SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has affirmed the San Diego Unified Port District, CA's (the district) $36.3 million of outstanding revenue bonds at 'A+'. The Rating Outlook is Stable.
KEY RATING DRIVERS
The rating reflects strong financial performance at a secondary west coast port, with a majority of revenues from lease-supported real estate operations and a focus on serving medium-sized vessels in its maritime operations. The district benefits from very strong coverage levels, and no additional borrowing is expected for its modest capital plan. Underlying revenue streams are atypical for port enterprises with dependence on various real estate and parking related cash flows, and, therefore, higher metrics are needed to maintain the district's strong rating level. The low leverage profile of the district serves as a strong mitigant to potential future economic volatility. Fitch views Port of San Francisco (CA), rated 'A' Stable, as a suitable peer for the district, given the port's similar revenue streams and financial metrics.
Revenue Risk - Volume: Midrange
Mix of Maritime and Real Estate Assets: The district's assets include real estate holdings in prime tourism/business areas of the city and two niche marine terminals primarily focused on break bulk and automotive cargo services. The port's multi-cargo facility is optimized to handle the growing market for refrigerated and roll-on/roll-off cargo.
Revenue Risk - Price: Midrange
Diverse Sources of Revenue: Revenues are primarily derived from real estate and maritime activities, including tenant agreements with hotel and rental properties in addition to revenues derived from parking facilities, restaurants, yacht clubs and wharfage charges. A portion of revenues derived from tenant agreements are supported by long-term fixed and percentage based agreements, which accounted for approximately 65% of fiscal 2015 (year-end June 30) operating revenues. Given the primarily leisure component of revenues, the district experienced a considerable decline in revenues during the most recent recession, but has since rebounded and moderate growth is forecast.
Infrastructure Development and Renewal: Stronger
Limited Future Capital Needs: Capital needs in the near term are limited and are fully funded through grants, excess cash and capital reserves. Management indicates the district's capital plan will require future cash flows of approximately $23 million through fiscal 2018.
Debt Structure: Stronger
Sound Debt Structure: The district's debt is entirely fixed rate with stable annual debt service requirements. Legal provisions include a 1.25x rate covenant and additional bonds require 1.25x coverage of projected maximum annual debt service. A cash funded debt service reserve fund is maintained.
Strong Balance Sheet and Financial Flexibility: Net debt to cash flow available for debt service (CFADS) is effectively cash positive at -1.38x as a result of the district's strong cash position, which also contributes to the issuer's strong liquidity position (374 days cash on hand as of fiscal year-end 2015). The senior debt service coverage ratio (DSCR) is extremely strong at 9.35x, while the all-in DSCR is narrower, but still robust, at 4.47x.
Peer Analysis: Port of San Francisco (CA), rated 'A' Stable, serves as a comparable peer to the district in terms of rating level, business focus, and secondary port function. Like the Port of San Francisco, the district receives the majority of revenues from real estate operations. However, the district has a significantly smaller capital plan than its peer and no plans for additional debt.
FACT Tool: U.S. Ports (opens in an Excel worksheet)
--A material shrinkage in the district's revenue base caused by economic factors or changes to operating leases that results in reduced debt service coverage levels (viewed by Fitch as unlikely in the near term);
--Significant deterioration in liquidity or a substantial addition of debt, as evidenced by an increasing net debt to CFADS.
--Given the potential volatility and underlying economic risks within the district's primary revenue streams, which are predominately leisure market related, upward rating movement is unlikely.
SUMMARY OF CREDIT
The district's financial performance continues to be robust, supported by strong growth in operating revenues and culminating in a very strong senior lien debt service coverage ratio (DSCR) of 9.35x for fiscal 2015. The district's total DSCR, which includes debt service on senior lien revenue bonds and the outstanding subordinated promissory note with the San Diego County Regional Airport Authority (current balance of $39.9 million), totalled 4.57x.
Operating revenues increased 2.6% in fiscal 2015, marking a third year of solid growth, primarily driven by strong real estate operations. Healthy performance by tideland hotels, restaurants and other visitor-serving businesses helped spur revenues, along with a substantial 20.5% increase in parking revenues. The addition of Sundays as a metered parking day, an increase in metered parking hours (ending at 8 p.m., instead of 6 p.m.) and a meter rate hike that brings rates in line with city rates all added to the 20.5% increase in parking revenues.
Total metric tons of cargo increased in fiscal 2015. However, cargo tons have seen an overall declining trend in six of the past nine years, evidenced by a fiscal 2009 through 2015 CAGR of -1.4%. Overall vehicle units through the port have seen strong, consistent growth since fiscal 2011, driven by low interest rates and the recovering economy facilitating the financing of new vehicles. The port's main anchor tenant at TAMT is Dole Fresh Fruit, which has seen stable to increasing volume levels. Dole is in the process of replacing its U.S. West Coast fleet with three new and larger ships, expected in July/August 2016. Once all vessels are deployed, management anticipates Dole will increase its volume capacity by up to 57%.
The district's FY2014-2018 capital improvement plan (CIP) totalled $98 million. As of June 30, 2015, the remaining CIP budget for the five-year plan, for fiscal years 2016 through 2018, was approximately $23.1 million (includes capitalized labor). The budget for the capital improvement program is set by the board of commissioners every five years. The plan post-2018 is unknown at this time but is expected to be finalized by October 2016. The CIP is fully funded from cash flows and grants through 2018. The district anticipates the new CIP will continue to be funded through cash flow and grants and debt funding is not expected at this time. Remaining large projects include the Shelter Island Boat Launch Facility Improvements, which totals $9.7 million through 2018 and received a $9.5 million grant in fiscal 2016, and infrastructure predesign at Chula Vista Bayfront, which totals $2.3 million.
Fitch's five-year Base Case assumes total operating revenues will increase at an average annual rate of 4.6%, supported by strong growth in real estate and maritime operations. Operating expenses increase at an average annual rate of 4.4% with the majority of growth occurring in fiscal 2017 due to the implementation of a new asset management program. In this scenario, the senior lien debt service coverage (DSCR) averages 10.0x and the total DSCR, including payments on the promissory note to the San Diego County Regional Airport Authority, averages 4.78x with a minimum of 3.93x. Under Fitch's Rating Case, which assumes total operating revenues will increase at an average annual rate of 2.6% based on flat maritime revenues and average annual growth of 4.2% in real estate operations, in addition to cost escalation, the senior lien DSCR averages 6.58x and the total DSCR averages 2.88x. In both cases, no additional debt is assumed and, given the district's strong cash position and minimal outstanding debt, net debt, or debt net unrestricted cash and debt service reserves, is negative throughout the forecast period.
The bonds are secured by a pledge of net revenues.
Additional information is available on www.fitchratings.com
Rating Criteria for Infrastructure and Project Finance (pub. 28 Sep 2015)
Rating Criteria for Ports (pub. 20 Oct 2015)
Dodd-Frank Rating Information Disclosure Form