Fitch Affirms Querencia at Barton Creek's (TX) Bonds at 'BBB-'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'BBB-' rating on approximately $50.7 million of series 2015 retirement facility revenue bonds issued by the Tarrant County Cultural Education Facilities Finance Corporation on behalf of Querencia at Barton Creek (Querencia).

The Rating Outlook is Stable.

SECURITY

The bonds are secured by an interest in the gross revenues of the obligated group, a security interest in certain mortgaged properties and a debt service reserve fund.

KEY RATING DRIVERS

STRONG OCCUPANCY: Querencia's strong demand and market niche is reflected in consistently high occupancy rates, with independent living unit (ILU), assisted living unit (ALU), including memory support, and skilled nursing (SNF) occupancy all averaging over 95% between fiscal years 2010 and 2015.

SOLID PROFITABILITY: Operating profitability has been solid with net operating margin (NOM) and net operating margin-adjusted (NOMA) averaging 12.3% and 30.3% since fiscal 2012, exceeding Fitch's 'BBB' category medians of 8.9% and 19.3%, respectively. NOMA decreased to 13.3% in the six-month interim period ending June 30, 2016 due to timing of entrance fee receipts and refunds.

HIGH DEBT BURDEN: Querencia's debt burden is high with maximum annual debt service (MADS) equal to 18.4% of fiscal 2015 total revenue. Despite the solid profitability, coverage metrics remain only adequate for the rating category with MADS coverage equal to 2.3x in fiscal 2015. However, MADS coverage decreased to 0.7x in the interim period reflecting the light net entrance fee generation.

WEAK BUT IMPROVING LIQUIDITY: Despite significant improvement in absolute liquidity, liquidity metrics remain weak for the rating category with 376 days cash on hand, 36.3% cash to debt and 5.2x cushion ratio.

PLANNED EXPANSION PROJECT: Due the strong demand for its services, Querencia is planning an expansion project that is estimated to cost approximately $63 million and is expected to be funded by a bond issuance. However, the project requires approval from the city of Austin and thus far the plans have been denied by the city due to zoning restrictions. The expansion project is not incorporated into the current rating due to the uncertainty that Querencia will receive the necessary approvals to proceed with the project.

RATING SENSITIVITIES

SUSTAINED CASH FLOW: Fitch expects Querencia at Barton Creek's (Querencia) NOMA to rebound from the compressed interim-period levels by fiscal year end and to remain at levels consistent with historical performance, providing for MADS coverage consistent with the rating category. Failure to maintain cash flow and coverage metrics consistent with the rating category may result in negative rating pressure given the light liquidity metrics.

EXECUTION OF EXPANSION PROJECT: Due to the weak liquidity metrics and heavy debt burden, execution of the expansion plan in the near term is likely to result in a downgrade. The rating impact will be determined by the final timing and scope of the project and Querencia's ability to grow into the increased debt burden upon stabilization.

CREDIT PROFILE

Located in the Barton Creek neighborhood of Austin, TX, Querencia (Barton Creek Senior Living Center, dba Querencia at Barton Creek) operates a Type A continuing care retirement community (CCRC) with 167 ILUs, 40 ALUs, 23 memory support units and 42 SNFs. The community opened in June 2007. Querencia is the sole member of the obligated group and accounts for 100% of consolidated total assets and 100% of consolidated operating revenues.

Querencia's parent company and sole corporate member is Senior Quality Lifestyles Corporation (SQLC). In addition to Querencia, SQLC owns and operates four CCRCs in Texas and one in Carmel, IN, with a total of 1,858 CCRC units. SQLC ranked as the 29th largest CCRC on the 2015 LeadingAge Ziegler 150.

STRONG OCCUPANCY

Querencia's consistently strong occupancy rates reflect the community's niche market position, strong demand for its services and strong demand across the Austin market for senior housing services. ILU occupancy has averaged 97% since fiscal 2010 and equaled 98% at June 30, 2016. Both ALU and SNF occupancy rates are similarly strong, averaging 97% and 96%, respectively, since 2010 and equal to 92% and 100% at June 30, 2016. Additionally, Querencia turns down approximately 220 SNF admissions per year due to capacity constraints. The community also maintains a strong wait list with over 70 prospective residents having deposited $10,000 for an ILU.

Demand for CCRC services is particularly strong in Austin. Of the six communities competing with Querencia in the Austin market, all six maintain ILU occupancy in excess of 90%. Of the six competitors, only two offer lifecare contracts, effectively reducing Querencia's competition.

