Fitch Affs New Jersey Economic Development Auth (Crane's Mill) Bonds at 'BBB-'; Outlook Stable

NEW YORK - (BUSINESS WIRE) - Fitch Ratings affirms the following New Jersey Economic Development Authority (Crane's Mill Project) bonds at 'BBB-':

--$16.2 million fixed-rate revenue bonds, series 2008A;

--$22.4 million variable-rate revenue bonds, series 2008B*;

--$14.5 million fixed-rate revenue refunding bonds, series 2005A;

--$14.5 million variable-rate revenue refunding bonds, series 2005B*.

*Underlying ratings. Variable rate bonds are backed by letters of credit (LOCs) from TD Bank, N.A. (rated 'AA-/F1+' by Fitch).

The Rating Outlook is Stable.

The 'BBB-' rating is based on Lutheran Social Ministries at Crane's Mill's (Crane's Mill) excellent occupancy, strong operating performance, and sound liquidity relative to expenses. Through May 31, 2009, Crane's Mill's occupancy remains solid with occupancy in the independent living units (ILUs) at 94%, the assisted living units (ALUs) at 85%, and skill nursing facility (SNF) at 97%. The high occupancy is consistent with the last three years and continues to support strong operating results, which has also been excellent over the last three years. In 2008, Crane's recorded a 93.1% operating ratio (excluding invest income) and a 9.8% excess margin, strong relative to the 'BBB' category. Crane's Mill had 472 days cash on hand (DCOH), based on $22.5 million in unrestricted cash and investments as of May 31, 2009. While this is a decline from year end 2008, when DCOH stood at 513 days, it is still strong liquidity relative to expenses for the 'BBB' category. Crane's Mill investment portfolio is fairly conservative with no alternative or hedge fund exposure and less than 30% of its investments in equities.

Fitch's main credit concerns are presales and fill-up for Crane's Mill's current expansion project. The project, which includes the building of 66 independent living units (ILUs) and 10 cottages, and the renovation of 12 existing ALUs and the adding of six ALUs, is expected to be completed by January 2010, with fill-up to start in March. Crane's Mill met its presale requirement of 60% in June 2008 to be able to begin construction; however, since that time sales have been flat with the presale list currently standing at 65%, with 49 out of a total of 76 units pre-sold. Along with the flat sales, Fitch is also concerned about Crane's Mill's ability to convert the 49 members on the presale list to residents given the continued downturn in both the general economy and the housing markets. While members of the list have put down a deposit of the lesser of $25,000 or 10% of the unit price, this amount is fully refundable should prospective residents decide not to convert and move in. If Crane's Mill experiences difficulties in filling up the new units, either through a lack of new sales or lower than expected conversion of current depositors, negative rating pressure could occur.

Mitigating these risks are Crane's Mill continued strong occupancy though the current difficult economy, the significant number of members of the list, 41 of 49, who requested customization of units (a positive indicator of the likelihood of conversion since payments for customizations are non-refundable), and the 2008B bonds not being including in debt covenant calculations until either 80% occupancy or four years after bond issuance, June 2012. Actual debt service coverage in 2008 of $2.2 million was adequate at 1.8 times (x), while maximum annual debt service coverage, $4.1 million, which includes the 2008B bonds, would have dropped coverage to 1.0x.

A second credit concern over the near term is Crane's Mill conversion of its residency contracts from a predominately type 'A' contract to a predominately type 'B' contract. As units turnover during this transition, Crane's Mill will be refunding type 'A' entrance fees which will be higher than the type 'B' entrance fees they will be receiving from the incoming residents. This differential will suppress operating results in the near-term and stress coverage figures, but in the medium- to long-term it should lower Crane's Mill's overall risk profile as health care liability should be diminished.

The Stable Outlook reflects Crane's Mill's solid occupancy and strong operations, which should continue over the near-term, as well as Crane's Mill's ability to fill the new units over the next two years.

Crane's Mill has two series of variable rate demand bonds and two associated swaps that synthetically fix the variable rate debt. The variable rate debt is supported by LOCs from TD Bank, N.A. The LOCs expire in 2013. Crane's Mill plans to refund one series of the variable rate debt with entrance fees from the new ILUs, and has adequate liquidity to cover a put on the other series. Bank bond provisions are for ongoing interest payments with the principal due upon the expiration of the LOC. However, to date the bonds have been regularly remarketed. Both swaps have no collateral posting requirements and will expire over the next few years, one in 2010, the other in 2013. The mark-to-market on the swaps as of Dec. 31, 2008 was (-$831,000).

Located in West Caldwell, NJ, Crane's Mill is a type A and type B continuing care retirement community consisting of 205 ILUs, 60 assisted living units, and 66 nursing beds. In fiscal 2008, Crane's Mill had total revenues of $20.8 million. Crane's Mill has covenanted to provide to the Nationally Recognized Municipal Securities Information Repositories (NRMSIRs) annual audited financial statements within 120 days of its fiscal year end and un-audited financial statements within 45 days of each fiscal quarter.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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 Ratings
Gary Sokolow, +1-212-908-9186 (New York)
Jim Mitchell, +1-813-222-1395 (Tampa)
Media Relations:
Cindy Stoller, +1-212-908-0526 (New York)
cindy.stoller@fitchratings.com