Fitch Affirms John Knox Village (MO) Bonds at 'A-'; Outlook Revised to Negative.

CHICAGO -- Fitch Ratings has affirmed the 'A-' rating on the John Knox Village's $36.6 million outstanding bonds (listed below) issued through the Industrial Development Authority of the City of Lee's Summit, Missouri. The Rating Outlook is revised to Negative from Stable.

The 'A-' rating is supported primarily by John Knox Village's (JKV) modest debt burden, solid coverage of maximum annual debt service (MADS), moderate competition, and strong management practices. JKV is the largest continuing care retirement community (CCRC) in the greater Kansas City metropolitan area, offering a total of 1,335 independent living units (ILUs). JKV's current long-term debt equates to roughly $27,226 of debt per ILU with MADS as a percentage of revenue of only 6.9%. Coverage of MADS has been consistent over the last five years ranging between 2.9 times (x) and 2.0x. Moreover, Fitch views positively JKV's revenue-only coverage over the same time period in excess 1.0x. Although the Kansas City market is considered very competitive, JKV has no direct competitor within 5 miles of its campus and only one continuum of care competitor within 10 miles. In addition, most of the recent CCRC development has occurred in Kansas where JKV has drawn only 10% of their current resident population. Finally, JKV has benefited from a very seasoned management team that has been in place for more than 10 years. Management has been successful at maintaining occupancy while implementing a long-term repositioning of the campus through consolidation of small studio units into larger one- and two-bedroom units.

Credit concerns include issuance of additional debt in the next 12-18 months, the large number of small studio units remaining, and liquidity indicators that are below Fitch's 'A' medians. JKV has a $14 million bank line of credit which it intends to use to fund the combining of 60 existing smaller units into 34 entrance-fee one- & two-bedroom apartments, 22 new Alzheimer's assisted living units, common area renovations in the skilled nursing facility, and other improvements. A series 2007 bond issue would be used to repay advances under the line of credit as well as borrow additional moneys to fund general campus improvements. Currently, 31% of JKV's total independent living units are studio units measuring less than 450 square feet. Management will have to balance the effect of taking units off-line versus achieving profitability. JKV's liquidity indicators are below Fitch's 'A' medians. As of Dec. 31, 2005, JKV's days cash on hand of 217 and cash-to-debt of 73% are weak as compared to the 2005 'A' medians of 617 and 135%, respectively.

The Negative Outlook reflects the expected weakening of JKV's balance sheet from the planned incurrence of additional debt. Fitch expects JKV to have additional capital needs beyond 2007 both to add new units and continue unit reconfiguration. Fitch notes that the impact of any new debt on JKV's annual debt service requirement could be moderated through refunding existing debt and lengthening out debt amortization.

JKV is a CCRC with 1,335 ILUs, 119 assisted living units, and 400 available skilled nursing care beds located in Lee's Summit, MO, approximately 20 miles southeast of Kansas City. JKV had total operating revenues of $57.8 million in fiscal 2005. While JKV does not distribute quarterly information to the NRMSIRs, it has covenanted to provide to the trustee and direct to any requesting bondholder quarterly financial disclosure including balance sheet, income statement, cash flow statement, management discussion & analysis, and utilization statistics within 60 days of each quarter-end and audited financial and utilization information within 120 days of each year-end. JKV has covenanted to provide to each NRMSIR annual financials within 180 days of each fiscal year end.

Outstanding Debt:

-- $15,355,000 Industrial Development Authority of the City of Lee's Summit, Missouri health facilities revenue bonds (John Knox Village) series 2002 'A-';

-- $10,300,000 Industrial Development Authority of the City of Lee's Summit, Missouri health facilities revenue bonds (John Knox Village) series 1999 'A-';

-- $9,125,000 Industrial Development Authority of the City of Lee's Summit, Missouri health facilities revenue bonds (John Knox Village) series 1995 'A-'.

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.