OREANDA-NEWS. Fitch Ratings has assigned a 'BBB-' rating to the expected issuance of the following Buffalo and Erie County Industrial Land Development Corporation bonds issued on behalf of Orchard Park CCRC, Inc. d/b/a Fox Run at Orchard Park (Fox Run):

--\$47,255,000 revenue refunding bonds, series 2015 (Orchard Park CCRC, Inc. Project)

The Rating Outlook is Stable.

The series 2015 bonds are expected to be issued as fixed rate. Bond proceeds will be used to refund Fox Run's outstanding series 2006A bonds, fund a variety of capital projects, fund a debt service reserve fund, and pay cost of issuance. Maximum annual debt service (MADS), which was provided by the underwriter, is expected to be \$3.3 million. The bonds are expected to be sold via negotiation within the next month.

Security
Pledge of gross revenues, a mortgage, and a debt service reserve fund.

KEY RATING DRIVERS

STRONG OPERATING METRICS: Over the past four audited years, Fox Run at Orchard Park's (Fox Run) operating ratio has averaged 95.3% and its net operating margin - adjusted at 34.1%, both stronger than Fitch's 'BBB' category medians of 97.4% and 20.4%, respectively. The solid underlying operating performance has produced strong revenue-only coverage of 1.1x in fiscal 2014, which is particularly strong for a Type 'A' contract facility.

MIXED LIQUIDITY INDICATORS: Fox Run's days cash on hand (DCOH) of 479 is strong reflecting, in part, its small revenue base (\$14.9 million in 2014). Cash to debt of 40.3% and pro forma cushion of 5.1x at March 31, 2015 are weak relative to the respective 'BBB' category medians of 60.2% and 6.9x. However, since 2011, Fox Run's absolute cash and investment level has more than quadrupled to \$16.5 million at March 31, 2015, reflecting the improving occupancy and strong core operating performance.

SOLID OCCUPANCY: Fitch views Fox Run's current occupancy levels as a credit strength. Fox Run opened and was filling up at the height of the recession in 2008 but struggled, with IL occupancy at just 65% in 2010. The current management was brought in at approximately that time and has significantly improved sales and marketing, leading to improved occupancy. At March 31, 2015, independent living (IL) occupancy was at 92%, assisted living/memory care occupancy was 87%, and skilled nursing occupancy was 96%.

HIGH DEBT BURDEN: Fox Run's debt burden is elevated as indicated by MADS as a percent of 2014 revenue of 21.9% compared to the 'BBB' category median of 12.4%.

RATING SENSITIVITIES

CONTINUED TREND IN PERFORMANCE: Fitch expects Orchard Park CCRC, Inc. d/b/a Fox Run at Orchard Park to maintain its current levels of performance, with IL occupancy remaining above 90%, liquidity continuing to grow, and the debt burden continuing to moderate. Continued growth in liquidity and improvement in debt service coverage could lead to an upgrade over the medium term. A sustained fall-off from current levels of performance or a drop in liquidity could lead to negative rating pressure.

CREDIT PROFILE
Opened in 2007, Fox Run operates a not-for-profit life-care community in Orchard Park, NY, which is located just south of Buffalo. Fox Run has 180 IL units (30 patio homes and 150 apartments), 52 assisted living (AL) suites (including 18 memory care units) and 50 skilled nursing beds. Total operating revenues in 2014 were \$14.9 million.

The 'BBB-' reflects Fox Run's improved occupancy levels, solid operating metrics, and limited capital needs which are offset by mixed liquidity indicators and a high debt burden. The high debt burden will pressure Fox Run to maintain its improved level of IL occupancy in order to maintain its current level of operating performance.

Solid Operating Metrics
In 2014, Fox Run produced a 91.9% operating ratio and a 33.9% net operating margin - adjusted, both strong for the rating level. The operating ratio is particularly strong for a Type 'A' contract facility and reflects good expense management on the part of Fox Run management, as well as the improved levels of occupancy. First-quarter 2015 (1Q15) results show a 90.9% operating ratio and a 21.7% net operating margin - adjusted. Net entrance fee receipts were slightly negative in 1Q15, resulting in a lower net operating margin - adjusted. However, Fitch believes this is due more to timing on entrance fee receipts and lower turnover as IL occupancy has remained above 90%.

After slow fill upon opening in 2007, Fox Run has sold nearly all of its original units, collecting approximately \$13.3 million in initial entrance fees over the last four years. These funds have helped build Fox Run's balance sheet, and Fox Run has used those initial entrance fees as funds available for debt service, once it paid down a series of short-term variable-rate bonds. Including these initial entrance fees, Fox Run reported debt service coverage over 2x through the four-year historical period.

Fitch's analysis focused more on coverage with just turnover entrance fees and that coverage was weaker, averaging 1.4x through the four-year historical period but improved to 1.6x in 2014. The improved coverage in 2014 reflected a higher level of net entrance fee receipts on turnover units in 2014, which grew to \$1.8 million from \$1.2 million in 2013. With the vast majority of the initial units filled, Fitch expects Fox Run's net entrance fee receipts on turnover units to increase as residents begin to age through the continuum of care and a normalized pace of turnover and refill begins to occur. However, since Fox Run is a young facility, inconsistency in the level of turnover over the near term is a concern and could impact coverage.

Partially mitigating this concern is Fox Run's strong revenue-only coverage, which has been above 1x three out of the last four years. However, the high debt burden does pressure Fox Run to maintain this strong level of operating performance.

At year-end 2011, Fox Run had unrestricted cash and investments of only \$4 million, which equated to a very thin 126 DCOH, a 1.2x pro forma cushion ratio, and 9% cash to debt. At March 31, 2015, unrestricted cash and investments had grown to \$16.6 million, equating to 479 DCOH, a 5.1x pro forma cushion ratio, and 40.3% cash to debt, which are mixed relative to the 'BBB' category medians but consistent with the 'BBB-' rating. With the initial units filled, Fitch does not expect Fox Run's unrestricted liquidity to continue to grow at the current pace, but even modest cash growth would be accretive to Fox Run's current unrestricted liquidity position, further strengthening its credit profile.

Early Struggles/Improved Market Position
Fox Run struggled early in its history, as the campus opened in late 2007 and was filling up at the height of the recession in an area unfamiliar with the continuing care retirement community (CCRC) product. As a result, 70% of Fox Run's original depositors either requested a refund or delayed entry and this caused operational and liquidity stress in the first few years of operations. The current management team was brought in and slowly turned operations around and revamped the marketing efforts. A re-pricing of the patio homes, which took a long time to sell, also helped begin to improve occupancy and cash flow. The strong trend in operational performance and occupancy over the last four years has allowed Fox Run to begin to distance itself from its early struggles.

Fitch views Fox Run's current market position as a credit positive. Fitch visited the campus and found an attractive campus, with an appealing layout and entryway. The campus has larger IL units, a dementia unit, a pool, and a sizable casual bistro off the main entrance, all items many older CCRCs have had to invest in in recent years.

While service area demographics are mixed, Fox Run is in a demographically stronger part of the larger service area of Erie County (Fitch rates GO bonds 'A'/Positive Outlook) and housing prices in Fox Run's primary service area are generally higher than the rest of market. Erie County's rating had been as low as 'BBB-' through 2007 and 2008, reflecting the stress in the local economy at that time. Competitively there is only one other CCRC located approximately 17 miles away from Fox Run and a handful of other facilities that provide some senior living services but not the full continuum of care nor a Type 'A' lifecare contract.