Fitch Rates The Presbyterian Homes Obligated Group, NC’s Revenue Bonds ‘A-‘; Outlook Stable

NEW YORK–(BUSINESS WIRE)–Fitch Ratings has assigned an ‘A-‘ rating to the following bonds issued
by the North Carolina Medical Care Commission on behalf of The
Presbyterian Homes Obligated Group (PH):

–$30.6 million health care facilities first mortgage revenue refunding
bonds, series 2016C.

Bond proceeds and a $48 million (series 2016B) direct bank placement
will refund PH’s series 2006 and 2006B bonds and pay issuance costs. The
bonds are scheduled to sell via negotiated sale the week of Sept. 8,
2016.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by mortgages on PH’s three retirement communities
and a security interest in pledged assets (including gross receipts).

KEY RATING DRIVERS

EXCELLENT OPERATING PERFORMANCE: As a result of strong occupancy trends,
economies of scale from running three retirement communities and pricing
flexibility, operating performance and profitability levels are very
healthy. The operating ratio averaged a very good 96.1% from fiscal
2011-2015, which is in-line with Fitch’s ‘A’ category median of 94%. In
addition, PH’s net operating margin-adjusted averaged 31% from fiscal
2011 through 2015, which is well above Fitch’s ‘A’ category median of
19.3%.

FAVORABLE DEMAND TRENDS IN MULTIPLE LOCATIONS: Given its long operating
history, favorable locations and attractive service offerings, PH enjoys
strong demand at its three continuing care retirement communities (CCRC)
in North Carolina. On an aggregate basis, independent living unit (ILU),
assisted living unit (ALU) and skilled nursing facility (SNF)
occupancies averaged 95.4%, 91.3% and 91.2%, respectively, from fiscal
2013 through fiscal 2015 (Sept. 30 year-end).

VERY GOOD LIQUIDITY INDICATORS: At May 31, 2016, PH’s $92.4 million of
unrestricted cash and investments amounted to 721 days cash on hand,
8.9x pro forma cushion ratio, and 83% of pro forma debt. These liquidity
metrics are mixed verses Fitch’s ‘A’ category medians and are more
beneficial given PH’s mostly fee-for-service residency contracts with
non-refundable entrance fees.

MODERATELY HIGH DEBT POSITION: After the series 2016B and 2016C
refunding and issuance of a $20 million direct bank purchase (series
2016A) during the second quarter of fiscal 2016, PH’s long-term debt
will total approximately $112.7 million. As a result, pro forma maximum
annual debt service (MADS) of about $10.4 million amounts to a high
16.6% of fiscal 2015 revenues. Regardless, debt amortizes rapidly and
robust cash flows produced healthy pro forma debt to net available of
4.4x as of May 31, 2016.

RATING SENSITIVITIES

OPERATING PROFILE MAINTENANCE: The ‘A-‘ rating assumes that Presbyterian
Homes Obligated Group maintains its current credit profile,
characterized by favorable occupancy, healthy operations and very good
liquidity balances.

CREDIT PROFILE

The Presbyterian Homes, Inc. (Parent) traces its origins to 1946 and was
established by the Presbyterian Church. While the Parent enjoys close
ties to the Presbyterian Church, there is no legal relationship among
the parties. The Parent, either directly or through its affiliates, owns
and operates three continuing care retirement communities (CCRC) in
North Carolina: Glenaire, located in Cary; River Landing at Sandy Ridge
(River Landing), located in Colfax; and Scotia Village, located in
Laurinburg.

All three CCRCs are accredited by the Commission on Accreditation of
Rehabilitation Facilities and all of PH’s skilled care centers maintain
five-star Center for Medicare and Medicaid Services (CMS) overall
ratings. Resident agreements are mostly fee-for-service arrangements
since PH only includes 14 days of health center care in its contract.
While PH offers agreements with entrance fee refunds, a significant
portion (over 95%) of its residents select contracts with a declining
balance over 48 months, which is a positive rating factor since cash
flows are enhanced.

