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Fitch Affirms Appalachian Christian Village (TN) Revs at 'BBB-'; Outlook StableFitch Ratings has affirmed the 'BBB-' rating on the $19,170,000 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 OVERALL STABLE FINANCIAL PROFILE: Despite ongoing challenges to maintaining top-line revenue growth, overall profitability, liquidity, and debt metrics remain largely unchanged since Fitch's initial rating in 2013. SOUND REVENUE-ONLY COVERAGE: Coverage of maximum annual debt service (MADS) remained adequate for the rating category despite sustained weak performance compared to historical performance (pre-2012). Revenue-only MADS coverage of 1.3x in the fiscal year ended (FYE) March 31, 2014 and 1.1x in the seven-month interim period ended Oct. 31, 2014, while weaker than ACV's historical performance, remained favorable against Fitch's 'BBB' median of 0.9x. MIXED OCCUPANCY TRENDS: Occupancy in the independent living units (ILUs) recovered through the seven-month interim period in 2015 to 79%, compared to 74% in the prior two fiscal years. However, improvements in ILUs were offset by occupancy declines in assisted living units (ALUs) and in the skilled nursing facility (SNF). Fitch believes it is critical for ACV to stabilize occupancy across the continuum of care and improve top-line revenues in order to recover to historically stronger operating and financial performance levels. 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. WEAK BUT IMPROVED LIQUIDITY: Unrestricted cash and investment totaled $7 million at Oct. 31, 2014, up $435,000 from one year prior due to better net entrance fee receipts and lower capital spending. 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 or enable growth. RATING SENSITIVITIES CONSISTENT-TO-IMPROVING FINANCIAL PERFORMANCE EXPECTED: Fiscal 2013 and 2014 financial results were lower than prior years and below expectations; however, Fitch believes there is potential room for improvement with stabilization in occupancy. Softening in MADS coverage or unrestricted liquidity, which is not expected, would pressure the rating. CREDIT PROFILE Appalachian Christian Village is a Type-C CCRC in Johnson City, TN with 177 ILUs, 89 assisted living units (ALUs), and 103 skilled nursing beds (SNFs) 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 $16.6 million in total operating revenues in fiscal 2014. 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 $8,220 for a studio ad ranging up to $182,000 for its standard contract for a larger two-bedroom cottage located at its expansion campus, Maple Crest. Mixed Occupancy Trends ILU occupancy began showing signs of recovery, and improved to 79% through the seven-month interim ended Oct. 31, 2014, compared to 74% in the prior two fiscal years. Net entrance fee receipts improved to $445,000 compared to $247,000 the prior year, and ongoing revenue should benefit as well. Improvements in ILUs were offset by unanticipated declines in ALU and SNF occupancy, which fell considerably below historical levels in fiscal 2015. ALU and SNF occupancy was 82% and 81%, respectively, compared to around 90% achieved in prior years. Management believes some decline in SNFs is attributable to better recovery times and decrease in length of stay, which should eventually improve marketability. ACV created a dedicated position to better market quality results and manage referral relationships, which Fitch views positively. The combined result produced mostly consistent profitability metrics in 2015 with operating ratio, net operating margin, and net operating margin-adjusted of 95.9%, 7.8%, and 11.7%, respectively, which is relatively unchanged from the prior two fiscal years. Adequate Revenue-Only Coverage over a Moderate Debt Burden Reflecting steady financial results, revenue-only coverage of MADS remained adequate at 1.3x in 2014 and 1.1x in the seven-month interim period, and remains one of ACV's key credit strengths. While this is notably 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 1.4x in fiscal 2014 and 1.7x through the interim period, trailing the median of 2.0x. Given ACV's historical performance and market position, Fitch continues to believe coverage metrics have room for improvement with recovery in occupancy rates. Deterioration from current levels would produce negative rating pressure. Modest Capital Needs While there are no urgent capital needs, parts of ACV's campus remain dated and facility updates continue. In recent years, renovations took place throughout the campus, including apartments, building exteriors, main lobby area, and in the Towers, the apartment complex located across from the congregate living center. Remaining key capital projects include updating the therapy center. Capital spending for fiscal 2015 is budgeted at $1.2 million, which is below depreciation levels. Low but Moderately Improved Liquidity Unrestricted cash and investments of $7 million at Oct. 31, 2014 is increased from $6.4 million one year prior, supported by growth in entrance fee receipts and decreased capital spending year to date. While improved, liquidity metrics of 151 days cash on hand, 36.1% cash to debt, and 5.6x cushion ratio are weak against Fitch's 'BBB' medians of 408 days, 60.2%, and 6.9x, respectively. ACV's conservative fixed- rate debt profile mitigates some concerns, but deterioration in liquidity would lead to negative rating pressure. DEBT PROFILE ACV has one series of fixed-rate bonds totaling $19.2 million, producing level debt service of $1.2 million. Debt burden is relatively low, with MADS as a percentage of revenues at 7.5% in 2014 compared to the median of 12.4%. ACV has no new debt plans. 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 16, 2014 --'Not-for-profit Continuing Care Retirement Communities Rating Criteria', July 24, 2014. Applicable Criteria and Related Research: Not-for-Profit Continuing Care Retirement Communities Rating Criteria http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=752470 Revenue-Supported Rating Criteria http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012 Additional Disclosure Solicitation Status http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=960896 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. |
