OREANDA-NEWS. April 22, 2016. Fitch Ratings has affirmed the 'BBB' rating on approximately \\$108.4 million of bonds issued by the Tarrant County Cultural Education Facilities Finance Corporation on behalf of Edgemere.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a pledge of the revenues of the obligated group, a lien on the leasehold interest in the property, and a debt service reserve fund for the series 2006A, 2015A and 2015B bonds.

KEY RATING DRIVERS

MARKET NICHE: Edgemere's niche market as a provider of high-end luxury senior housing, location in an affluent area of Dallas and historically strong occupancy rates are primary credit strengths, which somewhat offsets concerns with declining profitability over the last two years. Additionally, Edgemere has a renovation and expansion project underway which should further solidify its market position.

TEMPORARY DIP IN ILU OCCUPANCY: Occupancy has been historically strong with ILU, ALU (including memory support) and SNF occupancy averaging 92.4%, 93.7% and 94.4%, respectively, between fiscal years 2009 and 2015. However, higher than average attrition decreased ILU's occupancy to 90.1% and 89.1% in fiscal years 2014 and 2015, respectively.

COMPRESSED PROFITABILITY: Reflecting the decreased occupancy and increased entrance fee refunds in fiscal 2015, net operating margin adjusted (NOMA) decreased to 16.2% in fiscal 2015 and operating ratio increased to 99%. Management has implemented operating improvement initiatives to improve profitability in fiscal 2016.

HIGH DEBT BURDEN: Adjusted to account for Edgemere's long-term ground lease, Edgemere's debt burden is among the highest in Fitch's CCRC portfolio with 'adjusted MADS' equal to 30.1% of revenue in fiscal 2015 relative to Fitch's 'BBB' category median of 12.4%. Reflective of the high debt burden and the compressed profitability, adjusted MADS coverage decreased to 1.1x in fiscal 2015, comparing unfavorably with Fitch's 'BBB' category median of 2.0x. However, Edgemere's debt service coverage per its covenant calculation equaled 1.6x in 2015.

MIXED LIQUIDITY METRICS: Liquidity relative to expenses remains very strong with 608.4 days cash on hand at Dec. 31, 2015. However, reflective of the high adjusted debt burden, liquidity relative to debt remains only adequate for the 'BBB' category rating with 5.2x adjusted cushion ratio.

RATING SENSITIVITIES

IMPROVING COVERAGE: To counter the impact of the decreased ILU occupancy, Fitch expects Edgemere's operating improvement initiatives to result in profitability sufficient to increase coverage to historical levels over the next 12 to 24 months.

MAINTAINED LIQUIDITY: Any erosion in liquidity metrics will likely result in negative rating action given Edgemere's heavy debt burden and light historical debt service coverage.

SUCCESSFUL EXECUTION OF CAPITAL PROJECT: Fitch expects that Edgemere will successfully execute its capital projects on time and on budget and that expected project benefits are realized.

CREDIT PROFILE

Located in the Preston Hollow neighborhood of Dallas, Edgemere (Northwest Senior Living Corporation, dba Edgemere) provides a complete continuum of care with 304 ILUs, 60 ALUs, 31 memory support units and 72 SNFs. The property is leased through a long term ground lease that runs through 2054. Total operating revenues equaled \\$36.5 million in fiscal 2015 (unaudited; fiscal year ended Dec. 31). Fitch's analysis is based on the obligated group.

The obligated group is composed of Edgemere and its parent company, Senior Quality Lifestyles Corporation (SQLC). The obligated group accounted for 100% of total consolidated assets and 100% of total consolidated operating revenue in fiscal 2015.

In addition to Edgemere, SQLC owns and operates four CCRCs in Texas and one in Carmel, IN, with a total of 1,858 CCRC units. SQLC ranked as the 29th largest CCRC on the 2015 LeadingAge Ziegler 150.

TEMPORARY DIP IN ILU OCCUPANCY

The strong demand for Edgemere's services is demonstrated by consistently robust historical occupancy rates. However, higher than average attrition in both fiscal years 2014 and 2015 compressed ILU occupancy to 90.1% and 89.1%, respectively, decreasing significantly from 96.4% at Dec. 31, 2013. Management expects attrition to normalize going forward and expects ILU occupancy to improve. However, management has cost controls in place in case ILU occupancy remains at the lower levels. ALU (including memory support) and SNF occupancy rates remained strong at 91.2% and 94.4%, respectively. The strong occupancy rates reflect Edgemere's niche market position and strategy as a provider of high-end, luxury retirement units.

