NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A+' rating to the following Sumter Landing Community Development District, FL (Sumter Landing CDD or the district) bonds:
--$55.675 million taxable recreational revenue refunding bonds series 2015A;
The bonds are expected to sell September 22 via a negotiated sale. Proceeds will refund outstanding tax-exempt district recreational revenue bonds for debt service savings.
In addition, Fitch assigns the district's implied general obligation 'A+'.
The Rating Outlook is Stable.
The bonds are secured by amenities fees, user fees derived from the use of recreational facilities within the district's service area and interest earnings on bond funds. Amenities fees consist of a monthly charge on 6,604 designated residential units located within the Villages (recreational amenities service area or RASA) for the use of recreational facilities. Amenities fees are levied on the same bill with utility charges and payment is secured by a foreclosable lien on each resident's property within RASA, senior to all other liens except the payment of property taxes and first institutional mortgages.
KEY RATING DRIVERS
STABLE REVENUE BASE: Amenities fees, the primary source of security, are collected from 6,604 single family residences within the residential amenities service area (RASA). The area is fully developed and resident-owned with no payer concentration.
STRONG ENFORCEMENT/COLLECTION MECHANISMS: The obligation to pay the amenities fees is secured by a foreclosable lien on property, subordinate only to property taxes and first institutional mortgages. Amenities fees are levied on residents' utility bill. These features provide strong incentives for payment of the amenities fees.
HIGHLY SUCCESSFUL RETIREMENT COMMUNITY: The district is located within The Villages, one of the fastest growing retirement communities in the nation. The Villages span 21,812 acres in central Florida and currently includes over 105,000 residents.
MODERATE DEBT SERVICE COVERAGE: Pro forma net revenue coverage of maximum annual debt service is a healthy 1.75x, well above the 1.25x rate covenant.
DEVELOPER ROLE LIMITED: The developer through its ownership of most of the commercial property in the district controls most of the votes in electing the board of supervisors. Fitch believes the district's exposure to potential developer financial difficulties is partially mitigated by statutory constraints imposed on elected officials and legal assignment of the amenities fees to the district.
RATE COVENANT VIOLATION: Significant financial weakness resulting in erosion of margins could to negative rating action.
The Villages is a retirement community encompassing over 22,600 acres located primarily in Sumter County (implied GO rated 'AA-') in central Florida, about 50 miles northwest of Orlando. A portion of the Villages spills over into Marion County as well as Lake County (implied GO rating of 'AA-'). Begun in the 1970s, the development has experienced extraordinary growth and currently contains over 54,000 homes and over 105,000 residents. At build-out, the Villages is projected to include 112,000 residents and over 58,000 homes.
GOVERNANCE AND MANAGEMENT
The district is a local unit of special purpose government created in 2002 to manage and finance basic community development services. The district encompasses only 432.4 acres but owns and operates recreational facilities throughout the RASA, a 1,500 acre portion of the Villages encompassing roughly corresponding with Village Community Development District No. 5 and a portion of No. 6 (special assessment bonds for both districts rated 'A' with Stable Outlooks). The district is governed by a five member board of supervisors elected by property owners who then select a district manager to manage day-to-day operations.
DEVELOPER RISK OFFSET BY LEGAL AND STRUCTURAL CONSTRAINTS
The district is entirely commercial with over 96% of the property owned by an affiliate of the developer, The Villages of Lake-Sumter, Inc. The developer's position as the majority land owner in the district enables it to cast the most votes in board elections. This raises the risk that developer could influence the board to act in the developer's interest at the expense of bondholders.
However, Fitch believes such a scenario is remote. Board members, as elected officials, are subject to statutory standards of professional responsibility, accountability and disclosure making it difficult for officials to take actions outside the parameters of the district's governmental responsibilities.
IRS LIABILITY CONTAINED
Fitch believes that the Internal Revenue Service (IRS) findings regarding Village Center Community Development District's (VCCDD) recreational revenue bonds will not have a materially adverse effect upon the district. The IRS concluded that VCCDD is not considered a governmental entity for the purpose of issuing tax-exempt bonds and its recreational revenue bonds may be private activity bonds. The district's governance and debt structures are similar to those of VCCDD and the IRS extended its audit to the district in 2009.
However, this refunding of outstanding tax-exempt debt with taxable bonds eliminates the issue going forward and any IRS penalties applied to the bonds to be refunded will be limited in scope and more than amply accommodated with district cash and investments on hand.
