Fitch Rates Buckner Retirement Services (TX) Series 2016A&B Rev Bonds 'A'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'A' rating to approximately $34,450,000 of series 2016A and $58,310,000 of series 2016B revenue bonds to be issued by Tarrant County Cultural Education Facilities Finance Corporation (the Corporation) on behalf of Buckner Retirement Services (BRS) obligated group (OG).

In addition, Fitch affirms the 'A' rating on $90,020,000 of series 2007 revenue bonds issued by the Corporation on behalf of BRS OG.

The series 2016A&B bonds are expected to be issued as fixed rate. Proceeds will be used to fund $58.2 million of capital projects, fund capitalized interest, advance refund $39.5 million of series 2007 bonds, and pay associated costs of issuance. The sale is expected via negotiation during the week of April 11, 2016.

The Rating Outlook is Stable.

SECURITY

Debt service payments are secured by a gross revenue pledge of BRS OG. There is additional security from a Credit and Support Agreement (CSA) provided by Buckner Foundation (BF) which agrees to make contributions, advances, or loans to BRS for timely payment of debt service. There is also a debt service reserve fund for the series 2007 bonds.

KEY RATING DRIVERS

STRENGTH OF FOUNDATION SUPPORT: The 'A' rating is based primarily on the financial support provided by BF which has been formalized through the CSA. At Dec. 31, 2015, BF's available funds totaled $193.6 million (liquid cash and investments less permanently restricted net assets). As a result, pro forma metrics against total debt and pro forma maximum annual debt service (MADS) are strong despite the material debt increase. BRS and BF are subsidiaries of Buckner International (BI), along with two other affiliates. BF's sole purpose is to support the operations of Buckner International (BI) and affiliates.

LARGE CAPITAL PLANS: A portion of series 2016 bonds will fund significant expansion and repositioning plans underway at the Longview, Austin, and Beaumont campuses. An increase of 105 independent living units (ILUs), seven assisted living units (ALUs), and 18 skilled nursing beds are expected to generate incremental revenues beginning in 2017. Outside of the OG, Buckner Senior Living (BSL; a subsidiary of BRS) is planning to build a new continuing care retirement community (CCRC) in north Dallas. The 'A' rating incorporates Fitch's expectation that the project will be financed on a standalone basis. BF has to date provided a guarantee on a loan of up to $11.7 million and anticipates a limited level of liquidity support and/or equity contribution.

WEAK OPERATING RESULTS: Profitability weakened in 2015 due to heightened benefit expenses and lower than budgeted census at Houston and Beaumont campuses. As a result, the OG generated coverage of 1.2x of actual debt service in 2015 compared to 1.4x in 2014 and 1.5x in 2013. However, as BI and BF have various methods of supporting BRS's financial position in order to meet its obligations (including direct distributions), the weakening at the OG level is not a major credit concern at this time.

RATING SENSITIVITIES

MAINTENANCE OF FOUNDATION ASSETS: A decline in Buckner Foundation's (BF) available resources due to investment performance or material increase in support provided to other affiliates could result in downward rating pressure on Buckner Retirement Services (BRS).

COVERAGE FROM CORE OPERATIONS: Fitch expects BRS to continue generating adequate cash flows to cover its debt service at or above 1.1x. Significant deterioration in core operations leading to reliance on operating support from BF would be viewed negatively.

CREDIT PROFILE

The BRS OG comprises five predominately rental retirement communities located in Austin, Beaumont, Dallas, Longview, and Houston with a total of 501 ILUs, 138 ALUs, 105 dementia care units and 186 skilled nursing beds. Of the 501 ILUs, only 24 are entrance-fee model. For the fiscal year ended (FYE) Dec. 31, 2015 (unaudited interim results), BRS OG had total revenues of $50.6 million. BRS includes two other subsidiaries - Baptist Memorial Ministries (BMM), which has a CCRC in San Angelo, Texas and Buckner Senior Living, which was incorporated to develop a new CCRC.

BRS is a subsidiary of BI, a Texas non-profit corporation that cares for families, needy children, and the elderly. BI's other affiliates are Buckner Children and Family Services, Inc. (BCFS), Buckner Adoption and Maternity Services, Inc., and Buckner Foundation, Inc. BF is governed by a separate board of trustees (appointed by the various BI affiliates) and its sole purpose is to support the activities of BI. Fitch's analysis is primarily based on BRS OG and BF.

Support of Foundation

The 'A' rating primarily reflects the strength of CSA with BF, which is irrevocable and in effect as long as the bonds are outstanding (for both 2007 and 2016 bonds). At FYE 2015, BF's available funds totaled $193.6 million, up from $174.1 million at FYE 2013 and $123.7 million at FYE 2011.

