OREANDA-NEWS. Fitch Ratings has assigned a 'BBB' rating to the following bonds issued by the North Carolina Medical Care Commission on behalf of The United Methodist Retirement Homes, Inc. (UMRH):

--$39.4 million retirement facility first mortgage revenue refunding bonds, series 2016A.

Bond proceeds will currently refund UMRH's series 2005A and 2005C bonds, provide monies for a debt service reserve fund and pay issuance costs. The bonds are scheduled to sell via negotiated sale the week of April 18, 2016.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by mortgages on UMRH's three retirement communities, a security interest in pledged assets (including gross receipts), and a debt service reserve fund.

KEY RATING DRIVERS

EXCELLENT OPERATING PERFORMANCE: As a result of healthy occupancy, pricing flexibility and effective cost controls, operating performance and profitability levels are robust. The operating ratio averaged a very strong 89.8% over the past three fiscal years, which is favorably below Fitch's 'BBB' category median of 96.1%. In addition, UMRH's net operating margin averaged 16.3% from fiscal 2012 through 2015, which is well above industry averages.

STRONG DEMAND TRENDS IN MULTIPLE LOCATIONS: Given its long operating history, favorable locations and attractive service offerings, UMRH enjoys strong demand at its three continuing care retirement communities (CCRC) in North Carolina. On an aggregate basis, independent living (ILU), assisted living unit (ALU) and skilled nursing facility (SNF) occupancies averaged 94%, 96% and 87%, respectively, from fiscal 2012 through fiscal 2015 (Sept. 30 year-end).

VERY GOOD LIQUIDITY INDICATORS: At Dec. 31, 2015, UMRH's $68.3 million of unrestricted cash and investments amounted to 521 days cash on hand, 8.6x pro forma cushion ratio, and 70.7% of debt. These liquidity metrics exceed Fitch's 'BBB' category medians and are more beneficial given UMRH's mostly fee-for-service residency contracts with non-refundable entrance fees.

EXPANSIVE CAPITAL PLANS: UMRH is planning a sizable expansion and renovation at its CCRC campus in Durham. The multi-phase project is expected to begin in late 2016 or early 2017 and includes 58 ILUs, 36 new ALUs, and a variety of upgrades and expansions to common spaces and amenities. The project is expected to be funded with temporary debt that will be repaid from initial entrance fees and long-term debt that will increase UMRH's leverage position and medium term operating risks. This project risk and anticipated debt issuance is incorporated into the 'BBB' rating.

RATING SENSITIVITIES

PENDING EXPANSION PLANS: The 'BBB' rating encompasses the proposed capital project; however, the anticipated borrowing is about six-to-nine months away. If the project timing, scope or financing details change materially, those modifications could affect the rating at the time of debt issuance. Moreover, construction and project risks from United Methodist Retirement Community's proposed expansion plans could potentially cause negative rating pressure due to cost overruns, service disruptions, and occupancy of new units that lag projections.

OPERATING PROFILE MAINTENANCE: The 'BBB' rating also assumes that United Methodist Retirement Community's current operating profile, characterized by high occupancy, strong operations and good liquidity balances, remains stable. Should any of these weaken during the planned construction and fill-up period, there could be negative rating pressure.

CREDIT PROFILE

UMRH traces its origins to 1945 and is related by faith with the Methodist Church's North Carolina Annual Conference (Annual Conference). UMRH currently owns and operates three CCRCs in North Carolina: Croasdaile Village Retirement Community (Croasdaile Village), located in Durham; Cypress Glen Retirement Community (Cypress Glen), located in Greenville; and Wesley Pines Retirement Community (Wesley Pines), located in Lumberton. UMRH is also affiliated with The United Methodist Retirement Homes Foundation, Inc. (Foundation). The Foundation was organized to raise endowment funds, support benevolent care and provide special programs for UMRH's residents. Both UMRH and the Foundation are obligated group members. UMRH's lone non-obligated affiliate develops affordable rental housing for seniors and is insignificant to the organization's financial profile. Since 2000, UMRH has been managed by Life Care Services LLC (LCS), which Fitch views favorably given their long and successful track record of operating CCRCs throughout the United States. LCS is also the development manager for the proposed Croasdaile Village expansion project.

