TMCnet News
Fitch Rates Edgemere, TX's Series 2015A/B Bonds 'BBB'; Outlook StableFitch Ratings has assigned a 'BBB' rating to the following bonds expected to be issued by the Tarrant County Cultural Education Facilities Finance Corporation on behalf of Edgemere: --$52,000,000 retirement facility revenue bonds series 2015A; --$22,000,000 retirement facility revenue bonds series 2015B. Fitch has also affirmed the 'BBB' rating on the following bonds issued by the Tarrant County Cultural Education Facilities Finance Corporation on behalf of Edgemere: --$56,480,000 retirement facility revenue bonds series 2006A; --$17,240,000 retirement facility revenue bonds series 2006B*. *Underlying rating. The series 2006B bonds are supported by a letter of credit issued by Bank of America. The series 2015A/B bonds are expected to be issued as tax-exempt fixed-rate bonds. Series 2015A proceeds will be used to fund various capital projects, including the construction of additional assisted living units (ALU), memory support units, and skilled nursing beds (SNF) and the renovation of common areas; refund the outstanding series 2006B bonds; and to pay costs of issuance. Series 2015B proceeds will be used to defease all or a portion of the outstanding series 2006A bonds and to pay costs of issuance. The exact size of the series 2015B issuance will be dependent upon tender results. The series 2015A bonds are expected to price via negotiation the week of May 4, and the series 2015B expected to price via negotiation the week of May 18. The Rating Outlook is Stable. SECURITY The bonds are secured by a pledge of the revenues of the obligated group, a lien on the leasehold interest in the property, and a debt service reserve fund for the series 2006A, 2015A and 2015B bonds. KEY RATING DRIVERS STRONG OCCUPANCY: Despite higher than average attrition in fiscal 2014, ILU occupancy remained relatively strong at 90.1%. Edgemere's strong demand and market niche is reflected in consistently high occupancy rates, with ILU, ALU (including memory support) and SNF occupancy averaging 92.7%, 93.9% and 93.4%, respectively, between fiscal years 2009 and 2014. SOLID PROFITABILITY: Profitability has been historically strong and stable with net operating margin adjusted averaging 22.7% between fiscal years 2009 and 2013, reflecting Edgemere's strong occupancy, net entrance fee generation and effective management practices. However, net operating margin adjusted decreased to 18.2% in fiscal 2014 reflecting the decreased ILU occupancy. HIGH DEBT BURDEN: Adjusted to account for Edgemere's long-term ground lease, Edgemere's debt burden is among the highest in Fitch's CCRC portfolio with pro forma 'adjusted MADS' equal to 28% of revenue in fiscal 2014 relative to Fitch's 'BBB' category median of 12.3%. Reflective of the high debt burden, pro forma MADS coverage of 1.7x in fiscal 2013 and 1.3x in fiscal 2014 compare unfavorably with Fitch's 'BBB' category median of 2.0x. MIXED LIQUIDITY METRICS: Liquidity relative to expenses remains very strong with 643.5 days cash on hand at Feb. 28, 2015. However, reflective of the high adjusted debt burden, liquidity relative to debt remains only adequate for the 'BBB' category rating with 5.1x cushion ratio. RATING SENSITIVITIES IMPROVING COVERAGE: Fitch expects debt service coverage to improve from 2014's historical pro forma level due to expected improvements in ILU occupancy and that coverage will improve to levels consistent with the 'BBB' rating category by the expected project stabilization date. MAINTAINED LIQUIDITY: Any erosion in liquidity metrics will likely result in negative rating action given Edgemere's heavy debt burden and light historical pro forma debt service coverage. INCREASED CAPITAL SPENDING EXPECTED: Fitch expects that Edgemere will successfully execute its capital projects on time and on budget and that expected project benefits are realized. CREDIT PROFILE Located in the Preston Hollow neighborhood of Dallas, Edgemere (Northwest Senior Living Corporation, dba Edgemere) provides a complete continuum of care with 304 ILUs, 60 ALUs, 31 memory support units and 72 SNFs. The property is leased through a long term ground lease that runs through 2054. Total operating revenues equaled $39 million in fiscal 2014 (fiscal year ended Dec. 31). The obligated group is composed of Edgemere and its parent company, Senior Quality Lifestyles Corporation (SQLC). The obligated group accounted for 100% of total consolidated assets and 100% of total consolidated operating revenue in fiscal 2014. In addition to Edgemere, QLC owns and operates four CCRCs in Texas and one in Carmel, IN, with a total of 1,857 CCRC units. SQLC ranked as the 30th largest CCRC on the 2014 LeadingAge Ziegler 150. STRONG OCCUPANCY The strong demand for Edgemere's services is demonstrated by consistently robust occupancy rates. Despite higher than average attrition in fiscal 2014 and the interim period, ILU occupancy remained strong, although below historical levels, at 89.1% at Feb. 28, 2015, decreasing from 96.4% at Dec. 31, 2013. Management expects attrition to normalize going forward and expects ILU occupancy to improve. ALU (including memory support) and SNF occupancy rates remained strong at 91% and 94%, respectively. The strong occupancy rates reflect Edgemere's niche market position and strategy as a provider