Fitch Affirms Friendship Village of Columbus (OH) Series 1998 $15MM Revs at 'BB-'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed the 'BB-' rating on the following revenue refunding and improvement bond issued on behalf of Friendship Village of Columbus (FVC).

--$15,025,000 Franklin County, Ohio series 1998.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a revenue pledge, first mortgage, and debt service reserve fund.

KEY RATING DRIVERS

WEAK HISTORICAL DEBT SERVICE COVERAGE: Although FVC's debt burden is moderate with maximum annual debt service (MADS) equal to 8.4% of revenues in fiscal 2013, historical coverage of MADS has been weak. Weak profitability and high entrance fee refunds resulted in a rate covenant violation (0.9x) that required FVC to hire a consultant.

IMPROVED INTERIM PROFITABILITY: FVC replaced the executive director in July 2013, which seems to have improved its performance through the six-month interim period ended Dec. 31, 2013. Based on interim financials, FVC's operating ratio improved to 95% from 107.1% in fiscal 2013 while net operating margin improved to 8.7% from negative 2.8% in fiscal 2013. MADS coverage improved to 2.3x in the interim period reflecting, in part, better core profitability.

INCREMENTALLY IMPROVING OCCUPANCY: Independent living unit (ILU) occupancy remains low but continued to improve to 79.3% at Dec. 31, 2013 from 75% at June 30, 2012. The improvement is mainly due to enhanced marketing initiatives, reduced turnover and an improving real estate market.

LIGHT LIQUIDITY: Unrestricted liquidity remains light with 31.6% cash to debt and 3.3x cushion ratio at Dec. 31, 2013. Limited capital needs and continued improvements in occupancy should allow for improved liquidity metrics in the short to medium term.

RATING SENSITIVITY

CONSISTENT OPERATING PROFITABILITY: Fitch expects the recently implemented operating improvement initiatives will be sustained through the full fiscal year resulting in stronger cash flow and coverage.

CREDIT PROFILE

FVC operates a type-A CCRC located in Columbus, OH, which consists of 221 independent living units, 63 assisted living units, and 80 skilled nursing beds. Total operating revenue equaled $16 million in fiscal 2013.

WEAK HISTORICAL DEBT SERVICE COVERAGE

With $15 million of fixed rate debt outstanding, FVC's debt burden remains moderate with MADS equal to 8.4% of revenues in fiscal 2013. The continued weak operating profitability and increased entrance fees refunds in fiscal 2013 decreased MADS coverage to 0.9x in fiscal 2013 from 1.9x in fiscal 2012.

FVC violated its rate covenant in fiscal 2013 resulting in a mandatory consultant call-in. The rate covenant requires MADS coverage equal to or greater than 1.15x. So long as FVC continues to follow the consultant's recommendations, violation of the rate covenant will not result in an event of default.

Fitch's last rating action stated that failure to meet FVC's rate covenant would likely result in negative rating pressure. However, negative rating action is precluded at this time due to the improved operating performance and coverage in the interim period. Fitch expects that operating improvements will be sustained resulting in coverage levels compliant with the rate covenant.

IMPROVED INTERIM PROFITABILITY

Operating profitability improved marginally in fiscal 2013 but remained weak before demonstrating significant improvement in the interim period.

Operating revenue increased a moderate 5.9% in fiscal 2013 from the prior year while cost management initiatives limited expense growth to 2.4%. Continued cost management efforts decreased operating expenses 7% through the six month interim period. Consequently, operating ratio decreased to 107.1% in fiscal 2013 and 95% in the interim period from 109.4% in fiscal 2012. Net operating margin improved to 8.7% in the interim period from negative 2.8% in fiscal 2013 and negative 4.9% in fiscal 2012.

In addition to expense management, the improved operations reflect labor productivity initiatives and improved occupancy rates. Despite the improved operations, net operating margin adjusted decreased to 5.7% in fiscal 2013 from 14% in fiscal 2012 before rebounding to 18.2% in the interim period. The decline in fiscal 2013 was primarily due to increased entrance fee refunds.

INCREMENTALLY IMPROVING OCCUPANCY

ILU occupancy continues to improve but remains low, increasing to 79.3% at Dec. 31, 2013 from 75% in fiscal 2012. Further, SNF occupancy increased from 67.1% in fiscal 2013 to 80% in the interim period but remains consistent with levels achieved in fiscal 2012. ALU occupancy remains above 90%, with 93.8% at the six-month interim. The improved occupancy reflects the increased marketing efforts with a particular emphasis on skilled nursing, decreased turnover in the interim period and an improving real estate market.

LIGHT LIQUIDITY

Unrestricted liquidity metrics remain light but are consistent with the 'BB' category. FVC had $4.6 million of unrestricted cash and investments at Dec. 31, 2013, equating to 119.2 days cash on hand, 31.6% cash to debt and 3.3x cushion ratio. Capital spending is expected to remain consistent with prior years and is not expected to negatively impact liquidity or require additional debt.

DISCLOSURE

FVC covenants to provide annual disclosure within 150 days of the end of each fiscal year and quarterly disclosure within 50 days of the end of each quarter. Disclosure is provided through the Municipal Securities Rulemaking Board's EMMA system. FVC had failed to provide disclosure documents in accordance with its continuing disclosure agreement. Management has taken steps to ensure more timely disclosure going forward.

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

Applicable Criteria and Related Research:

--'Not-for-profit Continuing Care 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

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Contacts

Fitch Ratings
Primary Analyst
Adam Kates, +1-312-368-3180
Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Katie Proux, +1-312-368-3348
Analyst
or
Committee Chairperson
Jim LeBuhn, +1-312-368-2059
Senior Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Adam Kates, +1-312-368-3180
Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Katie Proux, +1-312-368-3348
Analyst
or
Committee Chairperson
Jim LeBuhn, +1-312-368-2059
Senior Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com