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Fitch Rates East Ridge Retirement Village (FL) Revs 'BB'; Outlook Stable

January 31, 2014

CHICAGO --(BUSINESS WIRE)-- Fitch Ratings has assigned a 'BB' rating for the following Alachua County Health Facilities Authority bonds expected to be issued on behalf of East Ridge Retirement Village (ERRV): -- $71.5 million health facilities revenue bonds, series 2014; The Rating Outlook is Stable. SECURITY The bonds are expected to be secured by a pledge of gross revenues and receivables of the OG (ERRV is the only OG member), a first mortgage lien on all current and future property of the OG, and a fully-funded debt service reserve. The series 2014 bonds are expected to be fixed rate, and price the week of March 3 via negotiated sale. The bonds will be used to fund or reimburse the cost an assisted living (AL) and skilled nursing expansion, fund a debt service reserve, fund 25 months of capitalized interest, and pay costs of issuance. KEY RATING DRIVERS SIGNIFICANT DEBT LEVEL: ERRV's pro forma leverage metrics reflect a sizable debt burden against its current financial profile. Coverage of pro forma maximum annual debt service (MADS) (including turnover entrance fees) is weak at 0.9x in 2013 while pro-forma MADS is a high at 33% of 2013 revenues. However, historical pro-forma ratios do not reflect the increased revenues expected to be generated from the project. WEAK BUT IMPROVING PROFITABILITY: ERRV's cash flow is reliant upon turnover entrance fees, which is typical for a Type 'A' facility. Financial performance was weak from fiscal 2008 through 2011 resulting from light entrance fee receipts reflecting housing price deflation. However, ERRV's entrance fee receipts have improved as the area housing market has improved. Fitch believes ERRV will need to maintain existing entrance fee and occupancy levels to produce adequate coverage near 1.0x through stabilization. IMPROVED IL SALES : ERRV generated 33 sales in 2013 and 36 sales in 2012 compared to just 11 in 2011. ERRV has used incentives, including discounting, to improve sales; however, due to improving real estate values, Fitch believes the need for discounting and other marketing incentives will decline over the next few years, which should support better net entrance fee levels. STRONG SKILLED NURSING DEMAND: Fitch believes ERRV has been challenged by its dated physical plant which has negatively impacted AL occupancy. However, ERRV has maintained solid occupancy in the skilled nursing facility (occupancy averaging 90% from 2005 - 2013) despite small, semi-private units which are obsolete by today's standards. Fitch believes that the strong demand for skilled nursing supports the rationale to expand and upgrade its health center. LIMITED COMPETITION: Within the primary service area (Cutler Bay, Florida and 10 to 15 miles to the west and north), there are only two CCRCs, both of which are rental communities. The nearest Type 'A' continuing care retirement community is the Vi at Aventura (33.1 miles away) and John Knox Village (53 miles away), both well outside ERRVs target market. RATING SENSITIVITIES CONSTRUCTION AND FILL: The project comes with the typical risk associated with construction projects, as well as the need to fill the additional units. Fitch believes the risk on the fill up of the units is mitigated by the strong demand for assisted living skilled nursing services and the experience of sponsor, manager and developer in successfully managing campus repositioning projects. CONSISTENT OCCUPANCY: The current rating assumes ERRV will maintain steady or improved occupancy in the existing facility until the project is available for occupancy. Keeping the project on time and within budget is critical in maintaining the rating. CREDIT PROFILE East Ridge Retirement Village (ERRV) is a Type 'A' life care continuing CCRC located on 76 acres in the town of Cutler Bay, Florida , approximately 20 miles south of Miami . The community currently includes 221 IL Units, 57 AL Units, and 60 semi-private skilled nursing beds. ERRV reported total revenues of $18.2 million (unaudited) in 2013. Since 2008 ERRV has been controlled by SantaFe Senior Living (SFSL) via an affiliation agreement between ERRV and SFSL's corporate parent, SantaFe HealthCare (SFHC). Neither SFSL nor SFHC are obligated on the series 2014 bonds. Fitch's analysis is done solely on the financial results of ERRV. CAPITAL PROJECTS Bond proceeds will be used to help finance the construction of new buildings that will house 90 new AL units, 31 new memory support units (MSUs), and 74 new skilled nursing beds. The buildings will replace the existing AL and skilled nursing buildings. The project includes additional landscape, utilities, dining, and common space renovations. A guaranteed maximum price contract is in place, and construction is expected to begin in April 2014 and be completed by September 2015 . Stabilization of occupancy at approximately 93% for the new units will happen between August 2016 and May 2017 for the individual service lines. Fitch views the project positively as significantly outdated buildings that have mostly shared units will