SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB' rating to the approximately $14 million Hospital Facilities Authority of Multnomah County, Oregon revenue refunding bonds, series 2016 issued on behalf of Terwilliger Plaza, Inc. (Terwilliger). In addition, Fitch has affirmed the 'BBB' rating on Terwilliger's outstanding debt listed below.
The series 2016 bonds will be fixed rate and bond proceeds will refund the series 2006 bonds, fund a debt service reserve and pay costs of issuance. The series 2016 bonds are expected to price the week of May 23.
The Rating Outlook is revised to Stable from Positive.
SECURITY
The bonds are secured by a gross revenue pledge and mortgage pledge. Each bond series has a debt service reserve fund.
KEY RATING DRIVERS
SOLID PERFORMANCE FOR RATING LEVEL: The Outlook revision to Stable from Positive reflects lower debt service coverage in 2015 (fiscal year ended Dec. 31) than expected. Although Terwilliger's overall financial profile is solid for the rating level, the likelihood for upward rating movement over the next one to two years is less now compared to during our last rating review in September 2015 given current performance. Debt service coverage declined to 2.3x in 2015 from 3.1x in 2014 and 2013. Upward rating movement would not be likely unless debt service coverage is sustained around 3x, which was expected at the time of our last review.
HIGH OCCUPANCY: Terwilliger's independent living unit (ILU) occupancy continues to be very strong and was 98.4% in 2015 compared to 96.4% in 2014 and a drastic improvement from 87% in 2011. Management attributes the strong sales activity to the solid housing market and prior financial sales incentives have not been utilized since 2013.
STRONG LIQUIDITY: Liquidity is strong for the rating level with $27.2 million in unrestricted cash and investments at Feb. 29, 2016, which translated to 709 days cash on hand and 82.9% cash to debt compared to the BBB category medians of 400 and 60%.
LONG OPERATING HISTORY AND UNIQUE MARKET POSITION: Terwilliger has been operating in the Portland, OR market since 1962. In addition to its location in downtown Portland, the community is one of only three continuing care retirement communities (CCRCs) in the U.S. primarily governed by its residents, which Fitch views as a differentiating factor in a competitive market.
SMALL REVENUE BASE: With total revenues of $18 million in 2015, Terwilliger has one of the smaller revenue bases in Fitch's CCRC portfolio, which inherently subjects the organization to higher volatility as changes in occupancy or turnover, or external factors like financial market movements, can have a larger impact on the organization's financial profile. This was evident in 2015 with lower investment returns impacting debt service coverage.
RATING SENSITIVITIES
FUTURE CAPITAL PLANS: Terwilliger Plaza is land locked and has been purchasing adjacent property when available to prepare for the longer term. Any major expansion plans would likely be at least three years away, and Fitch will monitor the impact of the capital plan when details and funding sources are determined and available.
CREDIT PROFILE
Located in Portland, Oregon, Terwilliger Plaza is a type-B (modified life care) CCRC, offering independent, assisted, and residential care living services in 306 units: 245 ILUs (197 Tower, 48 Heights), 44 assisted living units (ALUs) and 17 residential care units. There is no skilled nursing facility (SNF). Nursing care is provided to residents who require that level of care in the ALUs and residential care units. Terwilliger offers a traditional non-refundable contract and a 90% refundable contract. The refundable contracts are only available for the ILUs in the Heights (newest ILU addition). Terwilliger is under management transition with a current interim CEO and CFO; a new CEO will start in June 2016 who has prior experience at senior living facilities in the area. A permanent CFO position is expected to be filled once the new CEO starts. In 2015, Terwilliger had $18.1 million in total revenue.
Strong Occupancy
ILU occupancy has improved significantly since 2011, which has mainly been driven by the recovery in the real estate environment. ILU occupancy was 95.6% through March 31, 2016, compared to 98.4% in 2015, 96.4% in 2014, 90.9% in 2013, 86.6% in 2012, and 87% in 2011. ALU occupancy has been volatile, but they are 'closed' units and only available to residents of Terwilliger.
Terwilliger has been operating in the Portland, OR market since 1962. There are four main competitors in the area and Terwilliger's differentiating factors include its location on the west side of the Willamette River, the self-governing community, its long history in the market, having an optional meal program instead of mandatory plan, and providing on-site in-home health services. Additionally, Terwilliger's entrance fees span a large range, enabling the organization to attract residents of varying income levels. Terwilliger does not have a SNF, unlike the rest of its competitors.
Varying Debt Service Coverage
Terwilliger's debt service coverage has been inconsistent with 2.3x in 2015, 3.1x in 2014, 3.1x in 2013 and 2.3x in 2012. Given Terwilliger's small revenue base, changes in investment income and net turnover entrance fees can result in fluctuating debt service coverage. The decline in debt service coverage in 2015 mainly related to lower investment income. Net turnover entrance fees received were $4 million in 2015, $4.5 million in 2014, $5.5 million in 2013 and $3.7 million in 2012. Management projects that net turnover entrance fees will be $4.4 million for 2016 and debt service coverage to be 2.3x.
Operating performance is solid with operating ratios consistently below 100%. However, there is expected to be ongoing wage pressures as Terwilliger is committed to maintaining market wages.
Strong Liquidity
Liquidity is strong for the rating level with $27.2 million unrestricted cash and investments at Feb. 29, 2016 but has declined since 2014 due to unrealized investment losses. In addition, in April 2016, Terwilliger has funds in escrow to purchase adjacent property for $1.6 million in cash. The budgeted liquidity ratios for 2016 are still favorable compared to the BBB category medians with 639 days cash on hand and 83.3% cash to debt, compared to the medians of 400 and 60%.
Future Capital Plans
The last major capital project was in 2008 when Terwilliger constructed the Heights, a 10-story apartment building, with larger ILUs. Capital spending totaled $2.4 million in 2015 compared to $3.7 million in 2014 and $3.2 million in 2013. Capital spending is projected to be $4.5 million in 2016 mainly for apartment remodels as well as land acquisition for future development.
Terwilliger has been in the process of acquiring adjacent property as it becomes available. A longer-term master facilities plan was expected to be developed by the end of 2015 but is now on hold due to the management transition. Fitch will evaluate the impact of the capital plan when it is available.
Conservative Debt Profile
The series 2016 bonds will refund Terwilliger's series 2006 bonds, which includes approximately $3 million of adjustable rate bonds. Pro forma total outstanding debt is approximately $30 million and is 100% fixed rate. There are no swaps outstanding.
Series 2016 Transaction
Terwilliger is proposing a new master trust indenture (MTI) with the series 2016 issuance, which will require two-thirds bondholder approval. The MTI will not be in effect until Terwilliger receives consent from the necessary amount of series 2012 bondholders. The security remains the same - gross revenue pledge and mortgage pledge. The financial covenants are fairly similar, although currently Terwilliger has a cash to debt covenant, which is not in the MTI. Other financial covenants include 1.2x debt service coverage ratio and 125 days cash on hand.
Disclosure
Terwilliger covenants to provide annual disclosure within 120 days of fiscal year end and quarterly disclosure within 45 days of quarter end for the first three quarters and within 60 days for the fourth quarter.
Outstanding debt:
--$15,890,000 Hospital Facilities Authority of Multnomah County, Oregon revenue refunding bonds, series 2012 (Terwilliger Plaza, Inc.);
--$15,575,000 Hospital Facilities Authority of Multnomah County, Oregon revenue bonds, series 2006 (Terwilliger Plaza, Inc.)
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
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1004263
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1004263
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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