OREANDA-NEWS. Fitch Ratings has affirmed the 'BBB+' rating on the following Wisconsin Public Finance Authority bonds issued on behalf of Fellowship Senior Living (FSL):

--\$45,000,000 (Fellowship Senior Living) variable rate tax exempt revenue bonds series 2013A
--\$51,500,000 (Fellowship Senior Living) variable rate tax exempt revenue bonds series 2013B

The Rating Outlook is Stable.

SECURITY

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

KEY RATING DRIVERS

STRONG FINANCIAL PROFILE: FSL's financial profile is defined by solid operating results, with the major operating ratios above category medians throughout the four year historical period, consistent, near median level maximum annual debt (MADS) service coverage, and good days cash on hand.

HIGH OCCUPANCY: The solid financial profile is supported by high occupancy across all levels of care. Occupancy has been consistently in the mid-90% through most of the historical period. In the 2014 nine month interim period, independent living (IL), assisted living (AL) and skilled nursing occupancies were 95%, 97% and 93%, respectively.

PROJECT START DELAYED: FSL has encountered delays in starting a large capital project. The project, which includes construction of a new AL/skilled nursing building, expansion and renovation of existing AL/skilled nursing units, construction of a new 240-seat multi-purpose theater, and renovation of the main entryway, has been delayed as FSL is waiting final project approval from the township. While the delay is a concern, FSL was able to postpone the drawing down of funds from a bank loan that will be used to finance the project -- a total of \$45 million will be borrowed -- and the delay in approval has been largely due to administrative process and not to issues specific to the project.

ELEVATED DEBT BURDEN: The \$45 million bank loan increased FSL's debt burden. Pro forma MADS as a percent of revenue at September 30, 2014 of 18.2% was above Fitch's 'BBB' median of 12.3%. However, pro forma MADS coverage by turnover entrance fees remained solid at 2x for the same time period.

GOOD MARKET POSITION: FSL benefits from its location in Basking Ridge, New Jersey, an affluent suburb with household income and housing prices well above state and national averages. FSL's entrance fees are consistent with the area housing prices and competition, while present, is manageable.

RATING SENSITIVITIES

PROJECT COMPLETION: Given FSL's current financial profile, Fitch believes the project risk is manageable at the current rating. However, there are credit concerns until the projects are completed and the new units are put into service. Over the longer term as FSL grows into its debt, there is potential for positive rating pressure should occupancy and financial performance stay steady and liquidity continue to grow. Management now expects to receive approval by fall 2015 with project completion by the end of 2018. A further delay in starting the project would be a credit concern.

Credit Profile

Located in Basking Ridge, NJ, Fellowship Senior Living is a senior living organization with several distinct service lines. Fellowship Village (FV) is FSL's continuing care retirement community (CCRC), offering a Type-A, life care and a Type-B contract. FV has 257 IL units, 81 AL units and 54 skilled nursing beds. FSL's other service lines include Fellowship Senior Living at Home, which is a CCRC 'without walls', and Fellowship Helping Hands, a home health agency. Total operating revenues were approximately \$36.2 million fiscal year 2013 (Dec. 31 fiscal year end).

Financial Performance

In the 2014 nine month interim period, FSL had an 87.1% operating ratio and 32.1% net operating margin - adjusted, both of these are consistent with historical performance and compare well to Fitch's 'BBB' category medians of 97.4% and 20.4%, respectively. The strong net operating margin adjusted reflects solid net entrance fee receipts (\$6 million in the FY14 interim period), and FSL has averaged a strong \$8.2 million in net entrance fee receipts for the last four audited years.

High levels of occupancy across the continuum of care continue to support the strong operating performance. Since 2007, FSL's IL and skilled nursing occupancy has remained above 90%, with IL occupancy mostly at or above 95%. Assisted living has been somewhat more volatile, ranging from 86% to 100%, but has been steadier in recent years and was 97% at September 30, 2014. FSL's skilled nursing payor mix is good as well, with Medicare representing between 25 to 30% of skilled nursing revenue. FSL does not take Medicaid.

FSL has made progress in its goal to diversify its revenues through a number of initiatives, including a CCRC without walls and a home health agency. Both programs started up within the last five years. Home health volumes have grown very well and that has been a key driver of top line revenue growth. Total operating revenue grew by 8% from 2012 to 2013.

FSL's CCRC without walls has about 35 participants. A change in leadership in 2014 slowed program enrollment, but FSL management reports that it should have good gains in enrollment in 2015, as reflected by the strong turnout and interest at recent sales events. FSL needs approximately 100 to 150 enrollees for the program to be financially viable.

Good Liquidity Growth

FLS has steadily strengthened its balance sheet over the four year historical period. At Sept. 30, 2014, FSL had \$41.6 million in unrestricted cash and investments, up from \$34.8 million at year end 2010. FSL's days cash on hand of 557, its cushion ratio of 6x, and its cash to debt of 80.3%, all compare well with category medians. Cash to debt will weaken as FSL draws down the bond funds for the project. And further cash growth will be suppressed in the near term as FSL contributes a total \$10 million to the capital project over the next three years.

Capital Projects

FSL plans to construct a new AL and skilled nursing building, expand and renovate its existing AL and skilled nursing units, build a new 240-seat multi-purpose theater, undertake an extensive renovation of its main entryway, and complete smaller landscaping and capital projects around the campus. These capital projects will be funded by the \$45 million series 2013A bonds, \$8 million in equity, and \$2 million in philanthropy. Approval for the project from the township has delayed the start of the project. Fitch expects the project to move forward within the next nine months. However, a delay beyond that timeframe could create a credit concern.

The newly constructed AL/skilled nursing building, which will be built contiguous to the current building, will have floor plans designed using the household care model, which is a more people centered approach to care, and will include a new dedicated dementia unit, with outdoor space. The number of units will also expand, with AL increasing to 92 beds from 81, including memory care increasing to 37 from 14, and skilled nursing beds increasing to 67 from 54.

Fitch believes that while the projects increase FSL's leverage and exposes the organization to construction risk, the capital improvements should position FSL well to remain competitive for the longer term. The new entrance and auditorium will provide an attractive upgrade to the campus and the additional programming should help marketing efforts. The new model of care and redesign of the AL and skilled nursing reflect current trends in long term care. Once these projects are completed, capital spending is expected to be manageable as FSL's current campus will be largely built out.

Debt Profile

FSL has two series of bonds, which were issued in 2013 and privately placed. The series 2013A bonds have a par of \$45 million and bond proceeds have yet to be drawn upon for the capital projects due to the delay. The series 2013B has a par of \$51.5 million and was used to refund all of FSL's outstanding long term debt. Both series of bonds are variable rate, and FSL pays 65% of LIBOR + 120bps. The debt is hedged with two fixed payor swaps, executed with two separate counterparties, and the net rate is fixed at 3.377%.

The bonds have a mandatory put date of Dec. 1, 2023 and amortize over 21 years. Debt service is slightly lower in the first few years at approximately \$5.5 million then increases to approximately \$6.9 million from 2018 to 2027, after which it drops back to the \$5.5 million.

FSL's debt metrics will be stressed in the near term until the projects generate additional revenue. Mitigating concerns has been FSL's solid coverage of the \$6.9 million MADS figure, which stood at 2.3x in 2013 and 2x in the nine month 2014 interim period, compared to the 'BBB' category median of 2x. Fitch also expects the high leverage to ease as the projects are completed and come on line. In addition, FSL is paying approximately \$3 to 5 million a year in principal, as its debt amortization is short at 21 years, and this will also help reduce leverage over time.