[April 30, 2014]

Fitch Affirms Cathedral Village (PA) Revs at 'BBB-'; Outlook Stable

Fitch Ratings has affirmed the 'BBB-' rating on the following bonds issued on behalf of Cathedral Village (CV):

--$9,175,000 of Philadelphia Authority for Industrial Development revenue bonds (Cathedral Village Project), series 2013.

--$665,000 of Philadelphia Industrial Development Authority, PA revenue bonds (Cathedral Village Project), series 2003A and 2003B.

The Rating Outlook is Stable.

SECURITY

The debt is secured by a security interest in gross receipts and a first lien on and security interest in the facilities.

KEY RATING DRIVERS

IMPROVED MOVE-INS: CV's 26 move-ins through the eight month fiscal year (FY) 2014 (June 30 year end) interim period were better than FY 2013 and FY 2012 full year move-ins of 25 and 23, respectively. Move-ins have been helped by a reenergized marketing effort, including new materials and additional staff, and the use of a rental option. However, CV is nearing management's maximum number of rental contracts it will allow.

SLIGHT OCCUPANCY IMPROVEMENT: Independent living unit (ILU) occupancy has increased slightly in the interim period to 76.2% from 74.1% in FY 2013. CV continued to be impacted by elevated levels of turnover in FY 2013, with 41 units turning over. Fitch notes positively that turnover is significantly down, with only 12 turnovers for the first eight months of FY 2014. A sustained period of lower turnover could alleviate the stress on IL occupancy.

MANAGEABLE DEBT BURDEN KEY CREDIT STRENGTH: CV's debt burden remains manageable, with maximum annual debt service (MADS) as a percent of revenues of 9.6% in the eight-month interim, compared to Fitch's 'BBB' median of 12.4%. MADS coverage by turnover entrance fees has averaged 2 times (x) over the last four audited years, slightly above Fitch's category median of 1.9x. Additionally, a portion of CV's debt matures in 2016, which will drop MADS to $1.1 million from $2.3 million, further lightening CV's debt burden.

THIN FINANCIAL PROFILE: CV's liquidity and profitability metrics are below category medians, with liquidity particularly thin. However, CV's consistent net entrance-fee receipts and manageable debt burden help mitigate the weaker operating profile.

RATING SENSITIVITIES

OCCUPANCY IMPROVEMENT: Fitch expects CV's occupancy to show further improvement in the near to medium term. Further deterioration in occupancy could negatively affect the rating.

FUTURE CAPITAL NEEDS: While renovations at CV's health center, Bishop White Lodge, have been completed, CV still has capital needs for which CV management is in the planning phase. Fitch expects more information on the scope and timing of these projects over the next one to two years. CV has limited debt capacity at the current rating level, but the maturing of a portion of CV's debt in 2016, which will free up approximately $1 million in cash flow a year, does provide CV with some financial flexibility in pursuing the projects.

CREDIT PROFILE

Cathedral Village is a Type-A continuing care retirement community located in Philadelphia, PA. The community consists of 293 ILUs (50 of which are eligible to be utilized as assisted living) and 133 skilled nursing beds. In FY 2013, Cathedral Village had operating revenues of approximately $24.3 million.

IMPROVED MVE-INS

CV had an increased 26 move-ins through the eight-month interim period, compared to 25 and 23 move-ins in full year FY 2013 and FY 2012, respectively. Growth in the number of move-ins has been attributed to reenergized marketing efforts and patient outreach. A new director of marketing was hired in mid FY 2013, and several advertising personnel have been replaced in an effort to improve marketing operations. In addition, CV has created a marketing suite on campus and acquired a new marketing database that has been active since the beginning of FY 2014. A new rental contract has been added to expand options and entice additional prospects; a number of move-ins in the interim period is attributed to this new residency contract. However, CV's reaching its stated number of units it will allow under this option, which could pressure occupancy if sales are unable to improve.

SLIGHT OCCUPANCY IMPROVEMENT

ILU occupancy increased slightly in the interim period to 76.2% from 74.1% in FY 2013. The increase was in part due to a significant decrease in turnovers from 41 in FY 2013 to 12 in the eight-month interim period of FY 2014. Management is budgeting to reach 80% occupancy by FY 2015, and 89% occupancy by FY 2019, which Fitch views as feasible given the improved marketing efforts, and could be further helped if turnover levels continue to moderate over the new few years. Skilled nursing facility (SNF) occupancy was a low 58% due to the construction at Bishop White Lodge, which included the closing of a whole floor during renovation, but is expected to increase to 79% by FY 2015 now that renovations have been completed.

MANAGEABLE DEBT BURDEN KEY CREDIT STRENGTH

CV's debt burden remains manageable as total operating revenue of $15.6 million resulted in a MADS as a percent of revenue of 9.6% in the interim period, comparing well to Fitch's 'BBB' median of 12.4%. MADS coverage by turnover entrance fees has averaged 2x over the last four audited years, slightly above Fitch's category median of 1.9x. Coverage was 1.5x in the eight-month interim period of 2014, up from 1.3x in the same period of 2013. Additionally, a portion of CV's debt matures in 2016, which will drop MADS by more than 50% to $1.1 million, further lightening CV's debt burden. Renovations at Bishop White Lodge, which included the creation of a short-term rehabilitation unit and were financed in 2013 via $4.2 million bank loan, have been completed. Fitch views positively CV's creation of a separate rehab unit, and believes it will be financially accretive to the organization's financial performance. CV has additional capital plans in the medium term, which would be funded through further borrowing. Fitch believes that CV does not have room for additional debt at the current rating level, but notes that the debt decrease in 2016 may provide slight room for additional borrowing to support capital projects.

THIN FINANCIAL PROFILE

CV's low SNF occupancy contributed to stressed financial metrics in FY 2013 and in the eight-month interim period of 2014. CV's 83.6 days cash on hand, 30.5% cash to debt and 2x cushion ratio in the interim were all significantly below Fitch's 'BBB' medians of 371.3 days, 58.9% and 6.9x respectively. In addition, CV's net operating margin adjusted of 13% compared unfavorable to category median on 21.3%. However, CV's consistent net entrance-fee receipts help mitigate the organization's weak operating profile. Management is budgeting for a total of 38 move-ins for FY 2014 and Fitch believes that improved occupancy in the near to medium term should help improve liquidity and operating performance.

CONTINUING DISCLOSURE

Disclosure language requires annual audit within 120 days, quarterlies within 45 days, with balance sheet, income statement, cash flows, occupancy and annual budget. However, disclosure covenant requires that information be sent only to the Trustee, Underwriter, and Bondholders holding $1 million of more. CV discloses quarterly and annual audited financial results on EMMA.

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

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 (News - Alert) 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.

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