COMPRESSED PROFITABILITY

Operating profitability compressed in fiscal 2015 due to the higher than average attrition and entrance fee refunds. After averaging 23.8% between fiscal years 2010 and 2013, net operating margin adjusted (NOMA) decreased to 18.2% in fiscal 2014 and 16.2% in fiscal 2015. Operating ratio increased from 93.5% in fiscal 2014 to 99.0% in fiscal 2015. Both metrics compare unfavorably to Fitch's 'BBB' category medians of 19.3% and 96.1%, respectively. In response to the increased attrition and decreased profitability, management has implemented expense controls to offset the lower than budgeted occupancy and biweekly manager's meetings to ensure that operating targets are met. Edgemere is budgeting for NOMA to rebound to 18.9% in fiscal 2016.

HIGH DEBT BURDEN

For analytical purposes, Fitch classified Edgemere's long-term ground lease as a capital lease rather than an operating lease as per the audit. The ground lease obligation was valued by applying an 8x multiple to the annual lease expense, which is the standard Fitch multiple in North American markets. Additionally Fitch adjusted MADS to include the annual operating lease cash payment and added operating lease expense back to net revenues available for debt service. Edgemere's debt burden increases materially with the capitalized ground lease.

Edgemere's debt burden remains high with bonded MADS equal to \\$7.7 million and adjusted MADS equal to \\$11.1 million, equating to 21.0% of fiscal 2015 revenue and 30.1%, respectively. Both metrics are heavy relative to Fitch's 'BBB' category median of 12.4%.

Adjusted MADS coverage is reflective of the heavy debt burden and the compressed profitability in fiscal 2015, decreasing to 1.1x in fiscal 2015 from 1.3x in fiscal 2014. Prior to fiscal 2015, MADS coverage averaged 1.4x since fiscal 2010, below Fitch's 'BBB' category median of 2.0x. Revenue only coverage has been consistent, averaging 0.9x between fiscal years 2010 and 2015 and equal to 0.9x in fiscal 2015 despite the compressed profitability. Revenue only coverage remains consistent with Fitch's 'BBB' category median of 1.0x.

Per Edgemere's bond covenant calculation, debt service coverage equaled 1.6x in fiscal 2015.

MIXED LIQUIDITY METRICS

Edgemere's liquidity remains very strong relative to operating expenses but remains only adequate relative to the community's heavy debt burden. Unrestricted cash and investments equaled \\$56.9 million at Dec. 31, 2015, equating to a strong 608.4 days cash on hand, exceeding Fitch's 'BBB' category median of 400 days. However, reflecting the high debt burden, cash to adjusted debt of 37.1% and 5.2x adjusted cushion ratio are light relative to Fitch's 'BBB' category medians of 60% and 7.3x, respectively.

Edgemere has historically provided loans to other SQLC communities to fund capital projects and liquidity support agreements for new communities. As of Dec. 31, 2015, Edgemere had approximately \\$22 million of intercompany loans outstanding. The loans accrue interest at the prime rate. Additional intercompany loans or any other dilution of liquidity metrics will likely result in a negative rating action.

CAPITAL PROJECTS

While Edgemere's campus remains in very good shape with limited current capital needs, as highlighted by a low 9.3 year average age of plant, management is executing a series of capital projects to ensure that Edgemere maintains its strong competitive position in the mid- to long term. The capital projects, 'Renaissance at Edgemere,' include continued renovations and enhancements to ILU common spaces as well as additional assisted living, memory support and skilled nursing units and services.

The total project will cost approximately \\$32.5 million and add a net of eight new ALUs, 11 new memory support units and 15 new SNFs. The project, which is entirely funded by series 2015 bond proceeds, started in July 2015 and is expected to be completed in December 2017. The project is both on time and on budget to date. Fitch expects Edgemere's financial profile to benefit from the project beginning in fiscal 2018. Failure to do so would likely result in negative rating action.

DEBT PROFILE

Edgemere had approximately \\$113.9 million of total debt outstanding at Dec. 31, 2015. The debt portfolio is comprised of 100% underlying fixed rate bonds. The community is not counterparty to any swaps. Fitch views the conservative debt profile favorably.

DISCLOSURE

Edgemere covenants to provide annual disclosure within 120 days of fiscal year end and quarterly disclosure within 45 days of each fiscal quarter end. Disclosure is provided through the Municipal Securities Rulemaking Board's EMMA system.