, and 92% in SN units.

AL occupancy at Westland and East Harbor increased 89.4% as of March 31, 2015, from 83.3% in prior year three-month interim. The increase was driven primarily by a fire which destroyed 20 units. Insurance proceeds have been received and will fund the reconstruction of the units.

STRATEGIC AND CAPITAL PLANNING

PVM is undergoing substantial strategic and capital planning efforts at present, with completion expected in September 2015. At present, management expects an additional $4 million in East Harbor projects within the obligated group and may finance improvements entirely from borrowing. Additional capital needs are anticipated at Westland, which management reports will be financed from HUD insured loans outside the OG. Additional spending may result from strategic and capital planning and will be reviewed by Fitch for impact on credit quality. However, Fitch believes that PVM has a limited ability to accommodate additional debt without an improvement in profitability.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Not-for-Profit Continuing Care Retirement Communities Rating Criteria (pub. 24 Jul 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752470

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

Additional Disclosures

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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Fitch Ratings

Primary Analyst

Stephen Friday
Associate Director

+1-212-908-0384

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Gary Sokolow
Director

+1-212-908-9186

or

Committee Chairperson

James LeBuhn
Senior Director

+1-312-368-2059

or

Media Rleations

Elizabeth Fogerty, New York, +1-212-908-0526

[email protected]

Source: Fitch Ratings