NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BB+' rating on the following bonds issued on behalf of Wichita Falls Retirement Foundation Project, d/b/a Rolling Meadows (RM):
--$17,715,000 Red River Health Facilities Development Corporation first mortgage revenue bonds (Wichita Falls Retirement Foundation Project), series 2012.
The Rating Outlook is Stable.
Bonds are secured by a gross revenue pledge, a mortgage, and a debt service reserve fund.
KEY RATING DRIVERS
NOTABLE UPCOMING CAPITAL PROJECT: RM is planning a $6.5 million, 22-unit memory care addition, expected to break ground this October and anticipated to open by the end of 2016. RM plans to borrow $3.5 million, through a bank loan (unrated by Fitch), and add $3 million of its own equity to fund the project. The project budget is equal to 67% of 2014 revenue and will significantly increase RM's debt burden; however, Fitch believes that the additional debt and project risks are manageable at the current rating level and that the project will be accretive to revenues once completed.
ADEQUATE COVERAGE DESPITE HIGHER LEVERAGE: Coverage in 2014 of pro forma MADS was good at 2.0x, consistent with the prior year. However, on a pro forma basis, RM will be highly leveraged, with MADS as a percent of revenue at 14.9%, above the BIG median, and adjusted debt to capitalization very high for a rental community (89.1%). MADS is estimated at $1.4 million, an 18% increase.
ADEQUATE PRO FORMA LIQUIDITY: Pro forma liquidity metrics weaken substantially from current strong level to adequate levels for the rating level assuming RM's $3 million equity contribution for its assisted living expansion. Fitch estimates cash-to-pro forma debt at 43.9% and cushion ratio at 6.5x, which are in line with the rating level.
IMPROVED SKILLED NURSING OCCUPANCY: Skilled nursing (SN) occupancy improved notably to 89% in 2014, up from 85% in 2013, and improved further through the interim period to 91%. Independent living occupancy has been stable since 2013, with 89% occupancy at the interim period. The good occupancy figures have supported solid operating metrics.
ELEVATED REVENUE SENSITIVITY: RM's total operating revenues of $9.6 million in 2014 is one of the smallest for Fitch's senior living credits and compares with an investment grade median of $23.6 million for stand-alone facilities. While some of RM's operating metrics compare well with investment grade medians, Fitch views the smaller revenue base as a credit concern. Fitch believes small changes in RM's operational profile can impact its financial profile. RM's above median liquidity and coverage figures serve to offset the concerns regarding the smaller revenue base.
OPERATIONAL STABILITY DURING PROJECT: Fitch expects Rolling Meadows to maintain stable operations and a continued adequate financial profile through the capital project, which will be key to rating stability over the coming two years.
Located in Wichita Falls, TX, RM is a type D (rental) continuing care retirement community with 169 ILUs and 82 skilled nursing facility (SNF) beds in a gated community on 25.2 acres. RM has its own home health agency for residents, which provides assisted living services for a fee.
STRONG 2014 PERFORMANCE
Operations were strong in 2014, continuing 2013's operating improvements. RM's low operating ratio improved to 79.6% from 82.3% year prior, favorable to BIG category medians and consistent with a rental contract type. IL occupancy remained stable and SN occupancy improved to 89% from 85%.
MEMORY CARE EXPANSION
RM is planning a 22-unit greenfield memory care project on the north side of its campus, which will connect to its health center. The project is expected to break ground in October 2015 and reach 75% occupancy by year-end 2016. Fitch believes that the project has the potential to be accretive, allowing for individuals to age in place through the continuum of care, differentiating RM from local competitors.
PROJECT FINANCING AND DEBT PROFILE
Management estimates that total cost of the project at $6.5 million, $3 million of which will be equity funded and $3.5 million of which will be a seven-year bank loan from BOKF (rated 'A'/'F1'/Stable by Fitch) d/b/a/ Bank of Texas. The loan will be drawn after RM's makes it equity contributions. The loan is structured as a balloon payment and management expects to at least partially amortize principal over the seven year commitment.
Pro forma MADS as a percent of revenue will remain high at 14.9% versus an 11.1% below investment grade (BIG) median. Positively, pro forma debt to net available will be 7.3x, marginally favorable to BIG median (7.8x). In addition to the bank loan, RM has $17,715,000 of fixed-rate bonds outstanding (series 2012). Conservatively, RM has no swaps.
ADEQUATE PRO FORMA LIQUIDITY MITIGATES REVENUE SENSITIVITY
Liquidity is currently strong for below investment grade rating, but Fitch expects that ratios will moderate significantly on a pro forma basis. Fitch estimates pro forma days cash on hand at 447 (assuming no further liquidity growth), still strongly favorable to BIG median (233 days), protecting to some extent RM from routine operational variability. However, a $3.5 million increase in debt results in a Fitch-estimated cash-to-pro forma debt ratio of 43.9% and cushion ratio of 6.5x, which are near respective BIG medians of 36.7% and 4.9x. Fitch believes that its estimates of pro forma liquidity are conservative, given the timing of equity contributions and expectations of continued adequate cash flow, and that RM will likely outperform these estimates.
Rolling Meadows covenants to deliver to EMMA audited financial statements and utilization within 150 days of fiscal year end, and quarterly unaudited financial statements and utilization within 45 days of quarter end.
Additional information is available at 'www.fitchratings.com'.
Not-for-Profit Continuing Care Retirement Communities Rating Criteria (pub. 04 Aug 2015)
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
Dodd-Frank Rating Information Disclosure Form