OREANDA-NEWS. Fitch Ratings has assigned a 'BB' rating to the following State Of Connecticut Health And Educational Facilities Authority Revenue Bonds expected to be issued on behalf of Church Home of Hartford Inc. D/B/A Seabury (Seabury Obligated Group):

--$51,990,000 Healthcare Facility Expansion Issue (Church Home Of Hartford Incorporated Project) Series 2016A Fixed Rate Bonds;

--$9,400,000 Healthcare Facility Expansion Issue (Church Home Of Hartford Incorporated Project) Series 2016B-1 Tax Exempt Mandatory Paydown Securities (TEMPS-80SM);

--$13,750,000 Healthcare Facility Expansion Issue (Church Home Of Hartford Incorporated Project), Series 2016B-2 Tax Exempt Mandatory Paydown Securities (TEMPS-50SM).

Fitch has also affirmed at 'BB' the rating on the following parity bonds also issued on behalf of the Seabury Obligated Group:

--$35,600,000 Public Finance Authority Healthcare Facility Expansion/Refunding Bonds (Church Home of Hartford Incorporated Project), Series 2015A.

The Rating Outlook is Stable.

The 2016 bonds are expected to be issued as fixed rate. Proceeds will be used to finance phases B and C of Seabury's master facilities plan, fund debt service reserve funds and capitalized interest for 24 months, and pay for the costs of issuance. The two series of 2016B bonds are anticipated to be issued as temporary debt, which will be paid down from the initial IL entrance fees as certain occupancy levels are reached. The bonds are expected to sell via negotiation the week of March 1.

SECURITY

Pledge of gross revenues of the obligated group (OG), a mortgage, and a debt service reserve fund.

KEY RATING DRIVERS

SIZABLE EXPANSION/REPOSITIONING PROJECT: Seabury is moving forward on a $75 million capital program that will add 68 independent living (IL) units as part of a new building, and 12 skilled nursing beds as well as renovate and/or expand parts of assisted living and common areas. The project will increase Seabury's IL units by 25%.

STRESSED FINANCIAL PROFILE: The 'BB' rating assumes the successful construction and fill up of the new ILUs, and the pay down of approximately $25 million in short-term debt from initial entrance fees received by 2019. Seabury's debt burden will remain elevated even after occupancy stabilizes on the new units.

MITIGATING CREDIT STRENGTHS: Development and fill risk is tempered by Seabury's underlying credit strengths, which include a long operating history, good demand for services as reflected in high occupancy, and historically stable operating performance.

STABLE OVERALL OPERATING PROFILE: Seabury has maintained total campus occupancy (IL, AL and skilled nursing combined) of above 90% over the last eight years. The high levels of occupancy has supported a very good operating ratio, which has averaged 92.6% over the last four audited years, particularly strong for a Type 'A' Lifecare facility.

GOOD MARKET POSITION: Seabury does have competitors in its service area. However, its entrance fees remain in line with area housing prices and competitor pricing. Seabury markets itself as an active community, which has attracted younger seniors. Seabury's average age of IL entry is below 80, and given the age of entry, its yearly IL turnover has been below 6% over the last three years, which is low for the sector.

RATING SENSITIVITIES

CAPITAL PROJECT MANAGEMENT: Construction and project management risks from Church Home of Hartford Inc. D/B/A Seabury's (Seabury) sizable capital project are mitigated by execution of a Guaranteed Maximum Price (GMP) contract, owner's and contractor's contingencies, engagement of owner's representative and liquidated damages. However, a delay in the receipt of initial entrance fees could cause negative rating pressure.

OPERATING PROFILE MAINTENANCE: The rating assumes that Seabury's current financial profile, characterized by high occupancy and solid operating metrics, will remain stable during the project period.

CREDIT PROFILE

The Seabury OG is a Type 'A' life care continuing retirement community (CCRC) located in Bloomfield, CT, just northwest of Hartford. The community currently includes 191 IL units, 49 AL units, and 60 skilled nursing beds.

Fitch bases its financial analysis on the results of the OG, which consists of Seabury, the senior living campus described above, and Seabury Meadows, which operates 58 memory support beds and is located adjacent to the senior living campus. Total OG operating revenues were $26.6 million in FY2015. Seabury also has two non-OG affiliated organizations, the Seabury Charitable Foundation and Seabury At Home, which is a CCRC without walls. The financial performance of the affiliates is not included in the results reported in this press release.

SECOND PHASE OF CAPITAL PLAN

In 2015, Seabury issued debt to fund a variety of projects as part of a phase A of a large master facilities plan. The projects include a new front entrance and new bistro area, renovation of the kitchen and main dining space, an arts studio, salon and day spa, and renovation of administrative offices. These projects are in progress and are expected to be finished within the next three months.

With the current $75 million debt issuance Seabury is moving forward with Phases B and C of the master facilities plan. Fitch assigned the 'BB' rating to the 2015 debt in anticipation of this larger debt issuance. The rating reflected the anticipated size of the debt to be issued, the short term debt structure, and the execution risk for the projects. Fitch notes that prior to the debt issuance Seabury had a very strong financial profile, with its operating, liquidity, and debt metrics all solidly investment grade.

This next phase is a large repositioning project that will add 68 IL units and include renovation and expansion of assisted and skilled nursing areas, including a new dedicated short term rehab unit and a new primary care space, as well as additional parking space. The construction will also feature a new chapel that will seat up to 225 people, which will be funded separately by Seabury.

