OREANDA-NEWS. Fitch Ratings has affirmed the 'BBB+' rating on the following Tarrant County Cultural Education Facilities Finance Corporation issued on behalf of Cumberland Rest, Inc. d/b/a Trinity Terrace:

--$63.9 million revenue bonds, series 2014A-1;
--$21.2 million revenue bonds, series 2014A-2.

Fitch's analysis also includes the impact of a $41 million unrated bank placement with BBVA.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a gross revenue pledge of the corporation, a mortgage on the property and a debt service reserve fund.

KEY RATING DRIVERS

VERY HIGH DEBT BURDEN: Trinity Terrace has taken on significant additional debt, with maximum annual debt service (MADS) of $6.1 million (after stabilization) equating to a very high 29.2% of fiscal 2014 (Sept. 30 year end) revenues, compared to the 'BBB' category median of 12.4%. However, Fitch continues to maintain the 'BBB+' rating because of Trinity Terrace's healthy liquidity metrics, consistently strong independent living unit (ILU) occupancy, strong demand for the project and adequate profitability.

FLUCTUATING COVERAGE: Fitch estimates coverage of MADS from recurring cashflow at 1.1x through June 30, 2015 (the interim period), which excludes a substantial release of assets for operations, and 1.6x in 2014. However, coverage of actual annual debt service in 2014 ($2.1 million) was solid at 4.3x. Projected coverage is expected to improve to over 2x upon stabilization as Trinity Terrace benefits from the additional monthly service fees from the new ILUs.

CONSISTENTLY STRONG ILU OCCUPANCY: Trinity Terrace has consistently been able to maintain solid occupancy of more than 90% in the ILUs over the last five years (2010-2014). Independent living unit (ILU) occupancy was robust at 95% as of June 30, 2015.

EFFECTIVE PROJECT EXECUTION TO DATE: The project remains within budget and on time despite rain delays from an abnormally wet spring in 2015. 77 units are presold (99%) with a 10% deposit, with minimal cancellations over the past year.

ADEQUATE OPERATING PROFITABILITY: Adjusted net operating margin in fiscal 2014 and through the nine-month interim ending June 30, 2015 were both 30.4%, comparing favorably to 'BBB' category median of 9.2% and reflecting the continued strong entrance fee receipts.

STRONG LIQUIDITY: Liquidity metrics are strong and benefited from a number of trusts for the benefit of Trinity Terrace, which Fitch considers unrestricted cash. Unrestricted cash and investments was $71.6 million as of June 30, 2015, which translated to 1,608 days cash, 79% cash to permanent debt, and 11.8x cushion ratio. Trinity Terrace's largest trust was fully released in 2015, which contained an estimated $27.4 in mineral assets.

RATING SENSITIVITIES

EXECUTION OF CONSTRUCTION PROJECT: Fitch expects Trinity Terrace will meet or exceed management's financial projections for the execution of the construction project. Risks associated with the River Tower expansion have been minimized through solid presales on the new units in excess of 99% (10% deposits received) and the execution of a guaranteed maximum price (GMP) construction contract with provisions for liquidated damages, as well as the engagement of an experienced contractor and project manager.

ON-TIME STABILIZATION: The rating assumes that construction and move-ins will occur in a timely basis to collect sufficient initial entrance fees to pay down the approximately $41 million in temporary debt on or before December 2018. The project is expected to reach 95% occupancy by November 2017. While not expected, a delay in completing the construction project, project cost overruns, and/or an inability to fill the units would weaken Trinity Terrace's financial profile and would likely 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. In fiscal 2014, Trinity Terrace had $20.1 million in total operating revenue. Trinity Terrace is managed by Pacific Retirement Services (PRS), which owns and manages over 37 senior living facilities nationwide.

CONSTRUCTION UPDATE ON EXPANSION PROJECT

The 23-story tower (River Tower) 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 and expansion of other amenities and three levels of parking. The total tower project is estimated to cost approximately $84 million. To-date, approximately 99% of units have been pre-sold. Despite the significant leverage associated with the project, Fitch views the expansion favorably as it will meet the demand for Trinity Terrace's attractive services and the additional units are expected to generate over $6 million of annual revenue upon stabilization.

