OREANDA-NEWS. Fitch Ratings has affirmed the 'BB' rating on the following bonds issued by Tarrant County Cultural Education Facilities Finance Corporation on behalf of Buckingham Senior Living Community, Inc. (The Buckingham):

--$50.88 million, series 2015A fixed rate bonds;

--$24.75 million, series 2015B-1 tax-exempt mandatory paydown securities;

--$33.75 million, series 2015B-2 tax-exempt mandatory paydown securities;

--$62.56 million, series 2007 fixed rate bonds;

--$18.58 million, series 2014 fixed rate bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a mortgage lien on the community's property, a gross revenue pledge, and series-specific debt service reserve funds.

KEY RATING DRIVERS

AGGRESSIVE EXPANSION UNDERWAY: The Buckingham is in the early stages of a large campus expansion and renovation project that includes a 56% increase in the number of units offered and enhanced common areas. Total direct project costs are sizeable and amount to $79.6 million, up very slightly ($244,000) from the original budget.

CONSTRUCTION AND FILL-UP RISKS: The construction project is substantial and involves multiple components including new units, renovated and removed units, and new activity space for all residents. Managing the various project stages as well as filling-up the new units in a timely and cost-effective manner poses operating challenges. Through May 31, 2016, the project is mostly on budget, 31.5% complete and slightly behind schedule due to poor weather and building permit issues.

VERY HIGH DEBT POSITION: The Buckingham's long-term debt increased dramatically with the series 2015 bond issue and amounts to $132 million as of Dec. 31, 2015. Additionally, the community has $58.5 million of temporary debt that is reliant upon repayment from initial entrance fees after the sale of new independent living units (ILUs). This level of debt does not compare favorably to unrestricted cash and investments, adjusted capitalization, net available or total revenues.

STRONG UNDERLYING CREDIT FACTORS: The 'BB' rating reflects The Buckingham's historically strong demand indicators, with ILU occupancy averaging about 96% from 2013-2015 and assisted living unit (ALU) and skilled nursing facility (SNF) occupancies experiencing similar trends; good pre-sales with 73% of the 106 new ILU's securing 10% deposits; the depth and experience of the project participants, including the management and development companies; and the affluent demographics of the primary market area. Fitch believes that these underlying credit factors offset the construction and fill-up risks and the debt burden, which is sizeable at the current rating level.

GOOD OPERATING PERFORMANCE: Over the last three audited years cash flow from operations has been very strong. During this period, the net operating margin-adjusted averaged nearly 31%, which compares well to Fitch's 'BBB' category median of 19.3%. Despite a high debt burden, actual annual debt service (AADS) coverage has been solid at 1.5x and 1.9x, respectively, in fiscal years 2014 and 2015.

RATING SENSITIVITIES

PROJECT MANAGEMENT: The 'BB' rating incorporates the appropriate management of the construction and fill-up risks and assumes that the expansion project will meet projections. Construction delays, cost overruns, higher than expected working capital requirements, and occupancy and fill-up levels that lag projections could result in negative rating action.

MAINTENANCE OF OPERATING PROFILE: The 'BB' rating assumes that The Buckingham's current operating profile, characterized by high occupancy across all levels of care, strong adjusted net operating margins, and adequate coverage of actual debt service, remains stable. Should any of these weaken during the construction and fill-up periods or liquidity declines, there could be negative rating pressure.

CREDIT PROFILE

Located in the Memorial/Tanglewood section of Houston, TX, The Buckingham is a continuing care retirement community (CCRC) that opened in 2005 and achieved stabilized occupancy in September 2007. It currently offers 204 ILU's, 43 ALU's, 16 memory support units, and 60 SNF beds. Total operating revenues amounted to $22.7 million in fiscal 2015 (Dec.31 year-end).

The Buckingham's parent company and sole corporate member is Senior Quality Lifestyles Corporation (SQLC). SQLC is also the parent company of Edgemere in Dallas (rated 'BBB'/Outlook Stable), Querencia at Barton Creek (rated 'BBB-'/Outlook Stable), two other CCRCs in Texas and one in Carmel, IN with a total of 1,857 units. Only The Buckingham is obligated on its indebtedness. SQLC and The Buckingham also continue to retain Greystone Management Services to manage the community's operations.

