CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB+' rating to the approximately $63.9 million series 2014A-1 and the approximately $21.2 million, series 2014A-2, Tarrant County Cultural Education Facilities Finance Corporation revenue refunding bonds issued on behalf of Cumberland Rest, Inc. d/b/a Trinity Terrace (TX).
In addition, Fitch affirms the 'BBB+' rating on the series 2011 bonds currently privately placed with Wells Fargo.
The Rating Outlook is Stable.
The series 2014A-1&2 bonds are expected to be issued as fixed rate. Proceeds will be used to refinance the outstanding series 2011 bonds that are currently a direct placement with Wells Fargo and fund a portion of the River Tower expansion project. The series 2014A-1&2 bonds are expected to price the week of Dec. 1, via negotiation.
Concurrently with the series 2014A-1&2 issuance, Trinity Terrace is also moving forward with a bank direct placement with BBVA to partially fund the construction of the River Tower expansion project. Fitch was not asked to rate the direct placement but considered the additional debt in its analysis.
The bonds are secured by a gross revenue pledge of the corporation, a mortgage on the property and a debt service reserve fund.
KEY RATING DRIVERS
VERY HIGH BURDEN: Despite the significant additional debt, with pro forma maximum annual debt service (MADS) of $5.6 million (after stabilization) equating to a very high 28.6% of fiscal 2013 (Sept. 30 year end) revenue compared to the 'BBB' category median of 12.3%, Fitch maintains the 'BBB+' rating because of Trinity Terrace's healthy liquidity metrics, consistently strong independent living unit (ILU) occupancy, demand for the project and adequate profitability. While historical coverage of pro forma MADS of 1.6x through July 31, 2014 (10-month interim) is somewhat light against the 'BBB' category median of 2.0x, Fitch notes that projected coverage is expected to improve to over 2x upon stabilization as Trinity Terrace benefits from the additional monthly service fees from the new ILUs.
CONSISTENTLY STRONG ILU OCCUPANCY: Trinity Terrace has consistently been able to maintain solid occupancy of more than 90% in the ILUs over the last four years (2010-2013). Because of this consistently high demand, management is moving forward with the addition of 79 ILUs, which Fitch believes will be accretive to Trinity Terrace's financial profile once the project reaches stabilization in summer 2017. Demand for the new ILUs has been robust with 10% deposits received on 67 units (85%) in just nine months. This project has been contemplated since before Fitch's initial rating in 2012 and the project scope and size is similar to the City Tower that opened in August 2008 and filled during the economic downturn.
ADEQUATE OPERATING PROFITABILITY: Net operating margin in fiscal 2013 and through the 10-month interim ending July 31, 2014 was 11.3% and 4.2%, respectively, compared to the 'BBB' category median of 9.2%. Adjusted net operating margin was solid at 29.6% and 26.6% during the same time period, reflecting the continued strong entrance fee receipts.
STRONG LIQUIDITY: Liquidity metrics are strong and partially driven by the benefit from higher oil and gas valuation on an asset held in trust (Stonestreet Trust). This asset is considered unrestricted cash and investments, which totaled $71.6 million at July 31, 2014 and translated to 1,708 days cash on hand and 81% pro forma cash to debt (permanent debt).
EXECUTION OF CONSTRUCTION PROJECT: With this financing, Trinity Terrace is moving forward on the construction of a third tower, which will add units for all levels of care as well as additional dining facilities, parking, and other amenities. Although various risks are inherent in executing a major capital project are present, Fitch expects Trinity Terrace will meet or exceed management's financial projections. Risks associated with the River Tower expansion have been minimized through solid presales on the new units in excess of 85% (10% deposits received), executing of a guaranteed maximum price (GMP) construction contract before the offering occurs with provisions for liquidated damages and engagement of an experienced contractor and project manager.
ON-TIME STABILIZATION: This rating assumes that construction and move-ins will occur in a timely basis to collect sufficient initial entrance fees to pay down the approximately $41 million in temporary debt on or before December 2018. The project is expected to reach 95% occupancy by October 2017. While not expected, a delay in completing the construction project, project cost overruns, and/or an inability to fill the units would weaken Trinity Terrace's financial profile and would likely result in negative rating pressure.
Located on 4.75 acres in Ft. Worth, Texas, Trinity Terrace is a full-service modified type-B continuing care retirement community (CCRC) with 249 ILUs, 20 assisted living units (ALUs) and 46 skilled nursing facility (SNF) units. In fiscal 2013, Trinity Terrace had $19.2 million in total operating revenue. Trinity Terrace is managed by Pacific Retirement Services (PRS), which owns and manages over 37 senior living facilities nationwide.
The 'BBB+' rating reflects Trinity Terrace's consistently very strong and growing liquidity position, good ILU occupancy, improved profitability and adequate historical pro forma debt service coverage. The primary credit concern is Trinity Terrace's high debt burden and the construction and fill risks inherent to an expansion project.
