Fitch Affirms Appalachian Christian Village, TN's Revs at 'BBB-'; Outlook Stable

Fitch Ratings has affirmed the 'BBB-' rating on the $19,520,000 series 2013 revenue bonds issued by the Health and Educational Facilities Board of the City of Johnson City, Tennessee on behalf of Appalachian Christian Village (ACV).

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a pledge of gross revenues and a mortgage on certain property of the obligated group, consisting of Appalachian Christian Village and the Appalachian Christian Village Foundation, Inc. A fully funded debt service reserve fund provides additional security.

KEY RATING DRIVERS

STRONG MARKET POSITION: Located in Johnson City, TN, ACV is the only facility providing a full continuum of care in the region, with the nearest continuing care retirement community (CCRC) competitor 25 miles away. ACV has nearly 50 years of operating history.

SOUND REVENUE-ONLY COVERAGE: Coverage of maximum annual debt service (MADS) remained good despite softened operating results from occupancy challenges. Revenue-only MADS coverage of 1.4x in the fiscal year ended March 31, 2013 and in the eight-month interim period ended Nov. 30, 2013 remained comfortably above Fitch's 'BBB' median of 0.9x.

LOW OCCUPANCY: Occupancy in the independent living units (ILUs) remained pressured over the last year at around 73-74% and remains considerably below historical averages driven by a stagnant real estate market. However, skilled nursing occupancy remained stable, and provided some stability to overall revenue base.

WEAK LIQUIDITY: Unrestricted cash and investment totaled $6.5 million at Nov. 30, 2013, which is down from one year prior but consistent with historical levels. Liquidity metrics continue to lag Fitch's 'BBB' medians and remain a credit concern. However, ACV's modest capital plans and conservative debt profile should help sustain current levels.

CONSERVATIVE DEBT PROFILE: ACV's debt portfolio consists of 100% fixed rate bonds and produces level debt service of $1.2 million annually.

RATING SENSITIVITIES

CONSISTENT REVENUE ONLY COVERAGE EXPECTED: Fiscal 2013 performance was lower than prior years and below expectations; however, Fitch believes there is potential room for financial improvement with recovery in ILU occupancy. A decline in revenue-only coverage, which is not expected, would pressure the rating.

MAINTENANCE OF LIQUIDITY: Material weakening in liquidity metrics would lead to negative rating action.

CREDIT PROFILE

Appalachian Christian Village is a Type-C CCRC in Johnson City, Tennessee with 180 independent living units (ILU), 89 assisted living units (ALU), and 103 skilled nursing beds (SNF) located on two campuses - Sherwood and Pine Oaks. Of the 89 ALUs, 69 are located at Pine Oaks Assisted Living Community, which is leased and operated by ACV, but not part of the obligated group. Fitch reviewed the financial results of the obligated group, which generated approximately $16 million in total operating revenues in fiscal year ended March 31, 2013.

Strong Market Position

ACV is the only facility providing a full continuum of care in its service area. There are several for-profit providers in the region, but the nearest CCRC, Asbury Communities, is 25 miles away in Kingsport, TN. ACV's market position is also enhanced by its modest pricing, with entrance fees starting at $7,900 for a studio and ranging up to $175,000 for its standard contract for a larger two bedroom cottage located at its expansion campus, Maple Crest.

Weak Occupancy

Occupancy in ILUs remained stagnant over the last year, depressed by slowdown in sales and persistence of unusually high move-outs from deaths and transfers. ILU occupancy of 73% through the 6-months ended Sept. 30, 2013 is similar to 74% in fiscal 2013, but markedly declined from 82% in 2012 and 88% in 2010. Occupancy in the assisted living units and the skilled nursing facility, which is a main driver of revenue, has remained stable at around 90%. These occupancy trends have remained static as of January 2014.

Sustained low ILU occupancy levels continue to be a key credit concern and the trend has closely followed the Johnson City real estate environment, which has plateaued following a decline in 2011. Fitch believes further deterioration is unlikely. Management reported ILU sales improved in 2014 with 21 move-ins during the first six months of fiscal 2014 compared to 24 in all of fiscal 2013.

Consistent Revenue-Only Coverage over a Moderate Debt Burden

Despite weak occupancy, revenue-only coverage of MADS remained sound at 1.4x in 2013 and in the eight-month interim period, and remains one of ACV's key credit strengths. While this is weaker than ACV's historical coverage at around 2x, it is consistent with the metrics at the time of Fitch's initial rating one year ago and stronger than the 'BBB' median of 0.9x. MADS coverage including turnover entrance fees was 1.7x in fiscal 2013 and 1.6x through the interim period, slightly below the median of 1.9x. Given ACV's historical performance and market position, Fitch believes coverage metrics have room for improvement with recovery of ILU occupancy rates. Deterioration from current levels would produce negative rating pressure.

ACV has one series of fixed rate bonds totaling $19.5 million, producing level debt service of $1.2 million. Debt burden is relatively low, with MADS as a percentage of revenues at 7.7% in 2013 compared to the median of 12.4%. ACV has no new debt plans.

Modest Capital Needs

While there are no urgent capital needs, parts of ACV's campus remain dated and facility updates continue to be a focus. In the last three years, renovations took place throughout the campus including apartments, building exteriors, main lobby area, and in the Towers, an apartment complex located across from the congregate living center. Remaining key capital projects include updating the therapy center, parking lot, and call system. Capital spending for fiscal 2014 is budgeted at $931,000, which is below depreciation levels. Combined with $795,000 remaining from the 2013 issuance for capital investments, ACV should be able to fund its planned projects without significant impact to unrestricted cash and investments.

Low Liquidity

Unrestricted cash and investments of $6.5 million at Nov. 30, 2013 is declined from $7.3 million one year prior, partly driven by unfavorable investment returns and overall weaker financial results. Fitch also notes that unrestricted cash and investments have been stable overall, and has totaled between $6.2 and $6.6 million over the last five fiscal years. Liquidity metrics of 138.7 days cash on hand, 33% cash to debt, and 5.2x cushion ratio are weak against Fitch's 'BBB' medians of 371.3 days, 58.9%, and 6.9x. While ACV's conservative fixed rate debt profile mitigates some concerns, further deterioration in liquidity would lead to negative rating pressure.

DISCLOSURE

ACV covenants to provide annual audited financial statements within 150 days of the end of each fiscal year and quarterly unaudited financial disclosure within 45 days of each quarter end.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Revenue Supported Rating Criteria', June 3, 2013

--'Not-for-profit Continuing Care Retirement Communities Rating Criteria' (July 10, 2013).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499

Not-for-Profit Continuing Care Retirement Communities Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=712401

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=813650

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