|[June 09, 2014]
Fitch Affirms Christian Homes, Inc., Illinois Revs at 'BBB-'; Outlook Stable
NEW YORK --(Business Wire)--
Fitch Ratings has affirmed the 'BBB-' rating on the following bonds
issued on behalf of Christian Homes, Inc. (CHI):
--$24,590,000 Illinois Finance Authority (Christian Homes, Inc.
Obligated Group Project), Revenue Refunding Bonds, Series 2010
--$34,235,000 Illinois Finance Authority Revenue Refunding Bonds, Series
--$6,600,000 City of Crown Point, Indiana Revenue Refunding Bonds,
--$7,660,000 County of Pottawattamie, Iowa Revenue Refunding Bonds,
--$11,395,000 Industrial Development Authority of the City of Joplin,
Missouri Revenue Refunding Bonds, Series 2007F
The Rating Outlook is stable.
Bonds are secured by a pledge of gross revenues, first lien mortgage and
security interest in the facilities, and a debt service reserve fund.
KEY RATING DRIVERS
STABLE FINANCIAL PERFORMANCE: CHI had an operating ratio of 95.5% and
debt service coverage of 1.8 times (x) in the nine month fiscal 2014
interim period (June 30 year end), solid for the rating level and
consistent with the prior five audited years.
STABLE OCCUPANCY: Total occupancy has remained consistently in the mid
80% range and stood at 83% across the system as of March 31, 2014,
slightly lower than the prior year. CHI revenue is driven heavily by
skilled nursing (more than 1,500 beds in service) and the strength of
its SNF occupancy, consistently between 85 and 90% has led to solid
revenue only coverage that has averaged 1.7x over the last four audited
MANAGEABLE DEBT BURDEN: CHI's MADS as a percentage of revenue is very
good at 6.9% at March 31, 2014, below Fitch's 'BBB' category median of
THIN LIQUIDITY: CHI had $41.1 million in unrestricted cash and
investments as of March 31, 2014, which equated to 107.3 days cash on
hand, a 3.9 times (x) cushion ratio, and 36.7% cash-to-debt, all below
the category medians, but liquidity has improved year over year.
REVENUE SIZE AND GEOGRAPHIC DIVERSITY: Fitch believes CHI's revenue size
- $126.1 million in patient service revenue in fiscal 2013 - and its
geographic diversity with facilities in four states help mitigate
concerns regarding CHI's reliance on government reimbursement.
Approximately 75% of CHI's payor mix is derived from government sources.
COMPETITIVE SERVICE AREAS: CHI operates in fairly competitive markets,
especially for skilled nursing, which keeps pressure on CHI to maintain
referral relationships and to continue to invest in its plant.
MAINTAINING OPERATING PERFORMANCE: CHI's ability to maintain current
levels of occupancy is essential for sustaining adequate levels of
financial performance. A falloff from current performance levels, which
is not expected, that also weakens liquidity could pressure the rating.
CHI is a large senior living system that operates 11 facilities in four
different states: Illinois, Indiana, Iowa and Missouri. In fiscal 2013,
CHI had $134.3 million in total operating revenue. The rating and
analysis are based on the CHI obligated group, which as of March 31,
2014 consisted of 11 facilities, with 552 ILUs, 285 assisted living
units (ALUs) and 1,544 nursing care beds.
The affirmation of the 'BBB-' rating is supported by CHI's stable
financial profile and operating performance in the historical period and
through the nine-month interim period. CHI's performance is
characterized by good operating ratios, stable occupancy, and strong
revenue only coverage. Credit concerns include light liquidity for the
rating category and reliance on government payors, which is heightened
by the stress at the state level in Illinois (Fitch GO bonds rated
GOOD OPERATING PERFORMANCE
CHI's operating ratio over the last four audited years has averaged
93.8% and its net operating margin 11.2%, compared to Fitch's 'BBB'
category median of 97.2% and 9.9% respectively. This level of
performance has been sustained through the nine month interim period,
with a 95.5% operating ratio and an 8.9% net operating margin. CHI
management has controlled expenses very well, with total operating
expenses down approximately 1% year over year in the nine month interim
In addition, CHI continues to pursue revenue enhancing strategies across
its system, with a focus on diversifying itsservice lines, revenue
streams, and geographic locations. At the Bensenville facility, located
outside Chicago, CHI has completed a repositioning project that has
brought AL units onto the campus by reconfiguring and reducing the ILUs.
