OREANDA-NEWS. March 30, 2015. Fitch Ratings has affirmed the 'BBB+' rating on the following revenue bonds issued through various issuing authorities on behalf of Presbyterian Homes Obligated Group, PA (PHOG):

--\\$6,000,000 Cumberland County Municipal Authority variable rate revenue bonds (Presbyterian Homes, Inc. Project) series 1993A;
--\\$13,600,000 Cumberland County Municipal Authority (Commonwealth of Pennsylvania) revenue bonds, series A of 2005 (Presbyterian Homes, Inc. Project);
--\\$6,660,000 Cumberland County Municipal Authority revenue bonds (Presbyterian Homes Obligated Group Project) series A of 2008;
--\\$25,000,000 Cumberland County Municipal Authority revenue bonds (Presbyterian Homes Obligated Group Project) series B of 2008;
--\\$15,210,000 Cumberland County Municipal Authority converted term rate restructure bonds (Presbyterian Homes, Inc. Project) series C of 2008;
--\\$2,630,000 Montgomery County Higher Education and Health Authority variable rate demand revenue bonds, series 1997A;
--\\$3,100,000 Maryland Health and Higher Educational Facilities Authority revenue bonds Glen Meadows Retirement Community Issue series 1999A;
--\\$12,585,000 Maryland Health and Higher Educational Facilities Authority revenue bonds Glen Meadows Retirement Community Issue series 1999B (taxable).

The Rating Outlook is Stable.

SECURITY

Bondholders are granted a security interest in the gross revenues of the Obligated Group, a mortgage interest in certain property and facilities of the OG, and a debt service reserve fund on the series 2005A and 2008A bonds.

KEY RATING DRIVERS

LARGE, DIVERSE REVENUE BASE: PHOG is comprised of 17 separate continuing care retirement communities (CCRC)/long-term care facilities, and in aggregate, operates 1,121 independent living units (ILUs), 462 assisted living units (ALUs) and 1,088 skilled nursing facilities (SNF) beds. Fitch believes PHOG's large revenue base, geographic diversity, and a wide array of services help to mitigate the organization's overall operating risk profile.

STABLE FINANCIAL PROFILE: Overall financial metrics have been remarkably steady, with operating ratio ranging between 91.6% and 91.7% over the last three fiscal years and maximum annual debt service (MADS) coverage ranging 1.7x to 1.8x over the same period. Liquidity has also remained stable, albeit weak for the rating category. PHOG is planning to bring Cathedral Village (CV; revenue bonds rated 'BBB-') into the obligated group in 2015, and its impact to financial ratios is expected to be minimal to the overall organization.

STRONG OCCUPANCY: Occupancy remained very good at or above 90% across the each level of care and at each individual campus for over six years. While there is some ongoing pressure on skilled nursing utilization due to shift in utilization trends related to healthcare reform, Fitch believes management's proactive planning will continue to provide a stable base of operations.

HEALTHY CAPITAL SPENDING: Capital plans continue to be robust, with ILU expansions planned on two campuses, part of which will be debt funded. PHOG's strategy is to fund ongoing routine capital expenditures with cash flow and limit debt issuance to additional revenue generating projects.

RATING SENSITIVITIES

STABILITY EXPECTED: Fitch expects PHOG to absorb the impact of CV acquisition and continue producing stable financial metrics, supported by its diverse revenue base and historically strong occupancy trends.

LIMITED DEBT CAPACITY: Fitch believes PHOG's ability to absorb further additional debt at the current rating level is limited without commensurate improvement in liquidity and debt service coverage metrics.

CREDIT PROFILE

Presbyterian Homes Obligated Group is comprised of 17 separate CCRCs/long term care facilities located throughout Pennsylvania and locations in Ohio and Delaware. In aggregate, PHOG operates 1,121 ILUs, 462 ALUs and 1,088 SNF beds. The organization operates a wide variety of facilities including entrance fee CCRCs, stand-alone skilled nursing and personal care facilities, and rental ILUs. PHOG generated total revenues of \\$172.8 million in fiscal 2014.