Glenaire includes 212 ILUs, 49 ALUs, and 71 SNF rooms on 30 acres in
Cary, which is adjacent to Raleigh. Glenaire is in the process of
constructing a new 12-unit apartment building that is 100% pre-sold with
50% entrance fee deposits which is expected to open in December 2016.
River Landing has 298 ILUs, 40 ALUs, 16 memory care units, and 60 SNF
beds and is located in Colfax which is adjacent to High Point in the
Piedmont Triad region. River Landing’s spacious 151-acre campus also
includes a nine-hole golf course which draws residents from a broader
geographic region. Scotia Village is located on about 66 acres in
Laurinburg, adjacent to St. Andrew’s University and near the South
Carolina border. Its unit mix includes 126 ILUs, 28 ALUs, 8 memory care
units, and 50 SNF rooms.

PH is also affiliated with The Presbyterian Homes Foundation, Inc.
(Foundation). The Foundation is combined into the Parent’s financial
statements and will be added to the obligated group as a part of the
series 2016C bond issue. The Foundation was organized to raise endowment
funds, support charitable care and provide special programs for PH’s
residents. The Foundation holds about $29.7 million of unrestricted
investments and $2 million of restricted funds as of Sept. 30, 2015. The
Parent, its affiliate Glenaire, Inc., and the Foundation are obligated
group members.

The Parent’s other non-obligate affiliate, PHI Management Services, LLC
was formed in April 2016 to provide management and administration
services for retirement communities. As of May 1, 2016, PHI Management
Services entered into its first management services contract with
Greensboro-based Friends Homes, Inc. The Parent is also a participant in
a joint venture, Capital Towers, III, LLC to redevelop a senior
affordable housing project in Raleigh that will be financed and
regulated by the Low Income Housing Tax Credit Program. In fiscal 2015,
the obligated group generated $56 million of operating revenues and
represented 100% of total system operating revenues. In addition for
fiscal 2015, the combined system totaled $254.6 million of assets, with
the obligated group representing the entire amount. It is expected that
the new non-obligated affiliates created during fiscal 2016 will have
modest operations and limited assets.

DEMAND FOR SERVICES AND OCCUPANCY

Given its long operating history, favorable locations and demographics
in North Carolina, and attractive service offerings, PH enjoys strong
demand at its three CCRCs. Another driver of PH’s demand, particularly
at Scotia Village and River Landing, is the attraction of residents from
outside the immediate market areas. For Scotia Village, its appeal to
outside residents reflects its relative value to comparable CCRCs and
location nearby Fort Bragg for persons with military affiliations. River
Landing’s central location in the Piedmont Triad and availability of on
campus golf attracts residents from a broader geographic region.

Demand indicators at PH’s three CCRC are as follows: (1) At Glenaire,
ILU, ALU and SNF occupancies averaged 98.3%, 86.5% and 91.1%,
respectively, from fiscal 2013 through the interim period ending May 31,
2016. (2) River Landing’s ILU, ALU and SNF occupancies averaged 96%,
94.1% and 91.6%, respectively, over the last four years. (3) Scotia
Village’s average occupancies during the last four fiscal years for ILUs
(92.3%), ALUs (89%) and SNFs (89.7%) were also very good.

FINANCIAL PERFORMANCE AND POSITION

Due to the strong occupancies, economies of scale from running three
communities and favorable residency agreement pricing, operating
performance and profitability levels are strong. The operating ratio
averaged a very solid 96.1% from fiscal 2011-2015 and is mostly in line
with Fitch’s ‘A’ category medians. Furthermore, PH’s net operating
margin (14%) and net operating margin-adjusted (31%) averages during the
last five fiscal years are some of most robust ratios for Fitch’s ‘A’
category rated CCRCs. Consistently strong net entrance fee receipts that
averaged nearly $12 million from fiscal 2012-2015 provide financial
flexibility given PH’s mostly fully amortizing resident agreements. As a
result, despite a high debt burden, pro forma MADS coverage is healthy
at 2.6x in fiscal 2014, 2.3x in fiscal 2015, and 2.5x for the
eight-month period ending May 31, 2016. Pro forma revenue only MADS
coverage is also solid at 1.4x and 1.2x, respectively during the last
two fiscal years.

