NEW YORK--()--Fitch Ratings downgrades Cheyenne Housing Authority's (the authority) $2.5 million series 2004 housing revenue bonds (Foxcrest II Project) to 'BBB-' from 'BBB'.
The Rating Outlook is Negative.
The bonds are secured by the Foxcrest II project revenues and reserves pledged to the bond trust estate and are special obligations of the authority.
KEY RATING DRIVERS
INCREASED VACANCY/DECREASED NOI: The downgrade reflects increased project vacancy largely due to turnover and decreased net operating income which has caused an increased reliance on financial support from the issuer to maintain covenanted debt service coverage in dramatically higher amounts from 2010 to 2012.
MARKET CONDITIONS: The maintenance of the Negative Outlook is based on the expectation of increased new competition that is reported to be coming on line later in 2013.
AUTHORITY PLEDGE REFLECTED: The 'BBB-' rating reflects the authority's covenanted pledge to maintain 1.30x debt service coverage and the presence of a fully cash funded debt service reserve fund at 10% of bonds outstanding (exceeding maximum annual debt service on the bonds). Additionally, the Authority has increased the amount of unrestricted assets related to the property in 2012.
INCREASED COMPETITION: Additional new competition from other senior living facilities in the area and/or the existing new competition lowers it rent levels to compete with the subject.
DECREASED DEMAND: Decreased demand for senior living units which could put negative pressure on project occupancy levels, net operating revenue and debt service coverage levels (prior to issuer transfers).
FLAT RENTAL RATES: Failure to raise rental rates or an inability to raise rental rates due to market conditions may prevent project revenue from keeping pace with increased project expenses.
AUTHORITY'S FAILURE TO HONOR COVENANT: Failure on the part of the Authority to honor its pledge to transfer funds to maintain a minimum of 1.3x debt service coverage.
Fitch's rating approach for housing bonds secured by the revenue from a single multifamily housing project involves the analysis of the following: the pledged revenue and historical debt service coverage ratio for the project; the competitive operating environment for the subject property; the debt profile and legal structure of the transaction; and a qualitative analysis of management oversight.
The 32-unit senior housing project built in 2004 is located in Cheyenne, WY. The units are available to tenants at or below 110% of area median income; the project does not receive any federal or state subsidy and the mortgage is not insured. The project's debt service coverage ratio for 2012 (without the issuer transfer) was 1.13x, which is a decrease from the 2011 ratio (without issuer transfer) of 1.17x.
The issuer has covenanted to maintain 1.30x coverage and when the issuer transfer is factored into the net operating income, the coverage was 1.32x in both years. The authority transfer amount increased to $33,500 from $29,000 in 2011. Management reports that it expects a 2013 transfer will be made in the approximate amount of $33,500. The most recent housing authority audit dated March 31, 2012 reports unrestricted net assets of $7.1 million which is down from $8.4 million in 2011. However, the amount of unrestricted assets related to this project increased in 2012 to $170,821.
Pledged revenues also include a debt service reserve fund currently sized at 10% of bonds outstanding and totals $287,517. There is also a replacement reserve fund currently sized at $101,289 with annual contributions of 5% of rental revenue set aside. This replacement fund amount is equal to $2,979 per unit and can be used for repairs and replacements on a regular basis.
The subject property reported 94% occupancy in 2012-2010, averaging two or three units vacant per month over these three years. The project was 96% occupied in 2009. Management reports that vacancies were largely due to turnover from move-outs to properties that offer assisted living units. There is currently one unit vacant (97% occupancy) and there is a waiting list of 5 potential tenants; management reports that many of these potential tenants need to sell their homes before they move in and are having difficulty due to the downturn in the U.S. housing market.
The current rent per unit at the project is $825 and this rent level has not been increased in the last four years.
Management reports that a new senior housing development with approximately 78 units (38 independent unit and 40 assisted living units) is being constructed two blocks away from Foxcrest II. It is scheduled to be complete in the calendar year and amenities include a movie theater, wellness center, and an assembly hall. Rent levels have not been determined yet.
This new project is in addition to the 70 unit project that was built four years ago across the street from the subject. This development offers independent living and assisted living units with meals included. While the current rent level for this property is significantly higher than that of the subject property, management believes that the new competition has had an impact on occupancy and they have increased marketing and advertising for the subject property as a result.
The bond trust indenture includes a rent covenant whereby the issuer agrees to maintain 1.30x annual debt service coverage either through raising rents or using unrestricted funds to supplement income. Failure to maintain 1.30x however, will not constitute an event of default on the bonds.
The property maintains property insurance and personal injury insurance up to $1 million per occurrence for each. There is no provision in the trust indenture for the project to maintain business interruption insurance.
The authority was established in 1971 and is governed by a five-member board of commissioners appointed by the mayor and subject to city council approval. It serves as property manager for over 800 units and administers over 1,500 Section 8 vouchers. The authority has a demonstrated history of transferring funds to the bond trust indenture to maintain the 1.30x coverage level. The authority itself is not rated by Fitch.
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:
--'Revenue-Supported Rating Criteria' (June 12, 2012).
Applicable Criteria and Related Research
Revenue-Supported Rating Criteria