Fitch Rates The Legacy at Willow Bend (TX) Rev Bonds 'BBB-'; Outlook Stable
The series 2016 bonds will be fixed rate and will refund Legacy at Willow Bend's (LWB) outstanding series 2006 bonds, fund a debt service reserve, and pay costs of issuance. The bonds are expected to price in mid-July.
The Rating Outlook is Stable.
Debt payments are secured by a gross revenue pledge, mortgage pledge, and debt service reserve fund.
KEY RATING DRIVERS
UNIQUE MARKET POSITION AND SOLID OCCUPANCY: Fitch believes LWB's main credit strength is its unique market position as a Jewish sponsored continuing care retirement community (CCRC). LWB has a broad geographic resident draw with 46% of its residents from outside the local area. Fitch views this favorably as it helps to insulate LWB from a downturn in the local economy. Occupancy is solid across all levels of care. Through the six months ended March 31, 2016, occupancy was 93% in the independent living units (ILU), 96% in the assisted living units (ALU), 94% in the memory support suites, and 90% in skilled nursing (SNF).
YOUNG AVERAGE AGE OF PLANT: There are limited major capital needs as the community has been well maintained since its opening in April 2008 and the configuration of units as well as amenities offered are up - to-date and meet current market demands.
RELATIONSHIP WITH AFFILIATED ORGANIZATIONS: LWB's sole corporate parent is Legacy Senior Communities (LSC). LSC has a long history in the market of providing senior living services and LSC provides management services to LWB. In addition, there is strong philanthropic activity by the related foundation - Dallas Home for Jewish Aged Endowment Foundation that directly benefits LWB. LSC has plans to build a startup rental community (Midtown Park project) and LWB will fund up to $4.5 million for this project. No other transfers are expected.
SIGNIFICANT BENEFIT FROM REFINANCING: The refinancing of the series 2006 bonds results in significant debt service savings despite the extension of the final maturity of the bonds. MADS reduces to $2.8 million from $4.2 million with based on current market conditions provided by the underwriters with an all in cost of 4.1%.
INCONSISTENT DEBT SERVICE COVERAGE: Operating performance has been solid with operating ratios consistently below 100%. However, debt service coverage has been inconsistent due to variability in net turnover entrance fees. The majority of residents are on a 90% refundable plan and the timing of refunds has affected debt service coverage; LWB was at or close to the bond covenant requirement (1.2x) in fiscal 2014 and 2015. However, the refinancing provides a greater cushion and management targets a 1x revenue only coverage, which Fitch views favorably. Revenue only coverage was 0.9x on current MADS compared to 1.3x on proforma MADS for fiscal 2015 (Sept. 30 year end). Debt service coverage including net turnover fees (on proforma MADS) was 3.3x for the six months ended March 31, 2016, 1.8x in fiscal 2015, 1.9x in fiscal 2014, and 2x in fiscal 2013.
WEAK LIQUIDITY: At March 31, 2016, LWB had $18.6 million in unrestricted cash and investments, equal to 378 days cash on hand (DCOH) and 36.3% cash to debt, below Fitch's 'BBB' category medians. The transfer of up to $4.5 million for the Midtown Park project would reduce DCOH to 287 and cash to debt to 27.5%.
IMPROVEMENT IN LIQUIDITY: Following the one time cash transfer of up to $4.5 million, Fitch expects Legacy at Willow Bend's liquidity position to rebound and improve consistently over the near term, especially due to debt service savings and manageable capital needs. The failure to improve liquidity over the near term would likely result in negative rating action.
SUSTAINED SOLID OCCUPANCY AND DEBT SERVICE COVERAGE: Fitch expects Legacy at Willow Bend to maintain solid occupancy and produce debt service coverage that is consistent for the rating level. The failure to do so would likely result in negative rating action since Legacy at Willow Bend has limited financial flexibility at the current rating level.
LWB is a Type A CCRC located in Plano, TX approximately 20 miles north of Dallas. LWB opened in April 2008 and has 114 ILUs (102 apartments and 12 villas), 40 ALU, 18 memory support suites, and 60 bed SNF. All of the lifecare residents are on primarily a 90% refundable entrance fee plan. Management has set aside 9 ILUs to be used as rentals for residents that do not have the financial resources for the lifecare contract.
LWB's sole corporate parent is LSC. Fitch's analysis is based on LWB, which is the only obligated group member. LWB had total revenue of $19.5 million in fiscal 2015 (Sept. 30 year end).
Unique Market Position
LSC has a long history of providing senior living services to the Jewish community in the Dallas area. With an equity contribution from philanthropy - LSC opened LWB in April 2008. LWB is open to all seniors and currently 60% of the residents are Jewish. LWB has a broad geographic draw with 39% of residents from out of state and 46% from outside the local area. The local area includes a primary market area of seven zip codes within a 10 mile radius and secondary market area of an additional 11 surrounding zip codes. Fitch believes LWB's status as a 'destination' CCRC is a unique trait. Management also attributed the diverse geographic draw to the location of adult children in the fast growing greater Dallas service area.
There is a significant amount of competition; however, LWB has maintained solid occupancy levels across all levels of care. Fitch believes the community is well maintained and highly marketable with attractive amenities offered. The average entrance fee is $493,526. Competition includes other CCRCs as well as standalone health centers.
