Fitch Affirms Friendship Village of Schaumburg (IL) Revs at 'BB-'; Outlook Revised to Stable

CHICAGO--()--Fitch Ratings has affirmed the 'BB-' rating on the following Illinois Finance Authority revenue bonds issued on behalf of Friendship Village of Schaumburg Obligated Group (FVS):

--$68.7 million series 2005A;

--$5 million series 2005B;

--$33.6 million series 2010.

The Rating Outlook is revised to Stable from Negative.

SECURITY

The bonds are supported by a pledge of gross revenues, a mortgage interest in property and improvements, and a debt service reserve.

KEY RATING DRIVERS

BETTER COVERAGE METRICS: The Outlook revision to Stable reflects FVS's on-improved sales and net entrance fee receipts, which provided stronger 1.5 times (x) coverage of maximum annual debt service (MADS) through the 11-month interim period ended Feb. 28, 2014. Additionally, FVS produced 1.4x rolling 12-month coverage per its master indenture formula, improved from the 1.3x produced in fiscal 2013 (year ended March 31).

FLAT OCCUPANCY: Resident attrition continues to pressure independent living unit (ILU) occupancy despite improved sales. At the 11-month interim period ended Feb. 28, 2014, FVS's ILUs were 71% occupied versus a budget of 75.9%. Even with better sales (96 versus 84 in 2013) in 2014, attrition of 108 effectively suppressed occupancy. A larger sales team and expanded contract options are expected to enhance sales going forward.

SIGNIFICANT LEVERAGE: FVS's debt burden remains high, as indicated by MADS equal to a high 16.9% of annualized revenues through Feb. 28 2014, and debt to net available of 8.7x. Debt is expected to moderate incrementally as no further debt is planned and future capital expenditures near $6 million will be funded as cash flow allows.

ADEQUATE LIQUIDITY: FVS's liquidity metrics remain sufficient for the rating level, despite mild erosion from the prior fiscal year end. As of Feb. 28, 2014, FVS had $25.5 million in unrestricted cash and investments, equating to 207.3 days of cash on hand, a 3.2x cushion ratio and cash to long-term debt of 21.6%.

MODEST HOUSING RECOVERY: The Schaumburg area housing market has improved, as indicated by improved home values and increased numbers of homes sold. This improvement is evidenced by FVS's gross sales of 150 through Feb. 28, 2014, well ahead of the 111 for the same prior year period.

RATING SENSITIVITIES

CONTINUED STABILITY: Fitch expects FVS to sustain its level of occupancy via healthy ILU sales and turnover entrance fee receipts, maintain its debt service coverage in fiscal 2015 as budgeted, and maintain stable liquidity against modest capital needs.

CREDIT PROFILE

Friendship Village of Schaumburg is a Type B continuing care retirement community (CCRC) currently consisting of 622 independent living apartments, 28 independent living cottages, 81 assisted living units, 25 assisted living dementia units, and 248 skilled nursing beds. The facility is located in Schaumburg, IL, approximately 30 miles northwest of downtown Chicago. In fiscal 2013 (year ended March 31), FVS reported total revenues of $46.8 million.

Fitch uses obligated group financial statements in its analysis. The consolidated entity also includes non-obligated entities including corporate parent Friendship Senior Options, Friendship Village Neighborhood Services, Friendship Village of Mill Creek, and the Foundation. At unaudited 11-month ended Feb. 28, 2014 the obligated group represented 55.9% of total assets and 88.1% of total revenues.

IMPROVED ILU SALES

The Outlook revision to Stable from Negative reflects FVS's improved debt service coverage, driven in large part from improved ILU sales and net entrance fee receipts. As a result of healthier sales to offset attrition, FVS's level of sales reservations (154) and occupancy (150) within Bridgewater Place remain above the covenant requirements of 146 and 138, respectively. It is anticipated that new entrance fee contract options and a more robust marketing and sales force will continue to provide sufficient unit sales to sustain or improve occupancy going forward. FVS is budgeting for nearly $7 million in annual net entrance fee receipts going forward, which is in line with YTD results through Feb. 28, 2014.

BALANCE SHEET STRAIN

While it is sufficient for its 'BB-' rating, FVS's balance sheet continues to show strain from somewhat light liquidity against a significant debt burden. Unrestricted liquidity equaled $25.5 million at Feb. 28 2014, and it is expected to remain stable over the next few years as FVS continues to produce cash flow sufficient to fund its capital plans (approximately $6 million annually). However, with no additional debt planned, FVS's debt burden should incrementally moderate over the longer term.

As of Feb. 28, 2014, FVS had $107.3 million in total long-term debt. Its debt structure is 100% fixed rate, and includes $5 million in extendable-rate adjustable securities (EXTRAS). These bonds were remarketed and reset on Feb. 15, 2014 for 5% on a five year term (through Feb. 15, 2019). FVS has no swaps.

ONGOING DISCLOSURE

Under its Continuing Disclosure Agreement, FVS' is required to provide annual audited financial statements within 150 days of each fiscal years end and quarterly unaudited financial statements with 45 days of each fiscal quarter-end. Disclosure to Fitch has been excellent and includes regularly scheduled investor calls.

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

Applicable Criteria and Related Research:

--'Rating Guidelines for Nonprofit Continuing Care Retirement Communities' (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=832034

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Contacts

Fitch Ratings
Primary Analyst
Emily E. Wadhwani
Director
+1 312-368-3347
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Dana Sodikoff
Director
+1 312-368-3215
or
Committee Chairperson
James LeBuhn
Senior Director
+1 312-368-2059
or
Media Relations, New York
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Emily E. Wadhwani
Director
+1 312-368-3347
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Dana Sodikoff
Director
+1 312-368-3215
or
Committee Chairperson
James LeBuhn
Senior Director
+1 312-368-2059
or
Media Relations, New York
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com