All the new AL units are now occupied. At Hickory Point in the
Decatur/Forsyth area, CHI is contemplating a further expansion of its
successful short term rehabilitation unit, which it built with the 2010
In fiscal 2013, CHI sold its Pleasant Meadows Christian Village
(Pleasant Meadows), located in Chrisman, IL. CHI netted about $1.2
million on the sale of the facility, which had no debt. The sale of
Pleasant Meadows reflects CHI's strategy to both reduce its exposure to
Illinois and advance its rehabilitation growth strategy, as Pleasant
Meadows is located in a fairly isolated part of Illinois, with no nearby
hospitals to use as a referral source.
In Indiana, CHI has developed an arrangement to lease its facilities
from the county in order to maximize state level reimbursement. This
relationship began in fiscal 2013 and is reflected as a reduction in
patient service revenue, which fell to $126.1 million from $133.2
million in fiscal 2012, as the amounts of CHI receives comes in the form
of supplemental payments. CHI management reports that the bottom line
reimbursement, net of the lease payments, it now receives has improved
in Indiana as a result of this program.
SLIGHTLY IMPROVED LIQUIDITY POSITION
CHI had $41.1 million in unrestricted cash and investments as of March
31, 2014, which equated to 107.3 days cash on hand, a 3.9 times (x)
cushion ratio, and 36.7% cash-to-debt, all below Fitch's 'BBB' category
medians, of 371.3, 6.9, and 58.9, respectively.
Liquidity has improved year over year, with unrestricted cash and
investments growing by approximately 14% from March 31, 2013. The sale
of Pleasant Meadows and CHI's continued stable cash flow has helped grow
unrestricted liquidity, but CHI has also been helped by improvements on
the timing of Medicaid payments from the state of Illinois. Accounts
receivable (AR), which was at $19.5 million at March 31, 2013 and
largely reflects owed payments from Illinois, improved to $15.1 million
by March 31, 2014. CHI generally receives a payment right at its fiscal
year end, and Fitch expects both liquidity and AR to further improve by
MANAGEABLE DEBT BURDEN
CHI's MADS as a percentage of revenue is very good at 6.9% at March 31,
2014, below Fitch's 'BBB' category median of 12.4%, and its debt to net
available, at 5.8x, was also better than Fitch's category median of
6.6x. Both of these reflect CHI's manageable debt burden.
Debt service coverage has remained stable, with revenue-only coverage
averaging 1.7x over the last four audited years. Through the nine months
ended March 31, 2014 revenue-only coverage was 1.8x. Fitch's maximum
annual debt service figure of $10.6 million includes CHI's corporate
debt, which CHI issued from its corporate offices in the 1990s. The
corporate debt, which is a general obligation and subordinate to the
master trust indenture debt, is taxable and variable rate. The interest
rate resets every three or five years, and the interest rates have
generally been around 5.5%.
Fitch notes positively that CHI continues to pay down extra principal on
the corporate debt, and the outstanding principal is currently at $30
million, down from $40 million when Fitch first rated CHI in 2010.
Additionally, CHI's debt service calculation for covenant compliance
includes the extra principal that CHI pays down during the year. CHI's
debt service coverage not including these additional principal payments
would be closer to 2 to 2.2x. This provides a measure of financial
flexibility, as CHI could reduce the extra payments its making should it
have a challenging operating year.
Total outstanding long term debt at March 31, 2014 was $112 million and
is approximately 73% fixed rate and 27% variable rate. CHI maintains a
$15 million line of credit, which could be used for any potential puts
of the corporate debt, and no amounts are currently drawn. The line of
credit is secured under the MTI (News - Alert).
In last year's press release Fitch noted that CHI was contemplating a
potential debt issuance and was actively pursuing acquisitions. CHI
management indicated that the debt plans are on hold and that while the
organization remains interested in acquisitions, none of the potential
acquisitions to date have been completed after CHI's further analysis.
Fitch notes the postponement of the debt issuance positively as CHI's
manageable debt burden is a key credit strength. Fitch also notes that
CHI's management team has shown fiscal discipline, which mitigates some
of the credit concern should CHI pursue an acquisition.
CHI disclosure requirements under its bond documents include the
submission of annual audited statements within 150 days of fiscal year
end and quarterly unaudited statements within 45 days of quarter end to
the Municipal Securities Rulemaking Board's EMMA system.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating Guidelines For Nonprofit Continuing Care Retirement
Communities' (July 10, 2013).
--'Nonprofit Nursing Home Rating Criteria' (July 5, 2013).
Applicable Criteria and Related Research:
Rating Guidelines for Nonprofit Continuing Care Retirement Communities
Nonprofit Nursing Home Rating Criteria -- Effective July 5, 2012 to July
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