HEALTHY LIQUIDITY

Trinity Terrace's liquidity indicators exceed Fitch's 'BBB' category medians and are viewed as a primary credit strength, mitigating to some extent the corporation's high debt burden and occasional fluctuations in profitability. In 2015, Trinity Terrace fully released for operations net assets from a split-interest trust. Historically Fitch has included this trust in board designated investments. The oil and gas reserves, classified as mineral assets ($27.4 million), are sensitive to oil and gas prices and assumptions on earnings multiples.

Days cash on hand of 1,608, cushion ratio of 11.8x and cash to debt (assuming repayment of $41.5 million of short-term construction debt in 2018) is 80%, which are favorable against the respective 'BBB' category medians of 400 days, 7.3x, and 60%.

SOLID OCCUPANCY CONTINUES

Occupancy in the ILUs and ALUs has been consistently strong and remains solid at 95% and 80%, respectively as of June 30, 2015. Trinity Terrace recently converted 16 of its skilled nursing suites to private rooms, which has attracted Medicare rehab patients and allows Trinity Terrace to improve its Medicare census and increase rehabilitation referrals. Skilled nursing occupancy was 89% through the interim period, much improved from 79% in 2013.

Trinity Terrace was the only full service CCRC in the Ft. Worth service area until October 2011 when Stayton at Museum Way, a Greystone development, opened less than five miles from its campus. Trinity Terrace's occupancy has remained strong despite the competition and the key reasons to the continued strong demand include ongoing renovations to common areas and its long-standing position in the community.

OPERATING PROFITABILITY DEPENDENT ON ASSET RELEASES

In fiscal 2014, Trinity Terrace had a very low operating ratio of 84%, compared to the 'BBB' category median of 96.1%. Fitch notes, however, that in several different time periods, Trinity Terrace supported its bottom line with above-average releases of assets from restrictions ($1.8 million in fiscal 2013 and $2.1 million in 2014), which mostly reflect earnings from trusts. Fitch views it as a positive that Trinity Terrace has sufficient temporarily and permanently restricted funds to be able to support operations in thin years but also considers all profitability metrics in its analysis. Net operating margin (which excludes assets released from restrictions) was 13.3% in fiscal 2013 but fell to 7.5% in 2014. Adjusted net operating margin (includes entrance fees) was solid at 30.4% in both fiscal 2014 and the interim period, reflecting solid net turnover entrance fee receipts of $4.8 in fiscal 2014 and $2.8 million through the interim period.

VERY HIGH DEBT BURDEN

Trinity Terrace projects to have approximately $130 million in outstanding debt through the capital cycle, of which about $88 million is permanent debt. Fitch's analysis assumes that $41 million in short-term debt will be paid down with initial entrance fees from the River Tower expansion. The permanent debt will be about 71% fixed rate and about 29% variable rate debt.

Historical debt service coverage ratio of 1.6x and historical revenue-only MADS coverage ratio of 0.8x in 2014 are light relative to the 'BBB' category medians of 2.0x and 1.0x, respectively. Coverage of actual annual debt service in 2014 ($2.1 million) was solid at 4.3x.

Pro forma MADS equates to a high 29.2% of fiscal 2014 revenue when compared to the 'BBB' category median of 12.4%. Although the leverage position is very high for the rating category, Fitch believes Trinity Terrace's healthy liquidity position coupled with the strong level of pre-sales of the River Tower, mitigates some of the risk associated with the significant debt burden. Projections show coverage improving to over 2.0x after stabilization (2017) as Trinity Terraces receives the added revenue from the new River Tower ILUs. Trinity Terrace has no capacity at the current rating level for additional debt without commensurate improvement to capital metrics. Moreover, Fitch will closely monitor entrance fee receipts. Any significant deviation from expected paydown of the short-term debt could lead to negative rating pressure.

DISCLOSURE

Trinity Terrace covenants to disclose to EMMA annual financials within 150 days, quarterly financials within 45 days, and monthly financials and construction updates during construction.