NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A-' rating on the following Orlando, Florida Community Redevelopment Agency (CRA) bonds:
--$23.9 million tax increment revenue refunding bonds (Republic Drive/Universal Boulevard District), series 2012.
The Rating Outlook is Stable.
SECURITY
Pledged revenues consist principally of tax increment revenue generated from the redevelopment area deposited by the agency into the revenue account held by the trustee. Additional security is provided by a cash funded debt service reserve account (DSRF).
KEY RATING DRIVERS
UNIVERSAL ORLANDO EXPOSURE: Almost all of the tax increment area consists of entertainment and related venues affiliated with Universal Orlando. Universal Orlando's reputation as a world class tourist attraction and substantial ongoing investment in its properties somewhat mitigate concerns about the high level of exposure to a single property owner.
RECENT ATTENDANCE GAINS: Attendance at Universal Orlando's theme park has been growing recently as a result of an improving economy and the opening of new attractions. Planned new exhibits and hotels are expected to further boost visitor counts.
NO COLLECTION RISK: The two taxing authorities, the City of Orlando (the city) and Orange County (implied general obligations for both rated 'AAA'/Outlook Stable) are statutorily required to appropriate 95% of the incremental tax levy, regardless of actual collections.
STRONG DEBT SERVICE COVERAGE: Incremental revenues covered maximum annual debt service (MADS) by a solid 2.4x in fiscal 2015, up from 2.0x in the prior year. The widened coverage was attributable to a combination of increased district taxable assessed values (TAV) and a tax rate increase by the city.
SOLID STRESS PERFORMANCE: Taxable values within the redevelopment area could decline by 58% and still cover MADS by at least 1.0x.
STRENGTHENED AND DIVERSIFYING LOCAL ECONOMY: The Orlando region has seen an upsurge in tourism and other economic activity over the past three to four years. Significant health science-related development provides diversification away from the volatile tourist sector.
RATING SENSITIVITIES
TAX BASE CONTRACTION: A significant decline in district assessed valuation narrowing coverage could lead to negative rating action.
CREDIT PROFILE
The district was formed in 1994 and encompasses 780 acres in Orlando, Florida (implied general obligations rated 'AAA'/ Outlook Stable by Fitch). Universal City Development Partners, Ltd (Universal Orlando) is the corporate owner of 680 acres of property within the redevelopment area, with TAV that exceeds the project area's incremental value. Universal Orlando is owned by Comcast Corporation (IDR 'A-'/Outlook Stable) through its wholly owned subsidiary, NBC Universal Media, LLC.
Universal Studios properties include the Universal Studios Theme Park, the Islands of Adventure Theme Park, City Walk, and auxiliary components such as the Hard Rock, Portofino Bay and Cabana Bay hotels, parking garages, and restaurants. Commercial developments in the area are limited and consist primarily of back-office functions for the theme parks, and residences for theme park workers.
VERY HIGH CONCENTRATION LEVELS
The district is dominated by Universal Orlando, which accounts for 87% of the redevelopment area and 89% of TAV. Concern regarding Universal Orlando's tax base concentration is partly mitigated by Universal's strong and proven brand, Orlando's presence as a worldwide tourist destination and management's sizable and expanding investment in its properties.
Other positive credit factors include the primacy of the property tax pledge (ahead of all other liens) and the rigorous Florida tax collection process in which tax certificates are promptly sold on properties of delinquent taxpayers, ensuring adequate cash flow to support debt service. Collection risk is also mitigated by the requirement that the taxing entities, the city and Orange County (implied general obligations rated 'AAA'/ Stable Outlook) pay the CRA 95% of the tax increment revenues regardless of actual collections.
ROBUST DEBT SERVICE COVERAGE
Coverage of MADS by fiscal 2015 increment revenues was a solid 2.4x. This represents a significant increase from fiscal 2014 coverage of 2.0x MADS. The boost in coverage stems from an $87 million or 7.8% increase in taxable values pushing incremental valuations up by 11%. The growth in assessed values was propelled by new rides and features coming onto the tax rolls such as the Transformers ride, Harry Potter Diagon Alley and partial construction of the Cabana Bay hotel.
Incremental revenues were also bolstered by a one mill increase in the city's 2015 tax rate, the first increase in seven years. As a consequence, combined city/county millage totaled 11.1 mills or 10% above the prior combined millage. Payment of debt service can withstand significant stress as TAV could decline by 58% and the resulting tax increment would still cover MADS by at least 1.0x. The incremental to base year value of 272% provides some moderation to tax increment volatility. The initial fiscal 2016 taxable value certification of $1.6 billion for the district is considerably above the district's current valuation of $1.2 billion, portending future gains in incremental revenues.
IMPROVED THEME PARK PERFORMANCE
Park performance has been strong since 2009. Attendance levels at Universal Orlando were up each year from 2010 through 2014, according to reports by Themed Entertainment Association/AECOM and Comcast. While no figures are publicly available for 2015, Comcast has reported record attendance through the third quarter of 2015 across all of its theme parks.
Attendance gains have been propelled by the Wizarding World of Harry Potter, which opened in mid-2010, a new Transformers ride and an improving economy. Comcast continues to make sizable investments in Universal Orlando including a King Kong ride at Islands of Adventure, the Volcano Bay water park scheduled to open in 2017 (Universal's Wet & Wild water park will close in 2016), a planned 400 room addition to Cabana Bay Resort and a new 1,000 room hotel named Sapphire Falls. These projects are expected to bolster future attendance and TAV growth.
SOLID LEGAL PROVISIONS
Legal provisions are adequate, and include an additional bonds test requirement that prior year's pledged revenues must equal at least 2.0x maximum annual debt service. Pledged revenues flow first to the authority for debt service, reserve fund replenishment and certain incidental costs, with residual revenues transferred to the taxing authorities to be used for any purpose. A debt service reserve fund funded with cash to maximum annual debt service provides additional support.
CENTRAL FLORIDA ECONOMY CONTINUES TO STRENGTHEN
The local economy continues to expand and diversify. Employment levels have increased steadily since 2011 and were up 1.4% in September 2015 over the prior year. The city's September 2015 unemployment rate of 4.4% was well below the state and national rates of 5.2% and 5.1%, respectively.
The leisure and hospitality sector continues to be a major component of the local economy, making up about 21% of total employment. Disney is the dominant player, employing about 69,000 or over 10% of total county employment. Universal Orlando reports 17,300 employees while SeaWorld of Orlando's workforce consists of approximately 7,000. Beside growing theme park attendance and tourist development tax TDT collections, expanding occupancy and hotel room rates are indicative of the strong recovery within this sector.
Economic diversification has occurred most notably within the education and health services sectors. A growing biotechnology and life sciences cluster is anchored by the University of Central Florida's (UCF) Health Sciences Campus, which is home to its College of Medicine and the Burnett College of Biomedical Sciences, the M.D. Anderson Cancer Center and the Sanford-Burnham Medical Research Institute. Other Lake Nona medical facilities are the recently opened Nemours Children's hospital and a new Veteran's Administration hospital. Significant additional residential and commercial development throughout the city including the development of UCF's new campus in downtown Orlando points towards ongoing near-term growth.
Additional information is available at 'www.fitchratings.com'.
Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to fewer than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by Jan. 20, 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.
In addition to the sources of information identified in Fitch's applicable criteria specified below, this action was informed by information from CreditScope, IHS Global Insight, and Zillow Group.
Applicable Criteria
Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=997705
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