OREANDA-NEWS. Fitch Ratings has assigned an 'A-' rating to the expected issuance of $41.9 million of North Carolina Medical Care Commission (MCC) health care facilities first mortgage revenue refunding bonds, series 2016 on behalf of Deerfield Episcopal Retirement Community (Deerfield).

In addition, Fitch has upgraded to 'A-' from 'BBB+' the ratings on the following revenue bonds issued through the North Carolina MCC on behalf of Deerfield:

--$46.6 million series 2008 A;

--$30 million series 2008 B.

Bond proceeds are expected to refund Deerfield's 2008 A fixed-rate bonds and pay costs of issuance. The bonds are expected to sell in mid-July.

The Rating Outlook is revised to Stable from Positive.

SECURITY

The bonds are secured by pledged assets which include gross receipts and a first-mortgage lien.

KEY RATING DRIVERS

STRONG OCCUPANCY: The upgrade reflects Deerfield's historically strong demand indicators. Occupancy in its independent living units (ILUs) has been at or above 95% in each of the last three fiscal years. Moreover, Fitch views Deerfield's national draw (roughly 1/3 of residents originate from outside NC) positively as it insulates the community from changes in the local economy and real estate prices.

CONSISTENT GROWTH IN LIQUIDITY: Deerfield's strong cash flow and profitability have translated into solid liquidity growth over the last five fiscal years. At March 31, 2016, unrestricted cash and investments totaled $93.5 million, which is up from $76 million at FYE 2013. As result, liquidity metrics are consistent with 'A' category medians with 1,329 days cash on hand (DCOH), a 14.1x cushion ratio (based on pro forma maximum annual debt service) and cash-to-debt of 95.1%.

SOLID PROFITABILITY: Deerfield's profitability metrics remained strong in fiscal 2015 with net operating margin-adjusted of 34.3%, well exceeding the 'A' category median of 22.2%. Over the last four fiscal years (2012-2015), Deerfield's net operating margin (NOM)-adjusted has been no less than 34%, reflecting its residency contract and strong demand for services.

HIGH DEBT BURDEN: Deerfield's debt burden is high with pro forma maximum annual debt service (MADS) equal to 18.2% of fiscal 2015 revenues. Historical coverage of pro forma MADS is adequate at 2.5x and 2.6x in fiscal 2015 and 2014, respectively. Deerfield's debt burden is currently mitigated by strong liquidity growth and an expansion project including 27 additional ILUs. The expansion should bolster annual revenues, enhance coverage, and moderate its debt burden.

RATING SENSITIVITIES

EXPANSION PROJECT: While Fitch expects Deerfield Episcopal Retirement Community's (Deerfield)ILU expansion project to be constructed and filled in a timely manner and within budgeted parameters, any related issues resulting in weakened balance sheet reserves or profitability metrics could put negative pressure on the rating.

MODERATED DEBT POSITION: Continued revenue growth and steady cash flows could further increase Deerfield's liquidity position, moderate its debt burden, and increase its coverage ratios, which together could result in upward rating movement.

CREDIT PROFILE

Deerfield is a Type-A continuing care retirement community (CCRC) located on 125 acres in Asheville, North Carolina. Deerfield consists of 351 ILUs, 62 assisted living units, and 62 skilled nursing beds. Total operating revenues in fiscal 2015 was $32.1 million.

STRONG MARKET POSITION AND OCCUPANCY

Deerfield has a long history of operations in Asheville, NC that dates back to 1955. Deerfield maintains a national draw on prospective residents as approximately 31% of current residents come from other states in the U. S., while 24% come from other areas in NC and 45% are from its primary market area. The geographic diversity amongst prospective residents is viewed favorably and is attributed to Deerfield's status as a 'destination' CCRC. Fitch believes this regional/ national draw of residents helps insulate Deerfield from local and regional economic and real-estate pressures and has led to robust occupancy levels over the last few fiscal years.

As of March 31, 2016, IL occupancy has been strong at 97%. This follows three strong years of IL occupancy which has been 97%, 97%, and 95% over the last three fiscal years. While assisted-living (AL) units and skilled nursing occupancy has dropped to 91% and 90%, respectively, at the six-month interim period, occupancy still remains strong. Given Deerfield's 'LifeCare' contract offering, there is less of a concern over the small drop in AL and skilled nursing occupancy through the interim period. Over the last three fiscal years, AL occupancy has been 100%, 98%, and 95% and skilled nursing has been 95%, 94%, and 92%. Deerfield currently maintains an extensive waiting list of 889 persons which translates to almost 19 years given actuarial turnover.

EXPANSION PROJECT

To meet increasing demand, Deerfield is continuing its current capital project to add 27 additional IL cottages to its campus. Construction began last year, and move-ins began in May 2016. As of June 28, 2016, one unit is occupied and five move-ins are scheduled for July 2016. All of the units for the project have been presold with deposits of 10% of entrance fees. The project is expected to be completed by June 2017. The total project cost is estimated at $15.8 million and is expected to be paid by an equity contribution. After factoring in first-generation entrance fees, the net cost of the project is expected to be only $2.5 million and should have minimal impact on Deerfield's liquidity position. The additional units should help generate excess revenues, which should have a positive impact on Deerfield's debt burden and coverage ratios.

BALANCE SHEET GROWTH

The upgrade incorporates the strong growth in cash and investments on Deerfield's balance sheet over the last five fiscal years. This growth is primarily attributed to robust profitability and cash flows following Deerfield's last expansion project which was completed in 2010. Unrestricted cash and investments at March 31, 2016 equates to a very strong 1,329 DCOH, a 14.1x cushion ratio, and 95.1% cash-to-debt. Additionally, over 91% of Deerfield's 'LifeCare' contracts are fully amortizing, which limits the community's entrance fee refund liability.

SOLID PROFITABILITY AND COVERAGE

Profitability remained strong in fiscal 2015 as adjusted net operating margin was 34.3% and excess margin was 15.7%. Both ratios far exceed Fitch's 'A' category medians of 22.2% and 5.4%, respectively. Operating margin declined to 4.3% in fiscal 2015 from 8.7% in fiscal 2014 but still remains sufficient for a Type-A facility. This decrease is primarily attributed to increased salaries and resident care costs. Pro forma MADS coverage remains adequate at 2.5x in fiscal 2015 and is slightly lower than the 'A' category median of 3.1x.

ELEVATED DEBT BURDEN

Deerfield has $98.4 million in outstanding debt which is comprised of 70% fixed-rate debt and 30% variable-rate debt (2008 B bonds). The variable-rate debt remains unhedged and has a letter of credit with Branch Banking Trust Company (rated 'A+/F1') that expires in 2019. The main credit concern is Deerfield's elevated debt burden. Pro forma MADS equates to a high 18.2% of fiscal 2015 revenues as compared to the 'A' category median of 9.2%. Deerfield's elevated debt burden is mitigated by its improving liquidity position and strong historical profitability. Furthermore, Fitch expects Deerfield's debt burden to moderate upon completion and stabilization of its 27 unit independent living expansion project.

CONTINUING DISCLOSURE

Deerfield covenants to provide audited financial information within 120 days of fiscal year end, quarterly statements within 45 days of quarter end (including occupancy statistics), annual budget and management letter within 120 days of fiscal year end, and for any material event.