Fitch Affirms Trinity Terrace (TX) Series 2011 Bonds at 'BBB+'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed the 'BBB+' rating on the approximately $45.2 million outstanding Tarrant County Cultural Education Facilities Finance Corporation revenue refunding bonds, series 2011, issued on behalf of Cumberland Rest, Inc. d/b/a Trinity Terrace, which are privately placed with Wells Fargo Bank.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a gross revenue pledge of the obligated group and a mortgage on the property.

KEY RATING DRIVERS

CONSISTENTLY STRONG OCCUPANCY: Trinity Terrace's occupancy is solid at over 90% across the continuum of care. Trinity Terrace is in the process of converting some semi-private rooms to private, which should further improve referrals to the skilled nursing facility.

SOLID LIQUIDITY: Trinity Terrace's liquidity indicators are strong and well exceed Fitch's 'BBB' category medians. At Oct. 31, 2012, days cash on hand was 1,208.7 and cushion ratio was 13.4x, both favorable compared to the respective category medians of 369 days and 6.6x.

ADEQUATE OPERATING PERFORMANCE: Because of relatively flat revenues without a moderation in expenses, profitability in fiscal 2012 was down from fiscal 2011 but still relatively in line with 'BBB' category medians. Also, Trinity Terrace's significant liquidity position provides some cushion for fluctuations in operations.

HIGH DEBT BURDEN: In fiscal 2012 (September 30 year-end; unaudited results), maximum annual debt service (MADS) comprised 18.5% of total revenue compared to the 'BBB' category median of 12.9%. MADS coverage has been stable due to solid generation of net entrance fee receipts. MADS coverage by turnover entrance fees only was 2x in fiscal 2012, compared to 2.3x in fiscal 2011 and in line with the 'BBB' category median of 2x. Trinity Terrace's debt profile is somewhat aggressive with a redemption date in 2016 for its 2011 bonds, which are privately placed with Wells Fargo. However, Trinity Terrace's liquidity position mitigates this concern with 101.3% cash to debt.

CREDIT PROFILE

The 'BBB+' rating reflects Trinity Terrace's consistently good occupancy and very strong liquidity position. The primary credit concerns are relatively flat revenues in fiscal 2012, mostly because of a decline in its Medicare census, and a high debt burden.

Despite opening a second tower (80 ILUs, underground parking and a fitness and wellness center) during a challenging economic environment in 2008, Trinity Terrace was able to reach stabilization in the new tower in February 2011 while maintaining over 90% occupancy in its existing units. Occupancy in the ILUs, ALUs and SNF has averaged 91.9%, 92.8% and 91.9%, respectively, over the last three years (2010 - 2012). Currently, 94% of ILUs are occupied and the remaining units have been sold. In its SNF, Trinity Terrace is converting fifteen suites to private rooms, which Fitch views favorably as it should help attract Medicare rehab patients and allow Trinity Terrace to improve its Medicare census.

Trinity Terrace was the only full service continuing care retirement community (CCRC) in the Ft. Worth service area until 2010 when Stayton at Museum Way (Stayton), a Greystone development, opened less than five miles from its campus. Stayton is struggling with fill up and occupancy is about 54% as of November 2012. Trinity Terrace's occupancy has remained strong despite the new competition and the key reasons to the continued strong demand include ongoing renovations to common areas and its long-standing position in the community. Management is even considering adding a third tower to its existing campus due to its current occupancy levels and success in opening its second tower. This project has been contemplated since Fitch's initial rating in January 2012 and Fitch will review the impact on the rating when the size, scope and timing of the project are determined.

Trinity Terrace's liquidity indicators exceed Fitch's 'BBB' category medians and are viewed as a primary credit strength, mitigating to some extent, the corporation's high debt burden and dip in profitability in fiscal 2012. At Oct. 31, 2012, Trinity Terrace had $47.1 million in total unrestricted cash and investments, which equated to a strong 1,208.7 days cash on hand, 104.1% cash to debt and 13.4x cushion ratio, which all exceed Fitch's respective 'BBB' category medians of 369 days, 50.9% and 6.6x.

Operating results in fiscal 2012 (unaudited) were below prior year results but still in line with the 'BBB' category medians. This dip can mostly be attributed to a drop in the Medicare census. However, management believes the conversion of 15 rooms to private suites will improve occupancy in the SNF and lead to improved revenue generation going forward. Operating ratio in fiscal 2012 (unaudited) was 100.1%, which has deteriorated from 97.5% in fiscal 2011. Net operating margin in fiscal 2012 was 6.1%, which is down from 11.9% in fiscal 2011 and somewhat light compared to the 'BBB' category median of 9.5%. Adjusted net operating margin (includes entrance fees) was strong at 30.1%, which is favorable compared to the 'BBB' category median of 20.3%.

MADS equaled a high 18.5% of fiscal 2012 (unaudited) revenues. This is elevated compared to the 'BBB' category median of 12.9%. Strong sales activity and turnover entrance fee generation has resulted in stable debt service coverage. Marketing initiatives include rebranding with a new ad campaign and frequent educational events. In 2012, the net turnover entrance fee was $4.8 million compared to $4.3 million in 2011 and $3.3 million in 2010.

Trinity Terrace's debt profile is somewhat aggressive for its rating level with 100% variable rate swapped to fixed rate. Total outstanding debt was $45.2 million as of Sept. 30, 2012. This debt (series 2011 bonds) is privately placed with Wells Fargo with an initial term of five years. There is no collateral posting requirement. Management is considering additional debt in the medium term, which Fitch will evaluate when details become available. Trinity Terrace's capital budget for fiscal 2013 is manageable at about $2 million.

Trinity Terrace is managed by Pacific Retirement Services (PRS) under a five year management agreement, which was renewed July 20, 2010. PRS provides management, marketing, accounting and information technology to Trinity Terrace and Fitch believes Trinity Terrace benefits from the management expertise.

The Stable Outlook reflects Fitch's expectation that Trinity Terrace's profitability and debt service coverage will return to historical norms and occupancy and liquidity will remain stable.

Located on 4.75 acres in Ft. Worth, Texas, Trinity Terrace is a full-service modified type-B CCRC with 254 ILUs, 20 ALUS and 60 skilled nursing facility units. In fiscal 2012 (unaudited), Trinity Terrace had $19.03 million in total operating revenue. Trinity Terrace does not covenant to disclose annual financial statements to EMMA.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 12, 2012);

--'Rating Guidelines for Nonprofit Continuing Care Retirement Communities' (July 12, 2012).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015

Rating Guidelines for Nonprofit Continuing Care Retirement Communities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=40171

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Contacts

Fitch Ratings
Primary Analyst:
Dana N. Sodikoff, +1-312-368-3215
Associate Director
Fitch, Inc.
70 West Madison
Chicago, IL 60602
or
Secondary Analyst:
Jim LeBuhn, +1-312-368-2059
Senior Director
or
Committee Chairperson:
Emily Wong, +1-212-908-0651
Senior Director
or
Elizabeth Fogerty, +1-212-908-0526
Media Relations, New York
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst:
Dana N. Sodikoff, +1-312-368-3215
Associate Director
Fitch, Inc.
70 West Madison
Chicago, IL 60602
or
Secondary Analyst:
Jim LeBuhn, +1-312-368-2059
Senior Director
or
Committee Chairperson:
Emily Wong, +1-212-908-0651
Senior Director
or
Elizabeth Fogerty, +1-212-908-0526
Media Relations, New York
elizabeth.fogerty@fitchratings.com