Fitch Affirms Royal Oaks Life Care Community (Arizona) at 'A'; Outlook Stable.

CHICAGO -- Fitch Ratings has affirmed the 'A' underlying rating on the $18,750,000 Arizona Health Facilities Authority (Royal Oaks Life Care Community Project), series 2002 variable-rate demand bonds. The bonds are supported by a letter of credit (LOC) provided by LaSalle Bank National Association (rated 'AA-/F1+' by Fitch). The Rating Outlook is Stable.

The rating affirmation is based on Royal Oaks Life Care Community's (ROLC) substantial liquidity position, solid historical occupancy, strong debt service coverage, and desirable service area demographics. For the fiscal year ended Feb. 28, 2007, ROLC's unrestricted cash and investments totaled $42.1 million which equates to 933 days cash on hand (DCOH), a cushion ratio of 27.2 times (x), and cash to long term debt of 224%. For analytical purposes, Fitch has used the consolidated financial statements, which include the assets of a non-obligated foundation that held approximately $8.8 million of unrestricted cash and investments at Feb. 28, 2007. (Excluding the Foundation assets, ROLC's DCOH, cushion ratio and cash to debt ratios would be 738, 21.5%, and 177%, respectively.) Occupancy of ROLC's 373 independent living units has exceeded 95% in each of the last four years. In addition, an active wait list of 417 potential residents allows ROLC to quickly turn over vacated units. Debt service coverage in fiscal 2007 was a strong 5.0x. (1.3x excluding entrance fee receipts) Fitch views Royal Oaks' location in Sun City, AZ, favorably as it contains a significant age and income qualified elderly population from which to draw potential residents along with numerous amenities and benefits available to residents.

Fitch's primary credit concern is ROLC's expected renovation and remodel of the dining and fitness areas. The Board of Trustees has approved a $12 million capital project that will add a new Health and Wellness Center, renovate the dining areas to provide additional dining venues, expand and upgrade the kitchens and upgrade certain portions of the HVAC systems. The project, which will be funded internally, is expected to begin in February 2008 and last 14 months. In addition, Fitch views the Phoenix metropolitan area as being moderately to highly competitive with many experienced CCRC (community care retirement center) operators offering a high degree of choice to the senior population. Although ROLC is the only CCRC in Sun City, management has identified 5 other retirement facilities within the primary market area (PMA).

The Stable Outlook reflects Fitch's expectation that ROLC will maintain solid liquidity and operating ratios over the near term. While the renovation project poses some near-term operating risk, Fitch believes that risk is mitigated by ROLC's seasoned management team and substantial balance sheet strength. Fitch views the reinvestment in physical plant as necessary to keep the community fresh and attractive to the future generation of potential residents. Upon successful completion of the renovation/ expansion project, an upward movement in the ratings may be warranted.

Although ROLC is not required to provide ongoing disclosure to bondholders under its 2002 variable-rate indenture, disclosure to Fitch has been excellent. The disclosure package has been received on time and includes a management discussion and analysis as well as annual audited financial statements and quarterly unaudited reports.

Located in Sun City, AZ, Royal Oaks Lifecare Community is a 'Type A' CCRC (Life Care) and currently operates 373 independent living units, 59 assisted living beds and 122 skilled nursing facility beds. In fiscal 2007, Royal Oaks reported total revenues of $21.5 million.

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