Fitch Affirms Trinity Terrace, TX Revs at 'BBB+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'BBB+' rating on the following bonds issued by the Tarrant County Cultural Education facilities Corporation on behalf of Cumberland Rest, Inc. d/b/a Trinity Terrace:

--$61.4 million revenue bonds, series 2014A-1;

--$21.2 million revenue bonds, series 2014A-2.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a gross revenue pledge, mortgage on Trinity Terrace's property, and a debt service reserve fund.

KEY RATING DRIVERS

HIGH DEBT POSITION: As a result of the additional debt associated with Trinity Terrace's River Tower project, maximum annual debt service (MADS) of $6.1 million represents a high 24.3% of fiscal 2015 revenues (Sept. 30 year-end and normalized to exclude $27.2 million of trust assets released from restrictions). Additionally, Trinity Terrace has $41.2 million of temporary debt outstanding that is expected to be repaid with initial entrance fees from its River Tower expansion project by Dec. 1, 2018.

SOLID, BUT VARIABLE OPERATIONS: Trinity Terrace benefits from royalty income and the receipt of net assets released from restriction to support operations. This mostly reflects earnings from trusts, but now includes earnings from mineral assets that were fully released from a split-interest trust in fiscal 2015. As a result, both the operating ratio and operating margin are routinely very favorable versus Fitch's 'BBB' category medians. Nevertheless, the net operating margin (NOM; which excludes net assets released from restrictions) was good in fiscal 2015 and the 11-month period ending Aug. 31, 2016 at 12.8% and 14.1%, respectively.

CONSISTENTLY STRONG ILU OCCUPANCY: Trinity Terrace has consistently maintained very good occupancy of more than 90% in the independent living units (ILU) over the last five years, with ILU occupancy averaging 93.5% through the first 11 months of fiscal 2016.

PROJECT MANAGEMENT AND PRE-SALES: Trinity Terrace's River Tower project remains within budgeted parameters and mostly on time. The project is estimated to be substantially complete by May 4, 2017, which is about 35 days later than originally expected mostly due to weather delays during the early portion of the construction period. Remaining project costs total $36.4 million, with sufficient contingency funds of $3.54 million remaining as of Aug. 31, 2016. Also as of Aug. 31, 2016, 70 of the 78 new ILUs are presold (90%) with a 10% deposit, with about seven net cancellations over the past year.

STRONG CASH AND INVESTMENT POSITION: Trinity Terrace's cash and investment position benefits from assets held in perpetual trusts and mineral assets which Fitch includes in its liquidity ratios. At Aug. 31, 2016, $84.6 million of cash and investments amounted to a robust 1,755 days operating expenses, 81.5% of long-term debt and 13.9x cushion ratio. However, Fitch notes that the mineral (oil and gas) assets are Level 3 investments that are highly volatile and valued with unobservable inputs that are supported by little or no market activity.

RATING SENSITIVITIES

CONSTRUCTION PROJECT MANAGEMENT: Fitch expects Trinity Terrace to meet its financial projections for the River Tower project. Risks associated with the expansion project have been minimized through strong presales of the new ILUs, a guaranteed maximum price construction contract with provisions for liquidated damages, and the use of an experienced contractor and project manager.

PROJECT FILL-UP AND STABILIZATION: The 'BBB+' rating assumes that construction and move-ins will occur on a timely basis to collect sufficient initial entrance fees to pay down $41.2 million of temporary debt on or before Dec. 1, 2018. The project is expected to reach 95% occupancy by April 2018. Delays in completing the project, cost overruns, and/or an inability to successfully fill the new ILUs could weaken Trinity Terrace's financial profile and may result in negative rating pressure.

CREDIT PROFILE

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. Resident contracts are modified life care or Type B arrangements. Trinity Terrace offers five different agreements, which include 50%, 90%, 95%, and 100% refundable contracts and nonrefundable contracts. About half of Trinity Terrace's resident contracts are nonrefundable.

Trinity Terrace is managed by Pacific Retirement Services, which manages over 37 senior living facilities nationwide. In fiscal 2015, Trinity Terrace had $24.7 million in total operating revenue. Fitch uses the consolidated financial statements for Trinity Terrace and its affiliate, Trinity Terrace Foundation for its analysis, but notes that the unaudited interim figures are for Trinity Terrace only. Trinity Terrace represented 99.9% of total system assets and 99.6% of total system operating revenues in fiscal 2015.

CONSTRUCTION PROJECT UPDATE

The 23-story River Tower building will be the third tower on the campus and will add 78 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, expansion of other amenities and three levels of parking. The total River Tower project is estimated to cost about $83.7 million, with $47.8 million spent through Aug. 31, 2016. Despite the additional debt associated with the project, Fitch views the expansion favorably as it is expected to meet the pent-up demand for Trinity Terrace's desirable services and the additional units are forecasted to generate over $6 million of annual revenue.