be replaced by brand new state of the art buildings, with larger units and mostly private rooms. ERRV has stepped up its capital spending since 2011, with capital spending as a percent of depreciation averaging 87.7% from 2011 to 2013, after being at only 26.1% in 2010. The capital improvements over this time included major renovations to common buildings on campus. The renovated buildings have a similar exterior design as the new AL and skilled nursing buildings will have. Fitch toured the campus and believes that once the buildings are completed ERRV's campus will be much more marketable, especially given that the new AL and skilled nursing buildings are prominently positioned near ERRV's entrance. Fitch believes the fill-up risk for the project is manageable, given ERRV's current occupancy levels of 90.5% in skilled nursing and 93.3% in AL during 2013. Further, the new skilled nursing will include 50 private and 24 semiprivate beds, supporting demand for private units which is currently difficult to accommodate. In addition, Fitch believes there is sufficient unmet demand for memory care within the service area to support the 31 new memory care units. Additionally, Fitch views ERRV's competitive position as a credit positive, especially for ERRV's entrance fee, Type 'A' life care contract. There are only two other retirement communities within 20 miles, and both of them are for profit and only one of them currently provides the full continuum of care. The limited competitive landscape coupled with a recovering housing market should support steady to improving demand at ERRV over the near to medium term. ELEVATED DEBT BURDEN The 'BB' rating reflects ERRV's significant debt burden following the issuance of the series 2014 bonds. Fitch used pro forma maximum annual debt service (MADS) of $6.1 million in its analysis. ERRV will have 25 months of capitalized interest and the first debt service payment will occur in fiscal 2018. The first debt service covenant test (equal to 1.1x MADS initially, then 1.2x) will occur at the earlier of stabilized occupancy or fiscal year end 2019. IMPROVED CASH FLOW ERRV significantly revamped its marketing processes and staff following the housing decline, and this strategy has begun to bear results. New entrance fee receipts were a low $393,000 in 2011 but improved significantly to $3 million in 2012 and unaudited 2013 results show further improvement to $4 million . Sales over the three year period jumped from 11 in 2011 to 36 in 2012, and held steady at 33 in 2013. Fitch believes the current improved levels of sales and entrance fee receipts are sustainable and seem to indicate a return to historical levels. From 2005 to 2007, ERRV averaged 32 sales per year, before dropping to an average of 15 sales per year from 2008 to 2011. In addition the real estate market in the PSA has shown improvement. As of Dec. 31, 2013 the weighted average sale price for homes in the PSA was $485,731 with an average 79 days on the market. This is well improved from prior years. In addition, ERRV's weighted average independent living (IL) entrance fee of $162,000 for a fully amortizing contract compares very well to the local real estate market, and Fitch views this as a further credit strength. ADEQUATE LIQUIDITY Fitch views ERRV's balance sheet metrics as good for the current rating level. Unrestricted cash and investments were $17.2 million at December 31, 2013 , up from $14.7 million at December 31, 2012 . The improved cash flow from net entrance fee receipts helped lift liquidity, and Fitch believes that the improved IL sales should continue to support moderate balance sheet growth. Liquidity metrics relative to pro forma debt show strain, with a 2.8x pro forma cushion ratio and pro forma cash to debt just above 25%. However, ERRV's debt is all fixed rate, so ERRV has no exposure to bullet payments or put or remarketing risks, which lends further stability to its current liquidity position. ERRV's liquidity relative to expenses is much stronger as ERRV had over 421 days of cash on hand at December 31, 2013 . DISCLOSURE ERRV will covenant to provide annual disclosure within 150 days of fiscal year end, and quarterly disclosure within 45 days of each quarter end. Disclosure will include a balance sheet, statement of revenues/expenses, statement of cash flows, calculation of DCOH, debt service coverage, and occupancy. Disclosure will be made via the Municipal Securities Rulemaking Board's EMMA System. Additional information is available at ' ' Applicable Criteria and Related Research : --'Rating Guidelines for Nonprofit Continuing Care Retirement Communities' ( July 10, 2013 ). Applicable Criteria and Related Research : Rating Guidelines for Nonprofit Continuing Care Retirement Communities 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 Emily E. Wadhwani , +1-312-368-3347 Associate Director 70 W. Madison Street Chicago IL 60602 or Secondary Analyst Gary Sokolow , +1-212-908-9186 Director or Committee Chairperson James LeBuhn , +1-312-368-2059 Senior Director or Media Relations Elizabeth Fogerty , +1 212-908-0526 Source: Fitch Ratings

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