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Fitch Affirms Presbyterian Villages of Michigan (MI) Series 2005 Revs at 'BB+'; Outlook Stable
[December 11, 2014]

Fitch Affirms Presbyterian Villages of Michigan (MI) Series 2005 Revs at 'BB+'; Outlook Stable


Fitch Ratings has affirmed the 'BB+' rating on the following bonds:

--$28.0 million Michigan State Hospital Finance Authority revenue and refunding bonds series 2005 (Presbyterian Villages of Michigan Obligated Group).

The Rating Outlook is Stable.

SECURITY

The series 2005 bonds are secured by a pledge of the obligated group's (OG) gross revenues, a first mortgage on the OG's facilities, and a debt service reserve fund.

KEY RATING DRIVERS

ONE-TIME ITEMS DRIVE STRONG COVERAGE: Presbyterian Villages of Michigan Obligated Group's (PVM or OG) reported strong debt service coverage in 2013 and 2014 YTD at 2.3x in and 2.5x, respectively, due to a one-time $2.3 million tax credit in 2013 and $1.6 million in a realized gain on sale of IL units in 2014. Excluding those items, coverage from recurring operations has been consistent with historical performance and adequate for the rating category, ranging from 1.2x to 1.5x since 2010.

SUFFICIENT LIQUIDITY FOR RATING LEVEL: PVM had adequate liquidity metrics, with 112 days cash on hand, a 5.0x cushion ratio, and 36.0% cash to debt as of September 30, 2014, all improved from same period year prior. Advances to and investments in related entities outside the OG depress the OG's liquidity.

STABLE OCCUPANCY: Overall occupancy is good at 88.3% as of September 2014, which is up slightly year over year. Occupancy has been supported by continued marketing efforts, reconfiguration of units to meet local consumer demand, and the addition of services. The largest drags on occupancy were independent living (IL) occupancy at Westland and assisted living (AL), including memory care, at East Harbor.

MANAGEMENT FOCUSING ON (News - Alert) STRENGTHENING OF OG: PVM continues to focus on improving the financial profile of the OG. These efforts include shedding weaker performing service lines and units, or adding ones that are more accretive to PVM's financial profile, as well as strong expense management. Fitch considers these efforts to lend stability to the rating despite operating volatility and flat revenues.

RATING SENSITIVITIES

STABLE FINANCIAL PERFORMANCE: PVM has little room for negative operating variance from 2013 and year-to-date performance (not including one-time items) at the current rating level. Similarly, a deterioration of current liquidity metrics would pressure the rating.

CREDIT SUMMARY

Headquartered in Southfield, MI, PVM consists of PVM Corporate, a foundation, three rental continuing care retirement communities located in Redford, Westland, and Chesterfield Township, MI, and a PVM entity that is a general partner in a PVM non-OG affordable housing campus. Currently, the three campuses total 289 independent rental units, 174 assisted living units, and 178 skilled nursing beds. PVM had approximately $35.9 million in operating revenue in 2013. In addition, PVM has an ownership interest in approximately 1,900 independent living and assisted living units through non-obligated entities, of which it manages 1,600 units.

The 'BB+' rating affirmation and stable outlook reflect PVM's stable financial profile at the current rating level characterized by adequate liquidity, consistent debt service coverage, tight expense control, and stable occupancy.

ONE-TIME ITEMS DRIVE 2013 & 2014 PROFITABILITY

Debt service coverage in 2013 and through the nine month interim period are both elevated from historic levels as profitability has been enhanced by one-time items. In 2013, PVM recorded a $2.3 million tax credit as other income while in 2014 PVM boked $1.6 million in cash from the sale to a related party of 63 independent living units on the Redford campus into non-operating revenues. The sale of the 63 ILUs totaled $6.0 million with PVM taking a seller's note for $4.4 million which will be paid over 30 years. PVM will manage the 63 units once they have been renovated.



Including these one-time items, PVM generated coverage of MADS by EBITDA of 2.3x and 2.5x in 2013 and through the 3Q 2014. Excluding these one-time items, MADS coverage by EBITDA would have been 1.3x and 1.6x, respectively. Fitch expects coverage to be between 1.25x and 1.5x annually going forward.

GOOD EXPENSE MANAGEMENT


Expenses decreased from 2012 to 2013 and rose a small 2% through the nine month interim period. PVM continues to flex staff based on occupancy levels and look for ways to reduce administrative costs. Revenue growth has been flat as total occupancy has remained below 90%. Tight expense control is critical in maintaining adequate profitability and coverage going forward.

OCCUPANCY INITIATIVES

PVM has implemented a number of initiatives to help increase occupancy. The Village of Westland campus has been a particular challenge. Occupancy of the ILUs at the Westland campus remains weak 79% at Sept. 30, 2014.

SUBSTANTIAL ADVANCES DEPRESS LIQUIDITY METRICS

PVM regularly advances funds for programs and capital projects outside the OG. As of Sept. 30, 2014, PVM had $10.4 million of advances to and investments in related parties, roughly consistent with prior year. PVM has a formal written policy and practices in place for annual review and re-measurement of these advances and any associated bad debt, which Fitch believes is a positive measure to mitigate risks associated with these substantial advances.

While Fitch understands that strategic importance of the advances to the organization's overall mission, the impact to liquidity metrics have been highly dilutive. At Sept. 30, 2013, PVM's level of unrestricted cash and investments was $11.4 million, which equated to 112 days cash on hand, a 5.0x cushion ratio, and 36.0% cash to debt. Additionally, resident receivables have increased and bad debt reserve is running $638,000 over budget, partially driven by delays in Medicaid reimbursement.

SIGNIFICANT PHILANTHROPIC CAMPAIGN

PVM is in the middle of a state-wide fundraising campaign which has increased donations. System-wide the campaign has netted $15.9 million in unrestricted, temporarily restricted, and permanently restricted donations as of Sept. 30, 2014. An additional $5.25 million of grants was received in Oct. 2014. PVM has increased its goal to $27.5 million, with a considerable portion to be invested in the OG.

CONSERVATIVE DEBT PROFILE

The OG's debt profile is conservative. The 2005 bonds are all fixed rate and PVM has no swaps. The system is reviewing its debt profile in order to increase debt capacity. Board review of preliminary recommendations is expected in early 2015. Fitch will monitor capital structure changes for credit impact. MADS is $2.3 million, representing a low 5.9% of revenue.

DISCLOSURE

PVM provides annual audited financial statements and quarterly unaudited financials, including an extensive MD&A, to the to the Municipal Securities Rulemaking Board's EMMA system.

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

Applicable Criteria and Related Research:

--'Rating Criteria for Not-for-Profit Continuing Care Retirement Communities' (July 24, 2014);

--'Revenue Supported Rating Criteria' (June 16, 2014).

Applicable Criteria and Related Research:

Rating Criteria for Not-for-Profit Continuing Care Retirement Communities - Effective July 26, 2011 to July 12, 2012

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=644895

Revenue-Supported Rating Criteria

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=948535

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