Fitch Rates Three Pillars Senior Living Communities -WI- Revs 'A-'.

NEW YORK -- Fitch assigns an 'A-' rating to the approximately $13,455,000 Wisconsin Health and Educational Facilities Authority revenue bonds (Three Pillars Senior Living Communities), series 2004 A and B. In addition, Fitch affirms the 'A-' rating on Three Pillars', series 2003 bonds. The Rating Outlook is Stable. Bond proceeds will fund the construction of a 75-unit residential care apartment complex (RCAC), fund a debt service reserve fund, and pay costs of issuance. The 2004 bonds will be fixed and variable rate and will be issued in two series. The bonds are tentatively scheduled to price in December through negotiation by A.G. Edwards & Sons, Inc.

The 'A-' rating reflects Three Pillars Senior Living Communities' (Three Pillars) strong balance sheet, affiliation and support from the Masonic fraternity, and good occupancy rates. Three Pillars' unrestricted liquidity base is its main credit strength, and as of June 30, 2004, the organization reported 1,008 days cash on hand, a cushion ratio of 13.7 times (x), and a cash-to-pro forma debt ratio of 103%, all of which meet or exceed Fitch's 'A' medians. Fitch views the affiliation with the Masonic fraternity positively; especially the annual financial support provided by the Wisconsin Masonic Foundation (WMF), which contributed $833,000 to Three Pillars in fiscal 2004 and has averaged approximately $831,000 for the past four years. The WMF maintains an endowment for the sole purpose of providing assistance to the organization, and annual support is based on a 5% distribution policy (four-year rolling average). With the assistance of foundation contributions and investment income, Three Pillars has recorded solid excess income up until fiscal 2004.

Financial performance in fiscal 2004 was down due to low occupancy at the Wisconsin Masonic Home facility, which will be replaced by the new RCAC. As part of their campus repositioning, the decline in occupancy has been ongoing for the past couple of years and was planned. Even though profits are down compared with prior years, the fiscal 2004 operating ratio was still favorable at 94.3%, compared with Fitch's 'A' median operating ratio of 98.8%. However, the operating ratio has steadily worsened and is at its highest level in six years. Occupancy rates are solid at its independent living and skilled nursing facilities with the exception of the Wisconsin Masonic Home.

Credit concerns include low historic pro forma debt service coverage of 1.08x (excluding any revenues from the new RCAC units), a decline in total revenues, and poor operating performance (due to charitable mission). However, Three Pillars' forecast projects that operating performance should be profitable once the new project comes on line. Fitch's other main concern is Three Pillars' exposure to Medicaid funding, which represents 54% of its skilled nursing facility payor mix and 24% of total revenues. Skilled nursing care is a profitable service line for Three Pillars, but reduced Medicaid reimbursement could negatively affect operations. In addition, the competitive environment is heavy and remains a key credit concern.

The 'A-' rating and Stable Outlook reflects Fitch's expectation that Three Pillars will continue to experience strong demand, sustain its liquidity, return to profitable operations, and record solid debt service coverage once the new project is completed. Fill-up of the new units should be strong as approximately 50 residents will be moved from the existing facility. While Three Pillars' profitability waned in 2004 and historic pro forma debt service coverage is weak, Fitch believes that the organization's sound liquidity provides ample cushion as the campus repositioning occurs. Once the new project is completed, Fitch expects that profitability will be sound and debt service coverage should reach levels expected of 'A' category credits. Should the organization's financial performance not meet expectations, negative rating action may be warranted.

With the primary campus located in Dousman, WI (30 miles from Milwaukee), Three Pillars is a type C continuing care retirement community with a total of 225 independent living units, 20 assisted living units, and 84 skilled nursing beds. In fiscal 2004, Three Pillars reported total operating revenue of $10.27 million. Three Pillars has covenanted to provide Fitch and bondholders with annual audits and quarterly financial disclosure, which is viewed favorably. While Fitch has received quarterly and annual financial statements on a timely basis, quarterly disclosure does not include a management discussion and analysis or a cash flow statement.