Fitch Affirms Brazos Presbyterian Homes (TX) Rev Bonds at 'BB+'; Outlook Stable
Fitch Ratings has affirmed the 'BB+' rating on Brazos Presbyterian Homes' (Brazos) series 2013A&B bonds, which are listed at the end of the press release. Brazos also has a $25 million draw down construction loan with BB&T, which will be temporary debt and repaid with initial entrance fees by the final maturity on Dec. 1, 2018.
The Rating Outlook is Stable.
The bonds are secured by a gross revenue pledge, mortgage pledge and debt service reserve fund.
KEY RATING DRIVERS
SIGNIFICANT EXPANSION PROJECT ALMOST COMPLETE: Brazos is undertaking a significant expansion and renovation project at its Brazos Towers community (funded mainly from series 2013 bond proceeds), which will provide upgraded units and common area spaces to meet current market demand. The project includes 84 additional independent living units (ILU), 33 assisted living units (ALU), new common area spaces including a fitness center, pool and an informal dining option as well as the renovation of its health center, which will provide a higher percentage of private rooms. The total project cost is approximately $94 million. The project is 84% complete and is on budget despite being several months behind schedule due to weather conditions that delayed construction. The ILUs are expected to be ready for occupancy in December 2015 compared to July 2015 in the original feasibility study.
VERY HIGH DEBT BURDEN: Brazos' debt burden is extremely high with MADS accounting for 33.4% of total revenue in 2014 (fiscal year end Dec. 31). Historical pro forma MADS coverage is light at 1.2x in 2014 and 1.5x in 2013 and was 1.7x through the six months ended June 30, 2015 but adequate for the rating level. In addition, debt service coverage based on MADS, including the debt for the expansion project, will only be calculated upon stabilized occupancy (85% in bond documents) of the expansion project. Coverage in 2017 is expected to be around 1.75x.
GOOD PROFITABILITY: Brazos' profitability has improved with operating ratio falling below 100% in 2013 and sustained through the six months ended June 30, 2015. Management attributes good profitability to solid rate increases and continued expense management.
CONSISTENT OCCUPANCY: Demand is good and exhibited by solid occupancy at both communities, but Brazos Towers' occupancy has slipped slightly. Brazos Towers' ILU occupancy was 88% through the six months ended June 30, 2015 compared to 90% in 2014 and 95% in 2013. Hallmark has maintained higher occupancy with 94% ILU occupancy through June 30, 2015 compared to 96% in 2014 and 91% in 2013. The construction project is expected to enhanced occupancy and demand for Brazos Towers and pre-sales for the expansion project are at 100% (84 units reserved with 10% deposits).
SOLID LIQUIDITY: Brazos' liquidity is solid with 1,165 days cash on hand and 48.6% cash to debt at June 30, 2015. The cash to debt figure includes the temporary debt, but only $500,000 was outstanding as of June 30, 2015. The 10% deposits and subsequent conversion to initial entrance fees will be segregated in restricted cash on Brazos' balance sheet for the pay down of the temporary debt. The initial entrance fee pool is projected to total $29.7 million.
EXECUTION OF EXPANSION PROJECT: Fitch views the level of presales favorably, and the maintenance of the rating will be dependent on Brazos' ability to convert the 10% deposits to move-ins on a timely basis. The failure to achieve stabilized occupancy in a timely manner could result in negative rating pressure given the organization's highly leveraged position. A successful execution of the project with improved debt ratios more in line for an investment grade rated credit could result in upward movement of the rating.
EXPOSURE TO BANK AGREEMENT TERMS: The BB&T loan is parity indebtedness under the master trust indenture (MTI). The bank loan includes certain non-financial related covenants that could trigger a cross default and an acceleration of all parity debt with events of default such as the failure to meet reporting requirements and certain occupancy levels. Fitch views these terms negatively as it places a significant amount of control with the bank as certain events of default can be cured or waived by the bank to prevent an acceleration of debt.
Brazos is a Type B continuing care retirement community (CCRC) that owns two communities, Brazos Towers at Bayou Manor (Brazos Towers) and the Hallmark, located in Houston, TX. These communities have been operated by Brazos since 1963 and 1972, respectively. Brazos Towers currently has 89 ILUs, eight ALUs, and 37 licensed skilled nursing (SNF) beds. The Hallmark has 125 ILUs, 12 ALUs, 10 memory support units, and 32 bed SNF. Although the communities are only approximately six miles apart, the resident draw for each community is from different zip codes within the Houston area. Brazos had $20.7 million in total revenue in 2014.
The expansion project at Brazos Towers has been in the planning stages since 2008, and the project will include the addition of 84 ILUs, 33 ALUs with eight being dedicated to memory support, new common spaces and amenities, additional parking and the renovation of its healthcare center. Eight of the existing ALUs will be converted to four ILUs. Spectrum is the developer for the expansion project.
The total cost is $112 million and includes $94 million for the construction and $18 million of financing related costs. The sources of funding include $68 million from series 2013B bonds, $25 million in temporary debt (BB&T construction loan), $9 million from series 2013A bonds, and $9.6 million equity contribution. The project is 84% complete, and as of September 2015 is within budget despite being behind schedule due to heavy rain in the area that caused a delay in construction. Management indicated that there is still approximately $2 million of project contingency remaining.
