OREANDA-NEWS. May 13, 2016. Fitch Ratings has upgraded the following Hawaii Department of Budget & Finance revenue bonds issued on behalf of Kahala Senior Living Community (d/b/a Kahala Nui, Kahala) to 'BBB+' from 'BBB':

--\\$67.8 million series 2012.

The Rating Outlook is revised to Stable from Positive.

SECURITY
The bonds are secured by a pledge of gross revenues, a leasehold mortgage on real property subject to ground lease, and a debt service reserve fund.

KEY RATING DRIVERS

PROFILE CONSISTENT WITH HIGHER RATING: The upgrade reflects liquidity, operational, and coverage metrics that are on the higher end of Fitch's 'BBB' category, as well as Kahala's high occupancy levels, which have averaged approximately 95% across all levels of care, and its strong market position in an affluent part of Honolulu.

BALANCE SHEET GROWTH: At Dec. 31, 2015, Kahala had \\$65.6 million in unrestricted cash and investments, which equated to 937 days cash on hand (DCOH) and 94.4% cash to debt, both of which compare favorably to Fitch's 'BBB' category medians of 400 DCOH and 60%, respectively.

ELEVATED DEBT BURDEN: Debt levels remain elevated as indicated by maximum annual debt service (MADS) as percent of revenue of 17.6% and debt to net available of 6.1x,relative to Fitch's 'BBB' category medians of 12.4% and 5.9x. Kahala's manageable capital needs (mostly lifecycle expenditures to keep the campus marketable) and steady revenue only coverage (1.1x in 2015) help offset concerns about the debt burden.

EXCELLENT MARKET POSITION: Fitch views Kahala's location within Honolulu's most affluent area as a credit strength. Kahala's entrance fee pricing is comfortable relative to the area's average home values, and Kahala faces limited competition for its Type 'A' contract in its primary service area of Honolulu County (GO rated 'AA+').

RATING SENSITIVITIES

CONSISTENT PERFORMANCE EXPECTED: Over the next two years, Fitch expects Kahala Senior Living Community (d/b/a Kahala Nui, Kahala) operational platform to remain steady, supported by high levels of occupancy. Over this time, capital needs should remain manageable, liquidity continue to grow, and its debt burden should ease further.

CREDIT PROFILE
Located in Honolulu, HI, Kahala Nui is a Type-A continuing care retirement community (CCRC) with 270 ILUs, 63 assisted living units, and 60 skilled nursing beds. In 2014, Kahala reported total operating revenues of \\$29 million.

CONSISTENT OPERATING PERFORMANCE
Kahala continued its solid operational performance in 2015, with its 92.7% operating ratio and 27.7% net operating margin -adjusted, both above their respective 'BBB' medians. Resident service revenue growth remained constrained at about 1%, with expenses rising about 2.2%. The rise in expenses was offset by a good year in investment income which increased by approximately \\$\\$500,000, reflecting the continued growth in Kahala's balance sheet.

Turnover of IL units normalized in 2015, with 25 turnovers compared with 30 in 2014. As a result, net entrance fee receipts of \\$5.6 million were lower in 2015, but coverage remained above Fitch's 'BBB' category median. Kahala's good market position and waitlist, currently over 200, has kept IL occupancy high. ILU occupancy has averaged 98% since 2010. IL turnover is budgeted at around 16 to 23 moving forward, which should support debt service coverage in excess of Fitch's 'BBB' category medians, as well as further debt moderation.

ELEVATED DEBT BURDEN
Kahala's rating incorporates its elevated debt burden. MADS of \\$5.2 million was 17.6% of revenues, above Fitch's 'BBB' category median of 12.4%. However, no further debt is planned, with Kahala funding its approximately \\$3 million a year of capital expenses with cash flow. Most of the capital projects are infrastructure investments or enhancements to keep the campus up to date. Kahala's age of plant is 10.4 years versus the 'BBB' median of 11.5 years.

Kahala's future service obligation (FSO) has continued to moderate since the accounting change regarding entrance fees was implemented in 2012. In 2015, it was \\$6.5 million down from \\$12.2 million at fiscal 2014 and \\$15.8 million at fiscal 2013. Fitch expects the FSO to disappear within the next few years. Separately, Kahala's 2015 actuarial study showed a satisfactory actuarial balance that reflects Kahala's entrance fee and monthly service revenues being adequate to fund the future health care needs of its residents.

DEBT PROFILE
The \\$67.8 million in series 2012 bonds are fixed-rate term bonds, with level debt service through 2036 save for a double payment upon release of the debt service reserve in 2037. Per its fiscal 2015 covenant calculation, Kahala reported 2.28x debt service coverage (relative to a budget of 2.54) and 943 DCOH, both of which were ahead of the 1.2x coverage and 180 DCOH requirements.

DISLCOSURE
Kahala provides annual disclosure within 150 days of fiscal year end and quarterly disclosure within 45 days for the first three quarters, and 60 days for the fourth quarter. Disclosure to Fitch has been timely and thorough.}