ILU occupancy was 93% through the six months ended March 31, 2016 compared to 90% in fiscal 2015, 89% in fiscal 2014 and 87% in fiscal 2013. LWB has had to use some financial incentives to secure sales due to the increasing competition in the market. Move-ins have averaged about 13 units a year over the last five years.
ALU occupancy has been strong with 96% through the six months ended March 31, 2016 compared to 95% in fiscal 2015, 96% in fiscal 2014 and 93% in fiscal 2013. Given the age of the community, the majority of ALU residents are direct admits (versus lifecare residents) and the percentage of direct admits was 78% in fiscal 2015 compared to 95% in fiscal 2011.
Memory support occupancy has also been solid with 93% through the six months ended March 31, 2016 compared to 95% in fiscal 2015, 93% in fiscal 2014 and 89% in fiscal 2013. The percentage of direct admits was 92% in fiscal 2015 compared to 80% in fiscal 2011.
The SNF is Medicare certified and has five stars from CMS. There is a high concentration of Medicare (life care and direct admits) payors at 87% of SNF residents in fiscal 2015 compared to 88% in fiscal 2011. In fiscal 2015, 12% were direct admits and 1% were lifecare.
Since the community is only eight years old, Fitch believes there could be pressure on operating performance as lifecare residents begin to utilize more healthcare resources. Fitch expects management to be able to manage these expense pressures. Also of concern is the exposure to Medicare and changing landscape with Medicare short stays. Management indicated that they maintain favorable relationships with local hospitals especially due to their quality and readmissions outcomes. SNF revenue comprised almost 50% of total operating revenue.
Other entities under LSC include a home care organization and the related foundation. LSC had an assisted living and SNF (Preston Hollow), which was recently sold and the proceeds from the sale will be used to fund a portion of the cost of the Legacy at Midtown Park project. Management indicated that the Midtown Park project is mission driven with the desire to provide a rental community option for the Jewish community with a different financial resource base. Once Midtown Park opens, this could potentially free up some of the units that LWB currently designates for rental.
The form of LWB's support of the project (maximum of $4.5 million) has not been determined (loan, liquidity support agreement) but Fitch's analysis assumes a cash transfer of $4.5 million. Management reiterated that this is a one-time transfer and there will be no ongoing transfers or support from LWB.
Total unrestricted cash and investments increased to $18.6 million at March 31, 2016 compared to $12.7 million at fiscal year end 2010. However, LWB's liquidity ratios are weak for the rating level. LWB has consistently invested in its plant and capital spending totaled $545k in fiscal 2015, $573k in fiscal 2014 and $590k in fiscal 2013. The capital budget for fiscal 2016 is $667k. Capital investments have been in excess of routine needs with a recent upgrade of its memory support and health center areas to maintain its marketability and competitiveness.
LWB's liquidity position after the proposed transfer of $4.5 million of cash is very weak at 287 days and 27.5% cash to debt. Fitch expects LWB to rebuild its liquidity position fairly quickly due to the significant debt service savings and manageable capital needs. The failure to improve liquidity metrics over the near term would likely pressure the rating.
Solid Cash Flow
Operating performance has been consistent with operating ratios below 100% for the last five years. Monthly fee increases have been consistent with an annual 2-3% increase in the ILUs over the last three years. Net operating margin - adjusted compares very favorably to BBB category medians and was 22.5% in fiscal 2015, 24.2% in fiscal 2014 and 26.2% in fiscal 2013 compared to the BBB category median of 19.3%.
Given LWB's smaller revenue base, fluctuations in net turnover entrance fees greatly affects debt service coverage. Net turnover entrance fees received were $1.6 million in fiscal 2015, $1.2 million in fiscal 2014, $1.3 million in fiscal 2013 and $2.7 million in fiscal 2012. Net turnover entrance fees was at a much higher level through the six months ended March 31, 2016 compared to the same prior year period with $2.1 million compared to $785k.
Debt service coverage is also greatly benefited by the refinancing and coverage based on current MADS ($4.2 million) was 2.2x through the six months ended March 31, 2016, 1.2x in fiscal 2015, 1.2x in fiscal 2014 and 1.3x in fiscal 2013. Debt service coverage on proforma MADS ($2.8 million) was 3.3x through the six months ended March 31, 2016 compared to 1.8x in fiscal 2015, 1.9x in fiscal 2014, and 2x in fiscal 2013.
Management has a target of maintaining at least 1x revenue only coverage, which Fitch views favorably. Revenue only coverage was 1.7x through the six months ended March 31, 2016, 1.3x in fiscal 2015, 1.5x in fiscal 2014, and 1.5x in fiscal 2013 based on proforma MADS.
The series 2016 bonds will be the only debt outstanding. The refinancing of the series 2006 bonds creates significant savings despite extending the final maturity to 2049 from 2036. Debt service is level and MADS of $2.764 million was provided by the underwriter. This compares to current MADS of $4.212 million.
A new master trust indenture will be in place after the series 2016 bonds, which contains a special provision that allows the transfer of up to $4.5 million maximum for the Midtown Park project. Other financial covenants include 1.2x debt service coverage and 150 days cash on hand.