Currently, Seabury has secured 36 entrance fee deposits and management will not begin construction on the new ILUs until pre-sales reach 41 or 60%. To fund the project Seabury is issuing three series of debt, two of which will be short term bonds, approximately $25 million, payable from initial entrance fees received on the new IL units as they fill up, which is estimated to total $28.5 million. The debt will significantly stress Seabury's financial profile over the next three to five years.

In spite of the execution risk and additional debt burden, Fitch views the projects positively, believing that they will be financially accretive to Seabury, enabling the campus to remain competitive over the longer term. Currently Seabury's high occupancy and low turnover is limiting revenue growth. The project will increase the number of Seabury's IL units by 25% and the total unit increase will be approximately 22% or 80 units, when including the additional skilled nursing beds and AL units that will be built.

Management has taken appropriate steps to reduce the inherent construction and development risk through the execution of a GMP with a provision for liquidated damages, funding of owner's and builder's contingencies totaling 6% of construction costs and the engagement of an owner's representative.

The sizable number of units to be added, especially the 68 IL units, and the need to fill them in order to pay down debt are credit concerns. However, Seabury's high IL occupancy, 98% at December 31, 2015, its low turnover, under 6% over the last few years, and its Seabury At Home product, which is an entry point for potential new IL residents, demonstrate a good demand for services and pent up demand as so few IL units have turned over at Seabury in the last few years.

In addition, the new IL units from a size and price perspective should fit well with Seabury's current stock of ILs. The new units, on average, will have slightly larger floor plans than the current ILs, but that is being driven by the demand for large units, which are Seabury's most popular units. Seabury has begun to combine apartments to meet the demand for larger units. Fitch notes that the largest units at 1,600 square feet, which are also the most expensive, have already pre-sold. Seabury also plans to renovate current ILs to the standard of the new ILs as they turnover.

Fitch recently toured the campus and saw the progress of the Phase A projects, which were underway. Seabury has a sizable campus and the new IL building should integrate well with the current buildings. The new IL building along with the new chapel/auditorium and bistro will be a central part of the campus after construction and represents a significant upgrade to the common spaces and flow of the current campus.

STEADY OPERATIONAL PERFORMANCE

Seabury has historically maintained a steady financial performance, with its operating ratio particularly strong for type 'A' contract community. The operating performance was down slightly in FY15, due in part to changes to Medicare short term rehab related to shorter lengths of stay and reduced referrals from hospitals that Fitch is seeing across the sector. The weaker performance was offset by a good year for entrance fees ($2.7 million in net entrance fee receipts). As a result, Seabury's operating ratio weakened to 93.7% from 90.9%, relative to a category median of 96.1%, and its net operating margin - adjusted improved to 15.4% from 13.4%, relative to a category median of 19.3%.

The below median net operating margin - adjusted does reflect the low level of IL turnover at Seabury. Only 11 IL units (5.8% of its IL units) turned over in 2015. IL turnover is generally higher than that in the sector. The IL expansion should help increase turnover in the longer term.

First quarter FY16 results were softer. Seabury's operating rose to 98.8%, as the issues in Medicare rehab continued to impact performance. The timing of entrance fee on sales also impacted with performance, as IL turnover increased at Seabury in the first quarter. The units were remarketed and sold, and those sales will be reflected in the quarter two performance. As a result, the net operating margin adjusted in first quarter FY16 dropped to a thin 4.2%.

Fitch views Seabury's occupancy as a credit strength. At December 31, 2015, IL, AL and skilled nursing occupancies were 98%, 92%, and 98%, respectively, which is consistent with Seabury's occupancy through the historical period. In addition, Seabury has 137 active members on its priority waitlist and 133 members in Seabury At Home, of which 83% are on the priority waitlist. Membership fees for Seabury At Home average $70,098 per person.

Liquidity was adequate at Dec. 31, 2015, with $19.2 million in unrestricted cash and investments equating to 305 days cash on hand, a 7.2x cushion ratio, and 52.6% cash to debt. However, Seabury's liquidity will severely weaken after the debt issuance with its cushion ratio and cash to debt falling to 3.4x and 22.2%, respectively. The cash to debt figure assumes pay down of the short term debt.

DEBT PROFILE

As of Dec. 31, 2015, Seabury had approximately $34.5 million in long-term fixed rate bonds. Total debt will peak at approximately $106 million in 2016 before paydown of the short-term debt and be approximately $80 million in 2020 after the IL units stabilize. A pro forma analysis of the debt, using a debt figure of $85 million and maximum annual debt service (MADS) of $5.6 million shows a very elevated debt burden.

At Dec. 31, 2015, MADS of a percent revenue was 21.5%, debt to net available was 19.1x, and MADS coverage was 0.8x, all consistent with a non-investment grade rating. Seabury will not be tested on the $5.6 million MADS figure until 2020.

Fitch expects Seabury's debt profile to improve as the short term debt is paid down, other debt amortizes, and the new units are brought into service and begin to generate revenue and over the longer term turnover entrance fees.

DISCLOSURE

Seabury will covenant to provide annual disclosure within 150 days of fiscal year end, and quarterly disclosure within 45 days of each quarter end. Disclosure will be made via the Municipal Securities Rulemaking Board's EMMA System.