[December 02, 2016]

Fitch Affirms Givens Estates (NC) at 'BBB'; Outlook Stable

Fitch Ratings has affirmed the 'BBB' rating on the following bonds issued by the North Carolina Medical Care Commission on behalf of Givens Estates (GE):

--$60.58 million retirement facilities first mortgage revenue refunding bonds, series 2007.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by pledged assets, including gross receipts, a first mortgage lien, and a debt service reserve fund.

KEY RATING DRIVERS

STRONG ILU OCCUPANCY: GE benefits from strong demand on independent living units (ILU) as illustrated by consistent occupancy at or above 95% each year since 2012. While occupancy in the assisted living units (ALU) remained strong in 2015 at 91%, occupancy in the skilled nursing facility (SNF) slipped to 80% in 2015 due to increased competition from local hospital providers. SNF occupancy has improved to 84% through the interim period.

GOOD OPERATING PROFITABILITY: GE's operating ratio has averaged 93.5% over the last four audited years, favorable to Fitch's 'BBB' category median of 96.8%. Profitability through the nine-month interim (ended Sept. 30, 2016) was strong with a 93.3% operating ratio, a 12.6% net operating margin (NOM) and a 29.6% NOM-adjusted, all favorable to Fitch's respective medians.

SATISFACTORY COVERAGE: Maximum annual debt service (MADS) coverage of 1.8x in 2015 was in line with Fitch's 'BBB' median of 1.9x. Coverage improved to 2.5x through the nine month interim period due to improved profitability and good entrance fee receipts. Revenue-only coverage has averaged a solid 1.2x over the last four years and was at 0.9x through the interim reflecting some realized losses through the period.

CAPITAL IMPROVEMENT PLAN: GE is in the final phase of a project that includes replacing 50 ILU apartments on the Creekside portion of its Asheville community and has broken ground on Phase II of an ILU expansion at its Highland Farms campus. Construction is being funded primarily through short-term loans that are expected to be repaid with initial entrance fee receipts. Fitch views the phased construction favorably as it moderates overall development risk and limits the amount of additional debt outstanding at any given time.

ADEQUATE LIQUIDITY: GE's $41.2 million in unrestricted cash and investments at Sept. 30, 2016 equated to 402 days cash on hand (DCOH), 6.7x cushion ratio and 50.2% cash to debt. While all liquidity metrics are slightly unfavorable to Fitch's 'BBB' medians of 425 days, 7.2x, and 57.4%, respectively, GE's solid historical occupancy and profitability, as well as expected incremental revenues from its capital projects, provide some cushion against softer liquidity at the current rating level.

RATING SENSITIVITIES

SUCCESSFUL PROJECT COMPLETION: While Fitch views Givens Estates' expansion projects favorably, there is some construction and fill-up risk associated with the undertaking. Earlier phases of the projects have been successful; however, any significant cost overruns or slower than anticipated occupancy, which materially impacts the organizations financial profile could lead to negative rating pressure.

IMPROVED DEBT BURDEN: Givens Estates will be refinancing its series 2007 fixed rate bonds. A significant reduction in debt burden and improvement in coverage could lead to positive rating movement.

CREDIT PROFILE

Givens Estates operates two Type-C continuing care retirement communities in western North Carolina: Givens Estates located in Asheville and Givens Highland Farms located in Black Mountain, about 15 miles east of Ashville. The total combined unit count includes 602 ILUs, 77 ALUs, and 144 SNFs. Givens Estates generated $43.7 million of total revenue in fiscal 2015.

CONSISTENTLY STRONG DEMAND INDICATORS

ILU demand has remained strong due to favorable demographics, attractive pricing and a healthy real-estate market, with occupancy averaging 95.4% over the last four years. ALU occupancy has also averaged a robust 93.8% over the time period. SNF occupancy was above 90% from 2012 to 2014, but fell to a low 80% in 2015 due to increased competition from local hospital providers. SNF occupancy improved to 84% through the interim, while ILU and ALU occupancies were 95% and 88%, respectively. Additionally, GE continues to successfully fill its expansion projects and maintains robust waiting lists at both of its communities, which have allowed them to quickly re-occupy existing units, fill their ILU expansions and pre-sell a majority of the proposed units in advance of construction.

Givens Estate's closest competitor, Deerfield Episcopal Retirement Community (rated 'A-'; Outlook Stable), is located about two miles from Givens Estates' Asheville campus and also maintains very high occupancy. However, Deerfield Episcopal Retirement Community is a life care community and draws a significant portion of its residents from outside the Asheville area, somewhat limiting competition.

ILU EXPANSION PLANS

After successfully constructing and filing the first two phases of its Creekside expansion, GE is starting the construction of the final phase of the project which will feature an additional 24 ILUs. Management reports that 20 out of the 24 units have been pre-sold to date, with prospective residents depositing 10% of the entrance fee, and that all units are expected to be sold by year end. The last 24 units will open in sets of 12 in April and June of 2017, respectively, and construction is being funded by a $9 million construction loan, 70% of which is expected to be paid off via initial entrance fee receipts in June of 2017. Despite the large capital plans, Fitch views the strategy of updating its ILU services favorably since Givens Estates is taking out older, less-marketable units, enjoys strong demand, and has a sizeable waiting list.

Additionally, Phase I of GE's expansion project at its Highland Farms campus has opened for occupancy on Nov. 1, 2016. The first phase featured the construction of 18 ILUs (out of a total of 72 units), all of which were pre-sold and are expected to be fully occupied by year end. Construction was funded in part by a $4.4 million construction loan which was fully paid off via initial entrance fee receipts on Dec. 2, 2016. GE has roken ground on Phase II of the project which consists of 24 ILUs (20 pre-sold to date). The new ILUs are expected to be open for occupancy in March of 2018 and are being funded via a $7.3 million construction loan which will also be repaid through entrance fees in 2018.

GE is undertaking another capital project (Givens Gerber Park II; GGP2) on a property near its Asheville campus. The project will consist of 82 rental apartments that will cost $12.5 million and will be funded via an $8 million construction loan and a $4 million grant. GGP2 will be moved into the Givens obligated group. GGP2 will be one of three phases of a 262 unit affordable housing project. The other phases of Givens Gerber Park (phases I and III) will consist of 180 apartments (78 are apartments that will receive HUD Section 8 Housing Assistance) and will be funded via a mixture of tax credits, grants and loans, and will not be part of the obligated group. The project will allow GE to free up space on its current campus which may be used for future construction.

DEBT PROFILE

Givens Estates' debt profile includes about $61 million of fixed-rate bonds, $12.8 million of variable rate bank loan that matures in 2022, $9 million of floating rate bank loan for phase III at Creekside, and a $7.3 million floating rate bank loan for Phase II of Highland Farms. Fitch used maximum annual debt service (MADS) of $6.1 million, which includes all debt except the construction loans since they are expected to be repaid with initial entrance fees from the sale of the new ILUs.

Management expects to refinance its existing series 2007 fixed rate bonds in the first half of 2017. Based on preliminary debt service schedules, Fitch would view the successful refinancing of the series 2007 bonds favorably as it should provide Givens Estates with substantial present value savings and improve its debt burden and coverage.

DISCLOSURE

Givens Estates has covenanted to provide annual audits within 120 days of fiscal year end and quarterly disclosure within 30 days of quarter end via the MSRB's EMMA system. Fitch views the disclosure requirements imposed by the state of North Carolina Department of Insurance favorably and considers the content as an industry best practice.

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=1015818

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1015818

Endorsement Policy

https://www.fitchratings.com/regulatory

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