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Fitch Affirms Trinity Terrace, TX Revs at 'BBB+'; Outlook Stable.

New York: 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: Maximum annual debt service (MADS) of $6.1 million represents a high 28.3% of fiscal 2016 revenues (Sept. 30 year-end). 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 and 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 to Fitch's 'BBB' category medians. The net operating margin (NOM; which excludes net assets released from restrictions) was very good in fiscal 2016 and the nine month period ending June 30, 2017 at 15.1% and 13.7%, 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 92% through the first nine months of fiscal 2017.

PROJECT MANAGEMENT AND FILL-UP: Trinity Terrace's River Tower project was substantially complete on June 1, 2017 within budgeted parameters. As of Sept. 19, 2017, 41 of the 78 new ILUs had move-ins and another 30 units have been pre-sold with 10% deposits. Management reports that 19 more move-ins are scheduled prior to the end of the year, which would bring River Tower occupancy to 77% and in line with projections.

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 June 30, 2017, $106.3 million of cash and investments amounted to a robust 2,028 days operating expenses, 88.6% of long-term debt and 17.5x cushion ratio. However, Fitch notes that certain mineral (oil and gas) assets are Level 3 investments which are highly volatile and valued with unobservable inputs that are supported by little or no market activity.

RATING SENSITIVITIES

PROJECT FILL-UP AND STABILIZATION: Fitch expects Trinity Terrace to meet its financial projections for the River Tower project. Remaining risks associated with the expansion have been minimized through strong presales of the new ILUs. The rating assumes that move-ins 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. Inability to successfully fill the new units and repay temporary debt may weaken Trinity Terrace's financial profile and could result in negative rating pressure.

CREDIT PROFILE

Located on 4.75 acres in Ft. Worth, Texas, Trinity Terrace is a type-B continuing care retirement community (CCRC) with 249 ILUs, 16 assisted living units (ALUs) and 46 skilled nursing facility (SNF) units. Trinity Terrace's River Tower project will add 78 ILUs, 10 ALUs, 17 memory support units and 15 SNF beds when it's fully operational. 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 35 senior living facilities nationwide. In fiscal 2016, Trinity Terrace had $22.2 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 99.5% of total system assets and 99.8% of total system operating revenues in fiscal 2016.

CONSTRUCTION PROJECT UPDATE

The 23-story River Tower building is the third tower on the campus and adds 78 ILUs, 10 ALUs, 17 memory support units and 15 SNF units. The project was substantially complete by June 1, 2017, which was about 60 days later than originally expected mostly due to weather delays during the early portion of the construction period. Trinity Terrace received the certificate of occupancy on June 30 and the first ILU resident moved into the building on July 31. Full admissions to the ALU and memory support units are expected to commence in about two months after final inspections and licensing is received from the state of Texas.

The project also created a new dining venue, which is connected to the original tower, as well as a cafe, physical therapy space, expanded other amenities and added three levels of parking. The total River Tower project is expected to cost $83.7 million, with about $78 million spent through July 31, 2017, which is in line with budgeted parameters. Remaining project costs total approximately $7 million, with sufficient contingency funds of $1.5 million remaining.

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 services and the additional units are forecasted to generate over $6 million of annual revenue.

As of Sept. 19, 2017, 41 of the 78 new ILUs had move-ins and another 30 units have been pre-sold with 10% deposits. Management reports that 19 more move-ins are scheduled prior to the end of the year, which would bring River Tower occupancy to 77% and in line with projections. Moreover, most 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 28.3% of fiscal 2016 revenues. 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 1.1x in fiscal 2016 and 1.5x for the nine-month period ending June 30, 2017. 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 12.9x of net available for debt service or 73.7% of adjusted capitalization as of June 30, 2017. 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 92% during the first nine months of fiscal 2017. 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. Margins softened in fiscal 2016 due to higher interest expense, lower performance at the SNF, and lessened investment income and net assets released from restrictions. In fiscal 2016, the operating ratio amounted to 89.4%, favorably below Fitch's 'BBB' category median of 97.4%. During the first nine months of fiscal 2017, the operating ratio remained healthy and decreased to 87.3%.

The NOM (which excludes net assets released from restrictions) was also favorable in fiscal 2016 and the nine-month period ending June 30, 2017 at 15.1% and 13.7%, respectively. The NOM-adjusted, which reflects net entrance fees received, continues to be very good at 24.7% in fiscal 2016 and 27.7% through June 30, 2017, both ahead of Fitch's 'BBB' category median of 21.2%.

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, about $40 million of Trinity Terrace's liquidity balances are held in cash or highly liquid short-term investments as of June 30, 2017.

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 $33.6 million as of June 30, 2017. Other assets held in trust are valued at $31.3 million as of June 30, 2017. 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.
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Publication:Daily the Pak Banker (Lahore, Pakistan)
Date:Dec 20, 2017
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