Fitch Rates Saint John's Communities, Inc., Wisconsin Bnds 'BBB'; Outlook Stable.

TAMPA, Fla. -- Fitch Ratings assigns an underlying 'BBB' rating on the approximately $17.5 million Wisconsin Health and Educational Facilities Authority adjustable-rate put option revenue bonds, series 2005 (Saint John's Communities, Inc.). The Rating Outlook is Stable. In addition, Fitch affirms the 'BBB' rating on the approximately $13 million outstanding series 1997 bonds, which will be entirely refunded with this issuance for an estimated net present value savings of $1.7 million, or 10.8% of the refunded bonds. Saint John's Communities, Inc. (St. John's) also has $4.3 million series 2003 variable-rate demand bonds outstanding, which Fitch does not rate. The entire outstanding 2003 bonds also will be refunded.

The series 2005 bonds will be issued as insured floaters with a liquidity facility provided by M&I Marshall & Ilsley Bank. The bonds are expected to be insured by Radian, whose insurer financial strength is rated 'AA' by Fitch. In addition, Fitch is expected to assign a short-term rating on the series 2005 bonds based on the liquidity provider at a later date. The initial term of the liquidity facility is one year and St John's must notify the liquidity provider of its intent to renew no later than 180 days prior to the expiration date. Term-out provisions in the event of an unremarketed put include mandatory redemption in monthly installments equal to 1/60th of the outstanding principal amount. Bond proceeds will be used to refund all of St. John's existing debt, fund a debt service reserve, pay the premium for the bond insurance policy, and pay costs of issuance. The bonds are expected to price on Oct. 26th via negotiation with Ziegler Capital Markets Group. Saint John's capital structure at closing will be 72% synthetic fixed and 28% variable rate.

The underlying rating is supported by a strong balance sheet, improved financial performance and debt service coverage through the second quarter ended June 30, 2005, excellent location and community history in Milwaukee, and recently completed facility renovations that accomplished a campus repositioning. Saint John's balance sheet is highlighted by excellent liquidity for the rating category with days cash on hand of approximately 415 days and cash to debt of 104% at June 30, 2005. These levels compare favorably to Fitch's 'BBB' medians of 278 days and 57%, respectively. Financial performance has begun to show improvement since the completion of the St. John's on the Lake (the main campus) facility renovation in May 2004. Although the facility did not experience improved occupancy immediately after the renovation as management had anticipated, that improvement is now underway and has had a positive impact on financial performance and cash flow. Net income for the second quarter ended June 30, 2005, was negative $102,000, which was $340,000 favorable to the same period last year and ahead of budget. In addition, net advance fees received was strong at $2 million in the six months ended June 30, 2005. Debt service coverage for fiscal 2004 was 1.3 times (x), up significantly from 2003 when St. John's recorded coverage below 1.0x due to poor entrance fee receipts and weak occupancy during a major renovation project. Despite the low coverage in 2003, St. John's did not have a rate covenant violation due to the 'major construction period' exception per the indenture. Debt service coverage through the first six months of fiscal 2005 is a strong 3.5x. Fitch expects debt service coverage will stabilize in the 2.0x range over the near term. Saint John's Communities, Inc. continues to enjoy a favorable reputation in the community due to its long history and favorable location.

Credit concerns include the volatility in St. John's recent financial performance, and the high Medicaid payor mix at the Sunrise Care Center. St. John's has been negatively affected by low turnover of independent living units, which is inherent in all type A CCRCs (continuing care retirement communities). However, St. John's results are prone to wider variations due to lower absolute number of ILUs (independent living units) combined with a higher proportion of nursing units. Moreover, given the high Medicaid mix at the Sunrise Care Center, the organization's results may be pressured due to declining state reimbursement rates. Fitch believes that Sunrise Care Center will be challenged to maintain its favorable financial performance in the future.

The Stable Rating Outlook reflects the expectation that Saint John's financial performance should improve due to the completion of the project and stabilization of the census at the main CCRC campus.

In connection with this financing, St. John's will enter into a floating-to-fixed-rate swap with Lehman Brothers as counterparty. Saint John's will receive a variable rate based on 67% of LIBOR and will pay a 3.40% fixed rate. The notional amount equals $12,300,000 and will match the amortization of the series 2005 bonds from 2006 through 2018. The $4,800,000 of the 2005 bonds that amortize in 2019 through 2022 will be unhedged in a floating-rate mode. Swap documents have not yet been provided to Fitch and it is assumed that swap payments will be insured by Radian. Fitch views the swap as a neutral credit factor.

Located in Milwaukee, WI, Saint John's Communities, Inc. is a Type A CCRC that operates St. John's on the Lake, a CCRC with 122 ILUs, 20 assisted living units, and 52 skilled nursing beds, and Sunrise Care Center, a freestanding 99-bed nursing facility. St. John's on the Lake and Sunrise Care Center are the sole members of the obligated group. St. John's covenants to provide only annual disclosure to bondholders, which Fitch views negatively.

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.