DEMAND FOR SERVICES AND OCCUPANCY

Given its long operating history, favorable locations, attractive pricing and desirable service offerings, UMRH enjoys strong demand at its three CCRCs. Another driver of UMRH's demand, particularly at Croasdaile Village is the appeal to residents outside the immediate market area. Given the proximity to educational, healthcare and cultural institutions, the city of Durham attracts residents from a broader geographic area.

Demand indicators at UMRH's three CCRC are as follows: (1) At Croasdaile Village, ILU, ALU and SNF occupancies averaged 95%, 96% and 86.5%, respectively, from fiscal 2010 through fiscal 2015. (2) Cypress Glen's ILU, ALU, SNF and memory care occupancies averaged 93.3%, 93.7%, 80% and 98.7%, respectively, over the last six fiscal years. (3) Wesley Pines' average occupancies during the last six fiscal years for ILUs (87%), ALUs (96.5%) and SNFs (94%) were also very good.

FINANCIAL PERFORMANCE AND POSITION

Due to the healthy occupancy, favorable residency agreement pricing and effective cost controls, operating performance and profitability levels are impressive. The operating ratio averaged a very strong 89.8% from fiscal 2013-2015, which are some the strongest levels in Fitch's rated portfolio. Furthermore, UMRH's operating margin (7.9%) and net operating margin (16.3%) averages during the last three fiscal years are some of most robust for all of Fitch's rated CCRCs. Finally, pro forma maximum annual debt service (MADS) coverage is healthy at above 2.0x in each of the last three fiscal years.

UMRH's $68.3 million of unrestricted cash and investments amounted to 521 days cash on hand, 8.6x pro forma cushion ratio, and 70.7% of debt as of Dec. 31, 2015. These liquidity metrics exceed Fitch's 'BBB' category medians and are more notable since UMRH does not have any exposure to life care residency agreements.

PENDING CAPITAL PLANS

UMRH is in the later stages of planning a sizable expansion and renovation of Croasdaile Village. The multi-phase project is expected to begin in late 2016 or early 2017 and includes 58 ILUs, 36 new ALUs, extensive renovation to the existing 30 ALUs, renewal of the SNF, and a variety of upgrades and expansions to common spaces and amenities. The development is expected to be funded with temporary debt that will be repaid from initial entrance fees and long-term debt.

Despite the fact that the project will increase UMRH's leverage position and medium term operating risks, Fitch has a positive view of the expansion and renovation. Croasdaile Village's high occupancy, pent-up demand, robust financial performance and prior experience with similar projects position them well to successfully execute the development.

DEBT PROFILE

After the refunding, UMRH's total debt will be approximately $98 million and include half fixed rate and half floating rate debt in the form of direct bank purchases with BB&T. About $25.7 million of UMRH's $50.2 million variable rate debt is hedged with fixed payor interest rates swaps (with BB&T as the counterparty) until maturity in 2024. The bonds, bank debt and swaps are secured on a parity basis and generally have the same financial covenants. In addition, the swaps do not have any collateral posting requirements.

UMRH's remaining $24.5 million of variable rate debt amortizes over about 20 years and expire in 2024, leaving them subject to moderate put risk. While this level of bank held and floating rate debt with a single provider is a bit high, UMRH's interest rate hedge and strong unrestricted liquidity balances are offsetting factors.

Pro forma MADS as a percent of revenues is manageable at 13% in fiscal 2015 and is slightly above Fitch 'BBB' category median of 12.4%. Debt to net available (5.4x) and adjusted debt to capital (51.1%) are also very manageable and compare quite well to the 'BBB' category medians of 5.9x and 58.8%, respectively.