CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB' rating on the following bonds issued by the Tarrant County Cultural Education Facilities Finance Corporation on behalf of Edgemere, TX:
--$57,715,000 retirement facility revenue bonds series 2006A;
--$17,670,000 retirement facility revenue bonds series 2006B.
The Rating Outlook is Stable.
The bonds are secured by a pledge of the revenues of the obligated group, a lien on the leasehold interest in the property, and a debt service reserve fund for the series 2006A bonds.
KEY RATING DRIVERS
STRONG OCCUPANCY: Despite higher than average attrition in the six month interim period ending June 30, 2014 (the interim period), ILU occupancy remained relatively strong at 90.1%. Edgemere's strong demand and market niche is reflected in consistently high occupancy rates, with ILU, ALU (including memory support) and SNF occupancy averaging 93.2%, 93.3% and 92.7%, respectively, between fiscal years 2009 and 2013.
SOLID PROFITABILITY: Edgemere's strong occupancy, net entrance fee generation and effective management practices have translated into solid operating profitability with net operating margin adjusted (NOMA) equal to 27.3% in fiscal 2013 and 25.2% in the interim period, easily exceeding Fitch's 'BBB' category median of 21.3%.
HIGH DEBT BURDEN: Adjusted to account for Edgemere's long-term ground lease, Edgemere's debt burden is among the highest in Fitch's CCRC portfolio with 'adjusted MADS' equal to 24.2% of revenue in fiscal 2013 relative to Fitch's 'BBB' category median of 12.4%. Despite the high debt burden, MADS coverage of 2.0x in fiscal 2013 and the interim period was adequate for the rating category reflecting Edgemere's solid operating profitability.
MIXED LIQUIDITY METRICS: Liquidity relative to expenses remains very strong at 664.6 days cash on hand at June 30, 2014. However, reflective of the high adjusted debt burden, liquidity relative to debt remains only adequate for the 'BBB' category rating with 6.3x cushion ratio.
INCREASED CAPITAL SPENDING EXPECTED: In order to maintain Edgemere's strong competitive position in the mid to long-term, management is contemplating a large capital project. Plans are currently preliminary but could involve issuance of additional debt. Fitch will assess the credit impact of any increased capital spending or additional debt as more details become certain.
SUSTAINED OPERATING PERFORMANCE: Fitch expects that Edgemere's strong competitive position, robust occupancy and solid entrance fee generation will continue to support its heavy adjusted debt burden while maintaining liquidity metrics.
Located in the Preston Hollow neighborhood of Dallas, Edgemere (Northwest Senior Living Corporation, dba Edgemere) provides a complete continuum of care with 304 ILUs, 60 assisted living units (ALUs), 31 memory support units and 72 skilled nursing units (SNFs). The property is leased through a long term ground lease that runs through 2054. Total operating revenues equaled $37.7 million in fiscal 2013 (fiscal year ended Dec. 31).
The obligated group is composed of Edgemere and its parent company, Senior Quality Lifestyles Corporation (SQLC). The obligated group accounted for 100% of total consolidated assets and 100% of total consolidated operating revenue in fiscal 2013.
In addition to Edgemere, SQLC owns and operates four CCRCs in Texas and one in Carmel, IN, with a total of 1,857 CCRC units. SQLC ranked as the 30th largest CCRC on the 2014 LeadingAge Ziegler 150.
The strong demand for Edgemere's services is demonstrated by consistently robust occupancy rates. Despite higher than average attrition in the interim period, ILU occupancy remained strong at 90.1% at June 30, 2014, decreasing from 96.4% at December 31, 2013. Management expects attrition to normalize going forward and expects ILU occupancy to improve. ILU occupancy improved to approximately 92% at August 31, 2014. ALU (including memory support) and SNF occupancy rates remained strong at 97% and 94%, respectively. The strong occupancy rates reflect Edgemere's niche market position and strategy as a provider of high-end, luxury retirement units.
Strong occupancy, entrance fee generation and effective management practices have translated into consistently solid operating profitability with net operating margin adjusted (NOMA) averaging 23.8% between fiscal 2010 and fiscal 2013. NOMA improved to 27.3% in fiscal 2013 and remained strong at 25.2% in the interim period despite the increased attrition, exceeding Fitch's 'BBB' category median of 21.3%. Operating ratio decreased from 97.6% in fiscal 2012 to 93.7% in fiscal 2013 and 91.1% in the interim period, highlighting management's effective cost management practices.
HIGH DEBT BURDEN
For analytical purposes Fitch classified Edgemere's long-term ground lease as a capital lease rather than an operating lease as per the audit. The ground lease obligation was valued by applying an 8x multiple to the annual rental expense, which is the standard Fitch multiple in North American markets. Additionally Fitch adjusted MADS to include the annual operating lease cash payment and added operating lease expense back to net revenues available for debt service.
Edgemere's debt burden increases materially with the capitalized ground lease. Adjusted MADS of $9.3 million equaled 24.2% of operating revenue in fiscal 2013 and is heavy relative to Fitch's 'BBB' category median of 12.4%. Series 2006A/B MADS of approximately $6 million equaled a more moderate 15.7% of fiscal 2013 revenue but remains high. Despite solid operating profitability, adjusted MADS coverage is reflective of the heavy debt burden and remains only adequate for the rating category, averaging 1.7x since fiscal 2010 and equal to 2.0x in fiscal 2013 and the interim period relative to Fitch's 'BBB' category median of 1.9x.
MIXED LIQUIDITY METRICS
Unrestricted cash and investments increased 2.8% since fiscal 2012 to $58.1 million at June 30, 2014. Edgemere's liquidity is very strong relative to operating expenses with 664.6 days cash on hand relative to Fitch's 'BBB' category median of 371.3 days. However, given Edgemere's high debt burden, liquidity remains only adequate relative to debt with 6.3x cushion ratio and 60.3% cash to debt compared to Fitch's 'BBB' category medians of 6.9x and 58.9%, respectively.
Edgemere has historically provided loans to other SQLC communities to fund capital projects and liquidity support agreements for new communities. As of Dec. 31, 2013, Edgemere had $19.3 million of intercompany loans outstanding. The loans accrue interest at the prime rate. Fitch notes that Edgemere's ability to provide intercompany loans is limited by its liquidity covenant, which currently requires a minimum of 450 days cash on hand but could be lowered if certain financial targets are met; however, the covenant levels cannot fall below 250 days cash on hand.
INCREASED CAPITAL SPENDING EXPECTED
While Edgemere's campus remains in very good shape with limited current capital needs, as highlighted by a low 8.4 year average age of plant, management is contemplating a series of capital projects to ensure that Edgemere maintains its strong competitive position in the mid to long-term. The contemplated capital projects, nicknamed 'Renaissance at Edgemere,' include continued renovations and enhancements to ILU spaces as well as expanded assisted living and skilled nursing units and services.
The project would occur in two distinct phases with the first phase potentially beginning in spring 2015. The phased implementation of the project will partially mitigate some execution risk. Plans are not yet finalized and could include the issuance of additional debt. Fitch will assess the impact of any additional debt or the use of unrestricted liquidity to fund the project upon Edgemere's credit profile as more details become certain.
Edgemere covenants to provide annual disclosure within 120 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 and Related Research:
--'Non-Profit Continuing Care Retirement Communities Rating Criteria' (July 24, 2014).