The renovation of the SNF first floor and new covered parking area are complete and ILU construction started in January 2014. The first ILU move in is now projected for December 2015 and management expects a rapid fill and meeting the initial target of 93% occupancy by December 2016. The ALUs and memory support units are expected to be available for occupancy in January 2016 and reach stabilized occupancy in January 2017. The second and third floor health center renovation is complete, but the third floor is still waiting for licensure from the state, which is expected by Sept. 30, 2015.
The project will result in a significant upgrade and modernization of the community, which is important especially given the number of competing facilities in the area. One of Brazos' main competitors, Buckingham (rated 'BB'), is also undergoing a large expansion project, but Brazos' project will be completed first. The project is meeting the demand of prospective residents, and the wealth level will increase as the entrance fees of the new units are almost double the price of the existing ILUs. Fitch believes Brazos' service area has favorable characteristics with good demographics and a stable housing market.
VERY HIGH DEBT BURDEN
Total debt outstanding is $94.8 million, and only $500,000 of the $25 million construction loan has been drawn down. Management expects to draw down the remaining amount by the end of 2015. The $25 million construction loan has a mandatory tender on Dec. 1, 2018 and is expected to be paid down in 2016 and 2017 as initial entrance fees are received. The total entrance fee pool is approximately $29.7 million. Total permanent debt is 100% fixed rate and totals approximately $92 million at stabilization in 2017.
Debt service coverage is extremely dependent on entrance fee receipts with revenue only coverage of 0.2x in 2013 and 2014. Projected net turnover entrance fee receipts for 2014 were in line with actual results at $6.4 million. Net turnover entrance fee receipts for 2015-2017 are expected to be $6.5 million in 2015, $7.3 million in 2016, and $8 million in 2017 and meeting these will be key to covering its high debt service requirements. Historical entrance fee receipts have been a little volatile due to the improvement in occupancy mainly in 2012 and 2013 as well as the sale of more refundable versus nonrefundable plans with $8.6 million net turnover entrance fees in 2013, $11.1 million in 2012, and $5.8 million in 2011.
GOOD PROFITABILITY AND LIQUIDITY
Brazos' financial profile has improved steadily since 2008 as occupancy has rebounded, which was primarily driven by the hiring of Spectrum Consulting to assist with marketing. Profitability is solid and debt service coverage is good excluding the debt related to the expansion project. Current debt service coverage calculations are based on a MADS of $2.2 million, which will increase to $6.9 million once the ILU expansion units reach 85% occupancy. Current debt service coverage for the trailing 12 months ended June 30, 2015 was 4x.
Net operating margin - adjusted was 30.9% in 2014 compared to 34.4% in 2013 and a significant improvement from 18.2% in fiscal 2008 and was 36.9% through the six months ended June 30, 2015.
Strong cash flow has resulted in significant growth of the balance sheet with total unrestricted cash and investments of $56.9 million at June 30, 2015 from $22.4 million at fiscal year end 2008. At June 30, 2015, this translated to 1,164 days cash on hand and 60.6% cash to debt, which compares favorably to the 'BBB' category medians. Including the full draw down of the temporary debt and assuming no initial entrance fees are received, cash to debt falls to 48%. Although Brazos' profitability and liquidity metrics are in line with 'BBB' category medians, its high debt burden and risk related to the expansion project currently keeps the rating below investment grade.
CONSISTENT ILU OCCUPANCY
ILU occupancy improved since the hiring of Spectrum in 2009 and financial incentives that were offered have been discontinued. However, ILU occupancy at Brazos Towers has dropped from a high in 2013 at 95% to 90% in 2014 and was 88% through the six months ended June 30, 2015. ILU occupancy at Hallmark has remained consistently strong at 96% in 2014 compared to 91% in 2013 and 2012 and was 94% through the six months ended June 30, 2015.
LEGAL PROVISIONS AND DISCLOSURE
Under the MTI, Brazos is required to maintain MADS coverage of 1.2x (debt service of series 2013B bonds included at stabilization (first fiscal year after achieving 85% ILU occupancy of expansion project)), 180 days cash on hand and various marketing and occupancy targets. There are no events of default related to the liquidity, marketing or occupancy covenants. Events of default include MADS coverage below 1.2x for two consecutive years and below 180 days cash on hand or MADS coverage below 1x. The construction loan contains more stringent covenants including 1.25x debt service coverage and 225 days cash on hand and debt to capitalization under 95%. Events of default under the construction loan include the failure to meet financial reporting requirements and timely notice of an event of default as well as not meeting financial and occupancy covenants.
Brazos covenants to provide annual audits within 150 days of fiscal year end and quarterly disclosure for all four quarters within 45 days of quarter end.
--$67.3 million Harris County Cultural Education Facilities Finance Corporation first mortgage revenue bonds series 2013B;
--$24.5 million Harris County Cultural Education Facilities Finance Corporation first mortgage revenue bonds series 2013A.
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)
Dodd-Frank Rating Information Disclosure Form
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