Cathedral Village Acquisition

Announced in February 2015, PHOG is in the process of bringing CV into the PHOG obligated group. CV is a CCRC located in the greater Philadelphia area with 293 ILUs and 133 SNF beds, and generated \\$23.7 million in operating revenues in the fiscal year ended June 30, 2014. CV has been challenged with weak occupancy and liquidity, but carries a relatively low debt burden. Management believes there are numerous opportunities to improve operations and occupancy. While CV's financial profile is relatively weak, PHOG's overall financial metrics are not likely to be significantly affected given CV's relatively small revenue base.

Strong Occupancy Drives Profitability

PHOG's ability to maintain strong occupancy continues to be a core credit strength and has led to a historically stable and solid profitability. Since 2008, overall occupancy across each level of care has stayed above 90% despite the challenging economic environment. Net turnover entrance fee receipt of \\$11.4 million in 2014 was sustained from 2013 levels, and stronger than \\$8 million-\\$9 million in prior years.

Reflecting a large, diverse revenue base and strong occupancy, PHOG's financial profile has exhibited remarkable stability over the last several years. Operating ratio ranged from 91.6% to 91.7% over the last three fiscal years, compared to Fitch's median of 97.4%. Similarly, net operating margin has ranged 9.3%-9.6% over the last three years, compared to Fitch's median of 9.2%. Fitch notes that due to PHOG's large skilled nursing component (approximately 60% total revenues) and relatively small ILU operations, net operating margin-adjusted of 15.4% compares unfavorably to the median of 20.4%. However, this is reflective of PHOG's operating profile and is not a credit concern.

Light Liquidity

Unrestricted cash and investments totaled \\$92.7 million at Dec. 31, 2014, equating to light liquidity metrics relative to Fitch's 'BBB' medians. Days cash on hand of 225, 5x cushion ratio, and 37.4% cash to debt are consistent with prior year results but lag the respective 'BBB' category medians of 408 days, 6.9x cushion ratio, and 60.2% cash to debt. While PHOG's weak liquidity position is a credit concern, Fitch notes that it is not uncharacteristic of its operating profile, where the majority of income is generated from skilled nursing operations, compared to the typical entrance fee communities rated by Fitch. Further, historical stability of overall balance sheet metrics mitigates concerns.

Continued Capital Investments

Capital spending continues to be robust, but was offset by gains from sale in 2014. Two ILU expansion projects are planned in 2015, consisting of 31 new units at Ware Presbyterian Village and 38 new units at Kirkland Village. The total construction cost of \\$31 million is expected to result in \\$20 million of long-term debt. Initial entrance fee generation is expected to total \\$19 million and enhanced revenue stream from new units are expected beginning late 2015 or early 2016.

Management also expects to spend about \\$5 million to update CV and have longer-term capital plans for Quincy, Carroll Village, and Hollidaysburg campuses. Routine capital generally totals \\$10 million-\\$12 million annually.

Stable Debt Metrics

Sound cash flows coupled with a manageable debt burden helped generate adequate coverage of MADS, which totaled \\$18.2 million including all obligations under the guarantee. Revenue-only MADS coverage of 1.2x in 2014 and 2013 compared favorably against Fitch's median of 0.9x. MADS coverage including turnover entrance fees were consistent with the rating at 1.8x in 2014 and 2013 versus Fitch's 'BBB' median of 2x.

DEBT PROFILE

PHOG has \\$201.6 million in long-term debt outstanding. In addition, there is a \\$5 million note payable, \\$15.6 million line of credit draw, and \\$25 million in guaranteed debt issued for two non-obligated group facilities. Fitch's ratios reflect a total of \\$247.7 million in debt.

PHOG's debt portfolio now consists of 25% fixed rate bonds, 17% VRDBs with LOCs, and 58% in privately placed fixed rate loans. Exposure to near-term put risk under variable rate demand bonds (VRDBs) declined considerably over the last two years from 44% to 18% of total long-term debt. Outstanding VRDBs are supported by LOCs from M&T Bank and Bank of America, with expiration dates staggered in 2015-2016. Privately placed bank loans have well staggered reset dates ranging from three to 10 years.

DISCLOSURE

PHOG posts audited financial statements within 120 days of year-end and quarterly unaudited financial statement and operating data within 45 days of quarter-end on its website www.presbyterianseniorliving.org as well as to the MSRB's EMMA system.