TMCnet News
Fitch Affirms Evangelical Homes of Michigan at 'BB+'; Outlook StableFitch Ratings has affirmed the 'BB+' rating on the following bonds issued on behalf of Evangelical Homes of Michigan (EHM): --$23,910,000 Michigan Strategic Fund series 2013; --$10,470,000 Economic Development Corporation of the City of Saline (MI) series 2013. The Rating Outlook is Stable. SECURITY The bonds are secured by a pledge of unrestricted receivables of the Obligated Group, a mortgage on the revenue-generating property and structures on the three campuses, and two separate debt service reserve funds. KEY RATING DRIVERS MODEST LIQUIDITY: Liquidity metrics remain mixed relative to 'BB+' peers but are adequate for the rating category with a solid 5.2x cushion ratio and a light 35.8% cash to debt. CONSISTENT OPERATING PROFITABILITY: Operating profitability has been consistent since fiscal 2012 with operating ratio averaging 97.8% and net operating margin averaging 5.5%, respectively, and equal to 98.2% and 5% in fiscal 2016, comparing adequately with Fitch's below investment grade median of 5.7%. STRONG OCCUPANCY: Strong and consistent occupancy is a key credit strength. Independent living unit (ILU), assisted living unit (ALU), and skilled nursing facilities (SNF) occupancy has averaged 93%, 97%, and 93%, respectively, since fiscal 2012. LIGHT DEBT BURDEN: EHM's debt burden remains light with maximum annual debt service (MADS) equal to 4.6% of fiscal 2016 revenue. The light debt burden allowed for solid revenue-only MADS coverage of 1.3x in fiscal 2016. INCREASED CAPITAL SPENDING: Capital spending is expected to increase over the next four years. Projects include renovation of EHM's Sterling Heights rehabilitation facilities and construction of a new retirement community in Farmington Hills, MI. The Farmington Hills project will likely involve the issuance of new debt in 2018. HIGH EXPOSURE TO SKILLED NURSING: With over 70% of revenue generated from SNF services, Fitch believes EHM is more vulnerable to occupancy fluctuations and reimbursement changes than communities with higher proportions of ALUs and ILUs. RATING SENSITIVITIES SUSTAINED OPERATING PERFORMANCE: Fitch expects that occupancy levels and operating performance will be sustained, providing consistent cash flow and coverage metrics without materially impacting unrestricted liquidity. EXPECTED DEBT ISSUANCE: Fitch will assess the impact of the expected debt issuance in 2018 on EHM's overall credit profile as details become more certain. CREDIT PROFILE Headquartered in Farmington, MI, EHM operates two skilled nursing facilities, a rehabilitation center (the Redies Center) and a retirement community (Brecon Village). Additional operations include home care and home support, senior housing, hospice care and memory support services in southeastern Michigan. Primary operations are located in Saline, Sterling Heights, Ann Arbor and Farmington, MI. Effective August 29, 2016, EHM changed its name to EHM Senior Solutions to reflect its broadened scope of operations from primarily operating nursing homes in 2008 to its current operating platform. The obligated group accounted for 98.8% of consolidated revenue and 99.4% of consolidated total assets in fiscal 2016 (April 30 year-end). The figures cited are for the consolidated entity (except for the interim period, which is obligated group only). Total operating revenues equaled $54 million in fiscal 2016. CONSISTENT OPERATING PROFITABILITY Operating profitability has been generally consistent since fiscal 2012 with operating ratio and net operating margin averaging 97.8% and 5.5%, respectively, and equal to 98.2% and 5% in fiscal 2016. Profitability remained consistent in the three month interim period ending July 31, 2016 (the interim period) with a 96.6% operating ratio and 6.9% net operating margin. Fitch expects operating profitability to remain at levels consistent with historical performance. STRONG OCCUPANCY EHM's consistent operating profitability reflects its consistently strong occupancy levels. ILU, ALU (including memory care) and SNF occupancy averaged 93%, 97% and 93% since fiscal 2012, respectively and equaled 95%, 97% and 89% at July 31, 2016. Occupancy rates reflects EHM's solid reputation and the benefits derived from being the only rental community in its service area, which is beneficial given the service area's demographics. LIGHT DEBT BURDEN EHM's debt burden remains light with MADS equal to 4.6% of fiscal 2016 operating revenues. The light debt burden allowed for solid revenue-only MADS coverage of 1.3x in fiscal 2016 and 1.8x in the interim period, exceeding Fitch's below investment