of high-end, luxury retirement units. SOLID PROFITABILITY Strong occupancy, entrance fee generation and effective management practices have translated into consistently solid operating profitability with net operating margin adjusted (NOMA) averaging 22% between fiscal 2010 and fiscal 2014. NOMA decreased to 18.2% in fiscal 2014 reflecting the increased attrition and lower ILU occupancy, but increased to 27.7% in the interim period. Operating ratio decreased from 97.6% in fiscal 2012 to 93.5% in fiscal 2014 and 91% in the interim period, highlighting management's effective cost management practices. HIGH DEBT BURDEN For analytical purposes Fitch classified Edgemere's long-term ground lease as a capital lease rather than an operating lease as per the audit. The ground lease obligation was valued by applying an 8x multiple to the annual lease expense, which is the standard Fitch multiple in North American markets. Additionally Fitch adjusted MADS to include the annual operating lease cash payment and added operating lease expense back to net revenues available for debt service. Edgemere's debt burden increases materially with the capitalized ground lease. Pro forma bonded MADS is expected to increase to approximately $7.7 million from $6 million and is equal to 19.5% of fiscal 2014 operating revenue. Adjusted pro forma MADS of $10.9 million equals 28% of fiscal 2014 operating revenue. Both metrics are heavy relative to Fitch's 'BBB' category median of 12.3%. Despite solid operating profitability, adjusted pro forma MADS coverage is reflective of the heavy debt burden and remains only adequate for the rating category, averaging 1.4x since fiscal 2010 and equal to 1.3x in fiscal 2014 and the interim period, below Fitch's 'BBB' category median of 2.0x. MIXED LIQUIDITY METRICS Edgemere's liquidity is very strong relative to operating expenses but remains only adequate relative to the community's heavy debt burden. Unrestricted cash and investments equaled $56.6 million at Feb. 28, 2015, equating to a strong 643.5 days cash on hand, exceeding Fitch's 'BBB' category median of 407.6 days. However, reflecting the high debt burden, cash to adjusted pro forma debt of 38.5% and 5.1x adjusted cushion ratio are light relative to Fitch's 'BBB' category medians of 60.2% and 6.9x, respectively. Edgemere has historically provided loans to other SQLC communities to fund capital projects and liquidity support agreements for new communities. As of Dec. 31, 2014, Edgemere had $21.5 million of intercompany loans outstanding. The loans accrue interest at the prime rate. Fitch notes that Edgemere's ability to provide intercompany loans is limited by its liquidity covenant, which currently requires a minimum of 400 days cash on hand. However, the liquidity covenant may be modified upon bond closing, decreasing to 150 days cash on hand. Fitch views the modification negatively as it removes the related limitation on intercompany loans which potentially presents additional bondholder risk. Additional intercompany loans or any other dilution of liquidity metrics will likely result in negative rating action. CAPITAL PROJECTS While Edgemere's campus remains in very good shape with limited current capital needs, as highlighted by a low 8.7 year average age of plant, management is executing a series of capital projects to ensure that Edgemere maintains its strong competitive position in the mid- to long term. The capital projects, nicknamed 'Renaissance at Edgemere,' include continued renovations and enhancements to ILU common spaces as well as additional assisted living, memory support and skilled nursing units and services. The total project will cost approximately $32.5 million and add a net of eight new ALUs, 11 new memory support units and 15 new SNFs. The project, which will be 100% bond funded with no adverse impact to liquidity metrics, is expected to break ground in July 2015 and to be completed in December 2017. DEBT PROFILE Subsequent to the series 2015A/B bond issuance, Edgemere will have approximately $108 million of total debt outstanding. The pro forma debt profile will be 100% underlying fixed-rate bonds. Fitch views the conservative debt profile favorably. Edgemere is currently counterparty to a fixed payer swap and an interest rate cap, but both instruments are expected to be terminated upon closing of the series 2015A/B bonds. There are no related collateral posting requirements. DISCLOSURE Edgemere covenants to provide annual disclosure within 120 days of fiscal year end and quarterly disclosure within 45 days of each fiscal quarter end. Disclosure is provided through the Municipal Securities Rulemaking Board's EMMA system. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Revenue-Supported Rating Criteria' (June 16, 2014); --'Non-Profit Continuing Care Retirement Communities Rating Criteria' (July 24, 2014). Applicable Criteria and Related Research: Revenue-Supported Rating Criteria http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012 Not-for-Profit Continuing Care Retirement Communities Rating Criteria http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752470 Additional Disclosure Solicitation Status http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=983450 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE '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. |
