Fitch Affirms Rolling Meadows (TX) Rev Bonds at 'BB+'; Outlook Stable

NEW YORK--()--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):

--$17.7 million Red River Health Facilities Development Corporation, TX first mortgage revenue bonds (Wichita Falls Retirement Foundation Project), series 2012.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a gross revenue pledge, a mortgage, and a debt service reserve fund.

KEY RATING DRIVERS

CAPITAL PROJECT UNDERWAY: RM's $6.5 million capital expansion project, a 22-unit memory care addition, started construction in the fall of 2015 and is expected to be completed by January 2017. RM will fund the project through a $3 million equity contribution and $3.5 million bank loan. The project will increase RM's debt burden; however, Fitch believes the additional debt and project risks are manageable at the current rating level and that the project will be accretive to revenues once completed.

SUFFICIENT PRO FORMA COVERAGE: Pro forma MADS coverage was sufficient for its rating level at 1.6x for fiscal 2015. However, the current capital expansion project is expected to elevate RM's debt burden as pro forma MADS comprises 17.5% of fiscal 2015 revenues. Additionally, pro forma adjusted debt to capitalization is high at 86.2% which is higher than the below investment grade (BIG) median of 78.4%.

ADEQUATE PRO FORMA LIQUIDITY: Despite increasing liquidity levels over the last few fiscal years, RM's $3 million equity contribution for its capital expansion project is very dilutive to its liquidity metrics. Fitch estimates cash to pro forma debt at 47.4% and cushion ratio at 6.0x which both are on par with Fitch's BIG medians of 37.3% and 5.0x, respectively.

MIXED OCCUPANCY LEVLES: Skilled nursing (SN) occupancy levels have further improved to 93% in fiscal 2015 and have increased further to 96% during the interim period ending June 2016. Conversely, IL occupancy levels have weakened over the last year and were 84% in fiscal 2015. ILU occupancy has improved to 85% in the interim period and weakened ILU occupancy is attributed to transfers to SN from ILUs.

SMALL REVENUE BASE: RM's total operating revenues of $9.5 million in fiscal 2015 is one of the smallest for Fitch's senior living credits and remains much smaller than Fitch's stand-alone CCRC median of $27.2 million. Given its small revenue base, small changes in RM's operating profile can impact its financial profile. While Fitch views this small revenue base as a credit concerns, RM's increasing liquidity levels help offset many of the concerns with a smaller revenue base.

RATING SENSITIVITIES

COMPLETION OF CAPITAL PROJECT: Following the completion of its expansion project, continued improvement in liquidity levels mixed with strong operational performance could lead to upward rating movement. However, any increased costs or delays in construction and fill-up associated with the capital project could impact RM's operations and put negative pressure on the rating.

CREDIT PROFILE

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.

CAPITAL EXPANSION PROJECT

RM's 22-unit memory care expansion project began construction in October 2015 and is expected to be completed by January 2017. The expansion will occur on the north side of RM's campus and will connect to its health care center. The project is expected to cost $6.5 million and will be financed with a $3 million equity contribution and a $3.5 million bank loan from BOKF (rated 'A'/'F1', with a Negative Outlook). The bank loan will be structured as a seven-year balloon payment, with partially amortizing principal over its seven-year term.

DEBT PROFILE

The additional debt from the capital expansion project financing will further increase RM's debt burden. Pro forma MADS equates to a high 17.5% of fiscal 2015 revenues which remains much higher than Fitch's 'BBB' category median of 12.4%. Furthermore, pro forma debt to net available remains elevated at 7.8x and is higher than the BIG median of 7.6x. In addition to the bank loan, RM has approximately $17 million in outstanding fixed-rate debt. RM has no exposure to derivative instruments.

FINANCIAL PROFILE

RM's furthered its strong operational performance in fiscal 2015 as evidenced by its 81.4% operating ratio which remains significantly better than Fitch's BIG median of 97% and is consistent with a rental CCRC. Additionally, in fiscal 2015, RM had a net operating margin 26.2% and an excess margin of 12.3% which both compare favorably to the BIG medians.

RM's operational performance has weakened in the three-month interim period as evidenced by its elevated operating ratio of 85.1%. Additionally, ILU occupancy has decreased in fiscal 2015 to 84% from 91% in fiscal 2014. ILU occupancy reached a low occupancy point of 82% during the interim period however has increased to 85% as of June 2016. Conversely, SN occupancy increased to 93% in fiscal 2015 from 89% in fiscal 2014. SN occupancy increased further to 96% as of June 2016. In 2015, approximately 78% of RM's net revenues came from its SN units. This is likely attributed to RM's strong SN payor mix which had approximately 69% of its gross revenues come from private pay, 30% from Medicare, and 1% from Medicaid.

While currently liquidity ratios remain strong for a below investment grade credit, RM's liquidity will be diluted by its capital expansion project. Based on pro forma debt levels, Fitch estimates days cash on hand of 470, cash to debt of 47.4%, and a cushion ratio of 6.0x. RM's DCOH, pro forma cash to debt ratio, and cushion ratio all remain stronger than Fitch's BIG medians and are on par with its current rating level. Overall, RM's liquidity levels and operational performance have mitigated concerns over its small revenue base.

DISCLOSURE

RM 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'.

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=1011135

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1011135

Endorsement Policy

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

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Contacts

Fitch Ratings
Primary Analyst
Ryan Pami
Associate Director
+1-212-908-0803
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Gary Sokolow
Director
+1-212-908-9186
or
Committee Chairperson
James Lebuhn
Senior Director
+1-312-368-2059
or
Media Relations:
Hannah James, +1 646-582-4947
hannah.james@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Ryan Pami
Associate Director
+1-212-908-0803
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Gary Sokolow
Director
+1-212-908-9186
or
Committee Chairperson
James Lebuhn
Senior Director
+1-312-368-2059
or
Media Relations:
Hannah James, +1 646-582-4947
hannah.james@fitchratings.com