OREANDA-NEWS. Fitch Ratings has assigned a 'BB+' rating to the expected issuance of $50.8 million of New Hope Cultural Education Facilities Finance Corporation retirement facility revenue bonds series 2016 on behalf of MRC Crestview (Crestview).

The Rating Outlook is Stable.

The series 2016 bonds are expected to price the week of Aug. 22, 2016 via negotiation. The bonds are expected to be issued as fixed rate. Proceeds will be used to advance refund Crestview's outstanding series 2010 and series 2011 bonds and establish a debt service reserve fund (DSRF).

SECURITY

The bonds will be secured by a lien on and security interest in certain mortgaged properties, a gross revenue pledge, and a DSRF.

KEY RATING DRIVERS

STRONG OCCUPANCY: Crestview's replacement independent living units (ILU) opened in 2013 to strong demand, and had average occupancy of 97.4% in 2014. Average ILU occupancy remained a very strong 98.8% through May 31, 2016 (five-month interim). Assisted living unit (ALU) and skilled nursing facility (SNF) occupancies were also robust at 98% and 96%, respectively. Crestview's occupancy is supported by its favorable skilled care reputation and its status as the only lifecare facility in the service area.

STABILIZING OPERATING PROFILE: Crestview's operating ratio of 93.7% through the five-month interim was favorable to Fitch's 'below investment grade' (BIG) median of 97.0%, and was improved from 109.0% in 2013. The improvement is impressive for a Type-A community and indicates solid operations within Crestview's ALUs and SNF. Given Crestview's high leverage position and modest revenue base, it is necessary for the community to produce solid operating results in order to support stable debt service coverage.

ELEVATED DEBT BURDEN: Crestview's debt burden is elevated as evidenced by pro forma maximum annual debt service (MADS) as 23.6% of annualized 2016 revenues (based on five-month interim results). In addition, total pro forma debt to net available of 8.9x through the interim is unfavorable to the 'BIG' median of 7.6x. Offsetting some concern is strong revenue only coverage of 1.3x.

MIXED LIQUIDITY POSITION: Crestview's 433 days cash on hand (DCOH) at May 31, 2015 was above the 'BIG' median of 227 days. However, cushion ratio of 4.6x and cash to pro forma debt of 27.8% were below the respective medians of 5.0x and 37.3%. Given Crestview's low age of plant and modest capital expenditure assumptions, Fitch expects its liquidity position to improve over the medium term.

METHODIST RETIREMENT COMMUNITIES AFFILIATION: Crestview's sole corporate member and manager is Methodist Retirement Communities (MRC). In addition to Crestview, MRC owns and operates three other continuing care retirement communities (CCRC), a standalone SNF, and several affordable senior housing communities. Fitch believes that the affiliation provides Crestview with resources and expertise that are not typically available to single-site communities. MRC is not obligated on any of Crestview's debt.

RATING SENSITIVITIES

STABILITY EXPECTED: The 'BB+' rating incorporates Fitch's expectation that Crestview Retirement Community will continue to produce strong operating results that improve its liquidity position and support stable debt service coverage over the medium term.

CREDIT PROFILE

Crestview Retirement Community is a Type-A, lifecare, community located in Bryan, TX. The community underwent a full replacement and repositioning project in 2012, which included the construction of new ILUs, as well as a new Health Center consisting of ALU, ALU Memory Care units, and SNF beds. Crestview currently operates 92 ILUs, 48 ALUs, 18 Memory Care units, and 48 SNF beds. Crestview is the only member of the Obligated Group. There has been no history of transfers to MRC or its other affiliates and Fitch does not expect such transfers in the future. Total revenues for 2015 were $13.2 million.

STABILIZING OPERATING PROFILE

Crestview's operations have shown year-over-year improvement over the last three years, as evidenced by an improved operating ratio of 93.7% through the interim period, compared to 109.0% in fiscal 2013. Additionally, net operating margin (NOM) has grown to 31.3% from 21.9% over the same time period, and was significantly ahead of the 'BIG' median of 6.6%. Fitch believes that it is necessary for Crestview to continue producing strong operating results, in the absence of solid entrance fee receipts, in order to support stable debt service coverage over the medium term.

Improved performance is supported by Crestview's strong occupancy across all service lines and is indicative of good expense control and solid operations in the community's healthcare center. Crestview's SNF benefits from a currently favorable payor mix which consists of 46.4% Medicare and 26.8% private pay, with very little Lifecare at only 6.3%.

In the near term, Fitch believes that Crestview has a heightened sensitivity to changes in the SNF payor mix given its high percentage of Medicare residents and the emerging bundled payment initiatives. Over the longer term, Fitch expects the Lifecare portion of Crestview's payor mix to increase as the community's current residents begin to move through the continuum of care, which is likely to negatively affect profitability. However, given that the community is currently 99% occupied in its ILUs, resident turnover will allow Crestview to benefit from incremental entrance fee receipts, which should supplement any shortfalls from healthcare operations.

ELEVATED DEBT BURDEN

Crestview's pro forma MADS of $3.3 million represented a very high 23.6% of annualized 2016 revenues (based on five-month interim results), unfavorable to Fitch's 'BIG' median of 10.0%. Pro forma debt to net available of 8.9x and adjusted debt to capitalization of 123.2% were also both unfavorable to Fitch's median of 7.6x and 78.4%, respectively.

Crestview's MADS debt service coverage of 1.9x through the interim was ahead of the 'BIG' median of 1.5x. Significantly, revenue only coverage of 1.3x was also ahead of the 0.8x median and provides some comfort given Crestview's high leverage position.

MIXED LIQUIDITY POSITION

Crestview's $15.1 million in unrestricted cash and investments at May 31, 2016 was improved from $8.7 million at Dec. 31, 2013 and equated to 433 DCOH, 27.8% cash to pro forma debt and a 4.6x cushion ratio. Crestview's DCOH position is favorable to Fitch's 'BIG' median of 227 days, however, its metrics in relation to debt remain below the respective medians of 37.3% cash to debt and 5.0x cushion ratio. Fitch expects Crestview's liquidity position to improve over the medium to longer term as the community grows its cash position and amortizes its debt burden.

DEBT PROFILE

Post-issuance, Crestview's only outstanding bonds will be the fixed-rate series 2016 bonds. The bonds are expected to have level debt service of approximately $3.3 million through maturity. Crestview does not have any outstanding swaps.