OREANDA-NEWS. Fitch Ratings has affirmed the 'BBB-' rating on the following City of La Verne, CA certificates of participation, issued on behalf of Brethren Hillcrest Homes (Hillcrest):

--$38.8 million series 2014.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a gross revenue pledge, a first fee of trust on certain property, and a debt service reserve fund.

KEY RATING DRIVERS

SOLID ENTRANCE FEE RECEIPTS: Hillcrest generated a solid $6.9 million in net entrance fee receipts in fiscal 2015. Sales remained strong through the nine-month interim period (ended March 31, 2016) producing $3.3 million in net receipts, which resulted in a robust net operating margin (NOM)-adjusted of 26.8%. Management is projecting to generate $5.9 million in net entrance fee receipts in fiscal 2016, which Fitch views as feasible.

HEALTHY DEBT METRICS: Hillcrest's debt service coverage has averaged 2.9x over the last four fiscal years; coverage was 2.3x through the interim, ahead of Fitch's 'BBB' median of 2.0x. In addition, Hillcrest's debt burden remains manageable with maximum annual debt service equating to 12.4% of annualized revenues through the interim, equal to Fitch's median.

LIGHT, BUT IMPROVING LIQUIDITY: Hillcrest's liquidity position at March 31, 2016 remains light with 300 days cash on hand (DCOH), 38.5% cash to debt and a 5.1x cushion ratio, all of which were below Fitch's 'BBB' medians of 400 days, 60% and 7.3x, respectively. However, liquidity metrics have improved substantially from 220 DCOH, 23.7% cash to debt and 3.4x cushion ratio at Dec. 31, 2012.

MIXED SERVICE AREA: Hillcrest's service area is characterized by strong housing values and income levels, both of which compare favorably to Hillcrest's entrance fee and monthly fee pricing. However, the landscape is competitive with a number of other senior living and senior service providers in the area.

RATING SENSITIVITIES

MASTER FACILITIES PLAN DEVELOPMENT: Brethren Hillcrest Homes is in the process of developing a master facilities plan which may incorporate a nominal amount of additional debt. Fitch notes that there is limited debt capacity at the current rating level and a significant increase in debt or outlay of cash for capital needs could prompt negative rating pressure.

FURTHER LIQUIDITY GROWTH: Further liquidity growth which brings Brethren Hillcrest Homes' liquidity metrics more in line with the 'BBB' category medians could prompt positive rating movement.

CREDIT PROFILE

Brethren Hillcrest Homes (Hillcrest) is a Type B (modified fee-for-service) continuing care retirement community (CCRC), established in March 1947 by a local faith community of the Church of the Brethren to provide housing and services for its retiring ministers and missionaries. Today, Hillcrest consists of 229 residential homes and apartments, 48 assisted living units (ALU), 24 dementia beds, and 74 skilled nursing facility (SNF) beds. Hillcrest reported total revenues of $22.5 million in fiscal 2015 (year ended June 30).

MANAGEABLE DEBT BURDEN

Hillcrest's debt burden remains manageable with level debt service that equated to 12.4% of annualized revenues through the nine-month interim period, the same as Fitch's 'BBB' median. Hillcrest's total debt of $38.8 million equated to 5.7x of annualized net available through the interim, favorable to Fitch's median of 5.9x. Additionally, debt service coverage by net available has been strong for the rating category over the last four years. Revenue only coverage has declined somewhat over the last four years, and was at 0.8x through the interim, just below the 1.0x median.

LIGHT, BUT IMPROVING LIQUIDITY

Hillcrest's unrestricted cash and investments of $14.9 million as of March 31, 2016 have improved by almost 50% since Dec. 31, 2012. Liquidity metrics still remain light for the rating category, however, Fitch expects Hillcrest to continue growing its cash position over the medium term through cash flows from solid entrance fee receipts and continued positive operating profitability driven by strong occupancy.

MIXED SERVICE AREA AND OCCUPANCY

Hillcrest operates in an economically favorable, but competitive service area. The community has been able to maintain strong independent living unit (ILU) occupancy (94% through the interim), despite the competitive landscape. SNF occupancy has also remained relatively stable in recent years and was at 87% through the interim. However, ALU occupancy has declined over the last three years due to competitive pressures and a higher patient acuity mix. Additionally, Hillcrest has a relatively high exposure to Medi-Cal in its SNF of 30.6% through the interim, which presents some concern.

DEBT PROFILE

The series 2014 bonds are fixed rate, tax exempt certificates, comprised of both serial and term bonds with a 10-year call provision. The 2014 certificates mature in 2036, fully amortize, and have level debt service. Maximum annual debt service (MADS) is $2.9 million. Hillcrest has no swaps.

DISCLOSURE

Hillcrest covenants to provide routine annual disclosure within 120 days and quarterly disclosure within 60 days to bondholders. Disclosure includes financial statements, occupancy levels, payor mix data, material events, and covenant performance. Disclosure to Fitch has been timely, with good access to management.