Fitch notes that SQLC's Senior Living Center at Corpus Christi (Mirador) is currently under a forbearance agreement with bondholders and SQLC made the $2.83 million interest payment due on Mirador's bonds on May 15, 2016. The parties are currently negotiating a financial restructuring and SQLC does not anticipate any support for Mirador to be provided by The Buckingham.

The Buckingham offers type-A life care resident agreements for its ILUs. Most of its contracts are 90% refundable. Entrance fee refunds are subject to The Buckingham receiving sufficient re-sale proceeds and after re-occupancy of the vacated ILU.

LARGE SCALE EXPANSION PROJECT UNDERWAY

The nearly $80 million construction project is a complex endeavor involving a significant expansion of services and amenities that is expected to take another 23 months. In addition to adding units in all levels of care, the project entails taking units out of service and renovating others. Program disruptions to the existing residents are expected to be minimized by the project's phasing, but cost and timing risks related to the new units could potentially arise. Fitch views the Buckingham's engagement of an experienced development consultant, GCD Texas LLC (an affiliate of Greystone), as a credit positive. Through April 30, 2016, the project is mostly on budget, 31.5% complete and slightly behind schedule due to poor weather and building permit issues.

The project's expansion plans include 106 new ILUs, 27 new ALUs, 18 new memory support units and 32 new SNF rooms that will increase total units mix by nearly 57%. The Buckingham began taking reservation agreements for the new ILUs in February 2015, which included 10% entrance fee deposits. Indicative of the community's strong demand and boosted by incentives to encourage reservation agreements, pre-sale levels over the last nine months have been steady and amounted to 73% as of May 31, 2016. Most of the cancelled reservations have been due to residents moving into other available units in the community. Despite the good pre-sale levels, timely fill-up and occupancy of the new ILUs remains a risk and could stress working capital requirements if move-in rates are lower and slower than expected. Moreover, the additional ALU, memory support and SNF units are services that are subject to more market and healthcare industry pressures.

EXTREMELY HIGH DEBT POSITION

The Buckingham's total debt increased dramatically with the series 2015 bond issue and amounted to $187.6 million as of Dec. 31, 2015. Of this amount, $58.5 million represents temporary debt that is payable from initial entrance fees after the sale of the expansion ILUs. The $33.75 million series B-2 bonds are scheduled to be redeemed upon the expansion ILUs achieving 50% occupancy, and the $24.75 million series B-1 bonds are scheduled to be paid off when the expansion ILUs achieve 80% occupancy. With a total initial entrance fee pool of about $74.4 million (assuming 95% occupancy), proceeds are expected to be sufficient to redeem the paydown securities. Maximum annual debt service (MADS) based on permanent debt is extremely high at 40.8% of total revenues. However, this figure excludes any new resident service revenue from the expanded ILU, ALU, memory care and SNF projects.

After the entire project stabilizes in 2020, MADS is projected to amount to a still-high 23% of total revenues. Unrestricted cash to permanent debt was also light at nearly 19% in 2015. This level was well below Fitch's 'BBB' category median of 60%. After the first full year of project stability in 2020, unrestricted cash to permanent debt is expected to strengthen to about 51%, which is more in line with Fitch's 'BBB' rating category median.

GOOD HISTORICAL FINANCIAL PERFORMANCE AND POSITION

Due to strong occupancies, steady rate increases and effective cost management, historical cash flow from operations was very good. From 2013-2015, the net operating margin and net operating margin-adjusted averaged a healthy 18% and 31%, respectively. These levels compare positively with Fitch's 'BBB' category medians of 8.9% and 19.3%. The operating ratio also exhibits good results as it has declined since 2011 and amounted to 97.7% in 2015. This level is just below Fitch's 'BBB' category median of 96.1%. Through the first four months of 2016, performance remains very good with a net operating margin of 21.6%, net operating margin-adjusted of 29.5%, and operating ratio of 93.2%.

Despite the high historical debt burden, AADS is satisfactory and amounted to 1.5x in 2014 and 1.9x in 2015. Unrestricted cash and investments of about $23.2 million remains sufficient and represents 417 days of operating expenses. This level of days cash on hand (DCOH) is in line with Fitch's 400 DCOH 'BBB' category median.