OREANDA-NEWS. Fitch Ratings has assigned a 'BBB+' rating to the expected issuance of \$111.6 million Colorado Health Facilities revenue refunding bonds, series 2015A on behalf of Covenant Retirement Communities, Inc. (CRC). In addition, Fitch affirms the outstanding 'BBB+' rating on approximately \$326 million of bonds (a portion of which will be refunded by the series 2015 bonds) issued through the following issuing authorities:

--Colorado Health Facilities Authority;
--California Statewide Communities Development Authority;
--Plantation Health Facilities Authority.

The Rating Outlook is Stable.

The series 2015 bonds are expected to be issued as fixed rate debt. Bond proceeds will be used to current refund approximately \$118.1 million of outstanding Colorado Health Facilities series 2005 bonds, fund a debt service reserve fund and pay costs of issuance. The series 2015A bonds are expected to price the week of March 10 through negotiated sale.

Concurrently with the issuance of the series 2015A bonds, CRC will issue approximately \$22.3 million of series 2015B revenue bonds through the Colorado Health Facilities Authority which will be used to refund CRC's outstanding series 1992 and series 1995 VRDBs issued through the California Statewide Communities Development Authority and the series 1998 revenue bonds issued by the City of Plantation Health Facilities Authority. The series 2015B bonds are expected to be issued in variable rate mode and will be sold in a private placement to Bank of America Public Capital Corp. Fitch was not asked to rate the series 2015B bonds.

KEY RATING DRIVERS

BENEFITS OF GEOGRAPHIC DIVERSITY: CRC is a multi-state continuing care retirement community (CCRC) system. Fitch believes the system's overall operating risk profile is reduced due to the size of its operations and the geographic dispersion of its communities. CRC operates 14 campuses in eight states with no single one community accounting for more than 11% of obligated group revenues.

STRONG ENTRANCE FEE RECEIPTS: In fiscal year 2015, CRC has maintained the strong volume of re-occupancies and net entrance fee receipts realized in fiscal 2014. Through the 11 months ended Dec. 31, CRC reported 326 re-occupancies which generated \$43.2 million in net entrance fee receipts. Management anticipates that total re-occupancies for fiscal 2015 will approximate 430 which is well in excess of the 342 budgeted for the year.

IMPROVING OCCUPANCY: The sustainment of strong unit sales experienced in fiscal 2014 through fiscal 2015 has resulted in a strong improvement in aggregate occupancy in CRC's independent living units (ILU). Through Dec. 31, 2014 (11 month interim), average occupancy in CRC's 3,065 ILU's improved to 88% from 84% in fiscal 2014. Average aggregate occupancy in the assisted living and skilled nursing units through the 11 months ended Dec. 31 remained solid at 85% and 89%, respectively.

ADEQUATE LIQUIDITY POSITION: Despite liquidity metrics that lag the 'BBB' category medians, CRC's liquidity metrics are considered adequate given the benefits of its size and geographic diversity. At Nov. 30, 2014, CRC's unrestricted cash and investments totaled \$195.1 million which translates into 343.3 days cash on hand , a cushion ratio (based on pro forma maximum annual debt service [MADS]) of 6.8x and cash to pro forma debt of 46.7% which are light compared to the respective 'BBB' medians of 407.6, 6.9x and 60.2%.

MODERATE DEBT BURDEN: Pro forma MADS of \$28.5 million equates to a moderate 11.9% of fiscal 2014 revenues while adjusted debt to capitalization at Nov. 30, 2014 of 56% is in line with the 'BBB' category median of 59%. Historical coverage of pro forma MADS was a solid 2.7x in fiscal year (FY) 2014 and through the 10 month interim period reflecting strong net entrance fee receipts.

RATING SENSITIVITIES

SUSTAINED IMPROVED CASH FLOW: In light of the improved aggregate occupancy, Fitch expects profitability from core operations to show solid improvement in fiscal 2016. Revenue-only coverage of pro forma MADS through the 10 month interim period of 1.1x is a sharp improvement from 0.5x revenue only coverage generated in fiscal 2013. Further, the continued focus on improving the payor mix in the SNF should add to improved operating profitability.

SECURITY

The series 2015 bonds are secured by a pledge of gross revenue, a mortgage on certain property and a debt service reserve fund.

CREDIT PROFILE

Covenant Retirement Communities is a type B CCRC system that operates 14 facilities in eight different states with a total of 3,065 ILUs, 755 assisted living units (ALUs) and 949 skilled nursing facilities (SNFs). In fiscal 2014, CRC generated total operating revenues of \$229.2 million. Fitch's analysis and the financial ratios referenced in this report are based on the obligated group results.

GEOGRAPHIC DIVERSITY A KEY CREDIT STRENGTH
The 'BBB+' rating reflects CRC's lower overall operating risk profile due to the size and geographic diversity of its operations and adequate liquidity position. CRC is composed of 14 campuses in eight states with no single facility accounting for more than 11% of total obligated group revenues. With communities in Florida, Connecticut, Minnesota, Colorado, Illinois, California, Michigan and Washington, Fitch believes the geographic diversity helps to reduce overall operating volatility from adverse economic, demographic or competitive changes in a particular service area or region. Despite challenges at certain communities in California, Illinois and Florida, CRC's size and geographic diversity remains a primary credit strength.

