NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded its rating on the following bonds issued on behalf of Lutheran Retirement Ministries of Alamance County dba Twin Lakes Retirement Community (Twin Lakes) to 'A-' from 'BBB+':
--$23.5 million North Carolina Medical Care Commission health care facilities revenue refunding bonds, series 2009.
The Rating Outlook is revised to Stable.
Bond payments are secured by a pledge of gross revenues and a first mortgage lien.
KEY RATING DRIVERS
STRONG FINANCIAL PROFILE: The upgrade to 'A-' is attributed to Twin Lakes' good liquidity position, consistently solid debt service coverage, and strong profitability and cash flow.
MODERATING DEBT BURDEN: Twin Lakes' debt burden has moderated over the last four fiscal years as evidenced by a decreased debt-to-net available of 3.1x in fiscal 2016 (ended Sept. 30, 2016; unaudited), improved from 4.0x in fiscal 2013 and ahead of the 'A' category median of 4.3x. Twin Lakes' long-term debt amortizes at approximately $2 million per year, which, coupled with expected revenue growth, should help moderate its debt profile further over the medium term.
GOOD DEMAND FOR SERVICES: Twin Lakes' favorable reputation has allowed it to maintain solid independent living unit (ILU) occupancy of over 90% over the last four fiscal years, despite operating in a competitive service area with four other Type-C communities. ILU occupancy was a solid 91% in fiscal 2016, assisted living unit (ALU) and skilled nursing facility (SNF) occupancies were 83% and 87, respectively.
UPCOMING CAPITAL PROJECTS: Twin Lakes is in the process of constructing 22 new garden homes on its campus. Construction is expected to be completed in April of 2017 and has been on time and on budget. Longer-term plans also include the construction of a replacement SNF on the current campus.
STABILITY AT THE CURRENT RATING LEVEL: Fitch expects Lutheran retirement Communities of Alamance County to produce solid operating results that support debt service coverage and liquidity over the medium term. In addition, Fitch expects the community to successfully construct and fill up its expansion project, which should help grow top-line revenues.
Twin Lakes operates a Type-C continuing care retirement community (CCRC) in Burlington, NC (approximately 35 miles west of Durham/Chapel Hill, NC) consisting of 394 ILUs, 36 ALUs, 104 SNF beds, and 32 memory care units. In fiscal 2016 (unaudited) Twin Lakes had total revenues of $27.1 million.
STRONG FINANCIAL PROFILE
Twin Lakes' $30.8 million in unrestricted cash and investments at Sept. 30, 2016 equated to 536 days cash on hand (DCOH), 131% cash-to-debt and 10.1x cushion ratio, all improved from 501 DCOH, 88%, and 8.2x, respectively at FYE 2013, and significantly above Fitch's 'BBB' medians. Liquidity growth is likely to be hampered over the next two years, but management is projecting unrestricted liquidity to remain in excess of debt throughout the construction period.
Twin Lakes' operating profitability has been very stable over the last four years, with operating ratio averaging a very strong 89.5%, well ahead of the 'A' median of 94.9%. Net operating margin adjusted has also averaged a strong 27.5% over the time period, ahead of the 23.6% 'A' category median. Fitch believes that Twin Lakes' operating profile is more consistent with a higher rating category.
Maximum annual debt service (MADS) coverage has been very consistent over the last four years, and was a solid 2.5x in fiscal 2016. In addition, revenue-only coverage has averaged 1.2x over the same period, equal to the 'A' median.
MODERATING DEBT BURDEN
Twin Lakes' debt-to-net available of 3.1x and adjusted debt/to capitalization of 25.5x in fiscal 2016 have both moderated from 4.0x and 33x, respectively, in fiscal 2013, and were well ahead of Fitch's 'A' medians of 4.3x and 47.4x. The decrease in leverage is attributed to the rapid amortization of Twin Lakes' debt (approximately $2 million annually). In addition, MADS equated to an improved 11.2% of fiscal 2016 revenues, which remains unfavorable to the 'A' median of 8.6%, but has moderated from 12.2% in fiscal 2013. Twin Lakes' current garden home expansion is expected to generate incremental revenues starting in fiscal 2017, which should help further moderate the community's debt burden going forward.
UPCOMING CAPITAL PROJECTS
Twin Lakes started construction of 22 new garden homes in March 2016. Construction is expected to be completed in April 2017 and has been on time and on budget. The total project cost is anticipated to be $10 million, funded with cash, with approximately $7 million being reimbursed through initial entrance fee receipts. There were 20 depositors for the garden homes as of October 2016. Fitch views the project favorably, as it will help increase top-line revenues over the medium term, which should further help Twin Lakes moderate its debt burden.
Longer-term plans also include the construction of a replacement SNF on the current campus. Twin Lakes' debt service payments fall by approximately 50% after 2019 and management is anticipating tying the construction, and anticipated debt issuance, to that time-frame. Initial projections expect a total cost of $30 million. While this project will not be revenue-producing Fitch views it favorably, as it will allow Twin Lakes to maintain its competitive position in its marketplace over the longer term.
Twin Lakes' outstanding series 2009 floating-rate bonds are directly held by BB&T Corporation ('A+/F1'/Outlook Stable) through Jan. 1, 2019. Twin Lakes has an outstanding fixed-payer swap with a notional amount of $15.3 million. As of Sept. 30, 2016, the swap had an approximate mark-to-market valuation of negative $1.8 million. Twin Lakes is not required to post collateral on its swap. Fitch believes that the all-floating-rate debt structure is mitigated by the outstanding swap, as well as by the community's strong unrestricted cash position.
Twin Lakes covenants to provide audits within 120 days of each fiscal year's end, quarterly statements within 45 days of quarter's end (including occupancy statistics), annual budgets and management letters within 120 days of fiscal year's end, and any material events. Fitch views the disclosure requirements imposed by the State of North Carolina Department of Insurance favorably and believes the content represents an industry best-practice.
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)
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