NEW YORK--()--Fitch Ratings affirms its 'A' rating on approximately $36 million in Port Commission of the City and County of San Francisco (the port) revenue bonds, series 2010A and 2010B (the bonds). In addition, the port has approximately $2.7 million in outstanding subordinate lien California Department of Boating and Waterways loans. The Rating Outlook is Stable.
Key Rating Drivers:
Strategic Location with Stable Demand: The port's valuable real estate assets serve as a regional, national and international destination. Port properties have maintained relatively strong occupancy rates through the recent economic downturn, with current office occupancy at 92% and maritime shed occupancy at 100%. This unique positioning serves to partially mitigate the port's exposure to cyclical variations in both real estate and discretionary tourism spending, as well as to competition on the maritime side of the business.
Diverse Revenue Streams: Diversity of revenue generated from real estate, parking, and maritime assets has led to a stable operating profile for the port, with non-cancellable operating leases and minimum annual guarantees providing a base level of revenue stability (around 43% of operating revenues). The port also benefits from favorable renewal rates and pricing power due to its unique location.
Long-Term Capital Improvement Needs Remain: The burden of the port's aging infrastructure and overdue maintenance requirements remain a concern. The port estimates that over the next 10 years its facilities require approximately $1.6 billion to maintain a state of good repair, and $450 million for conditional seismic work. The majority of plan financing remains currently unidentified. The port is focused on prioritizing state of good repair and capital enhancement work to best utilize identified funding.
Stable Debt Structure: The port's debt is 100% fixed rate, with stable annual debt service requirements. The port plans additional revenue bonds in the 2013-2014 timeframe which will be partially covered with cruise passenger facility charge revenues. The port also plans to use certificates of participation (COP) issued through the city of San Francisco and payable by the port for some of its capital needs.
Strong Financial Profile: Low debt levels (2.1x gross debt/cash flow available for debt service, cash positive on a net debt basis) with expected coverage around 2.0x, are consistent with previous years. The port has an internal policy to maintain 1.75x coverage on debt going forward, and management intends to manage coverage to 2.0x or higher.
--Failure to find a sustainable solution to the capital program, including refurbishment of infrastructure and handling of overdue deferred maintenance, in addition to the port's ability to secure funding for unfunded portions of its capital program;
--Health of the San Francisco economy, including the real estate market and discretionary tourism spending;
--Fitch recognizes that the port's projections are conservative and actual performance for 2013 year to date exceeds plan. However, inability of the port to manage expenses and margins such that projected levels of net revenues are not achieved and DSCRs fall below port policy levels may put downward pressure on the rating.
The bonds are special, limited obligations of the Port Commission payable solely from net revenue and from amounts on deposit in certain funds and accounts held under the Indenture.
The port's current 10-year capital plan through 2023 includes $1.6 billion of projects needed to maintain the port in a state of good repair and $450 million in conditional seismic repairs which may be deferred. Management has identified an estimated $1.1 billion to fund the program, up from $956 million a year ago. Funding sources include additional port revenue bonds, GO bonds for parks related projects; infrastructure financing districts (IFD) bonds; port capital budget funds, and others. Fitch expects that the port will look to create partnerships and leverage various funding and financing options to address the significant backlog of deferred maintenance and the projected replacement costs in the plan. The port is focused on prioritizing refurbishment needs to best utilize funds available for capital development.
Fitch continues to note that the port's funding needs are considerable over the life of the plan, and inability of the port to secure a broad base of funding for remaining necessary maintenance and refurbishment work going forward may negatively impact credit quality, especially if leverage is used to fill the gap. The port will need to balance the timing and quantum of expected future borrowing with its ability to raise rental income and meet increased debt service requirements.
Port operating revenues have increased every year for the past 17 years, including through the recent downturn. Port operating revenues for fiscal year 2012 were $77.3 million, 6.9% above the previous year; 2011 was up 8.5% vs. 2010. The port derived approximately 67% of its total fiscal 2012 operating revenue from a diverse portfolio of over 550 leases. Approximately one third of revenue is derived from existing leases with terms extending 20 years and beyond. Leases and minimum annual guarantees provide a degree of revenue stability to the port, with $33 million of revenues in 2012 coming from minimum guarantees under non-cancellable operating leases.
Total operating and maintenance expenses reached $55.5 million in fiscal 2012, up 6.9% over 2011. The balance sheet has strengthened in recent years, with unrestricted cash balances reaching $92.4 million in 2012; this compares to $80 million in fiscal 2007, and represents 608 days cash on hand. Through January 2013, unrestricted cash has increased to $99.7 million, representing 656 days cash on hand. Looking forward, combined debt service coverage on both the 2010 bonds and projected issuances is expected to remain at or above 2.0x, consistent with coverage levels historically. While the legal covenant is 1.3x coverage, the port has an internal policy to maintain 1.75x coverage, and management intends to manage coverage to 2.0x or higher.
The port's unique mix of real estate assets, which serve as a regional, national and international destination, is a strength for the credit. In addition to the port's major tourist attractions, including Pier 39, Fisherman's Wharf, the Ferry building, and AT&T Park (Giants ballpark), the port also owns significant office and commercial space close to the financial district. Commercial and industrial leasing accounted for 56% of operating revenues in fiscal 2012, and has held steady at about 60% over the past several years. Port real estate assets have maintained relatively high occupancy rates despite the downturn, with office occupancy rising to 91% in 2012 and comparing favorably to city-wide vacancy rates. However, continued revenue generation by these assets, many of which were constructed 100 years ago, is dependent upon maintenance of the facilities in order to keep them functional, market competitive, and code compliant. Failure to address deferred maintenance requirements may negatively impact the port's revenue base and underlying credit quality.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--Rating Criteria for Infrastructure and Project Finance (July 12, 2012);
--'Rating Criteria for Ports' (Sept. 27, 2012).
Applicable Criteria and Related Research
Rating Criteria for Ports
Rating Criteria for Infrastructure and Project Finance