OREANDA-NEWS. Fitch Ratings has affirmed the 'BBB' rating on the following Westchester County Local Development Corporation revenue refunding bonds (Kendal on Hudson Project):

--\$66.7 million series 2013 bonds.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a gross revenue pledge, a mortgage pledge, and debt service reserve fund.

KEY RATING DRIVERS

STRONG ENTRANCE FEE GROWTH IN 2014: Kendal on Hudson's (KoH) net entrance fees grew to \$7.5 million in 2014, up from \$5.1 million (47%) year-on-year as a result of strong sales in fourth quarter 2014 (4Q'14). Maximum annual debt service (MADS) coverage was supported by entrance fee growth and improved to 1.6x in 2014 from 1.2x a year prior, but still compared unfavorably to the category median of 2x.

SOFTENED OCCUPANCY FROM HISTORICAL LEVELS: Kendal on Hudson's occupancy softened to 87% in 2014 from the organization's historical high of 97% in 2012. Fitch believes that KoH's lower occupancy was driven, in part, by higher attrition due to the first round of natural turnover since beginning operations in 2005. Softened occupancy is mitigated by strong independent living units (ILU) sales in 4Q'14 and good momentum in 1Q'15. KoH is projecting 11 move-ins by end of April. Fitch expects that KoH's occupancy will rebound to historically strong levels.

HEALTH CENTER PROJECT ELEVATES DEBT: KoH expects to complete its health center repositioning project this year which will add 13 memory support units, 10 assisted living units (ALUs), and 'right size' the mix of skilled nursing and enriched housing units. With the additional \$18 million in project-related debt, MADS of \$5.9 million equates to a high 21% of total 2014 revenues, which is well above the 'BBB' category median of 12.3%.

ASSOCIATION WITH KENDAL: Fitch views KoH's relationship with Kendal Corporation as a positive credit factor. Although Kendal does not have any control at the Board or management levels, Kendal provides assistance and guidance in the areas of finance, marketing and human resources and a shared mission statement.

MIXED LIQUIDITY METRICS: Unrestricted cash and investments totaled a high \$34.7 million in fiscal 2014, which translated into 584 days cash on hand, 6.2x cushion ratio, and 43.1% cash-to-debt. DCOH exceeds the 'BBB' category median of 408 days, while cash-to-debt and cushion ratio lag Fitch's medians of 60.2% and 6.9%, respectively.

RATING SENSITIVITIES

SUSTAINED CASH FLOW: Fitch expects KoH to improve current levels of entrance fees and cash flow for debt service coverage to be more in line with the category median. Any material decline in cash flow resulting in a decline in debt service coverage would be viewed negatively.

NORMALIZED OPERATIONS: Fitch expects that operations will normalize to historical levels with the completion of major capital investments. Failure to improve operations would be viewed negatively.

CREDIT PROFILE

KoH is a type-A continuing care retirement community located in Sleepy Hollow, NY. The community consists of 222 ILUs, 24 enriched housing units, and 42 skilled nursing beds. KoH had total revenues of approximately \$28.2 million in fiscal 2014 (unaudited). KoH provides audited financial statements and operating data to the MSRB's EMMA system not later than 120 days after each fiscal year-end and quarterly unaudited financial statements and operating data with 45 days of each fiscal quarter-end.

IMPROVED COVERAGE IN 2014

KoH's net entrance fee receipts grew to \$7.5 million in 2014, up 47% year over year as a result of strong sales in Q'14. As a result, MADS coverage improved to 1.6x in 2014 from 1.2x a year prior, but remained below the 'BBB' category median of 2x. Coverage improvement was driven by 23 sales in 2014, up from 12 the prior year. KoH is projecting 11 move-ins by end of April, which should further augment coverage for 2015. Fitch notes that debt service coverage as calculated under the Master Trust Indenture was 1.9x and 1.6x in 2014 and 2013, respectively.

CAPTITAL PROJECT PRESSURES 2014 OPERATIONS

Fitch's main credit concerns include KoH's elevated debt burden and construction risk associated with the organization's health care repositioning project. MADS of \$5.9 million equated to a high 21% of total 2014 revenues as compared to the 'BBB' category median of 12.3%. Additionally, operating performance slipped in 2014, with a 108.8% operating ratio and net operating margin of 0.7%.

KoH's 2015 budget assumes material improvement in operations due to improved occupancy, higher net entrance fee receipts and the opening of the health center project. Management is budgeting an operating ratio of 100% and MADS coverage of 2.1x in 2015. Fitch believes achieving this budget is likely given the strong sales pace at the end of 2014 and through the year-to-date period along with improvements in occupancy and marketing activities.

KoH's health center repositioning project will allow the organization to take advantage of new state licensing regulations to provide memory support services and a wider array of aging-in-place services. Additionally, the project will right-size the skilled nursing center and upgrade certain common areas. Management reports that the project is on-time and budget, with staggered unit openings scheduled beginning in May and project completion anticipated in early 2016. While Fitch views the strategic benefits of the repositioning positively, KoH's debt capacity is limited at the current rating level until leverage metrics moderate.

SOFTENED OCCUPANCY

KoH's occupancy dropped to 87% in its 222 ILUs from historical highs of over 96% prior to 2013. Softened occupancy was driven by KoH's first round of natural turnover since beginning operations in 2005. Fitch views this occupancy trend as temporary and continues to view KoH's historically strong occupancy in its ILUs as a primary credit strength (very strong at over 96% through 2012). KoH currently reports a 144-person waitlist, which Fitch believes is continued evidence of strong product demand. An inability to bolster occupancy levels over the longer term may result in debt service coverage pressure.

KENDAL RELATIONSHIP

Fitch views KoH's relationship with Kendal Corporation as a positive credit factor. In total there are 12 Kendal affiliates located in eight states which operated 2,460 ILUs, 625 ALUs and 556 SNF beds in 2013. Each Kendal community is separately incorporated and there is no cross collateralization. However, each community benefits from a shared vision and brand identity. Kendal provides assistance and guidance in strategic planning, management, marketing and support services.

CONSERVATIVE DEBT PROFILE

All of KoH's \$85 million of outstanding debt is fixed rate with no outstanding swaps, which Fitch views as conservative. In 2014, KoH privately placed \$18 million fixed-rate parity debt with First Niagara Bank, N.A. (long-term IDR rated 'BBB-'/Negative Outlook by Fitch). Security covenants are on parity between KoH's outstanding issues.