Fitch Affs Lutheran Retirement Ministries of Alamance Cnty (NC) Revs at 'BBB '; Outlook to Positive
--\\$25.6 million North Carolina Medical Care Commission health care facilities revenue refunding bonds, series 2009.
The Rating Outlook is revised to Positive from Stable.
The bonds are secured by a pledge of gross revenues and a first mortgage lien.
KEY RATING DRIVERS
STRONG FINANCIAL PROFILE: The revision of the Outlook to Positive reflects continued improvement in Twin Lake's liquidity position, solid year-over-year debt service coverage, and an overall operating profile which is more consistent with a higher rating category.
MODERATING DEBT BURDEN: Twin Lakes' debt-to-net available of 3.5x in FY 2015 (unaudited; ended Sept. 30, 2015) was improved from 4.5x in 2011, and favorable to Fitch's 'A' category median of 4.3x. Twin Lakes' long-term debt amortizes at approximately \\$2 million per year, which, coupled with expected revenue growth, should help moderate its debt profile further over the medium term.
SOLID OCCUPANCY DESPITE COMPETITIVE MARKETPLACE: Twin Lakes has maintained solid independent living unit (ILU) occupancy of over 90% over the last five fiscal years, despite operating in a competitive service area with four other Type-C communities. ILU occupancy was 92% in FY 2015, while assisted living unit (ALU) and skilled nursing facility (SNF) occupancies were solid at 89% and 87%, respectively.
REVENUE-PRODUCING CAPITAL PROJECT: Twin Lakes is expecting to construct 22 new garden homes on its campus starting in March 2016. The total project cost is anticipated to be \\$10 million and will be funded out of cash, with approximately \\$7 million to be reimbursed with initial entrance fee receipts. Fitch views the project favorably as it would help grow the community's topline revenues over the medium term.
FURTHER DEBT MODERATION: Fitch expects Lutheran Retirement Ministries of Alamance County (dba Twin Lakes Retirement Community) cash to remain in excess of debt throughout the construction period. Upward rating movement is likely over the next 12 to 24 months as Twin Lakes amortizes its debt, moderates its debt profile, and constructs and fills up its additional ILUs.
Twin Lakes operates a Type-C continuing care retirement community (CCRC) in Burlington, NC (approximately 35 miles west of Durham/Chapel Hill, NC) consisting of 394 ILUs, 36 ALUs, 104 SNF beds, and 32 memory care units. In fiscal 2015 (unaudited) Twin Lakes had total revenues of \\$26.7 million.
STRONG FINANCIAL PROFILE
Twin Lakes'\\$31.1 million in unrestricted cash and investments at FYE 2015 equated to 559 days cash on hand (DCOH), 121.5% cash-to-debt, and a 9.8x cushion ratio, all of which were significantly improved from 482 days, 69.8%, and 7.3x, respectively, at FYE 2011. While Twin Lakes' unrestricted liquidity is projected to decline slightly during the construction period, it is expected to remain in excess of total long-term debt.
Twin Lakes' operating ratio has been very stable over the last five fiscal years and was 88.9% in FY 2015, very strong even for a Type-C contract offering and favorable to Fitch's 'A' category median of 94.0%. Net operating margin (NOM) and NOM-adjusted of 14.5% and 25.4%, respectively, both exceeded Fitch's 'A' medians of 7.0% and 22.2% in FY 2015. Fitch views the strength and stability of Twin Lakes' operating profile as being more consistent with a higher rating category.
Debt service coverage by net available and revenue-only has been very consistent over the last five fiscal years, and were at 2.3x and 1.2x, respectively, in FY 2015. While coverage ratios are more in line with the 'BBB' medians, Fitch expects them to improve with supplementary cash flows from the expansion project. In addition, the community's debt continues to amortize at approximately \\$2 million per year, which has helped improve its debt-to-net available to 3.5x in FY 2015, favorable to the 'A' median of 4.3x. Maximum annual debt service was 11.8% of FY 2015 revenues, which has moderated from 13.6% in FY 2011, but remains somewhat elevated compared to the 'A' median of 9.2%.
REVENUE-PRODUCING CAPITAL PROJECT
Twin Lakes is expecting to embark on a manageable campus expansion project in 2016. The project scope includes the phased construction of 22 new garden homes on its current campus, starting in March 2016. Construction is expected to be completed in 2017 and the total project cost is estimated at approximately \\$10 million. The project is expected to be funded out of cash, with approximately \\$7 million to be reimbursed with initial entrance fee receipts. There were 14 depositors for the new garden homes as of Nov. 1, 2015. Fitch views the project favorably, as it will help increase topline revenues over the medium term, and notes that the management team has experience with similar phased projects. The total capital spend over the next four years is expected to be a manageable \\$22 million.
Twin Lakes' outstanding series 2009 floating-rate bonds are directly held by BB&T Corporation ('A+/F1'/Outlook Stable) through Jan. 1, 2019. Twin Lakes has an outstanding fixed payer swap with a notional amount of \\$17.4 million. As of Sept. 30, 2015, the swap had an approximate mark-to-market valuation of negative \\$1.9 million. Twin Lakes is not required to post collateral on its swap. Fitch believes that the all-floating-rate debt structure is mitigated by the outstanding swap, as well as by the community's strong unrestricted cash position.
Twin Lakes covenants to provide audits within 120 days of each fiscal year's end, quarterly statements within 45 days of quarter's end (including occupancy statistics), annual budgets and management letters within 120 days of fiscal year's end, and any material events. Fitch views the disclosure requirements imposed by the State of North Carolina Department of Insurance favorably and believes the content represents an industry best-practice.