CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB-' rating on approximately $15.7 million Washington State Housing Finance Commission refunding and revenue bonds, series 2012 issued on behalf of Riverview Retirement Community (Riverview).

The Rating Outlook is Stable.

SECURITY

The series 2012 bonds are secured by a pledge of the gross revenues of the obligated group, a mortgage on the properties and a debt service reserve fund.

KEY RATING DRIVERS

STRONG ILU OCCUPANCY: Occupancy in the independent living units (ILUs; the Village) has remained over 94% the last four years (2010-2013) and remained very strong at 96% at Sept. 30, 2014 (nine month interim). Riverview benefits from its position as a modest priced provider in the competitive Spokane service area.

LIGHT OPERATING PROFITABILITY: Although all the major projects associated with the series 2012 bond issuance were completed in fiscal 2013, operating profitability remained light reflecting the disruption in services during the construction as well as the additional interest and depreciation expense that impact profitability metrics. However, profitability has rebounded through the nine month interim period ended Sept. 30, 2014. Net operating margin and adjusted net operating margin of 4% and 13.2%, respectively through Sept. 30, 2014 are improved from negative 0.3% and 8.4%, respectively, in fiscal 2013.

MANAGEABLE DEBT BURDEN: Riverview's low debt burden is a key credit strength. Maximum annual debt service (MADS) equated to 5.2% of fiscal 2013 revenues, which is light compared to the 'BBB' category median of 12.3%. Reflecting weaker profitability MADS coverage declined to 2x in fiscal 2013 from 3.1x in the prior year but remained in line with the 'BBB' category median. Coverage of MADS improved to 2.9x through the nine month interim period reflecting the return to normal operations since the renovation and expansion have been completed.

IMPROVING LIQUIDITY: Riverview's liquidity position is mixed but improving. At Sept. 30, 2014 (nine month interim), Riverview had $13.7 million in unrestricted cash and investments, which is up about 5% from fiscal year-end 2013 and equates to 87.9% cash to debt and 14.4x cushion ratio, both above the respective 'BBB' category medians of 60.2% and 6.9%. Days cash on hand, however was 294 at the interim, which is light against the 'BBB' category median of 407.6.

UNUSUAL GOVERNANCE STRUCTURE: Riverview's corporate and governance structure is unusual as it is composed of three separate corporations with three separate boards. Although the structure has been in place for over 17 years, Fitch believes the governance oversight structure is atypical and could dilute unified oversight.

RATING SENSITIVITIES

CONTINUED SUFFICIENT CASH FLOW: Fitch expects profitability metrics to continue to improve since construction and renovation projects are now complete. However, due to Riverview's light debt burden, cashflow sufficient to cover debt service at or above Fitch's 'BBB' category medians should maintain the current rating.

CREDIT PROFILE

Riverview is located in Spokane, Washington and has 165 Village units (ILUs), 136 Terrace units (ILUs and assisted living units [ALUs]) and 75 Care Center units (SNF) on a 27-acre campus. Total operating revenue in fiscal 2013 was $17.9 million.

Riverview is composed of three separate corporations, which together provide a full continuum of care and comprise the obligated group: Riverview Lutheran Home of Spokane (assisted and independent living), Riverview Lutheran Care Center (skilled nursing) and Riverview Village (independent living).

The 'BBB-' rating reflects Riverview's consistently solid occupancy, low debt burden, and adequate liquidity. The primary concern is Riverview's unique corporate and governance structure and the light profitability, which was partially caused by interruption in services. However, now that all the major capital projects have been completed, Fitch expects continued improvement to profitability metrics.

SOLID OCCUPANCY

Fitch views Riverview's strong historical occupancy across all levels of care as a primary credit strength that reflects Riverview's good reputation and market position as a moderately priced provider in a competitive service area. As of Sept. 30, 2014 (nine month interim) occupancy at Riverview was strong with ILU occupancy at 96% and ALU occupancy at 96.8%. Occupancy in the ILUs and ALUs has remained above 92% over the last four years. Occupancy in the Care Center has dropped over the last couple of years, reflecting beds taken offline during construction. Care Center occupancy was 82.6% at Sept. 30, 2014, but despite the lower occupancy in the SNF, profitability in the Care Center has remained strong because of the higher Medicare and private pay mix.

LIGHT PROFITABILITY

The series 2012 bonds financed several projects at Riverview, including an aquatic center and renovations across the campus. These projects resulted in some short-term interruption in services as well as an increase in interest and depreciation, which has impacted profitability in fiscal 2012 and 2013. Operating margin dropped to negative 0.2% in fiscal 2013 from 0.3% in fiscal 2012. Adjusted net operating margin fell to 8.4% in fiscal 2013 from 12.4% the prior year and remained light against the 'BBB' category median of 20.4%. Through the nine months ended Sept. 30, 2014 profitability operating margin was still very light at negative 1% but net operating margin and adjusted net operating margin both improved to 4% and 13.2%, respectively. Fitch expects profitability to improve to historical results over the next one to two years. Failure to achieve improvement in operations may result in negative rating pressure.

LIGHT DEBT BURDEN

The debt burden is light with MADS of $950,000, which is just 5.2% of total fiscal 2013 revenue. Coverage of MADS by turnover entrance fees fell to 2x in fiscal 2013, down from 3.1x in fiscal 2012 but still in line with the 'BBB' category median of 2.0x, a result of light entrance fee generation. In fiscal 2013 net entrance fees were $1.5 million, down from $2.3 million the prior year. Through the nine months ended Sept. 30, 2014 debt service coverage improved to 2.7x, which still compares well with the category median of 1.9x. Fitch expects coverage to rebound in the near term now that the renovation projects are complete. Fitch includes the 'increase/decrease in refundable accommodation fees payable' in debt service coverage after a discussion with Riverview's auditor as it more appropriately captures actual entrance fees.

MIXED LIQUIDITY

With the exception of days cash on hand, Riverview's liquidity metrics meet or exceed 'BBB' category medians. At Sept. 30, 2014, Riverview's unrestricted cash and investments totaled $13.7 million, which equates to 87.9% cash to debt and 14.4x cushion ratio, comparing favorably to the respective 'BBB' category medians of 60.2% and 6.9x. Days cash on hand of 294 during the same time period is light for the 'BBB' category median of 407.6 days, mostly a function of its type-C contract.

UNUSUAL GOVERNANCE STRUCTURE

Riverview's corporate and governance structure is atypical by industry standards as it is composed of three separate corporations with three separate boards. Each corporation owns and operates the various care continuums, which are contiguous to each other. The bylaws of each of the three corporations specify the designation of a joint committee (CEO liaison committee) to have regular dialogue to meet common goals of the three organizations. Although the structure has been function for over 17 years, Fitch notes that the separate corporate structures could potentially dilute governance oversight compared to single corporate structure encompassing all levels of care that is more consistent with standard industry practices.

DISCLOSURE

Riverview covenants to provide audited financial information within 150 days of fiscal year end, and quarterly financial information including internal financial statements, occupancy information for all three corporations, payor mix for the Care Center and an officer's certificate within 45 days of each quarter end.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

'Rating Guidelines for Nonprofit Continuing Care Retirement Communities' (July 24, 2014).

Applicable Criteria and Related Research:

Not-for-Profit Continuing Care Retirement Communities Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752470

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=929875

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