SOLID PROFITABILITY

Core operating profitability remains robust for the rating category reflecting Querencia's strong occupancy rates and effective management practices. Operating ratio and NOM have continued to improve with operating ratio decreasing from 97.2% in fiscal 2014 to 94.6% in fiscal 2015 and 95.7% in the interim period. Similarly, NOM increased from 13.4% in fiscal 2014 to 16.7% in fiscal 2015 and 15.9% in the interim period, exceeding Fitch's 'BBB' category median of 8.9%.

NOMA has been historically strong, but declined in the interim period reflecting higher than expected turnover and the resulting entrance fee refunds offsetting new entrance fees received from sales. NOMA has been particularly strong due to robust net entrance fee generation, averaging 30.3% since fiscal 2012 and equal to 35.0% in fiscal 2015, easily exceeding Fitch's 'BBB' category median of 19.3%. However, NOMA declined to 13.3% the interim period due to the timing of entrance fee receipts and refunds. Management expects NOMA to return to historical levels by the end of the fiscal year as net entrance fee generation smooths out.

HIGH DEBT BURDEN

Querencia's debt burden remains heavy with MADS equal to 18.4% of fiscal 2015 total revenue, exceeding Fitch's 'BBB' category median of 12.4%. The strong core operating profitability has produced solid revenue-only MADS coverage of 0.9x in both fiscal 2015 and the interim period.

MADS coverage of 2.1x and 2.2x was solid in fiscal years 2012 and 2013, but decreased to 1.2x in fiscal 2014. MADS coverage rebounded to a solid 2.3x in fiscal 2015, consistent with Fitch's 'BBB' category median of 2.0x. Interim-period MADS coverage decreased to 0.7x, reflecting the negative impact of the timing of entrance fee receipts. Fitch expects MADS coverage to rebound to levels more consistent with the rating category by fiscal year end.

WEAK BUT IMPROVING LIQUIDITY

Unrestricted liquidity has strengthened significantly, increasing from $2.3 million in 2010 to $18.8 million at June 30, 2016, including a 5.4% increase since June 30, 2015 at the time of Fitch's last review. The increase reflects the stabilization and successful fill-up of the community after opening in 2007, strong operations and net entrance fee generation. Despite the increase, liquidity metrics remain weak for the rating category with 376 days cash on hand, 36.3% cash to debt and 5.2x cushion ratio comparing unfavorably to Fitch's 'BBB' category medians of 400 days, 60.0% and 7.3x.

PLANNED EXPANSION PROJECT

Querencia is planning an expansion project that includes the addition of 68 new ILUs, 12 new ALUs, 10 new memory support units and 24 additional SNFs, plus additional common spaces and parking. The project is estimated to cost approximately $63 million and is expected to be funded by a bond issuance, a portion of which would be redeemed with initial entrance fees from the new ILUs. The expansion is driven by the strong demand for Querencia's services, high occupancy rates and capacity constraints in skilled nursing. The project requires approval from the city of Austin and thus far Querencia's plans have been denied by the city due to zoning restrictions. Timing is currently uncertain and could occur within 18 months of receiving a city approval. However, the project will not happen if Austin does not grant approval. Querencia expects to receive the city's project determination in spring 2017.

Fitch views the expansion project favorably given Querencia's strong historical occupancy and SQLC's successful execution of prior capital projects; however, Fitch is concerned about the potential increase in debt. Any related rating impact will depend upon the final timing and scope of the project as well as Querencia's ability to successfully execute the project and to grow into the heavier debt burden upon project stabilization.

DEBT PROFILE

Querencia had approximately $51.8 million of total debt outstanding at June 30, 2016. The bond portfolio consists of 100% underlying fixed-rate bonds. Fitch views the conservative debt profile as appropriate for the rating level. Querencia is not counterparty to any interest rate swap agreements.

DISCLOSURE

Querencia covenants to provide annual disclosure within 150 days of fiscal year end and quarterly disclosure within 45 days of each fiscal quarter end. Disclosure is provided through the Municipal Securities Rulemaking Board's EMMA system.

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/site/re/868824

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

https://www.fitchratings.com/site/re/750012

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1011483

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1011483

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
Adam Kates
Director
+1-312-368-3180
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Paul Rizzo
Director
+1-212-612-7875
or
Committee Chairperson
James 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
Adam Kates
Director
+1-312-368-3180
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Paul Rizzo
Director
+1-212-612-7875
or
Committee Chairperson
James LeBuhn
Senior Director
+1-312-368-2059
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com