The 19-story tower (River Tower) will be the third tower on the campus and will add 79 ILUs, 10 ALUs, 17 memory support units and 15 SNF units. In addition, the project will also add a new dining venue, which will be connected to the original tower, as well as a cafe, physical therapy space and expansion of other amenities and three levels of parking. The total tower project is estimated to cost approximately $84 million. Including financing costs (debt service reserve fund [DSRF], capitalized interest), total funding needs increases to $94 million and will be financed by approximately $84 million of debt ($41 million temporary debt to be repaid with initial entrance fees) and $10 million from equity ($1.4 million expended to date). To-date, approximately 85% of units have been pre-sold. Despite the significant leverage associated with the project, Fitch views the expansion favorably as it will meet the demand for services and the additional units are expected to generate over $6 million of annual revenue upon stabilization.
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 occasional fluctuations in profitability. Included in board designated investments is the Stonestreet Trust, a split-interest trust that includes oil and gas reserves that have exhibited significant increase in value over the last four years. Fitch does note, however, that although the split-interest trust is included in unrestricted cash and investments, the trust is less liquid than more traditional investments. Of the $72 million of unrestricted cash and investments at July 31, 2014, $31.1 million was related to the trust. Trinity Terrace is currently restructuring the trust whereby the trust assets will be distributed to and held directly by the corporation.
Days cash on hand of 1,707.5, pro forma cushion ratio of 12.9x and pro forma cash to debt (assuming repayment of the $41.5 million of short-term debt) is 81%, which are favorable against the respective 'BBB' category medians of 407.6 days, 6.9x and 60.2%.
SOLID OCCUPANCY CONTINUES
Occupancy in the ILUs and ALUs has been consistently strong and remains solid at 92.8% and 85%, respectively as of July 31, 2014. Trinity Terrace recently converting 16 of its skilled nursing 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 and increase rehabilitation referrals. As of November 2014, Trinity Terrace had 151 applicants on the waitlist, not including the 10% depositors for the River Tower. The River Tower project has been contemplated since 2006, prior to Fitch's initial rating in January 2012 and because of the strong interest (Trinity Terrace received 55, 10% deposits within the first six months of announcing the project), Fitch views this favorably as it will add to the revenue base and fills a need for demand. As of Nov. 3, 2014, Trinity Terrace had received 10% deposits on 67 of the 79 new ILUs (85%) of which only two were internal transfers.
Trinity Terrace was the only full service CCRC in the Ft. Worth service area until October 2011 when Stayton at Museum Way, a Greystone development, opened less than five miles from its campus. Trinity Terrace's occupancy has remained strong despite the competition and the key reasons to the continued strong demand include ongoing renovations to common areas and its long-standing position in the community.
OPERATING PROFITABILITY REBOUNDED IN 2013
In fiscal 2013 and through the 10 months ending July 31, 2014, Trinity Terrace had an operating ratio of 87.8% and 84.3%, respectively, compared to the 'BBB' category median of 97.4%. Fitch notes, however, that in several different time periods, Trinity Terrace supported its bottom line with above-average releases of assets from restrictions ($1.8 million in fiscal 2013 and $2.3 million at July 31, 2014), which mostly reflect earnings from the Stonestreet trust that have been transferred to operations. Fitch views it as a positive that Trinity Terrace has sufficient temporarily and permanently restricted funds to be able to support operations in thin years but also considers all profitability metrics in its analysis. Net operating margin (which excludes assets released from restrictions) was 11.3% in fiscal 2013 but fell to 4.2% through the 10-month interim ended July 31, 2014. Adjusted net operating margin (includes entrance fees) was solid at 29.6% in fiscal 2013 and 26.6% through the interim, reflecting solid net turnover entrance fee receipts of $3.79 in fiscal 2013 and $3.70 million through the interim period.
VERY HIGH PRO FORMA DEBT BURDEN
Upon closing of the 2014 financing, Trinity Terrace will have approximately $133.4 million in outstanding debt, of which about $88 million is permanent debt and will remain after the pay-down of short-term debt with initial entrance fees from the River Tower expansion. The permanent debt will be about 72% fixed rate and about 28% variable rate debt. Fitch used pro forma MADS of about $5.6 million, which assumes the pay down of the $41.1 million of short-term bonds. Historical pro forma debt service coverage ratio of 1.6x and historical pro forma revenue-only MADS coverage ratio of 0.8x at July 31, 2014, are light relative to the 'BBB' category medians of 2.0x and 0.9x, respectively.
Pro forma MADS equates to a high 28.6% of fiscal 2013 revenue when compared to the 'BBB' category median of 12.3%. Although the leverage position is very high for the rating category, Fitch believes Trinity Terrace's healthy liquidity position coupled with the strong velocity of pre-sales of the River Tower, mitigates some of the risk associated with the significant debt burden. Projections show coverage improving to over 2.0x after stabilization (2017) as Trinity Terraces receives the added revenue from the new River Tower ILUs. Trinity Terrace has no capacity at the current rating level for additional debt without commensurate improvement to capital metrics. Moreover, Fitch will closely monitor entrance fee receipts. Any significant deviation from expected paydown of the short-term debt could lead to negative rating pressure.
Trinity Terrace does not currently covenant to disclose annual financial statements to EMMA, which Fitch views negatively. However, with this issuance, Trinity Terrace will disclose monthly financials and construction updates during construction and then will covenant to disclose to EMMA quarterly financials within 45 days and audited financials within 150 days.
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