BF usually distributes 5%-6% of a four-year average of its investment portfolio, and reported $18.5 million and $17 million of distributions to related entities in 2015 and 2014, respectively. Distributions mostly support BI and BCFS, and BRS is typically not a major recipient due to historically steady operating performance. However, BI and BF have numerous channels to financially support BRS if needed. BF continues to maintain a diversified portfolio with 45% equities, 30% fixed income, and 25% alternative investments. Fitch's calculation for available funds excludes the majority of alternative investments that are in the form of mineral interests.

Strong Debt Metrics Despite Material Debt Increase

Pro forma BRS OG debt is estimated at $156 million (all secured under CSA). Available funds totaled $193.6 million at Dec. 31, 2015. For BRS OG, this equated to 373% of operating expenses and 124% of pro forma debt. Available funds to pro forma MADS was also a solid 20.4x.

There is an additional $19.2 million of debt outstanding related to BSL and BMM, which are outside the OG but have support from certain BF assets (not secured under the CSA). There is also a small amount of additional debt outstanding at BI. Inclusive of all debt, available funds to pro forma debt remains above 100%.

If BRS OG's debt service coverage falls below 1.1x, BF is required to maintain unrestricted net assets at least equal to 75% of BRS obligated group's outstanding debt. BF had $223 million of unrestricted net assets at FYE 2015 which equates to 244% of outstanding debt and 143% of pro forma debt.

Sizable Capital Projects at BRS OG and non-OG Entities

New money proceeds from the series 2016 bonds are expected to be used for major projects on Longview, Austin, and Beaumont campuses. BRS expects to invest approximately $2.5 million in Longview to add a bistro and renovate certain common areas including corridors, main dining room, and wellness room. Approximately $29.8 million is budgeted for the expansion and repositioning of the Austin facility to add 69 ILUs and complete other improvements and renovations. Approximately $25.9 million of funds is allocated for the Beaumont campus's expansion and repositioning to add 36 ILUs, 7 ALUs, and 18 skilled nursing beds along with other improvements and renovations. All projects are expected to commence in May 2016 and open in 2017.

There are also major capital investments planned outside the OG. Most notably, BSL acquired land to construct a new CCRC in north Dallas, to be known as Ventana. Current plans include 189 ILUs, 38 ALUs, 26 memory support units, 72 skilled nursing beds, and various shared spaces and amenities. Total cost of the project is estimated at $200 million, to be funded with bond proceeds in 2017 (outside the OG). Management anticipates a limited level of liquidity support and equity contribution from BF for this project. Fitch's rating incorporates the expectation that BF's resources available to BRS OG will not be materially diluted, and will monitor potential impacts as plans progress.

Weaker 2015 for BRS OG

Operating and financial results were weaker in 2015, which management attributed to heightened health insurance expenses and lower than budgeted occupancy at Houston and Beaumont campuses. Further, the Dallas facility continues to experience low occupancy and management is weighing various options to reposition the campus. ILU occupancy excluding the Dallas facility is healthy, ranging from 87% to 94% on each campus.

Due to flat revenues and rising expenses, operating ratio increased to 94.2% in 2015, compared to 91.5% in 2014 and 89.3% in 2013. Net operating margin adjusted was also weaker at 14.9% compared to 17%-21% observed in the previous three years. Weaker cash flows and poor investment returns led to a decline in liquidity balance at BRS OG, which totaled $5.2 million at FYE 2015. While liquidity metrics of the OG (39 days cash on hand, 5.6% cash to debt, and 0.4x cushion ratio) are very weak, Fitch incorporates the assets at BF in its calculation of liquidity and the OG's ability to make timely payment of principal, interest and all other financial obligations.

DEBT PROFILE

At FYE 2015, the OG's only outstanding debt are the series 2007 bonds, which are 100% fixed rate and generate level debt service of $7 million. Pro forma debt of $156 million will remain 100% fixed rate, with debt service around $9.5 million from 2017 to 2037, which then decreases to $8.2 million through 2046. Debt service net of capitalized interest is approximately $5.4 million in 2016, steadily increasing to $9.5 million in 2019.

DISCLOSURE

BRS obligated group covenants to provide annual disclosure within 150 days of fiscal year end and quarterly disclosure within 45 days of each quarter end.

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

Applicable Criteria

Not-for-Profit Continuing Care Retirement Communities Rating Criteria (pub. 04 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=868824

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Nonprofit Institutions Rating Criteria (pub. 05 Jun 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=866668

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Contacts

Fitch Ratings
Primary Analyst
Jennifer Kim, CFA
Director
+1-212-908-0740
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Gary Sokolow
Director
+1 212-908-9186
or
Committee Chairperson
Jim LeBuhn
Senior Director
+1 312-368-2059
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Jennifer Kim, CFA
Director
+1-212-908-0740
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Gary Sokolow
Director
+1 212-908-9186
or
Committee Chairperson
Jim LeBuhn
Senior Director
+1 312-368-2059
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com