Fitch Affirms Presbyterian Villages of Michigan Obligated Group's 2015 Revs at 'BB+'; Outlook Stable

Fitch Ratings has affirmed the 'BB+' rating on the following bonds issued on behalf of the Presbyterian Villages of Michigan Obligated Group (PVM OG):

--$30.5 million Michigan Finance Authority revenue and refunding bonds (Presbyterian Villages of Michigan) series 2015.

The Rating Outlook is Stable.

SECURITY

Bonds are secured by a pledge of unrestricted receivables, a mortgage on certain properties, and debt service reserve fund.

KEY RATING DRIVERS

OG TRANSFORMATION CONTINUES: In the past year, the PVM OG has sold the OG portion of an underperforming campus, focused its strategy on its best performing campus, and completed a larger organizational strategic plan. Early results show improvement in PVM OG's core operating performance, with a 95.8% operating ratio in audited 2015, which is the strongest it's been over the four-year historical period. However, PVM OG's operating margin remained thin at 2.6%.

EAST HARBOR DRIVING PERFORMANCE: The strong operating results at the Village of East Harbor have been supported by high occupancy, with independent living (IL) occupancy at 96% in 1Q2016, and a good market position in a good service area. The PVM OG is moving forward on a campus repositioning and expansion that could cost up to $30 million.

ADEQUATE LIQUIDITY: At March 31, 2016, PVM OG had $10.7 million in unrestricted cash and investments, which equated to 150 days cash on hand and 45.7% cash to debt. Liquidity growth has historically been suppressed by PVM OG advances to entities outside the OG. While Fitch expects these advances to decline, capital spending could affect liquidity growth moving forward. Total unrestricted cash and investments have remained essentially flat over the last four audited years.

COVERAGE IMPROVING: Maximum annual debt service (MADS) coverage of 1.7x in 2015 and 1.9x in 2016 are very good for the rating level. Coverage in 2013 (2.7x) and 2014 (2x) was helped by one-time items, which when backed out lowered coverage to approximately 1.5x. Debt service coverage in the first quarter of 2016 represents core operating performance, and this level of coverage will be key to maintaining the rating, especially if any additional debt is issued, and for any potential upward movement in the rating.

RATING SENSITIVITIES

STABILITY AT CURRENT RATING: Fitch believes Presbyterian Villages of Michigan Obligated Group's (PVM OG) financial performance will remain stable over the next two years. Growth in liquidity and sustaining the improved level of coverage would be needed for an upgrade. A drop in liquidity or material fall off in performance would be needed for a downgrade.

EXPANSION PLANS: PVM OG is planning a licensed healthcare renovation and expansion at East Harbor that would require additional debt (project cost is estimated at $30 million) and would have associated fill up risk on the new units. The project is not factored into this rating. The first phase, anticipated to start by year's end, is expected to be a $9.2 million renovation and skilled nursing project that would be funded by the Redford sale proceeds, existing bonds funds, philanthropy, debt, and cash flow.

CREDIT PROFILE

Headquartered in Southfield, MI, PVM OG consists of PVM Corporate, a foundation, and rental continuing care retirement communities in Westland and Chesterfield Township, MI, and a PVM entity that is a general partner in a PVM non-OG affordable housing campus.

The two PVM OG campuses total 289 independent rental units, 126 assisted living (AL) units, and 90 skilled nursing beds. The PVM OG group reported $28.4 million in operating revenue in 2015, which is down approximately $10 million from 2104 reflecting the impact of the Redford sale. PVM also has an ownership interest in approximately 1,780 IL and AL units through non-obligated entities, most of which it manages, and an equity interest in a PACE program.

OG UPDATE/PERFORMANCE

In September of 2015, PVM OG completed the sale of its AL, memory care, and skilled units on the Redford campus to Advantage Management Group, which netted $6.5 million. PVM continues to own and operate non-OG IL units on the Redford campus. The sale proceeds are expected to be put towards a $9.2 million renovation project at the East Harbor campus. The project will include renovations to common areas, the existing AL, memory loss units, and licensed nursing areas, and the construction of new transitional care unit wing and rehabilitation center. Additional funds are anticipated to come from philanthropy, with approximately $895,000 raised as of Dec. 31, 2015, with a goal of a $2 million to support the new wellness center.

The East Harbor campus has been a strong financial performer, although both East Harbor and Westland had positive operating margins in 2015. East Harbor currently has the stronger demand for services, as indicated by high IL occupancy of 96%, relative to 76% at Westland, as of March 31, 2016. The high occupancy at East Harbor supports the capital investments that the PVM OG is planning, which should help keep the campus marketable and expand services.

The PVM OG showed improved performance in 2015 from 2014, with the operating ratio improving to 95.8% from 98.7%. The improved performance reflected higher operating income at both East Harbor and Westland and expense reductions at the PVM corporate parent. The improved performance has been sustained in the 1Q2016 interim period with the operating ratio at 94.8%. Fitch's 'BBB' category median is 96.1%.

Overall occupancy remains fairly stable, although IL occupancy fell to 82% in 1Q2016, from 88% at year-end fiscal 2015, reflecting the challenges in occupancy at Westland. AL and skilled nursing both improved with AL up to 90% from 84% and the skilled nursing census up to 90% from 80% when including the 88 licensed bed at Redford OG for the full year.

However, the increase in AL and skilled nursing occupancy is largely driven by the fewer units available with sale of Redford. The skilled nursing payor mix has also improved, as the OG's 90 skilled nursing beds are solely on the East Harbor campus. As a result both Medicare and private pay are up as a percentage of gross revenues and Medicaid fell.

Liquidity growth continues to be constrained with PVM OG's improved balance sheet reflecting the sale of Redford and the amortization of debt. At Dec. 31, 2012, unrestricted cash and investments were at $10 million and it was at $10.7 million at March 31, 2016. The lack of growth in unrestricted liquidity remains a credit concern, especially as the PVM OG is likely moving forward on a major capital project at East Harbor, and potentially at the Westland campus after that.

Advances to affiliates have remained fairly stable. At March 31, 2016, the receivable on the advances stood at $9.1 million relative to $8.1 million at year end 2015. The increase in the receivables was solely from the transfer of donation raised, so it did not affect PVM OG's cash and investments.

Debt Profile

All of the PVM OG's $30 million in long term debt is fixed rate. There are no outstanding swaps.

The PVM OG's debt burden is mixed. MADS of $2 million represent a manageable 7.4% of revenues at March 31, 2016, while Debt to EBITDA was elevated at 7.8x.

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

Not-for-Profit Continuing Care Retirement Communities Rating Criteria (pub. 04 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=868824

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

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

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1005173

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005173

Endorsement Policy

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

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