OREANDA-NEWS. Fitch Ratings has affirmed the 'A-' rating on the approximately $69 million California Statewide Communities Development Authority (Episcopal Communities & Services [ECS]) revenue refunding bonds series 2012.

The Rating Outlook is Stable.

SECURITY

Bondholders have a security interest in a gross revenue pledge of the obligated group (OG). In addition, there is a mortgage on OG facilities and a debt service reserve fund.

KEY RATING DRIVERS

STRONG OBLIGATED GROUP FINANCIAL PERFORMANCE: The OG has an overall strong financial profile with very good liquidity, consistent profitability, and solid debt service coverage. In addition, revenue only debt service coverage compares favorably against Fitch's 'A' category median.

CONSISTENT HIGH OCCUPANCY: Occupancy has remained very solid at both campuses and across all levels of care. Through the five months ended Nov. 30, 2015, combined independent living unit (ILU) occupancy was 93.4%, assisted living unit (ALU) occupancy was 90% and skilled nursing facility (SNF) was 95.5%.

HEALTHY CAPITAL INVESTMENT: The OG has been reinvesting at both campuses with capital spending averaging almost 2x depreciation expense the last two fiscal years. Capital spending is expected to remain higher than normal over the two years as Canterbury's SNF remodel project and dining room upgrade are being completed. The Covington just upgraded its dining facility and its major capital projects include renovating units upon turnover and updating common areas.

ELEVATED DEBT BURDEN: Maximum annual debt service (MADS) as a percentage of revenue is fairly high at 11.9% compared to the 'A' category median of 9.2%. However, debt service coverage is strong at 4.1x in fiscal 2015, and revenue only debt service coverage has always been solid and averaged 2x over the last four fiscal years compared to the 'A' category median of 1.5x.

TRANSFERS OUT OF OBLIGATED GROUP: Fitch's main credit concern is the transfer of funds out of the OG to support non-OG affiliates. The OG was created during the series 2012 financing to separate the core business from the risks associated with the development of a start up continuing care retirement community (CCRC), MonteCedro, on a non-obligated, non-recourse basis. ECS made an initial transfer to support MonteCedro, to assist the financing and with MonteCedro's construction complete, management is now focused on other opportunities that will further the mission of the organization. ECS has a formal transfer policy in place, which Fitch views favorably.

SYSTEM GROWTH PLANS: Management intends to expand its presence in affordable housing and has committed to fund this initiative with a maximum of $10 million from the OG, which will be phased over time with $1 million expected in fiscal 2016.

RATING SENSITIVITIES

MAINTENANCE OF OBLIGATED GROUP FINANCIAL PROFILE: The rating is dependent on the obligated group maintaining its solid financial profile. A weakening in performance related to a deterioration in core operations or to the impact of transfers out of the obligated group to support non-obligated group entities would be viewed unfavorably and likely lead to negative rating pressure.

CREDIT PROFILE

ECS is headquartered in Pasadena, CA and the obligated group includes The Canterbury, The Covington, and Scripps Kensington, which was sold in 2010. There are several non-obligated affiliates, which include ECS Management (provides administrative support to the organization), MonteCedro (start up CCRC), Community Housing Management Services (provides development, management, and consulting services to affordable housing facilities), Sophie Miller Foundation II (Foundation; fundraising exclusively for the benefit of ECS), and Artful Home Care (home care operations).

The obligated group communities are The Canterbury (opened in 1983) and The Covington (opened in 2004). The Canterbury is located in Rancho Palos Verdes and offers a Type B contract and has 98 ILU, 28 ALU and 28 SNF. The Covington is located in Aliso Viejo and offers a Type B contract and has 155 ILU, 32 ALU (10 designated for memory care) and 24 SNF. There are 36 remaining Scripps Kensington residents that ECS is liable for, and there are restricted funds held at the Foundation to ensure that there are sufficient funds for these residents that are now placed at other retirement communities. Fitch's analysis is based on the obligated group, which had total revenue of $33.1 million in fiscal 2015 (June 30 fiscal year end).

STRONG OBLIGATED GROUP PERFORMANCE
The OG's operating performance has been consistent with operating ratios below 100% the last four years. Profitability has been driven by solid occupancy, steady rate increases, and continued expense management. In fiscal 2015, operating ratio was 90.9% compared to 89% in fiscal 2014 and 2013 and 90.1% in fiscal 2012.

Liquidity is still strong with $72.5 million unrestricted cash and investments at Sept. 30, 2015 despite a decline since Fitch's last review ($81.5 million unrestricted cash and investments at fiscal year end 2014) due primarily to weaker investment performance. Days cash on hand (DCOH) was 889 and cash to debt was 105.2% compared to Fitch's A category median of 681 DCOH and 125.1%, respectively.

Debt service coverage is solid with a temporary dip in fiscal 2014 related to lower entrance fee receipts. Debt service coverage was 4.1x in fiscal 2015, 3.1x in fiscal 2014 and 4.2x in fiscal 2013. Net entrance fee receipts were $8.7 million in fiscal 2015, $3.6 million in fiscal 2014 and 7.8 million in fiscal 2013.

CONSISTENT HIGH OCCUPANCY
Occupancy has been consistently high at both campuses. ILU occupancy was 94% at The Covington in fiscal 2015 and was 96% at The Canterbury. The Covington's ILU occupancy has historically been between 95%-98% from fiscal 2010 to 2014 and The Canterbury's was between 91%-96% over the same time period.

The number of ALU and SNF units is relatively small and can result in fluctuating occupancy. On a combined basis for both campuses, ALU and SNF occupancy has remained in the high 80% range to 90% range from fiscal 2010 to 2015.

There are no specific financial incentives being offered during the marketing and sales process and management has attributed high occupancy to its continued investment in plant. The Covington recently upgraded its dining option to include a bistro. The next major capital projects are at The Canterbury and include a renovated dining room and remodelling its SNF.

Total capital spending was $8.9 million in fiscal 2015 and $8.3 million in fiscal 2014 compared to $2.4 million in fiscal 2013 and $3 million in fiscal 2012. Projected capital spending totals approximately $6 million a year in fiscal 2016 and 2017.

DEBT PROFILE
The obligated group's debt profile is conservative with 100% fixed rate debt. The only debt outstanding is the series 2012 bonds. Debt service is level and MADS is $3.9 million. There are no additional debt plans.

CORPORATE REORGANIZATION
The OG was formed in 2012 as the development of MonteCedro was progressing. ECS transferred $29 million to the then Sophie Miller Foundation (SMF) to primarily support MonteCedro's development. It is management's intent to bring MonteCedro into the OG once performance has stabilized and can be accretive to the OG. SMF was merged with MonteCedro to complete MonteCedro's financing. Sophie Miller Foundation II (Foundation) was created in 2014 and holds the assets that were originally in SMF. Total unrestricted net assets at the Foundation at June 30, 2015 were $23.4 million.

MonteCedro is located in Altadena, CA and $140 million of Cal Mortgage insured fixed rate bonds were issued in June 2014 that is non-recourse to the OG. MonteCedro opened on time in December 2015 and is currently in the fill up phase. Of its 186 ILUs, 152 are sold (82%) with 140 expected to move in in the first 90 days. There were 37 move ins in December 2015.

ECS has a formal transfer of funds policy in place and certain criteria need to be met (including maintaining the OG rating) before funds can be transferred out of the OG. In fiscal 2015, $4 million was transferred from the OG to ECS Management for its Strategic Fund. Fitch expects ongoing transfers out of the OG to be measured and not materially dilutive to the OG's financial profile.