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
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1013702
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013702
Endorsement Policy
https://www.fitchratings.com/regulatory
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING
THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS.
IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE
AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM.
PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS
SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS
OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES
AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF
THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE
RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR
RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY
CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH
WEBSITE.
Copyright© 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its
subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone:
1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or
retransmission in whole or in part is prohibited except by permission.
All rights reserved. In issuing and maintaining its ratings and in
making other reports (including forecast information), Fitch relies on
factual information it receives from issuers and underwriters and from
other sources Fitch believes to be credible. Fitch conducts a reasonable
investigation of the factual information relied upon by it in accordance
with its ratings methodology, and obtains reasonable verification of
that information from independent sources, to the extent such sources
are available for a given security or in a given jurisdiction. The
manner of Fitch's factual investigation and the scope of the third-party
verification it obtains will vary depending on the nature of the rated
security and its issuer, the requirements and practices in the
jurisdiction in which the rated security is offered and sold and/or the
issuer is located, the availability and nature of relevant public
information, access to the management of the issuer and its advisers,
the availability of pre-existing third-party verifications such as audit
reports, agreed-upon procedures letters, appraisals, actuarial reports,
engineering reports, legal opinions and other reports provided by third
parties, the availability of independent and competent third- party
verification sources with respect to the particular security or in the
particular jurisdiction of the issuer, and a variety of other factors.
Users of Fitch's ratings and reports should understand that neither an
enhanced factual investigation nor any third-party verification can
ensure that all of the information Fitch relies on in connection with a
rating or a report will be accurate and complete. Ultimately, the issuer
and its advisers are responsible for the accuracy of the information
they provide to Fitch and to the market in offering documents and other
reports. In issuing its ratings and its reports, Fitch must rely on the
work of experts, including independent auditors with respect to
financial statements and attorneys with respect to legal and tax
matters. Further, ratings and forecasts of financial and other
information are inherently forward-looking and embody assumptions and
predictions about future events that by their nature cannot be verified
as facts. As a result, despite any verification of current facts,
ratings and forecasts can be affected by future events or conditions
that were not anticipated at the time a rating or forecast was issued or
affirmed.
The information in this report is provided "as is" without any
representation or warranty of any kind, and Fitch does not represent or
warrant that the report or any of its contents will meet any of the
requirements of a recipient of the report. A Fitch rating is an opinion
as to the creditworthiness of a security. This opinion and reports made
by Fitch are based on established criteria and methodologies that Fitch
is continuously evaluating and updating. Therefore, ratings and reports
are the collective work product of Fitch and no individual, or group of
individuals, is solely responsible for a rating or a report. The rating
does not address the risk of loss due to risks other than credit risk,
unless such risk is specifically mentioned. Fitch is not engaged in the
offer or sale of any security. All Fitch reports have shared authorship.
Individuals identified in a Fitch report were involved in, but are not
solely responsible for, the opinions stated therein. The individuals are
named for contact purposes only. A report providing a Fitch rating is
neither a prospectus nor a substitute for the information assembled,
verified and presented to investors by the issuer and its agents in
connection with the sale of the securities. Ratings may be changed or
withdrawn at any time for any reason in the sole discretion of Fitch.
Fitch does not provide investment advice of any sort. Ratings are not a
recommendation to buy, sell, or hold any security. Ratings do not
comment on the adequacy of market price, the suitability of any security
for a particular investor, or the tax-exempt nature or taxability of
payments made in respect to any security. Fitch receives fees from
issuers, insurers, guarantors, other obligors, and underwriters for
rating securities. Such fees generally vary from US$1,000 to US$750,000
(or the applicable currency equivalent) per issue. In certain cases,
Fitch will rate all or a number of issues issued by a particular issuer,
or insured or guaranteed by a particular insurer or guarantor, for a
single annual fee. Such fees are expected to vary from US$10,000 to
US$1,500,000 (or the applicable currency equivalent). The assignment,
publication, or dissemination of a rating by Fitch shall not constitute
a consent by Fitch to use its name as an expert in connection with any
registration statement filed under the United States securities laws,
the Financial Services and Markets Act of 2000 of the United Kingdom, or
the securities laws of any particular jurisdiction. Due to the relative
efficiency of electronic publishing and distribution, Fitch research may
be available to electronic subscribers up to three days earlier than to
print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia
Pty Ltd holds an Australian financial services license (AFS license no.
337123) which authorizes it to provide credit ratings to wholesale
clients only. Credit ratings information published by Fitch is not
intended to be used by persons who are retail clients within the meaning
of the Corporations Act 2001
View source version on businesswire.com: http://www.businesswire.com/news/home/20161025006471/en/
Copyright Business Wire 2016
