Fitch Ratings has downgraded to BBB-minus from BBB the rating on the following bonds issued by the Bexar County Health Facilities Development Corporation, Texas, on behalf of Army Residence Community (ARC): $53 million series 2010 revenue bonds; $25 million series 2007 refunding revenue bonds.

The rating outlook is revised to negative from stable.

Bond payments are secured by a gross revenue pledge. A fully funded debt service reserve fund and a mortgage deed of trust provide additional security.

Operating ratio increased to 117.9% and net operating margin decreased to 12.8% in fiscal 2012. Both metrics now compare unfavorably to Fitch's BBB medians of 97.2% and 20.3%, respectively, and are below budgeted targets.

With maximum annual debt service (MADS) equal to 22.8% of revenue in fiscal 2012, ARC's debt burden remains very high for the rating and will require improved operations and cash flow to provide sufficient coverage.

ARC has yet to benefit from its larger revenue base and more profitable service mix. Expense growth has thus far outpaced revenue growth and coverage metrics remain below projected expectations.

Despite a decline in fiscal 2012 due to the expansion, independent living unit (ILU) occupancy strengthened to 91.4% at March 31, 2013. Fitch believes the rebound in occupancy reflects continued strong demand and ARC's unique market niche.

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