CONTINUED IMPROVEMENT IN OCCUPANCY AND PROFITABILITY
CRC has sustained the strong level of ILU sales/ re-occupancies in fiscal 2015 experienced in fiscal 2014. Average occupancy of CRC 3,016 ILUs improved to 88% through the 11 month's ended Dec. 31 which is a sharp improvement from the average ILU occupancy of 84% in fiscal 2014 and 83% in fiscal 2013. Eight of CRC's 12 CCRC communities showed higher ILU occupancy at fiscal year-end (FYE) 2014 compared to the prior year end. Only one community has an occupancy rate below rate 80% at Dec. 31, 2014 compared to five at FYE 2013.

The new marketing programs and personnel changes made over the last 12-18 months have sustained the level of robust sales experience in the fourth quarter of fiscal 2014. In FY 2014, CRC recorded the highest number of re-occupancies in its history at 452 which is a substantial improvement from the 252 and 249 re-occupancies generated in the fiscal 2013 and 2012, respectively. For fiscal 2015, CRC has generated a total of 326 re-occupancies through Dec. 31 and management expects to end fiscal 2015 at close to 430 which is well in excess of the 342 budgeted for 2015. Net entrance fee receipts of \$43.2 million through Dec. 31 is the second strongest year in CRC history and Fitch believes full year 2015 entrance fee receipts is likely to exceed fiscal 2014's record total of \$50.4 million. As result, net operating margin-adjusted of 23.8% through Nov. 30 is consistent with the 24.1% NOM-adjusted recorded in fiscal 2014 and exceeds the 'BBB' category median of 20.4%.

The improved ILU occupancy across the system combined with management's continued focus on expanding its Medicare/rehab census in the skilled nursing units has resulted in improved core operating profitability. Through the 10 month interim period, net operating margin improved to 6.6% from 4.1% and 3.3% in fiscal 2014 and 2013, respectively. Fitch expects profitability from core operations (i.e. excluding net entrance fee receipts) to improve further in fiscal 2015 as higher occupancy results in improved revenue from monthly service fees and as the dilutive impact from incentive programs burns off.

ADEQUATE LIQUIDITY
Despite liquidity metrics that lag the 'BBB' category medians, CRC's liquidity metrics are considered adequate given the benefits of its size and geographic diversity. At Nov. 30, 2014, CRC's unrestricted cash and investments totaled \$195.1 million which translates into 343.3 days cash on hand , a cushion ratio (based on pro forma MADS) of 6.8x and cash to pro forma debt of 46.7% which are light compared to the respective 'BBB' medians of 407.6, 6.9x and 60.2%. Additionally, CRC's unrestricted liquidity should improve in fiscal 2015 as the entrance fee receipts from re-occupancies in January are received and entrance fees from the 55 new ILUs at Covenant Village of Northbrook are realized.

MODEST DEBT BURDEN
The series 2015 refunding is expected to generate cashflow savings and reduce the par amount of debt outstanding. Pro forma MADS of \$28.5 million is down from prior MADS of \$30.5 million and equates to 11.9% of fiscal 2014 total revenues which is lower than the 'BBB' category median of 12.3%. Adjusted debt to capitalization of 56% at Nov. 30 is slightly below the 'BBB' category median of 59%. Historical coverage of pro forma MADS including net entrance fee receipts in fiscal 2014 and through the 10 month interim period has been strong at 2.7x and exceeds the 'BBB' category median of 2.0x. Further, revenue-only coverage of pro forma MADS of 1.1x through Nov. 30 is a sharp improvement from 0.5x in fiscal 2013 reflecting the benefit of improved overall occupancy.

Fitch views CRC's pro forma capital structure as conservative with roughly 80% fixed rate bonds and 20% variable rate direct bank placed debt. In addition, CRC is counter-party to three floating-to-fixed rate swap transactions with a total notional amount of \$96.1 million. At Nov. 30, the aggregate mark-to-market value on the swaps was negative \$19.5 million. No collateral is required to be posted as long as CRC's rating is no lower than 'BBB-' by both Fitch and S&P.

Consolidated Results
Consolidated results include the operations of non-obligated Covenant Retirement Services (CRS) which includes a home health company, a management service company and senior rental facilities. At FYE 2014, CRS had total assets of \$34.7 million. In fiscal 2014, CRS generated total revenues of \$18.7 million and reported a loss from operations of \$3 million which is improved from the \$4.2 million loss from operations on total revenues of \$15.3 million reported in the prior year. Using consolidated financial results for FYE 2014, CRC had 341 days cash on hand, a 7.1x cushion ratio, 48.3% cash-to-debt, NOM of 3.3% and NOM-adjusted of 22.2%. MADS coverage on a consolidated basis was 2.6x.

Disclosure
CRC's disclosure requirements under its bond documents include the submission of annual audited statements within 120 days of FYE and quarterly unaudited statements on a GAAP basis within 45 days of quarter end to the Municipal Securities Rulemaking Board's EMMA system.