The River Tower project remains within budgeted parameters and mostly on time. The project is estimated to be substantially complete by May 4, 2017, which is about 35 days later than originally expected mostly due to weather delays during the early portion of the construction period. Remaining project costs total $36.4 million, with sufficient contingency funds of $3.54 million remaining as of Aug. 31, 2016. In addition , as of Aug. 31, 2016, 70 of the 78 new ILUs are presold (90%) with a 10% deposit, with about seven net cancellations over the past year. Moreover, nearly all of the prospective residents have already paid non-refundable monies for customization options in their reserved unit, indicating a strong commitment to move-in.

HIGH DEBT POSITION

Trinity Terrace's MADS of $6.1 million represents a high 24.3% of fiscal 2015 revenues (normalized to exclude $27.2 million of trust assets released from restrictions). Additionally, Trinity Terrace has $41.2 million of temporary debt outstanding that is expected to be repaid with initial entrance fees from the River Tower expansion by Dec. 1, 2018.

Solid operations, support from royalty income and net assets released from restrictions, and steady receipt of net entrance fees produced MADS coverage of 1.9x in fiscal 2015 and 1.1x for the 11-month period ending Aug. 31, 2016. Fitch notes that Trinity Terrace will not be tested on its MADS coverage until after the River Tower project is at stabilized occupancy.

After repayment of the temporary bonds and loan by Dec. 1, 2018, permanent debt is projected to total about $86.4 million. This represents a high 14.4x of net available for debt service or 75.6% of adjusted capitalization as of Aug. 31, 2016. Nonetheless, the new revenues from the River Tower expansion are forecasted to support cash flows and improve Trinity Terrace's capital-related metrics.

OPERATING PERFORMANCE

Trinity Terrace benefits from consistent occupancy trends and the receipt of royalty income and net assets released from restrictions to support operations. ILU occupancy remains healthy and averaged 93.5% during the first 11 months of fiscal 2016. ALU and SNF census are adequate, but are more variable given the low number of ALUs (16) and SNFs (42) that are available for occupancy.

Trinity Terrace enjoys the financial support of earnings from trusts and mineral assets. As a result, both the operating ratio and operating margin are routinely well above Fitch's 'BBB' category medians, but softened in the current fiscal year due to higher interest expense, softer performance at the SNF, and lower investment income and net assets released from restrictions. In fiscal 2015, the operating ratio (normalized to exclude $27.2 million of trust assets released from restrictions) amounted to 75.2%, favorably below Fitch's 'BBB' category median of 96.1%. During the first 11 months of fiscal 2016, the operating ratio remained healthy but increased to 93.7% as a result of the factors mentioned above.

The NOM (which excludes net assets released from restrictions) was also favorable in fiscal 2015 and the 11-month period ending Aug. 31, 2016 at 12.8% and 14.1%, respectively. The NOM-adjusted, which reflects net entrance fees received, continues to be very good at 27% in fiscal 2016 and 26% through Aug. 31, 2016, both ahead of Fitch's 'BBB' category median of 19.3%.

CASH AND INVESTMENT POSITION

Trinity Terrace's cash and investment position benefits from assets held in perpetual trusts and mineral assets which Fitch includes in its liquidity ratios. However, Fitch notes that the mineral (oil and gas) assets are Level 3 investments that are highly volatile and valued with unobservable inputs that are supported by little or no market activity. Regardless, $39 million of Trinity Terrace's liquidity balances are held in cash or highly liquid short-term investments as of Aug. 31, 2016.

During fiscal 2015, Trinity Terrace was the beneficiary of a permanent distribution from a split interest trust of $27.2 million. Most of the distribution was in the form of mineral lease interests that are valued at $24.3 million as of Aug. 31, 2016. Other assets held in trust are valued at $19.8 million as of Aug. 31, 2016. The values of the mineral assets are estimated based on a multiplier of annual net revenue. Increases or decreases in the annual net revenue positively or negatively affect the estimated fair values. Trinity Terrace examines the mineral assets on a quarterly basis. The valuations consider variables such as financial performance of several publicly traded oil and gas companies and recent sales prices of investments.

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

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013702

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https://www.fitchratings.com/regulatory

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or
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Contacts

Fitch Ratings
Primary Analyst
Paul Rizzo
Director
+1-212-612-7875
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Ryan Pami
Associate Director
+1-212-908-0803
or
Committee Chairperson
Emily Wong
Senior Director
+1-415-732-5620
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com