After the reimbursement from the series 2016A direct bank purchase, PH’s
$92.3 million of unrestricted cash and investments amounted to 721 days
cash on hand, 8.5x pro forma cushion ratio, and 83% of pro forma debt as
of May 31, 2016. These liquidity metrics are mixed versus Fitch’s ‘A’
category medians of 681 days cash on hand, 18.5x cushion ratio, and 125%
cash to debt. Nonetheless, PH’s liquidity metrics are satisfactory for
the rating category given that they do not have any exposure to life
care residency agreements and traditionally provide very limited
entrance fee refunds.

CAPITAL PLANS

PH recently closed on a $20 million direct bank loan to finance about
80% of its capital projects over the next several years. While PH
originally anticipated funding the capital plans with reserves and cash
flow, the attractive cost of capital led to the increased borrowing. The
main projects include the 12-unit apartment building and total
renovation of the SNF and ALU areas to household models of care ($10.8
million) at Glenaire, common space renovation at River Landing ($3.25
million), and total renovation of the SNF rooms and ALU space to
household model of care ($5.4 million) at Scotia Village. Fitch views
the capital planning and projects favorably since they are manageable
and address ILU demand and facility limitations for its health care
programs.

DEBT PROFILE

After the series 2016 refunding and issuance of a $20 million direct
bank loan during the second quarter of fiscal 2016, PH’s total long-term
debt will be approximately $112.7 million. $1 million of the new direct
bank loan is expected to be repaid with initial entrance fees from the
aforementioned 12-unit apartment building project. PH’s long-term debt
is reduced from $132 million as a result of the release of debt service
reserve funds and the use of premium refunding bonds. Only the $30.6
million series 2016C bonds will be traditional fixed rate bonds. The $14
million series 2015 bonds are fully amortizing fixed rate direct bank
purchases that mature in 2031. The $48 million series 2016B direct bank
purchase is expected to be fully amortizing floating rate obligations
that are swapped to fixed rate and mature in 2027. The new $20 million
series 2016A direct bank purchase is also a fully amortizing floating
rate loan that is swapped to fixed rate and matures in 2028. All of PH’s
direct bank debt is provided by BB&T.

Additionally, all of PH’s variable rate bank debt ($68 million) is
hedged with fixed payor interest rates swaps (with BB&T as the
counterparty). The bonds, bank debt and swaps are secured on a parity
basis and generally have the same financial covenants. However, the bank
covenants include a 70% debt to capitalization ratio requirement. In
addition, the swaps do not have any collateral posting requirements.
While this level of bank held and floating rate debt with a single
provider is a high, PH’s interest rate hedge and avoidance of put risk
prior to maturity are offsetting factors.

Pro forma MADS as a percent of revenues is high at 16.6% in fiscal 2015
and is above Fitch ‘A’ category median of 9.2%. Nonetheless, PH’s debt
service schedule amortizes quickly and is relatively front-loaded with
most debt maturing within 15 years (by the year 2031). For the
eight-month period ending May 31, 2016, pro forma debt to net available
(4.4x) is very good due to robust cash flows and is in line with Fitch’s
‘A’ category median of 4.3x. Pro forma adjusted debt to capital is
manageable at 52.1%, but above the ‘A’ category median of 45.5%.

DISCLOSURE

PH covenants to disclose annual operating statistics and audited
financial statements within 120 days and quarterly statistics and
financial statements within 45 days, to the Municipal Securities Board’s
EMMA system.

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=1010654

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1010654

Endorsement Policy

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

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