grade category median of 0.7x. EHM expects to incur additional debt to fund certain capital projects as described below. Fitch will assess the rating impact of the project on EHM's credit profile as plans become more certain. MODEST LIQUIDITY Unrestricted cash and investments decreased 7% year-over-year to $13.1 million at July 31, 2016. The decrease was primarily due to the acquisitions of a 31-acre property in Farmington Hills, MI, and the former hospital in which the Redies Center is located. Despite the decrease, liquidity metrics remain adequate for the rating category relative to debt with 35.8% cash to debt and 5.2x cushion ratio, exceeding Fitch's below investment grade medians of 34.9% and 4.4x, respectively. However, days cash on hand remains weak with 94 days compared to Fitch's below investment grade median of 256 days. In addition, liquidity would be lower if not for a $2.8 million draw on a line of credit at July 31, 2016, which funded a portion of the acquisition costs. Fitch will monitor the impact of increased capital spending plan on liquidity metrics. INCREASED CAPITAL SPENDING Capital spending is expected to increase over the next four years as EHM pursues certain strategic initiatives including the development of a new retirement community in Farmington Hills, MI. Capital spending averaged $2.1 million (94.6% of depreciation) between fiscal 2012 and fiscal 2016, but increased to $4.3 million (699% of depreciation) in the interim period. Total capital spending in fiscal 2017 is expected to exceed $5 million. The increased capital spending in iscal 2017 reflects the renovation of EHM's Sterling Heights rehabilitation facility and acquisitions of the former hospital in which EHM's Redies Center is located and the 31 acre property in Farmington Hills, MI. The acquisition of the former hospital cost $1.2 million and will eliminating approximately $600,000 in annual lease expense while generating approximately $120,000 in annual lease revenue from existing tenants. The Sterling Heights rehabilitation project will increase the facility's number of private rooms and is expected to cost $1.8 million, which is expected to be funded by an equity contribution and philanthropy contributions. Additionally, EHM plans to build a new retirement community on the Farmington Hills property. The project is expected to begin in 2018 and cost $40 to $50 million, of which $25 to $30 million will be funded by an expected debt issuance in 2018. Fitch views the capital projects favorably as they should strengthen EHM's competitive position and diversify operations while increasing revenue and profitability. However, the projects, particularly the new retirement community, expose EHM to execution risk. Fitch will assess the impact of the increased capital spending on liquidity metrics and the expected new debt issuance on EHM's overall credit profile as details become more certain. HIGH EXPOSURE TO SKILLED NURSING Skilled nursing services account for approximately 75% of consolidated revenues. Fitch believes EHM's relatively high exposure to skilled nursing makes it inherently more vulnerable to Medicare and Medicaid reimbursement changes, and to relatively higher rates of attrition relative to communities with higher proportions of assisted and independent living units. DEBT PROFILE EHM had $36.7 million of total debt outstanding at July 31, 2016, including the series 2013 bonds and a term loan. The debt is 100% fixed rate and EHM is not counterparty to any swaps. MADS is level and equal to approximately $2.5 million. Additionally, EHM maintains a $2.8 million line of credit of which $2.8 million was drawn at July 31, 2016. DISCLOSURE EHM covenants to provide quarterly disclosure within 45 days of each fiscal quarter end and annual disclosure within 120 days of fiscal year-end. Disclosure is provided through the Municipal Securities Rulemaking Board's EMMA website. Additional information is available at 'www.fitchratings.com'. Applicable Criteria Not-for-Profit Continuing Care Retirement Communities Rating Criteria (pub. 04 Aug 2015) https://www.fitchratings.com/site/re/868824 Revenue-Supported Rating Criteria (pub. 16 Jun 2014) https://www.fitchratings.com/site/re/750012 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1014743 Solicitation Status https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014743 Endorsement Policy https://www.fitchratings.com/regulatory ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright (c) 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001 View source version on businesswire.com: http://www.businesswire.com/news/home/20161114006357/en/ |