DIVERSE AND STABLE PAYMENT BASE
Amenities fees are the primary revenue source for district operations but other income includes fees, rentals and charges associated with the use of the recreational facilities. The fees are derived from a diverse base, consisting of 6,604 residential units located within RASA. The area is fully built-out and occupied with no fee payer representing a significant portion of pledged revenues.
Each resident of the Villages is obligated to pay monthly amenities fees to the district. Amenities fee payment requirements range from $110 to $155 per month with the average rate hovering around $141. Fees can be raised or lowered according to a CPI index, although management retains some discretion to enact the rate adjustments. Whenever a residence is sold, the rate is adjusted to the prevailing rate at the time, currently $145. Other fees and charges stemming from the use of recreational facilities constituted a significant 40% of total revenues in fiscal 2014. These fees provide higher potential for revenue expansion as evidenced by a 33% increase over last three fiscal years.
STRONG ENFORCEMENT AND COLLECTION MECHANISMS
The obligation of each resident to pay amenities fees is secured by a foreclosable lien on their home. This provides a strong incentive to pay the amenities fees. The lien of amenities fees is subordinate to the payment of property taxes and first institutional mortgages. According to the district, over 45% of residents do not take out mortgages to purchase their homes in the Villages, adding to the strength of this enforcement mechanism.
Amenities fees are levied on the same bill as utility, trash collection and other fees billed by the North Sumter County Utility Dependent District (NSCUDD - senior and subordinate utility revenue bonds rate 'A'/'A-' with Stable Outlook). Payment receipts are applied first to past and current water and wastewater fees and charges and then to the amenities fees accounts so that a partial payment of the utility bill could result in insufficient monies to cover the amenities fees. However, amenities fee collection rates have historically been excellent totalling 99.6% as of July 31, 2015.
SOLID COVERAGE REQUIREMENTS
The bond documents provide a rate covenant requiring net revenues of the district's recreational amenities operations to cover annual debt service by at least 1.25x. Pro forma coverage of maximum annual debt service on the bonds based on fiscal 2014 net revenues was a solid 1.76x. The higher coverage and sizable cash and investments offset concerns regarding restrictions on raising amenities fees, unanticipated operating costs and lack of a reserve fund.
ELEVATED DEBT LEVELS
Debt levels are elevated within the RASA with debt burden estimated at approximately 8.5% of TAV. The majority of the debt consists of the recreational revenue bonds with overlapping debt comprising no more than 10% of total debt levels. Principal amortization is below average with 32% of principal retired within the next ten years. Capital plans are modest and funded on a pay-go basis. No additional debt secured by amenities fees is planned.
LIMITED, WELL MANAGED FINANCES
District financial operations are limited but well maintained. The district has no employees so all services are contracted out. Recreational facilities operations are reported as a separate enterprise fund. Major spending items include contractual services for public safety and recreation as well as debt service on the bonds. Operating results have historically been positive due in part to the 1.25x rate covenant. Liquidity is very strong as fiscal 2014 available cash and investments of $17.1 million would cover over 100% of operating and debt service costs.
AREA ECONOMY BOLSTERED BY THE VILLAGES
The presence of the Villages has been the catalyst for economic expansion in Sumter County and surrounding areas. Prior to the Villages, the economy was based on agriculture and corrections. At present, Village residents comprise over half of the county's population and were primarily responsible the county's 5.8% average annual population growth between 2000 and 2010. According to the U.S. census, over 50% of residents are over 65 years old compared to the state average of 18.7%. The Villages and the Villages Regional Medical Center are the county's third and sixth largest employers. The impact of the Villages upon the economies of Lake and Marion Counties has been more modest than in Sumter due to their larger economies and the smaller presence of the Villages within each of those counties.
Sumter County's economic expansion slowed in 2015 as employment for the first six months of 2015 was up only 0.7% from the prior year. Prior to 2015, the county experienced four consecutive years of employment growth averaging over 4% annually. The county unemployment rate of 7.6% as of May 2015 was significantly above the state (5.6%) and national (5.3%) rates. Income levels within the county are on par with the state averages but below the national norms. Wealth indices are likely constrained by the large number of retirees on fixed incomes. Villages' data indicates that about half of new homebuyers report income of over $100,000, although these earnings may represent many homebuyers' last year of employment before retirement.
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, Zillow Group.
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
Dodd-Frank Rating Information Disclosure Form