NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the following Manchester/Ballas Community Improvement District, Missouri's (the district) bond rating at 'BBB':
--$8.955 million sales tax revenue bonds series 2009.
The Rating Outlook is Stable.
SECURITY
The bonds are limited obligations payable solely from the revenues of a 1% sales tax on retail sales collected within the district, net of state fees, security fees and operating expenses, subject to annual appropriation.
KEY RATING DRIVERS
ECONOMICALLY SENSITIVE AND GEOGRAPHICALLY LIMITED TAX: The bonds are secured by economically sensitive sales tax revenues generated exclusively within one mall owned by a single corporate entity. Bondholders are exposed to risk should the location suffer physical damage or close.
PAYER CONCENTRATION: There is point-of-sale concentration with the top 10 payers accounting for roughly 33% of total 2014 revenues.
SOLID MALL METRICS: The operating and financial metrics for the mall are currently strong, but could be impaired by adverse business or economic conditions.
TURBO STRUCTURE PROVIDES FLEXIBILITY: The bond's mandatory prepayment (turbo) feature coupled with one bullet maturity provides payment flexibility and mitigates the risk of revenue collection fluctuations.
SHORTER MATURITY MITIGATES UNCERTAINTY: The 2029 final bullet maturity date and likely earlier turbo payout, even under revenue declines, mitigates the risk from economic variability.
STRONG LOCAL ECONOMY: The mall is located in the city of Des Peres, whose residents exhibit an above average socio-economic profile, within the economically vibrant St. Louis MSA.
NO ADDITIONAL BONDS: Pursuant to the indenture no parity bonds may be issued and the district has contractually agreed with the city to not issue any other indebtedness or obligations secured by the revenue source.
ANNUAL APPROPRIATION: Bondholders do not have a first lien on revenues. The flow of revenue is subject to annual appropriation by the district's five member board including two city officials and three representatives from the developer. Fitch believes there is little incentive not to appropriate as the revenues remain stranded if not appropriated.
RATING SENSITIVITIES
CONTINUOUS MALL OPERATION: The rating is sensitive to the continued operation and upkeep of the mall and the ability to continue retail sales to support revenue flow.
LIMITED UPGRADE POTENTIAL: The district's extremely small geographic area, point-of-sale concentration, potential for future competition, and the reliance on a single third party to maintain and operate the property constrain the rating at the current level.
CREDIT PROFILE
The district encompasses a very small area, taking in substantially the entire West County Center mall, exclusive of the three anchor tenants (Nordstrom, Macy's, and JC Penney). The mall is advantageously located seven miles west of downtown St. Louis in the affluent city of Des Peres.
The district, which was created in December 2007 by petition of certain property owners, is governed by a five-member board of directors currently consisting of two city officials and three employee representatives of the mall developer.
The anchor tenants do not generate pledged tax revenue, but they provide long-term stability to the mall, since both Macy's and JC Penney's own their respective property and Nordstrom owns its building and has a long-term ground lease agreement.
The majority of the remaining retail stores lease space under agreements with varying expirations dates. The mall has experienced some retail turn-over over the years; however, the changes have not adversely impacted sales tax revenues.
DELEVERAGING ACCELERATES TURBO REDEMPTION
The bonds are structured as one bullet maturity in 2029 with a special mandatory redemption feature whereby all excess sales tax revenue at the bottom of the flow of funds is required to redeem a portion of the bullet maturity. The structure provides important payment flexibility as the bonds are secured by an economically sensitive sales tax.
Pledged revenues for 2013 increased by 86% over the year prior, as expected. The tax increment financing (TIF) bonds that shared equally in the 1% sales tax were redeemed in 2013, resulting in a doubling of the allocated sales tax for the rated bonds from 1/2 of 1% to the full 1%. The pace of special redemptions has since accelerated. The district redeemed $950,000 of bonds in 2014 and expects to redeem another $400,000 on March 1, 2015.
REVENUE DECLINE WOULD PRESSURE RATING
Fitch analysis shows that if currently collected 2014 revenues are held flat and no further subordinate debt is issued, annual collections would be adequate to service required interest payments plus annually retire a portion of the bullet maturity to fully redeem the bonds by 2022, seven years prior to stated maturity date. Under a Fitch stress scenario, sales tax revenues could decline 7.8% annually beginning in 2015 and revenues plus the cash funded reserve would be adequate to retire the bonds by the stated maturity date. The 'BBB' rating assumes that no additional debt can be issued under the indenture that could delay turbo payments.
Collections in 2014 were down 16.3% from 2013 as a major taxpayer made an error in the amount of tax it remitted to the Missouri Department of Revenue. The Department of Revenue is working to collect the unpaid taxes. The district estimates that this unpaid amount would significantly reduce the amount of the collections decline from 2013. The 'BBB' rating incorporates both taxpayer concentration and the expectations that there will be adequate enforcement of payment should a taxpayer initially fail to pay.
MALL FUNDAMENTALS SUPPORT CONTINUED PAYMENT
The mall was 98.8% occupied as of September 2014. Occupancy cost, defined as rent as a percentage of sales, is a Fitch measurement indicating the overall health of the mall; as the occupancy cost percentage nears 20%, there is more concern that rents may be too high and tenants may vacate to a competing mall. Occupancy costs ranging between 12%-15% are considered healthy/sustainable. The mall is solidly within this range at 13%.
The mall is owned by West County Mall CMBS LLC, whose sole member is a joint venture with CBL & Associates Properties, Inc. (CBL) (Fitch IDR 'BBB-') and TIAA-CREF, and is managed by CBL & Associates, Inc. CBL is one of the largest publicly traded mall real estate investment trusts in the United States, with a current equity market capitalization of $3.2 billion. As of Dec. 31, 2013, CBL owned controlling interests in or managed 152 properties, including 75 enclosed malls and open-air centers throughout the U.S.
There are five competing regional malls in the surrounding St. Louis area, all within 25 miles of the West County Center. In addition to these malls, there are two outlet centers that came online in the summer of 2013, in the Chesterfield area. Three of the five competing malls are owned by CBL and the remaining two properties are not considered by Fitch to be direct competitors because of their location or price point.
STRONG LOCAL ECONOMY
City residents display a superior socioeconomic profile with median household income at 256% of the 2013 state average. However, given the mall's regional draw, a portion of retail sales are most certainly derived from shoppers residing outside the city limits. Currently there are 147 retail stores or restaurants located within the district. There is point-of-sale concentration with the top 10 taxpayers accounting for 33% of total sales tax revenues in 2013.
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, and 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=979623
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