OREANDA-NEWS. Fitch 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 (d/b/a Cornerstone Village) (ACV).

The Rating Outlook has been revised to Negative from Stable.

SECURITY

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

THINNER FINANCIAL PROFILE: The Negative Outlook reflects ACV's thinner financial profile since Fitch first rated ACV in 2012. Over this time, independent living (IL) occupancy fell below 80%, where it has remained, coverage including entrance fees has been below median levels, and liquidity growth has been flat.

MODEST DEBT BURDEN: A key credit strength is ACV's very modest debt burden that allows for solid debt service coverage despite weak historical profitability. In FY2015 (March 31 year end), MADS equated to a modest 7.7% of total revenues as compared to the 'BBB' median of 12.4%.

GOOD MARKET POSITION: ACV has a long operating history in the area and is the only senior living facility in its primary service area of Johnson City, TN (GO bonds rated 'AA') that provides the full continuum of care. The nearest continuing care retirement community (CCRC) competitor is 25 miles away. ACV's entrance fees are also modest, ranging from $10,000 to $182,000 for a fully amortizing contract.

NEW NAME AND MARKETING STRATEGY: In October 2015, ACV changed its name to Cornerstone Village. Management believes the new name is more representative of its mission and aligns better with its strategy. ACV has been working with Bluespire Senior Living, a marketing consultant, to revamp its marketing, and a new marketing director has been hired. Early indications show an increase in traffic on ACV's website and higher attendance at marketing events.

RATING SENSITIVITIES

TRACTION ON STRATEGIC PLAN: Fitch expects to see improved cash flow over the next two years as the strategic plan is executed. Failure to improve cash flow or a further weakening in performance, especially debt service coverage or liquidity, would likely lead to a downgrade.

POTENTIAL COVENANT VIOLATION: The Negative Outlook is also driven by a potential violation of Appalachian Christian Village (ACV)'s debt service coverage covenant of 1.2x in the current fiscal year. A midyear change in asset allocation caused a one-time realized loss on investments of approximately $650,000, resulting in coverage of 0.5x for the six month FY2016 interim period, down from 1.8x for the comparable six month FY2015 period. Fitch will also review any violation of a covenant and might also take rating action at that time.

CREDIT PROFILE

ACV 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 $16.1 million in total operating revenues in FY2015.

PERIOD OF TRANSITION
Over the last year, ACV has undergone a number of changes. The organization changed its name and revamped its marketing strategy, and the chief financial officer resigned. In addition, ACV replaced its investment advisor, which led to a revision to its investment policy and a change to its investment allocation. The change to allocation led to ACV taking a one-time realized loss on investments of approximately $650,000, which has negatively impacted debt service coverage and threatens to cause a rate covenant violation in FY2016. ACV is projecting coverage to be very close to the 1.2x covenant by year end.

Fitch believes the allocation transition could have been more thoughtfully phased in to reduce the impact on debt service coverage, particularly in year of average performance, but Fitch also recognizes that the impact is one time in nature, the underlying operational performance remains fairly stable year over year (with coverage at 1.6x when the realized loss is backed out), and management believes the new investment advisor and strategy will be beneficial to the organization over the longer term. However, Fitch will review the situation should ACV violate its debt service covenant.

While the name change and revamped marketing strategy have the potential to be credit positives, Fitch believes it is too early to access their impact. However, these changes do reflect the board and management's concern about the current level of performance at ACV.

WEAKER FINANCIAL PROFILE

The Negative Outlook not only reflects the potential of the covenant violation but also the weakening in ACV's overall financial profile since Fitch first rated it in January 2013. The historical time period at Fitch's initial rating (FY2010 through FY2012) was characterized by good liquidity and revenue growth, strong cash flow that supported above 2x coverage, and IL occupancy above 85%. A downward trend in performance began in FY2013 and has continued through the interim period. Over this time, debt service coverage has remained below 2x, falling to a low 1.4x in FY2014; IL occupancy has fallen below 80%, where it has remained; and liquidity and revenue growth has been thin, with patient service revenue falling year over year in FY2015.

Key drivers of the weaker performance have been the lower IL occupancy and an erosion of ACV's skilled nursing payor mix. Medicare, which provides the highest daily skilled nursing reimbursement rate, was 39% of gross revenues in FY2010 but had fallen to 24% in the six month FY2016 interim period. Medicaid, which generally provides the lowest daily reimbursement rate, rose to approximately 40% from 30% over this time but was slightly lower in FY2016 interim period. ACV has managed expenses well, but the thinner cash flow has impacted its financial strength.

ACV has been able to maintain the 'BBB-' rating in spite of the lower occupancy and weaker performance due to other credit strengths. Revenue only coverage has remained at or above 1x, the 'BBB' category median, although it has been on a negative trend over the last four years. And Fitch believes ACV has a good market position as the only facility in its primary service area providing a full continuum of care. There are several for-profit skilled nursing or assisted loving providers in the region, but the nearest CCRC, Asbury Communities, is 25 miles away in Kingsport, TN. ACV's market position is further supported by modest pricing, with the entrance fees for its fully amortizing contract starting at approximately $10,000 for a studio and ranging up to $182,000 for a larger two-bedroom cottage located at its expansion campus, Maple Crest.

However, Fitch believes that the current trend in occupancy and financial performance has weakened ACV's credit profile and the sustainment of the investment grade rating is at risk. A continued flattening or drop in liquidity or cash flow would likely lead to a downgrade over the next two years. Even a modest uptick in IL occupancy would likely have a meaningful positive impact on performance.

Debt Profile/Capital Spending/Liquidity

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 7.6% at Sept. 30, 2015, relative to the median of 12.4%.

While there are no urgent capital needs, parts of ACV's campus remain dated and facility updates continue. In recent years, renovations have taken place throughout the campus, including apartments, building exteriors, the 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 2016 is budgeted at $2.1 million, which is above depreciation levels. ACV has no new debt plans.

Unrestricted cash and investments of $6.4 million at Sept. 30, 2015 equated to 139 days cash on hand, 33.6% cash to debt, and 5.1x cushion ratio, all of which trail Fitch's 'BBB' medians of 400 days, 60.%, and 7.3x, respectively.

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.