Fitch Rates Air Force Village, TX's 2009 Revs 'BBB' & Downgrades Outstanding; Outlook Stable.

TAMPA, Fla. -- Fitch Ratings has assigned a 'BBB' rating to the $45,815,000 Tarrant County Cultural Education Facilities Finance Corporation Retirement Facility's revenue bonds (Air Force Village Obligated Group Project) series 2009. Fitch also downgrades Air Force Village's series 2007 bonds to 'BBB' from 'BBB+'. The series 2009 bonds will be used: (i) to finance the construction, renovation, rehabilitation and equipping of retirement and healthcare facilities for Air Force Villages, Inc. (the obligor) and its affiliates; (ii) to fund a debt service reserve fund; and (iii) to pay a portion of the costs of issuance of the 2009 Bonds. The bonds are anticipated to be priced the week of Oct. 26, through negotiation. The Rating Outlook is Stable.

The rating actions are supported by Air Force Village's sizable increase in debt, construction and fill-up risk associated with the project. AFV's strengths continue to be its long operating history in the San Antonio market, historically high occupancy levels in independent living, sound operating performance which has led to solid historic debt service coverage, strong liquidity, strong governance, well-maintained facilities and a draw from a national market due to their retired military officer resident base. The facilities at Air Force Village have had a long history in the market with Air Force Village I (AFV I) opening in 1970 and Air Force Village II (AFV II) opening in 1987. AFV I and II have consistently had occupancy rates in the mid to high 90% range in independent living while skilled nursing care occupancy has been fairly low. Monthly service fees at AFV II are set to absorb any losses from skilled nursing due to the low occupancy. The high occupancy in independent living at the facilities has resulted in reasonable historical debt service coverage of 1.7 times (x) over the past two fiscal years. The facilities have been well maintained, as evidenced by the average age of plant of 9.3 years for facilities built in the early 1970s and mid-1980s. Fitch toured the facilities and found them to be well kept and attractive.

Fitch's main credit concerns include the competition in the service area from another retired military officer retirement community (Army Retirement Residence in San Antonio), reliance on entrance fees to cover debt service, and a limited market due to the facilities only being available to retired military officers. Although San Antonio is the home of two not-for-profit corporations whose retirement communities are dedicated solely to retired military officers, all these facilities have experienced excellent occupancy in their independent living units. However, limiting the resident market to only retired military represents a credit risk. Air Force Villages, Inc. has relied on entrance fees to cover debt service historically, as evidenced by the revenue-only coverage of 0.7x, 1.6x and 0.7x over the past three fiscal years.

Operating performance in 2009 was lower, which affected coverage, but the decline was caused by a number of one time items. Negatively impacting performance was the vacancy of 36 older pre-existing cottages at AFV I as current residents were moved to existing units to make room for the new project, reducing the gain AFV would normally have on unit turnover. In addition, AFV had an accelerated depreciation expense and disposal loss of approximately $1.7 million due to the demolition of existing cottages and a skilled nursing unit at AFV I. Also, investment income was down approximately $2 million from FY2008 due to realized losses of approximately $1 million. Fitch expects AFV's performance to stabilize as the new units come online over the next three years, which should lead to more consistent coverage figures

Presales on the new units have been mixed with 12 new ranch homes in AFV II completely pre-sold and the new apartment independent living units (ILUs) at AFV I at only 20% pre-sold. Fitch does not see the slower pre-sales at AFV I as a credit concern as AFV has a strong waiting list and will not be relying on new entrance fees to pay down debt. All AFV debt, including the new issuance, is fixed rate. Additionally, management indicated that once construction is far enough along to show sample units, sales should increase.

The Stable Outlook assumes the maintenance of good financial performance and liquidity measures as well as successful completion of its project.

Air Force Villages, Inc. currently operates two type-B continuing care retirement communities located in San Antonio, TX. The communities combined consist of 734 ILUs, 34 assisted living units, 72 Alzheimer's beds, and 172 skilled nursing beds. In the fiscal year ended June 30, 2009, Air Force Villages, Inc. had total revenues of approximately $39.5 million.

Additional information is available at www.fitchratings.com.

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