OREANDA-NEWS. Fitch Ratings has affirmed the 'BB-' rating on the following revenue refunding and improvement bond issued on behalf of Friendship Village of Columbus (FVC), Ohio:

--\$14,460,000 Franklin County, Ohio series 1998.

The Rating Outlook is revised to Positive from Stable.

SECURITY

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

KEY RATING DRIVERS

IMPROVED PROFITABILITY: The Positive Outlooks reflects the continued improvements in operating profitability, with net operating margin adjusted increasing from 5.7% in fiscal 2013 to 17.6% in fiscal 2014 and 21.3% in the six-month interim period ending Dec. 31, 2014 (the interim period). The improved profitability primarily reflects continued cost management initiatives.

MODERATE DEBT BURDEN: FVC's debt burden remains moderate with maximum annual debt service (MADS) equal to 8.4% of revenues in fiscal 2014. Improved operating profitability increased debt service coverage since fiscal 2013 when weak operating performance resulted in a rate covenant violation. MADS coverage increased from 0.9x in fiscal 2013 to 2.2x in fiscal 2014 and 2.9x in the interim period.

LIGHT ILU OCCUPANCY: Independent living unit (ILU) occupancy remains light, decreasing from 78% in fiscal 2013 to 74% in the interim period, reflecting increased attrition. However, assisted living (ALU) and skilled nursing (SNF) occupancy were solid at 97% and 87%, respectively.

LIGHT LIQUIDITY: Despite improved absolute levels, unrestricted liquidity remains light with 39.6% cash-to-debt and 4.0x cushion ratio at Dec. 31, 2014.

RATING SENSITIVITY

CONTINUED STRENGTHENING OF CREDIT PROFILE: Sustained operating profitability improvements and continued strengthening of unrestricted liquidity metrics would likely result in positive rating movement, pending further clarification of future capital plans.

CREDIT PROFILE

FVC, located in Columbus, OH, operates a type-A continuing care retirement community (CCRC) which consists of 220 ILUs, 63 ALUs, and 80 skilled nursing beds. Total operating revenue equaled \$16.5 million in fiscal 2014.

FVC appointed a new executive director in July 2013 who subsequently initiated operating improvement and cost management initiatives. Additionally, the community hired a new management company, United Church Homes, effective Jan. 1, 2015, to assist with continued operating improvement initiatives. The prior management company (Life Care Services) had managed FVC since its inception.

IMPROVED PROFITABILITY

Operating profitability continues to improve, reflecting the new management team's cost control initiatives. Operating expenses decreased 5.4% in fiscal 2014 while 6.5% revenue growth in the interim period exceeded operating expense growth of 4.9%. Operating ratio declined from 107.1% in fiscal 2013 to 96.1% in fiscal 2014 and 93.9% in the interim period. Similarly, net operating margin adjusted improved from 5.7% in fiscal 2013 to 16.6% in fiscal 2014 and 21.3% in the interim period, exceeding Fitch's 'BBB' category median of 20.4%.

MODERATE DEBT BURDEN

FVC's debt burden remains moderate with MADS equal to 8.4% of fiscal 2014 operating revenue comparing favorably to Fitch's 'BBB' category median of 12.3%. Coverage metrics have improved significantly since fiscal 2013 when weak profitability and high entrance fee refunds resulted in a rate covenant violation. The covenant violation resulted in a mandatory consultant call-in. MADS coverage improved from 0.9x in fiscal 2013 to 2.2x in fiscal 2014 and 2.9x in the interim period, exceeding Fitch's 'BBB' category median of 2.0x. Additionally, revenue-only MADS coverage improved from 0.0x in fiscal 2013 to 0.8x in fiscal 2014 and 1.2x in the interim period. The improved coverage reflects the community's improved operating profitability.

LIGHT ILU OCCUPANCY

Despite the improved profitability, ILU occupancy remains light, decreasing from 78% in fiscal 2013 to 74% at Dec. 31, 2014. The decrease reflects increased attrition which offset move-ins. However, both ALU and SNF occupancy rates are strong with ALU occupancy equal to 97% at Dec. 31, 2014 and SNF occupancy increasing from 67% in fiscal 2013 to 87%. The improved SNF occupancy reflects increased marketing efforts at local hospitals.

LIGHT LIQUIDITY

Unrestricted cash and investments increased 19.6% since Dec. 31, 2013 to \$5.5 million at Dec. 31, 2014. Despite the improvement, liquidity metrics remain light but are consistent with the 'BB' category with 135 days cash on hand, 39.6% cash-to-debt and 4.0x cushion ratio. Capital spending is not expected to negatively impact liquidity or require additional debt in the near- to mid-term. However, management has engaged a consultant to assess the community's capital needs and to help develop a new master facility plan. Fitch will assess the updated capital plan as more details become available.

DISCLOSURE

FVC covenants to provide annual disclosure within 150 days of the end of each fiscal year and quarterly disclosure within 50 days of the end of each quarter. Disclosure is provided through the Municipal Securities Rulemaking Board's EMMA system.