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Fitch Affirms Franciscan Communities, Inc. (IL) Revs at 'BBB-'; Outlook Stable

January 23, 2014

NEW YORK --(BUSINESS WIRE)-- Fitch Ratings has affirmed the 'BBB-' rating on the following bonds issued on behalf of Franciscan Communities, Inc. : -- $100.3 million Illinois Finance Authority (IL) ( Franciscan Communities, Inc. ) revenue bonds, series 2013A; -- $40.1 million Illinois Finance Authority (IL) ( Franciscan Communities, Inc. ) revenue refunding bonds, series 2007A; -- $3.0 million Illinois Finance Authority (IL) ( Franciscan Communities, Inc. ) revenue bonds (EXTRAS), series 2004B; -- $5.2 million Cuyahoga County (OH) ( Franciscan Communities, Inc. - Mount Alverna Project ) health care facilities revenue bonds, series 2004C; -- $2.7 million Cuyahoga County (OH) ( Franciscan Communities, Inc. - Mount Alverna Project ) health care facilities revenue bonds (EXTRAS), series 2004D. The Rating Outlook is Stable. SECURITY Bonds are secured by the Franciscan Communities Obligated Group's (FCOG) pledge of gross revenues, a mortgage interest in owned and leased property of FCOG and a debt service reserve fund on the series 2013A bonds. KEY RATING DRIVERS CONSISTENT OPERATING PERFORMANCE: FCOG's operating performance has been very steady over the last four audited years, averaging an operating ratio of 93.4% and a net operating margin of 12.2% over this time, both better than Fitch's 'BBB' category medians. LARGE, DIVERSE REVENUE BASE: The stable operating performance is supported by a large revenue base (approximately $119 million in operating revenue in fiscal 2013 ( June 30 year end) and moderate geographic diversity. FCOG has eight separate campuses in three different states, with over 1,900 units in service, and no single entity accounts for more than 18% of total system revenues. SOLID REVENUE ONLY COVERAGE: FCOG's revenue only coverage was strong at 1.4x at year end fiscal 2013 reflective of the revenues from FCOG's sizable number of skilled nursing beds and rental units. Coverage, including entrance fees, was good at 1.7x, consistent with the prior year. FCOG's debt burden is manageable as indicated by maximum annual debt service as a percent of revenue of 9.5% at Sept. 30, 2013 ; better than Fitch's 'BBB' median of 12.4%. LIGHT LIQUIDITY: FCOG's liquidity metrics are light relative to the 'BBB' category medians. At June 30, 2013 , FCOG has approximately $69.3 million of unrestricted cash and investments which equated to 231.0 days cash on hand (DCOH), a 5.8x cushion ratio, and 38.7% cash to debt. IMPROVED GOVERNANCE: Since Fitch's initial rating, FGOC's sole corporate parent has added two board members and is close to adding two other members. The board additions, which include finance and management professionals, help address concerns Fitch has about the size and professional diversity of the board, particularly given the organization's size and scale. RATING SENSITIVITIES CAPITAL NEEDS: Given the age of some of its campuses, FCOG continues to have capital needs. Over the next two fiscal years FCOG plans to spend approximately $26 million on capital (about 120% above depreciation) and will be assessing longer term capital needs as well. While FCOG's operating performance has been steady, with a number of ratios comparing favorably to the 'BBB' medians, positive rating momentum will depend on modest growth in liquidity, the completion of the capital projects over the next two years, and additional clarity on longer term capital plans. CREDIT PROFILE FCOG is composed of eight senior living communities located in Illinois , Indiana and Ohio , with a total of 749 ILUs, 384 assisted living sheltered care units and 776 SNFs. In fiscal 2013, FCOG generated total operating revenues of $118.7 million . STABLE FINANCIAL PROFILE FCOG benefits from its large and geographically diverse revenue base, consistent financial performance from its core operations, and moderate debt burden. FCOG's large number of rental units, along with a proportionately high number of assisted living units and skilled nursing beds relative to ILUs, has produced solid operating ratios. In fiscal 2013, FCOG's operating ratio of 93.6% and net operating margin of 11.6% exceeded the respective 'BBB' category medians. The net operating margin - adjusted (which includes entrance fees) of 14.1% trailed the 'BBB' category median of 21.3% and reflects FCOG's lower number of entrance fee contracts and their modest pricing. Consistent AL and skilled nursing occupancy, approximately 90% throughout the historical period, provides further support to the stable financial profile. IL occupancy was more mixed hovering in the lower 80% range in the historical period, but IL occupancy did climb to 86.3% in the three month fiscal 2014 interim period. FCOG debt burden is manageable. MADS of $11.9 million equated to a modest 9.3% of total 2013 revenues. Coverage of MADS on a 'revenue only' basis of was 1.4x in fiscal 2012 and 2013, which exceeds Fitch's 'BBB' median of 1.0x. However, coverage of MADS including net entrance fee receipts was 1.7x in fiscal 2012 and 2013, compared to Fitch's 'BBB' category median of 1.9x. Fitch views FCOG's 'revenue only' coverage positively as it provides a measure of stability, given FCOG does not have to rely on ILU sales and entrance fee receipts to cover its debt service. FCOG's liquidity metrics trail Fitch's 'BBB' category medians. At Sept. 30, 2013 , FCOG had approximately $66.8 million of unrestricted cash and investments which equated to 218.7 days cash on hand, a 5.6x cushion ratio, and 37.3% of debt. However, Fitch believes FCOG's liquidity is adequate for the rating level. Fitch expects FCOG's cash growth to be modest, given FCOG's large number of rental contracts and SNF beds, especially compared to the typical entrance fee community rated by Fitch that can grow cash through entrance fee receipts. A decline in liquidity, not expected, would be a credit a concern. CAPITAL NEEDS As a system with older campuses, FCOG has ongoing capital needs. Fitch believes continued capital investment is key for a CCRC to maintain its competitiveness over the longer term. FCOG's capital spending has averaged 29.1% of depreciation over the last four audited years, which was materially lower than the 'BBB' category median of 85.3%. Fitch notes positively that FCOG plans to spend $26 million (approximately 120% of depreciation) over the next two years on capital, with capital projects focused at Franciscan Village . Approximately $19 million of FCOG's bond issuance in 2013 is new money to fund capital projects. Approximately $13 million of that will be for projects at Franciscan Village , including renovation to IL and Al common spaces and a larger renovation project of Franciscan Village's skilled nursing center. FCOG is in the process of creating a longer term a strategic plan, which Fitch expects to be completed by the next review. The scope, cost, timing, and funding of this plan will be a key rating driver for FCOG. DISCLOSURE Franciscan expects to release annual audited financial statements and utilization statistics within 150 days after each fiscal year end and quarterly unaudited financial statements and utilization statistics within 45 days of each quarter end. Additional information is available at ' '. Applicable Criteria and Related Research : --'Rating Guidelines for Nonprofit Continuing Care Retirement Communities' ( July 10, 2013 ); --'Nonprofit Nursing Home Rating Criteria' ( July 5, 2013 ). Applicable Criteria and Related Research : Rating Guidelines for Nonprofit Continuing Care Retirement Communities Nonprofit Nursing Home Rating Criteria -- Effective July 5, 2012 to July 5, 2013 Additional Disclosure Solicitation Status 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 Gary Sokolow , +1-212-908-9186 Director Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 or Secondary Analyst Jennifer Kim , +1-212-908-0740 Associate Director or Committee Chairperson Eva Thein , +1-212-908-0647 Senior Director or Media Relations, New York Elizabeth Fogerty , +1 212-908-0526 Source: Fitch Ratings

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