News Column

Fitch Affirms Westminster Manor's (TX) Revs at 'BB+'; Outlook Stable

June 6, 2014

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed the 'BB+' rating on the following bonds issued by the Travis County Health Facilities Development Corporation on behalf of Westminster Manor (Westminster):

--$64,620,000 series 2010 revenue bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a pledge of gross revenues, a mortgage lien on property and a debt service reserve fund.

KEY RATING DRIVERS

STRONG OCCUPANCY: Westminster's location and reputation in the Austin market has resulted in strong demand and high occupancy rates. Prior to the expansion, independent living unit (ILU) occupancy exceeded 96% in each year since 2000 through fiscal 2011 (Dec. 31 year end). ILU occupancy rebounded to 94.3% at March 31, 2014 from 91% in fiscal 2012 due to the successful fill up of the new units.

EXPANSION PROJECT COMPLETED: The final phase of the expansion project was completed with the addition of 11 ILUs in July 2013. The new units filled within a month. In total, the expansion project added 75 new ILUs.

IMPROVING PROFITABILITY: Operating profitability improved in fiscal 2013 and the three-month interim period ending March 31, 2014 (the interim period) after compressing in fiscal 2012 due to costs related to the expansion project.

HIGH DEBT BURDEN: Westminster's debt burden has moderated due to the increased revenue generated from the expansion units, but remains high with maximum annual debt service (MADS) equal to 20.6% of revenue in fiscal 2013.

LIGHT LIQUIDITY RELATIVE TO DEBT: Liquidity metrics remain light relative to Westminster's high debt burden with 45.9% cash-to-debt at March 31, 2014. However, Fitch expects liquidity metrics to improve as future capital expenditures should decrease now that the expansion project is completed.

RATING SENSITIVITIES

CONTINUED STABILIZATION: Fitch expects that operating profitability will continue to improve and that decreased capital spending will strengthen liquidity metrics. Post-expansion operations are expected to stabilize in 2014. Upward rating movement is precluded until debt service coverage is sustained at levels consistent with an investment grade rating.

CREDIT PROFILE

Westminster Manor is a type-A continuing care retirement community (CCRC) located in Austin, TX, and consists of 332 ILUs, 22 assisted living units (ALUs) and 85 skilled nursing facility (SNF) units. Total operating revenue equaled $25.2 million in fiscal 2013.

STRONG OCCUPANCY

Westminster's location and excellent reputation in the Austin market has resulted in strong demand for 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 rebounded to 94.3% at March 31, 2014, reflecting the successful fill up of the phase I and II expansion units. Additionally, SNF occupancy has exceeded 90% each fiscal year since 2005 and equaled 96.4% at March 31, 2014.

EXPANSION PROJECT COMPLETED

The expansion project began in 2010 and concluded with the completion of 11 phase II ILUs in July 2013. The new units filled within a month of opening. In total, the project added 75 new ILUs, a new 85-unit replacement SNF (including 30 dementia units) and 22 ALUs. The phase I ILUs were completed in January 2012 while the new SNFs and ALUs were completed in April 2012 and June 2012, respectively. Total operating revenues increased 23.4% since fiscal 2011 to $25.2 million in fiscal 2013 reflecting the fill up of the phase I and II expansion units. The expansion project was funded by the series 2010 bonds.

IMPROVING PROFITABILITY

Operating profitability improved in fiscal 2013 and in the three month interim period. Operating ratio improved to 112.5% in fiscal 2013 from 117.4% in fiscal 2012 while net operating margin increased to 4.0% from 0.6%. Operations continued to improve in the interim period with operating ratio decreasing to 110.2% and net operating margin increasing to 6.7%. The improvements reflect the benefits of the expansion project and effective cost management as Westminster adjusted its expense base to the expanded operations. While improved, these profitability metrics compare unfavorably to Fitch's 'BBB' category medians of 97.2% and 9.9%, respectively.

Net operating margin adjusted increased to 28.6% in fiscal 2013 from 26.2% in fiscal 2012 and is strong relative to Fitch's 'BBB' category median of 21.3%. The strong net operating margin adjusted reflects Westminster's strong demand for services and net turnover entrance fee generation, which equaled $7.3 million in fiscal 2013 and $6.6 million in fiscal 2012. Net entrance fee generation should benefit from the increased number of ILUs once the expansion units begin to turn over.

Post-expansion operations are expected to stabilize in fiscal 2014 and Fitch expects operating profitability to continue to improve.

HIGH DEBT BURDEN

Westminster's debt burden has moderated, reflecting the increased revenue generated from the expansion project, but remains high. MADS as a percent of revenue decreased from 27.6% in fiscal 2011 to 20.6% in fiscal 2013. Fitch expects that the debt burden will continue to moderate in fiscal 2014 as the community benefits from a full year of revenue from the phase II expansion units.

MADS coverage increased from 1.3x in fiscal 2012 to 1.7x in fiscal 2013 due to the improved profitability and net entrance fee generation. However coverage remains dependent upon entrance fees, with revenue-only MADS coverage equal to a light 0.3x in fiscal 2013 relative to Fitch's 'BBB' median of 0.9x. Revenue only coverage improved to 0.7x in the interim period, reflecting the full quarter of revenue generated from the phase II expansion units.

LIGHT LIQUIDITY RELATIVE TO DEBT

Liquidity metrics remain stressed relative to Westminster's elevated debt burden. Westminster had $31.3 million of unrestricted cash and investments at March 31, 2014, equating to 45.9% cash-to-debt and 6.0x cushion ratio. Both metrics are light relative to Fitch's 'BBB' category medians of 58.9% and 6.9x, respectively. Fitch expects liquidity metrics to improve now that the expansion project is completed. Capital expenditures are expected to decrease in fiscal 2014 to $1.54 million (38.1% of fiscal 2013 depreciation) from $10 million in fiscal 2013 (246.9% of depreciation).

DISCLOSURE

Westminster 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.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Retirement Communities Rating Criteria' (July 10, 2013).

Applicable Criteria and Related Research:

Not-for-Profit Continuing Care Retirement Communities Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=712401

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=833418

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Adam Kates

Director

+1-312-368-3180

Fitch Ratings, Inc.

70 West Madison Street

Chicago, IL 60602

or

Secondary Analyst

James LeBuhn

Senior Director

+1-312-368-2059

or

Committee Chairperson

Emily Wong

Senior Director

+1-415-732-5620

or

Media Relations

Elizabeth Fogerty, +1-212-908-0526

elizabeth.fogerty@fitchratings.com


Source: Fitch Ratings


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