Fitch Rates Army Residence Community's (TX) Rev Bonds 'BBB+'; Upgrades Outstanding.

NEW YORK -- Fitch has assigned a 'BBB+' rating to approximately $26.585 million Bexar County Health Facilities Development Corp. (TX) (Army Retirement Residence Foundation Project) refunding revenue bonds, series 2007. Fitch has also upgraded to 'BBB+' from 'BBB' the rating on the outstanding $21.3 million Bexar County Health Facilities Development Corporation revenue bonds (Army Retirement Residence Foundation Project) series 2002. The Rating Outlook is revised to Stable from Positive.

The series 2007 bonds will be issued as uninsured traditional fixed-rate bonds and are expected to sell during the week of Jan. 8, via negotiation led by Raymond James. Bond proceeds will be used to refund the entire outstanding series 2002 bonds ($20.3 million), fund various projects and enhancements to the retirement community ($2.6 million), reimburse for prior capital expenditures ($2.4 million), and to pay for the costs of issuance.

The upgrade to 'BBB+' reflects the Army Retirement Community's (ARC) unique market niche, strong demand for services, strong liquidity, and improved profitability. The ARC's primary strength remains its strong demand as it serves a unique market niche. ARC is only one of approximately eight to ten continuing care retirement communities (CCRCs) nationwide that exclusively serve retired military officers. Demand for services remains strong, with occupancy consistently at or above 97% in its 387 independent living units (ILUs) over the last 12 years. In addition, 29 of the 30 assisted living units (ALUs) are currently occupied and occupancy of the ALUs has been maintained above 90% since fiscal 2003. Fitch believes high occupancy rates should continue due to increasing nationwide demand for retirement housing for military officers and personnel, ARC's solid reputation, and its deep priority and wait lists numbering 474 and 145 applicants, respectively.

Strong demand and turnover rates combined with management expense control initiatives have led to solid liquidity growth and improved operating profitability over the last three fiscal years. Liquidity indicators are strong with cash and investments increasing to $24.2 million at Sept. 30, 2006 (including reimbursement from bond proceeds) compared to $11.3 million at June 30, 2002. On a pro-forma basis, ARC's 561 days cash on hand and cash to debt of 90% compare favorably to Fitch's 'BBB' category median ratios of 292 days cash on hand and cash to debt of 96%. Profitability levels also improved as ARC posted a net income of $488,000 in fiscal 2005 and $2.7 million in fiscal 2006, which resulted in an excess margin of 2.9% and 14.2% respectively. Investment income in fiscal 2006 was favorably affected by a one-time gain related to the liquidation of the investment portfolio due to a change in investment managers. Normalizing investment gains in fiscal 2006 would have resulted in an excess margin of 6.2%. ARC had an excess margin of 2.6% through the three months ended Sept. 30 2006 and is budgeting for a 3.6% margin for fiscal 2006. Maximum annual debt service (MADS) coverage improved to 2.3 times (x) in fiscal 2005 and 2.4x normalized in fiscal 2006. Increased unit turnover has resulted in strong net advance fees received of $2.9 million in fiscal 2005 and projected $2.3 million in fiscal 2006. In addition, expense growth has been modest over the last two and a half years.

Primary credit concerns include future capital needs and competition from military focused (and non-military focused) CCRCs. ARC's average age of plant is high at 13 years, which indicates the need for future capital expenditures. In addition, ARC faces both local and national competition due to its military focus, competing against a number of CCRCs in the primary market area, two of which are military focused.

The Stable Rating Outlook reflects ARC's strong demand for services, which remains supported by the organization's solid regional and national reputation in serving a unique market niche. While ARC's capital needs are expected to increase given the community's high age of plant and capacity needs, Fitch does not anticipate any major expansions to occur over the next three years.

ARC is a Type A CCRC for retired military officers located in San Antonio, TX with 386 ILUs, 30 ALUs, and 91 nursing care beds (including 18 dementia care). In fiscal 2006, ARC had total revenue of $17.3 million. ARC covenants to provide annual audited financials and quarterly disclosure to bondholders, which are disseminated through the NRMSIRs. Quarterly disclosure includes a balance sheet, income statement, cash flow statement, occupancy statistics and management discussion and analysis.

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