OREANDA-NEWS. September 15, 2015. Fitch Ratings has affirmed the 'BBB+' rating on the following North Carolina Medical Care Commission Deerfield Episcopal Retirement Community (Deerfield)) outstanding first-mortgage revenue bonds:

--Approximately \\$46 million, series 2008A;
--Approximately \\$30 million, series 2008B*.

*Underlying rating. The series 2008B bonds are backed by an irrevocable direct-pay letter of credit from BB&T.

The Rating Outlook is revised to Positive from Stable.

SECURITY

The bonds are secured by pledged assets including gross receipts, a first-mortgage lien, and a debt service reserve fund for the fixed-rate bonds.

KEY RATING DRIVERS

EXPECTATION OF DEBT MODERATION: The Positive Outlook reflects Fitch's belief that Deerfield will likely develop and sell on time and within budget 27 independent living (IL) cottages over the next two years, which will address strong market demand and augment total revenues, resulting in a moderation of certain capital-related metrics to be more in line with the 'A' rating category.

EXCELLENT LIQUIDITY: Liquidity has consistently grown and at June 30, 2015, unrestricted cash and investments totaled \\$96.4 million, up over 85% since 2011, translating to balance sheet metrics that all exceed 'BBB' category medians. Notably, days cash on hand (DCOH) was an impressive 1,447 days in comparison with the 'BBB' category median of 408. Cushion ratio (13x) and cash-to-debt (96.5%) were both favorable to the respective 'BBB' category medians of 6.9x and 60.2%.

STRONG OCCUPANCY: Deerfield's long presence in the Asheville, North Carolina market, strong marketing staff, and desirable location has led to consistently solid occupancy.

STABLE AND IMPROVING PROFITABILITY: Deerfield's profitability metrics remain strong. Adjusted net operating margin in fiscal 2014 (Sept. 30 year-end) remained very strong at 38.5%, reflecting strong turnover entrance fee receipts. Deerfield's operating ratio was 100% in fiscal 2014, slightly higher than the median of 97.4%, but has shown a trend of steady improvement since 2011 (108.3%).

HIGH DEBT BURDEN: The primary credit concern is Deerfield's large debt burden with maximum annual debt service (MADS) at a high 20.3% of total revenue in fiscal 2014 compared to the 'BBB' category median of 12.3%. However, turnover entrance fee receipts continued to be very strong in fiscal 2014 and through the nine months ended June 30, 2014, producing debt service coverage in both periods of 2.4x, above the 'BBB' category median of 2x.

RATING SENSITIVITIES

PROJECT EXECUTION AND BALANCE SHEET GROWTH: Deerfield Episcopal Retirement Community's ability to execute its IL unit project with a moderation in debt metrics through the project will likely result in upward rating momentum.

CREDIT PROFILE

Deerfield is a type-A continuing care retirement community (CCRC) located on 125 acres of land in Asheville, North Carolina. The facility consists of 351 ILUs, 60 assisted living units (ALUs) and 62 skilled nursing facility units (SNFs). Total operating revenue in fiscal 2014 (Sept. 30 year end) was \\$32.4 million.

EXPANSION PROJECT MOVING FORWARD

Deerfield is moving forward with an expansion project adding 27 IL cottages to its campus. Site work is underway and management anticipates starting construction on the six-unit first phase of the project in November.

The total project cost is estimated at \\$16.7 million and will be paid with an equity contribution. Deerfield expects to self-reimburse with first-generation entrance fees, projected to be about \\$15.5 million. Fitch views positively the staggered construction and move-in schedule over the next two years and that the project will have minimal impact on liquidity. Fitch believes this project will be accretive as it will address market demand and augment total revenues with minimal additional expenses.

STRONG OCCUPANCY

Fitch considers Deerfield's 60-year operating history as a positive. Strong demand for Deerfield and the desirability of retirement in Ashville have translated into robust occupancy. Through the nine months ended June 30, 2015, occupancy was solid, averaging 96.2% in the ILUs, 100% in the ALUs and 96.3% in the SNFs. Management reports nationwide interest, with approximately one-third of its waitlist of over 800 individuals from outside of a four-hour drive.

Deerfield's closest competitor, Givens Estates (rated 'BBB'; Stable Outlook by Fitch), is located about two miles from Deerfield and also maintains high occupancy. However, Givens Estates is a fee-for-service contract, limiting product-type competition.

SOLID PROFITABILITY

Profitability remains solid in 2014 since Deerfield experienced some softness after a facility expansion in 2010. Operating ratio has steadily declined over the past four years, reaching 100% in 2014. Adjusted net operating margin was solid in 2014 at 38.5%, down slightly from the year prior (42.7%) but very favorable to the 'BBB' category median (20.4%). Favorably, operating margin was robust for a lifecare contract at 8.7% in 2014.

ELEVATED DEBT BURDEN

Fitch's primary credit concern continues to be Deerfield's leverage position with MADS as a percentage of fiscal 2014 revenue at 20.3%. This is well above the 'BBB' category median of 12.3% but a significant improvement from 33% in 2008 when the bonds were issued for the expansion project. Debt service coverage of 2.4x in fiscal 2014 and through June 30, 2015 is solid against the 'BBB' category median of 2x, driven by strong occupancy and solid revenue growth from the new units. Additionally, revenue-only coverage has improved, reaching 1x in 2014 and 1.2x in the interim, strong for a facility with a lifecare contract.

DEBT PROFILE

As of June 30, 2015, Deerfield had approximately \\$99.9 million in debt outstanding, composed of 70% underlying fixed-rate and 30% underlying variable-rate debt (\\$30 million of VRDBs outstanding [series 2008B]), which exposes the organization to some put, renewal and remarketing risk. Positively, cash-to-puttable debt is over 2x, which provides some comfort. Although the letter of credit on Deerfield's VRDBs does not expire until 2019, if there is a failed remarketing the term-out provision is fairly onerous at 367 days but is not triggered by one-time financial covenant violations without a consultant call remedy first. Additionally, there is \\$24 million in debt directly purchased with First-Citizens Bank and Trust Company, the commitment for which extends through final maturity in 2024.

CONTINUING DISCLOSURE

Deerfield covenants to provide audits 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.