NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A' rating on the following Orlando Community Redevelopment Agency (CRA) Florida tax increment revenue bonds:
-- $143.4 million Orlando CRA tax increment revenue bonds (downtown district).
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a gross lien on property tax increment revenues within the project area. Pledged revenues include gross tax increment revenues from the city, Orange County, and the Downtown Development Board (DDB), which levies at its maximum one mill limit, and investment income.
KEY RATING DRIVERS
DIVERSE, ACTIVE PROJECT AREA: The project area is sizable at 2.5 square miles and represents the city's downtown core. The area has received significant private and public investment with numerous additional projects planned or under construction.
DEBT SERVICE COVERAGE: Fiscal 2014 coverage of maximum annual debt service (MADS) remains adequate at 1.54x including federal subsidies for the CRA's series 2010 Build America Bonds (BABS) and 1.31x without the subsidies. However, coverage levels are expected to improve as taxable values recover from the recent recession.
TAX BASE RECOVERY: Taxable assessed value (TAV) increased in fiscal 2014 for the first time in five years and is expected to continue to expand as the economy recovers and current development projects come on line. The high ratio of incremental value (IV) to total assessed value serves to reduce tax increment revenue volatility related to changes in assessed values.
NO COLLECTION RISK: The taxing authorities are required to appropriate 95% of the incremental tax levy, regardless of actual collections.
SOUND LEGAL PROVISIONS: The additional bonds test requires historical coverage including the BABs subsidy equal to 1.5x pro forma MADS. The CRA does not currently plan to issue additional debt. A debt service reserve fund (DSRF) cash-funded to MADS provides added protection.
RATING SENSITIVITIES
ONGOING TAX BASE REDUCTIONS: A sustained downturn in CRA taxable values could result in negative rating action.
CREDIT PROFILE
The downtown district includes much of Orlando's business core, encompassing 1,620 acres with total TAV of $2.2 billion. As such, economic drivers for the CRA largely mirror those for the city as a whole. The area stands to benefit from significant public and private development in process or planned within its jurisdiction. Projects include the completion of phase 1 for the performing arts center scheduled for later this year, Creative Village, a planned mixed use development on the former Orlando Metroplex site, and retail, residential, and commercial development associated with the future Sunrail system, scheduled to begin operations in May 2014.
FISCAL 2014 TAV GROWTH; THE FIRST IN FIVE YEARS
TAV increased by 6.1% in fiscal 2014, the first tax base growth in five fiscal years. Prior to this year, TAV had declined by about 30% between fiscals 2009 and 2013 as a consequence of the severe recession. Given the strong economic recovery currently experienced by the city in addition to ongoing development activity within the CRA, Fitch believes that taxable valuations will maintain their upward trend over the near term.
The tax base is somewhat concentrated with the largest 10 taxpayers constituting 27.7% of total district valuation and 37.4% of incremental value (IV). Most of the large taxpayers own office buildings including the leading taxpayer representing about 6% of TAV and 8% of IV. The city reports that the downtown office occupancy rate for class A space as of the third quarter of 2013 improved to over 87%, a 3% increase in occupancy from the prior year. Municipal office buildings located in the district, while tax-exempt, bring activity to the area.
The CRA was formed in 1981 and was expanded in 1989 so base year values are relatively low compared with present TAV. As a result, the IV to TAV ratio is elevated at 76% or nearly triple that of the base year, serving to tamp down incremental revenue volatility.
STABLE CITY, COUNTY AND DDB TAX RATES
Tax rates for all three jurisdictions have been unchanged since fiscal 2009. Both the city and county tax rates are moderate for the state, at 5.65 and 4.43 respectively, and retain a healthy revenue raising capacity under the 10 mill cap. The DDB tax rate is at the 1 mill maximum.
WEAK DEBT SERVICE COVERAGE EXPECTED TO IMPROVE
MADS coverage has generally stabilized over the two year review cycle reaching 1.54x in fiscal 2014, its highest level since fiscal 2011. Coverage includes the federal subsidy associated with the BABs. The BABs subsidy is not pledged under the legal documents but must be applied by the CRA in the same manner as pledged revenues. Without the subsidy, fiscal 2013 MADs coverage is reduced to a very thin 1.31x. Coverage is expected to increase with the projected expansion of the CRA's tax base over the next few years.
Outstanding debt consisting of series 2009 and 2010 tax increment bonds financed the CRA's portion of funding for a new performing arts center nearing completion in downtown Orlando. The CRA does not intend to issue additional debt backed by the tax increment pledge.
Subordinate obligations outstanding include internal loans from other city departments and agencies, incentive payments to developers and certain operating and capital costs. The city has some flexibility to adjust or restructure the internal loans if necessary but has yet to do so. A CRA failure to pay its subordinate obligations would not affect the status its tax increment bond obligations.
AMPLE RESERVES
The CRA maintains high fund balance levels which provide flexibility to fund future capital requirements or unanticipated costs. Despite a $4.5 million drawdown, the unaudited fiscal 2013 fund balance remains robust at $57.1 million or over 200% of total fiscal 2013 CRA expenditures. The CRA's policy is to maintain a fund balance of between 15% and 25% of budgeted expenditures. Budgeted fiscal 2014 CRA operations are balanced. The CRA is expected to remain in compliance with its reserve policy, providing additional cushion against revenue fluctuations.
CENTRAL FLORIDA ECONOMY STRENGTHENS
The local economy continues to expand and diversify. Employment levels have increased steadily since 2011 and were up 2.8% in December 2013 on a year over year basis. The city's December 2013 unemployment rate of 5.3% was lower than the state and national rates of 5.9% and 6.5%, respectively.
Citywide taxable values gained 3.4% in fiscal 2014, the second consecutive increase after three years of decline, attributable to a combination of higher residential values and reduced homestead exemptions. Median January 2014 home values are up 22% over the prior year according to Zillow.com suggesting future tax base growth.
The leisure and hospitality sector continues to be a major component of the local economy, comprising about 21% of total employment. Disney is the dominant player, employing about 53,500 or about 9% of total county employment. Universal Orlando reports 13,000 employees while SeaWorld of Orlando's workforce consists of approximately 7,000. Beside growing theme park attendance and TDT collections, expanding occupancy and hotel room rates are indicative of the strong recovery within this sector.
EXPANDING BIOTECH AND LIFE SCIENCE HUB
Economic diversification has occurred most notably within the education and health services sectors. A growing biotechnology and life sciences cluster is centered in Lake Nona Medical City, a master planned mixed community within Orlando. Lake Nona is anchored by The University of Central Florida's (UCF) Health Sciences Campus, which is home to its College of Medicine and the Burnett College of Biomedical Sciences, and the Sanford-Burnham Medical Research Institute. Other Lake Nona medical facilities are recently opened Nemours Children's and a new Veteran's Administration hospital. Significant additional residential and commercial development throughout the city points towards ongoing near term growth.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors.
Applicable Criteria and Related Research:
-- 'Tax-Supported Rating Criteria' (Aug. 14, 2012);
-- 'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=822112
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