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Fitch Affirms Christian Care Centers, TX Rev Bonds at 'BB+'; Outlook Remains Negative.

Austin: Fitch Ratings has affirmed the 'BB+' rating on the following bonds issued by Mesquite Health Facilities Development Corporation, TX on behalf of Christian Care Centers (Christian Care):

--$24.4 million retirement facility revenue bonds, series 2016;

--$29.785 million retirement facility revenue bonds, series 2014.

The Rating Outlook remains Negative.

SECURITY

The bonds are secured by a gross revenue pledge, mortgage liens on Christian Care's property, and debt service reserve funds.

KEY RATING DRIVERS

PRESSURE FROM TRANSFORMATION PROJECT: Maintenance of the Negative Outlook on Christian Care reflects Fitch's expectation that pressure on coverage and liquidity will continue into fiscal 2019 as a result of its transformation project. The project has included the addition of independent living unit (ILUs), assisted living unit (ALUs), memory care MC) units at the Allen campus, conversion of the skilled nursing facility (SNF) at the Fort Worth campus to assisted living, and reconfiguration of SNF operations at the Mesquite campus to increase private rooms. Christian Care reports that projects are complete with the exception of the Mesquite campus SNF configuration, which is expected to be complete by the end of Jan. 2019. The projects are designed to position Christian Care to realize improved profitability based on the increase in ILUs and reduced exposure to risks associated with governmental payors.

TRANSITIONING OPERATIONS: Christian Care has realized some year-over-year improvement in ILU, ALU and MC occupancy through Sept. 30, 2018 (Dec. 31 year-end) as its projects reach completion. Its operating ratio through the first nine months of fiscal 2018 of 99.2% is improved from 102.5% in fiscal 2017 and favorable to Fitch's below-investment grade (BIG) category median of 101.6%. SNF occupancy remained low through the first nine months of the fiscal year due to operating difficulties since addressed. The current rating assumes ongoing utilization gains into fiscal 2019, reflecting a substantially full year of stabilized operations.

IMPROVING MARGINS; WEAK LIQUIDITY: A fiscal year to date (September 30) net operating margin of 7.8% is improved from 3.9% in fiscal 2017 and favorable to Fitch's BIG category median of 5.1%. Cash to debt of 26.2% is light in relation to Fitch's BIG category median of 32.1%. Modest liquidity is somewhat mitigated by Christian Care's ILU residency agreements -- rental contract and fee-for-service arrangements -- which lack exposure to long-term healthcare liability risks. Fitch expects Christian Care's liquidity to remain modest during the next two years based on its plans to cash fund ILU and AL upgrades in order to bolster its competitive position.

ELEVATED DEBT PROFILE: Leverage is high as measured by maximum annual debt service (MADS) coverage of 1.1x through Sept. 30 2018, unfavorable in relation to Fitch's BIG category median of 1.3x. Christian Care calculates historical debt service coverage per its master trust indenture (MTI) of 1.16x through the first nine months of fiscal 2018. To the extent that historical coverage is below 1.20x at the December 31 measurement date, the MTI requires retention of a consultant within 30 days following the calculation to make recommendations with respect to rates, fees, and charges and operations.

RATING SENSITIVITIES

OCCUPANCY AND UNIT/PAYOR MIX: Inability of Christian Care Centers to improve assisted living unit, memory care and skilled nursing facility occupancy levels and skilled nursing facility payor mix could pressure operating results and result in a rating downgrade.

WEAKENED OPERATING PERFORMANCE AND LIQUIDITY: Inability of Christian Care Centers to improve coverage or a sustained loss of liquidity could put pressure on the current rating. Improved coverage and liquidity could result in revision of the rating outlook to Stable.

CREDIT PROFILE

Christian Care serves the Dallas-Fort Worth metroplex with three senior living campuses in Mesquite, Fort Worth and Allen Texas. Aggregate capacity as of Sept. 30, 2018 consists of 409 ILUs, 232 ALUs - including 77 MC units, and 127 SNF beds. Total fiscal 2017 operating revenue was $35 million.

STABILIZING OPERATIONS

Occupancy averaged a strong 91% for ILUs, 92% for ALUs, and 90% for SNFs between fiscal 2012 and 2016. Christian Care has benefited from desirable locations, religious affiliation, and a reputation for quality care. A decline in fiscal 2017 utilization resulted from the planned SNF changes and the Allen campus fill up period, which was extended for the MC units due to competition from stand-alone ALU and MC facilities.

Overall occupancy through the first nine months of fiscal 2018 of 87.1% is improved from the fiscal 2017 average of 84.4% and incorporates ILU occupancy of 92.6%, as well as occupancies of 75.3% (SNF), 84.6% (ALU), and 82.5% (MC), generally improved from fiscal 2017, but still weak in relation to historical averages. Fitch expects Christian Care to realize improved occupancy levels in fiscal 2019 based on material completion of its transformation projects, new management attention focused on SNF operations and enhanced relationships with referring organizations.

IMPROVING MARGINS; WEAK LIQUIDITY

Christian Care turned around a four-year trend of deteriorating margins with a fiscal year to date net operating margin of 7.8%. The recent history of declining margins reflects pressure from governmental payors at Christian Care's skilled care centers. Medicaid reimbursement has not kept pace with general expense growth and Medicare payments were reduced by the clinical transformation of post-acute care services.

Fitch expects the recent selection of a new President and CEO, as well as retention of an experienced skilled nursing manager to support a modest improvement in fiscal 2019 margins. Fitch continues to believe that significant margin improvement necessitates both revenue growth and cost savings. Reduced exposure to governmental payors is likely to help Christian Care's profitability; however, this is dependent on the timing of resident turnover through attrition.

Christian Care calculates 152 days cash on hand at Sept. 30, 2018 compared to its MTI liquidity covenant of 160 days prior to stable operations. MTI days cash on hand increases to 170 on the Dec. 31, 2019 testing date and 180 days thereafter. Management anticipates potentially remaining below its liquidity covenant requirements over the next couple of years as cash is used to renovate its ILUs and ALUs given the regional competitive market. Upon failure to achieve at least 160 days cash on hand, the MTI requires that Christian Care submit to the master trustee an officer's certificate disclosing such deficiency, setting for the reasons for the deficiency and adopting a plan to address the liquidity shortfall. The MTI requires the certificate and retention of a consultant on the second occurrence of a liquidity shortfall below 160 days.

ELEVATED DEBT PROFILE

Leverage is high as measured by debt to net available of 12.8x through Sept. 30 2018, unfavorable in relation to Fitch's BIG category medians of 9.8x. Christian Care's fiscal year to date historical debt service coverage of 1.16x is below the fiscal 2017 coverage of 1.22x. While the MTI rate covenant requires retention of a consultant for the first missed historical debt service coverage ratio below 1.20x, it also considers that failure to maintain an historical debt service coverage ratio of at least 1.0x for two consecutive years constitutes an event of default. The current rating assumes that Christian Care will realize operating improvements to avoid triggering an event of default based on its rate covenant test.

Christian Care anticipates spending of about $2.4 million on capital improvements in fiscal 2018 and moderately more, subject to board approval, in fiscal 2019 and 2020 to improve its competitive position.
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Publication:Daily the Pak Banker (Lahore, Pakistan)
Geographic Code:1U7TX
Date:Jan 22, 2019
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