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Fitch Affirms Rolling Meadows, TX's Rev Bonds at 'BB+'; Outlook Stable.

Austin: Fitch Rating has affirmed the 'BB+' rating on the following bonds issued on behalf of Wichita Falls Retirement Foundation Project, d/b/a Rolling Meadows (RM):

--$16.78 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

CHALLENGING OPERATING ENVIRONMENT: Fitch attributes Rolling Meadows' declining independent living unit (ILU) occupancy over the past several years to low service area population growth, moderate competition, and the trend of seniors aging in place within their residences. Rolling Meadows' strong payor mix and its ability to increase fees provide some level of mitigation to its census decline.

SOUND FINANCIAL PROFILE: Adept cost management has allowed Rolling Meadows to maintain sound profitability throughout census fluctuations, to which they are more sensitive given their relatively small revenue base. Consistent profitability and ample liquidity represent key credit strengths, providing flexibility for rental agreement facilities like Rolling Meadows. Although filling up slower than initially expected, additional revenue from the Rolling Meadows Pines memory care addition should prove accretive to its finances.

LONG-TERM LABILITIES CONSISTENT WITH RATING CATEGORY: Leverage (8.9x Debt-to-Net Available) and debt burden (1.5x maximum annual debt service (MADs) coverage) approximate the respective below investment grade (BIG) category medians of 8.8x and 1.5x. Fitch expects theses capital metrics to remain stable or improve based on the lack of new debt issuance plans and assuming Rolling Meadows is able to maintain profitability consistent with recent history.

RATING SENSITIVITIES

OPERATING PERFORMANCE; MODERATING DEBT: Weakening of operating performance leading to a decline in coverage could pressure the current rating. Alternatively, consistent operating performance and ample liquidity through the Pines fill-up, coupled with a moderation of leverage could support positive rating action.

CREDIT PROFILE

Rolling Meadows is a type D (rental) continuing care retirement community located in Wichita Falls, TX (2017 population 104,747), approximately 130 miles northwest of the Dallas-Fort Worth (DFW) metroplex. Wichita Falls is the primary population center between DFW and Oklahoma City (OK) and is home to the Sheppard Air Force Base.

The Rolling Meadows 25.2-acre gated community includes 169 ILUs (cottages and apartments), 82 SNF beds, and 22 memory care units, which went into operation in September 2017. Rolling Meadows provides home health agency services for its residents on a fee for service basis.

CHALLENGING SERVICE AREA AND COMPETITIVE MARKET

ILU occupancy has weakened to an average 79% and 76% respectively during fiscal 2017 (ending Dec.) and the first quarter of 2018 (ending Mar.) from a five-year peak of 92% (2013). The decline in census is coincident with the opening of senior housing complexes within proximity to the Rolling Meadows campus. Skilled nursing facility (SNF) occupancy averaged 86% in fiscal 2018, only moderately below the 89% average occupancy during fiscal 2013 through 2016.

Rolling Meadows operates with a moderate amount of competition in its 50-mile service area, and has distinguished itself with a solid reputation in the community, strong hospital affiliations and a five-star CMS rating. Fitch expects the competitive market conditions to endure based on a recent 40-bed SN expansion and a planned ILU expansion within Rolling Meadows' service area. An aggressive marketing and availability of Rolling Meadows' new Pines memory care unit offer the potential to improve occupancy over the next couple of years.

PROFITABILITY SUPPORTS AMPLE LIQUIDITY

Rolling Meadows continued its history of strong operating performance in fiscal 2017 as reflected in a net operating margin of 22.5% and operating ratio of 87.7%, very strong in relation to the respective BIG medians of 9.5% and 101.5%. SNF service fees contribute a high proportion of the community's net revenues. This is likely attributable to Rolling Meadows strong payor mix, weighted heavily toward private payors (at 90.2% in fiscal 2017). Limited exposure to Medicare and Medicaid payors reduces Rolling Meadows exposure to the risks associated with changes in governmental reimbursement and performance-based payment trends.

A history of consistent profitability supports healthy liquidity as measured by 630 days-cash-on-hand (DCOH) as of Mar. 31, 2018, very strong in relation to the 283 day BIG median. Cash-to-debt of 67.1% at March 31, 2018 is similarly strong in relation to the 34.2% BIG median.

LONG-TERM LIABILITY PROFILE CONSISTENT WITH RATING CATEGORY

Rolling Meadows debt consists of $16.78 million in outstanding fixed-rate debt and the recently acquired fixed-rate bank debt ($3.2 million outstanding). There is no exposure to swap or derivative instruments.

The addition of bank debt firmly places Rolling Meadow's debt profile within BIG category medians. Debt-to-net available at March 31, 2018 of 8.9x approximates the 8.8x BIG median. Cash funding of future renovations or expansions would support an improvement in leverage over the medium term as existing debt is amortized. Rolling Meadows MADS consumes 16.1% of fiscal year-to-date March 31, 2018 revenue, adequate in relation to the 17.1% BIG category median.

Rolling Meadows completed The Pines 22-unit memory care expansion at a cost of $6.1 million. The Pines is located on the northern section of the campus and connects to the community's health care center. Total average age of plant as of Mar. 31, 2018 of 24 years is high in relation to the 12.0 year BIG median, although five year capital expenditures averaged 234% of depreciation through fiscal 2017. Rolling Meadows' projections reflect proforma capital spending at a level approximating depreciation.
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Date:Oct 10, 2018
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