Fitch Upgrades Westminster Manor's (TX) Bonds to 'BBB'; Outlook Revised to Stable
OREANDA-NEWS. Fitch Ratings has upgraded the rating to 'BBB' from 'BBB-' on the following bonds issued on behalf of Westminster Manor, TX:
--$59,620,000 Travis County Health Facilities Development Corporation revenue bonds series 2010.
The Rating Outlook has been revised to Stable from Positive.
The bonds are secured by a pledge of gross revenues, a mortgage lien on property and a debt service reserve fund.
KEY RATING DRIVERS
SUSTAINED PROFITABILITY: The upgrade reflects the sustained profitability levels subsequent to the post expansion project stabilization and the resulting strengthening of coverage and liquidity metrics. Net operating margin adjusted increased to 34.3% in both fiscal 2014 and 2015, exceeding Fitch's 'BBB' category median of 19.3%.
STRONG OCCUPANCY: Westminster Manor's location and reputation in the Austin market has produced strong demand and high occupancy rates. Occupancy rates remain strong with ILU, ALU and SNF occupancy rates equal to 97.6%, 96.6% and 98.1%, respectively, at March 31, 2016.
HIGH DEBT BURDEN: The community's debt burden has continued to moderate due to the increased revenue generated from the expansion units, but remains high with maximum annual debt service (MADS) equal to 17.8% of revenue in fiscal 2015.
IMPROVED LIQUIDITY: Unrestricted liquidity increased 66.3% since fiscal 2012 to $48.4 million at March 31, 2016. With 729 days cash on hand, 79.3% cash to debt and 9.2x cushion ratio, liquidity metrics compare favorably to Fitch's 'BBB' category medians of 400 days, 60% and 7.3x.
SUSTAINED CASH FLOW: Fitch expects Westminster Manor to continue to produce cash flow at levels sufficient to support its heavy debt burden and to provide for coverage levels consistent with the rating category. Sustained profitability levels combined with continued strengthening of liquidity metrics could result in further positive rating movement.
Westminster Manor is a type-A continuing care retirement community located in Austin, TX. Operations include 328 ILUs, 22 ALUs and 85 SNF units. The community completed a significant expansion project in July 2013 and achieved stabilized operations in fiscal 2014, as projected. In total, the project added 75 new ILUs, a new 85-unit replacement SNF (including 30 dementia units) and 22 ALUs. Total operating revenues increased 44.4% since fiscal 2011 to $28.8 million in fiscal 2015 reflecting the fill up of the expansion units.
Operating profitability in fiscal 2015 continued at the strong levels achieved in fiscal 2014. Fiscal 2014 was the first year of expected post-expansion stabilization and Westminster Manor exceeded its original 2010 projections related to fiscal 2014 coverage and liquidity metrics. The sustained strong operating profitability reflects the benefits of the completed expansion project and effective cost management initiatives as operations were successfully adjusted to the new operating base.
Operating ratio further decreased to 101.8% in fiscal 2015 and 100.3% in the three month interim period ending March 31, 2016 (the interim period) from 103.5% in fiscal 2014 and 112.6% in fiscal 2013. The improvement reflects the effective cost management initiatives. Both net operating margin and net operating margin adjusted remained strong in fiscal 2015 at 13.1% and 34.3%, respectively, exceeding Fitch's 'BBB' category medians of 8.9% and 19.3%, respectively. Net operating margin increased to 14.3% in the interim period while net operating margin adjusted decreased to 17.1%, reflecting decreased ILU turnover in the first quarter. Management is budgeting for net operating margin adjusted to increase to 32.5% in fiscal 2016, which Fitch views as reasonable given historical performance.
Westminster Manor's location and excellent reputation in the Austin market has resulted in strong demand for its services. Prior to the expansion project, ILU occupancy averaged 97.3% between fiscal years 2008 and 2011. ILU occupancy decreased to 91% in fiscal 2012 reflecting the addition of 64 new expansion units. However, ILU occupancy incrementally increased each subsequent year to 97.6% at March 31, 2016, reflecting the successful fill up of the phase I and II expansion units. Additionally, both ALU and SNF occupancy remain strong at 96.6% and 98.1%, respectively, at March 31, 2016.
HIGH DEBT BURDEN
Westminster Manor's debt burden continues to moderate, but remains high. MADS as a percent of revenue decreased from 27.6% in fiscal 2011 to 17.8% in fiscal 2015. The moderation reflects the increased revenue generated from the expansion projects. Despite the moderation, the debt burden remains high relative to Fitch's 'BBB' category median of 12.4%.
MADS coverage has strengthened each year since fiscal 2012 reflecting the improved profitability, net entrance fee generation and moderating debt burden. MADS coverage incrementally increased each year from 1.3x in fiscal 2012 to 2.3x in fiscal 2015, exceeding Fitch's 'BBB' category median of 2.0x. Concurrently, revenue only MADS coverage incrementally increased from 0.0x to 0.9x and is consistent with Fitch's 'BBB' category median of 1.0x. Revenue only MADS coverage increased to 1.1x in the interim period while MADS coverage decreased to 1.2x, reflecting low turnover of ILUs during the first quarter.
Unrestricted cash and investments increased 6.8% since March 31, 2015 to $48.4 million at March 31, 2016. The strengthened liquidity reflects decreased capital spending now that the expansion project is completed, continued net entrance fee generation and improved cash flows. Liquidity metrics increased to 729 days cash on hand, 79.3% cash to debt and 9.2x cushion ratio at March 31, 2016 ,exceeding Fitch's 'BBB' category medians of 400 days, 60% and 7.3x.
Capital expenditures are expected to remain at approximately $1.5 million per year in the near term, which should allow for further strengthening of liquidity metrics. Current capital projects include the exterior renovation of the community's Preston Building and continued interior renovations upon turnover.
Westminster Manor covenants to provide annual audited financial statements within 150 days of the end of each fiscal year and quarterly unaudited financial disclosure within 45 days of each quarter-end. Disclosure is provided through the Municipal Securities Rulemaking Board's EMMA system.