Fitch Affirms I-470 & 350 Transportation Development District's (MO) Sales Tax Revs at 'A-'

NEW YORK--()--Fitch Ratings affirms at 'A-' the rating for I-470 & 350 Transportation Development District's (the district) $11,300,000 outstanding transportation sales tax refunding and improvement revenue bonds series 2007. The Rating Outlook is Stable.

SECURITY

The bonds are limited obligations of the district, secured by a 1% transportation district sales tax, subject to annual appropriation; the bonds are also secured by a cash-funded debt service reserve funded to the IRS standard.

KEY RATING DRIVERS

CONTINUED REVENUE VOLATILITY: Economically sensitive sales tax revenues remain somewhat volatile but surpassed the pre-recession peak in 2012. Revenues adequately cover scheduled sinking fund debt service, with excess revenues continuing to prepay (turbo) term bond principal.

TAXPAYER CONCENTRATION RISK: Revenues are derived from a small geographic area with considerable taxpayer concentration.

THIRD PARTY RISK: Sales tax collections are reliant upon the continuous operation of the shopping center, which is largely owned by a single corporate entity.

STRONG LEGAL STRUCTURE: Bond structure and covenants are strong and include a cash-funded debt service reserve, prohibition on further issuance of debt, mandatory sinking funds and early redemption provisions. Sales tax revenues are subject to annual appropriation, but there is little incentive to not appropriate as revenues may not be used for other purposes.

FAVORABLE ECONOMIC PROFILE: The district serves as a retail center for the southeast Kansas City metro area, with favorable demographic and wealth characteristics and limited competition within 10 miles.

RATING SENSITIVITIES

SALES TAX DECLINES: The rating is sensitive to continued strong performance of the concentrated retail area comprising the district, as this performance directly correlates with the trend in pledged revenues and debt service coverage.

LOSS OF TOP RETAILER: The rating is sensitive to the loss of a top district retailer. A sustained major vacancy or slow velocity of site releasing would likely move the rating down.

CREDIT PROFILE

The 87-acre transportation development district is located in the city of Lee's Summit, approximately 22 miles southeast of downtown Kansas City, Missouri (general obligation 'AA'; Outlook Stable by Fitch). The district is comprised solely of SummitWoods Crossing Shopping Center (the center), which is anchored by Target Corporation (IDR 'A-'), Lowe's Home Improvement, and Best Buy Co, Inc. (senior unsecured 'BB-' Outlook Stable by Fitch). The center is occupied by approximately 40 retailers, most of which lease their sites. The district is 100% occupied.

There is point-of-sale concentration with the top 10 taxpayers accounting for a high 74% of total sales tax revenues in calendar 2013. The developer is contemplating a third retail development adjacent to the current development and plans to seek city approval in the coming months. Fitch believes that there is the possibility for some competition from further local retail development outside the district, which may affect coverage and turbo redemption. There is otherwise limited retail competition within ten miles.

The district, organized in 2001, is governed by a five-member board of directors currently consisting entirely of employees of the district's developer. The mall is owned and managed by RED Development and is organized as a joint venture with CBL & Associates, Inc. (CBL). RED Development is privately held and holds an interest in 32 properties totaling more than 17 million square feet in 11 states. CBL is one of the largest publicly traded mall real estate investment trusts in the United States, with a current equity market cap of $3.7 billion. As of June 30, 2013, CBL owned controlling interests in 120 properties, including 77 enclosed malls and open-air centers throughout the U.S.

ADEQUATE PERFORMANCE OF CONCENTRATED REVENUES

Revenues are derived from a 1% voter-approved sales tax on sales within the district, which are deposited into a special fund for repayment of bonds and are subject to annual appropriation. However, appropriation risk is minimal as funds are not usable for any other purposes. Formerly, half of collections flowed through an overlapping tax increment financing (TIF) district prior to flowing to the trustee for the series 2007 bonds; since dissolution of the overlapping TIF, all collections flow to the trustee, subject to appropriation.

Year-on-year sales growth in the district was 2.4% despite the opening of a new development adjacent to the district; however, same-store sales in the district were down 3.5%.

The bonds were structured as serial bonds due through 2012 and a term bond due in 2029 with mandatory sinking funds resulting in descending debt service throughout the life of the bonds, assuming continued prepayment of principal. Furthermore, the bonds have a special mandatory redemption feature whereby all excess revenues must redeem the term bond, which will turbo principal and reduce leverage. In turn, the deleveraging will allow the bonds to handle greater potential revenue stress. Approximately 30% of the outstanding term bond principal has been redeemed, and based on current calculations, Fitch projects full repayment of the bonds in 2020, based on a trailing 36-month average of district sales and assuming no revenue growth.

Growth in revenues is not required from current levels to fully pay annual debt service. Revenues in 2012 covered maximum annual debt service 1.75 times (x). Based on Fitch stress tests, the district could withstand 7% annual revenue declines from 2012 levels and maintain 1.0x coverage with defeasance in 2022. Alternatively, simulating the loss of the top two taxpayers, the district could withstand a one-time 45% decline from 2012 levels and no subsequent growth and maintain adequate coverage of interest and sinking funds. However, the small geographic area, revenue source concentration, incongruent lease terms of center tenants to the bond's final maturity, and the reliance on a single third party to maintain and operate the property introduce the risk of future material and permanent revenue declines.

STRONG ECONOMIC PROFILE

The city of Lee's Summit is a suburban community approximately 22 miles southeast of Kansas City. The city has experienced steady population growth through the past decade. Wealth levels (as a proxy for local consumption) are high for the city, with median household income 160% of state and 143% of national averages. However, county wealth levels are weaker, with median household income at 89% of the national average. Unemployment statistics are mixed: in December 2013, city unemployment was 4.2% and county unemployment was 6.6%, compared with the state (5.6%) and national (6.5%) averages.

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, and IHS Global Insight.

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=826998

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Stephen Friday, +1-212-908-0384
Associate Director
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Arlene Bohner, +1-212-908-0554
Senior Director
or
Tertiary Analyst
Ryan Frank, +1-312-368-3133
Senior Director
or
Committee Chairperson
Douglas Offerman, +1-212-908-0889
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Stephen Friday, +1-212-908-0384
Associate Director
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Arlene Bohner, +1-212-908-0554
Senior Director
or
Tertiary Analyst
Ryan Frank, +1-312-368-3133
Senior Director
or
Committee Chairperson
Douglas Offerman, +1-212-908-0889
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com