Jan 15 - Fitch Ratings has affirmed the 'BBB-' rating on approximately $24 million City of Lakeland, Florida, fixed-rate revenue bonds, series 2008, issued on behalf of Carpenter's Home Estates (Carpenter's). The Rating Outlook is Stable. SECURITY Debt payments are secured by a pledge of the gross revenues of the obligated group. In addition, a fully funded debt service fund provides additional security for the bond issue. KEY RATING DRIVERS SOLID OPERATIONS: Despite low occupancy in the independent living units (ILUs) (75% as of Oct. 31, 2012), Carpenter's has shown good operating performance with adjusted net operating margin of 20.8% in fiscal 2011, which meets the 'BBB' category median of 20.3%. LOW ILU OCCUPANCY: Historically utilization has been a credit strength with occupancy across all levels of care averaging over 90%. Carpenter's completed a 32 ILU expansion in 2009, which has had slow fill up in addition to a deterioration in occupancy in its existing ILUs. In fiscal 2011, the new units were 33% occupied while the existing ILUs were 79% occupied. However, the ALU and SNF occupancy is around 100%. IMPROVING LIQUIDITY: Liquidity, which has historically been on the low-end of the 'BBB' category, has been improving and is now more in line with category medians but still light for a Type A Continuing Care Retirement Communities (CCRC). MANAGEABLE DEBT BURDEN: All bonds are fixed rate and there are no swaps associated with the debt. Debt service coverage has improved for the 10-month interim period ended Oct. 31, 2012 at 1.7x compared to 1.3x for fiscal 2011, 1.6x for fiscal 2010 and the 'BBB' category median of 1.8x. SMALL REVENUE BASE: Carpenter's relatively small revenue base inherently subjects the organization to higher debt service coverage volatility as small changes in occupancy or turnover may impact coverage. CREDIT PROFILE The 'BBB-' rating reflects the organization's good operating performance, manageable debt burden with adequate debt service coverage, and improving liquidity. The primary credit concern is the low ILU occupancy, which is additionally being challenged by the 32 unit expansion that was brought on line in 2009. As of Oct. 31, 2012, only 11 of the 32 new units have been filled. In 2009, Carpenter's completed an expansion project [32 additional ILUs and 12 skilled nursing facility units (SNFs)]. Prior to the expansion, ILU occupancy was over 90%, but slow fill-up and housing and economic challenges have brought this figure down. Overall ILU occupancy is low but slowly improving and was 75.2% at Oct. 31, 2012 compared to 74.5% in fiscal 2011 and 73% in fiscal 2010. Carpenter's reinvigorated its marketing campaign in 2011 by bringing on a new director of marketing. Recently, Carpenter's added a third sales counselor, which should also help to boost sales. Carpenter's sold a total of 42 units (both new and existing units) through Oct. 31, 2012 (10-month interim), with 34 move-ins compared to 44 move-ins in fiscal 2011 and 31 in fiscal 2010. Assisted living unit (ALU) and skilled nursing facility occupancy remain very strong at 91.9% and 100%, respectively at Oct. 31, 2012. According to a recent report, the employment outlook in the Lakeland-Winter Haven market is showing signs of improvement, and the unemployment rate of 9% as of October 2012 in the metropolitan area is at its lowest rate since December 2008. Despite the low occupancy, Carpenter's financial profile remains in line with 'BBB' category medians. In fiscal 2011, Carpenter's posted a net operating margin of 9.5% and an adjusted net operating margin of 20.8%, both meeting or exceeding the respective 'BBB' category medians of 9.5% and 20.3%. Carpenter's operating performance has supported adequate debt service coverage, which was 1.7x through the 10-month interim period, compared to a 'BBB' category median of 1.7x. Debt service coverage has been inconsistent with 1.3x in fiscal 2011, 1.6x in fiscal 2010, 1.2x in fiscal 2009 and 1.5x in fiscal 2008. Fitch notes that Carpenter's bond covenant debt service coverage calculation allows for the inclusion of initial entrance fees, which would increase debt service coverage to 1.6x for fiscal 2011. Carpenter's debt burden is manageable with MADS equating to 12.9% of total revenue at Oct. 31, 2012, which is in line with the 'BBB' category median of 12.9%. Furthermore, its debt profile is conservative, which is expected for its rating level with 100% fixed rate debt and no swaps. Carpenter's purchased and redeemed about $650,000 of its outstanding debt in 2011 and will purchase more debt as the opportunity arises. Liquidity, which has historically been on the low-end of the 'BBB' category, has been improving and is now more in line with category medians. Total unrestricted cash and investments at Oct. 31, 2012 (10-month interim) increased 9% from fiscal 2011 year-end through the ten-month interim and was $13.3 million, which equals 343.5 days cash on hand, 55.1% cash to debt and 6.1x cushion ratio compared to the respective 'BBB' category medians of 369 days, 50.9% and 6.6x. The Stable Outlook reflects Fitch's belief that Carpenter's current financial profile will be sustained over the next year and that ILU occupancy will continue to progress, albeit slowly. A deterioration in debt service coverage would likely result in downward rating pressure. Established in 1986, Carpenter's Home Estates is a type A continuing care retirement community located in Lakeland, FL, which is approximately 35 miles east of Tampa. The facility consists of 372 ILUs, 49 ALUs, and 72 SNFs. In fiscal 2011, Carpenter's had total revenues of $16.4 million. Carpenter's covenants to deliver to EMMA annual financial statements, calculation of compliance with debt service coverage ratio covenant and liquidity covenant and occupancy information within 120 days of fiscal year end and quarterly financial and covenant compliance statements within 45 days after the end of each fiscal quarter.