TEXT-Fitch affirms Hollywood, Fla. CRA bonds at 'A-'
Jan 29 - Fitch Ratings affirms an 'A-' rating on the following bonds of city of Hollywood, Florida's Community Redevelopment Agency's (CRA): --$15.3 million redevelopment bonds, series 2004 (Beach CRA); --$34.3 million redevelopment bonds, series 2007 (Beach CRA). The Rating Outlook is Stable. SECURITY The bonds are limited obligations of the CRA (the agency) secured by pledged 'trust fund revenues'. On or before each Jan. 1, each such taxing authority levying taxes in the Beach Redevelopment Area must appropriate and pay to the Trust Fund an amount equal to 95% of the incremental ad valorem taxes levied by that taxing authority. SENSITIVITY/RATING DRIVERS STRONG DEBT SERVICE COVERAGE: Pledged revenues continue to provide ample debt service coverage of over 3 times (x) maximum annual debt service (MADS) despite a sluggish housing market. Pledged revenues prove resilient under stress scenarios. SUCCESSFUL, DEVELOPED PROJECT AREA: The project area is a well-developed oceanfront location. While further development is not required to meet future debt service obligations, additional developments are currently planned which are expected to add to the area's value. SMALL AREA: Additional risk relates to the project area's small size at less than 300 acres and its coastal location, which makes it vulnerable to natural disasters. ELEVATED DEBT BURDEN: Overall debt levels are high due to the single-purpose nature of the agency and the tourist-based economy, with its relatively small residential population. Capital needs are manageable. CREDIT PROFILE The Beach Redevelopment Area (the project area) encompasses 293 acres along the Atlantic Ocean within the southeast area of the city of Hollywood (the city) (ULTGO rated 'A' with a Negative Outlook by Fitch). STRONG DEBT SERVICE COVERAGE Debt service coverage is strong and adequately compensates for for risks of future AV declines that may result from loss of one of the largest taxpayers or further depression of the housing market. Pledged revenues totaled $17.4 million in fiscal 2011, covering MADS (of $5.3 million) 3.27x. Debt service is level over the life of the bonds. Fiscal 2012 and 2013 projections for pledged revenue growth is 2.2% and 4%, respectively. Additionally, Fitch notes that the IV to base ratio is moderate at 2.6x. Coverage levels remain sound under different stress scenarios. Should the project area lose its top taxpayer, thereby decreasing pledged revenues by 18.2%, MADS coverage would still be strong at 2.74x. Fitch determined that MADS coverage would remain above 1.5x even if the tax base fell by over 50% in one year. SUSTAINED ECONOMIC DEVELOPMENT, TOURISM-DOMINATED ECONOMY The project area is largely developed and dominated by residential condominiums and hotel/motel property. It encompasses less than 2% of total city acreage but 19% of the city's taxable assessed valuation (TAV). Though the project area ended fiscal 2011 with ample reserves of $34.2 million or a very high 171% of spending, these reserves are not pledged to bondholders. Some economic development continues within the project area. The Margaritaville Resort Hotel, with approximately 350 rooms, is scheduled to open in March 2014. Also scheduled to open in calendar year 2014 are Costa Hollywood, a condominium hotel, and Villas of Positano II, a residential, retail and commercial development. The tourism sector, which has a large concentration in the local economy, shows persistent growth as hotel occupancy rates have increased for 35 consecutive months. In fiscal 2011, the city hosted 3.3 million tourists, generating over $405 million in tourist tax revenues. Within Broward County, the City of Hollywood ranks second in the collection of tourist tax dollars. MODERATELY CONCENTRATED TAX BASE The tax base and incremental value (IV) have fallen significantly (25% and 26%, respectively) since their peak in fiscal 2008. Though TAV increased a healthy 4% in fiscal 2011 with the opening of the Trump Condominium, it fell again in fiscal 2012 (-2.6%). Management reports stabilization on the horizon, with modest to flat growth for fiscal 2013 and 2014 (0.3% and 1%, respectively). Fitch considers these estimates realistic given signs of an improving housing market. The top 10 taxpayers represented 16% of TAV (18% of IV) in fiscal 2011, which Fitch considers moderate for a tax increment district. The largest taxpayer, the Diplomat, accounts for a high 13% of TAV. The Diplomat consists of a 38-story hotel, convention center, retail shopping complex, and parking garage. Occupancy levels at the Diplomat Hotel are reportedly sound. There is no significant concentration among any of the other taxpayers in the project area. Fitch notes as a credit positive that the project area's taxpayer concentration has fallen significantly since fiscal 2010, when the top 10 taxpayers accounted for 30% of the tax base. In fiscal 2010, the project area's top taxpayer was TRG Holiday, representing 14% of TAV (19% of IV). However, as of fiscal 2011, TRG Holiday has sold off its condominium to individual owners and thus is no longer a top taxpayer, reducing the project area's taxpayer concentration by almost half. SIGNIFICANT STATE AUDIT FINDINGS Fitch views as credit neutral a recent state audit of the agency, because the findings do not appear to impose a risk to the flow of tax increment revenue to bondholders. Published in November 2012, the audit found four significant weaknesses related to the agency's budget preparation and use of funds for community policing, operational support for capital improvements, and enhanced maintenance, to name a few. The agency released a formal response in December 2012 refuting the auditor's findings based on a divergent interpretation of state statutes and GAAP guidelines. The agency has no plans to take additional action in response to the audit. Both the auditor's and agency's responses will be posted on the state auditor's website for one year. The state auditor will perform a follow-up audit within a year, and Fitch will review the agency's performance at that time. HIGH DEBT LEVELS, MODERATE CAPITAL NEEDS Overall debt levels represent an elevated 6.8% of TAV, which is indicative of a tourist-based economy with a smaller permanent population due to the single-purpose nature of the agency. Risk related to high debt levels is tempered by the rapid amortization of outstanding principal, with over 80% of principal retired in 10 years. No new debt is planned. Fitch considers the additional bonds test adequate, requiring revenue received within 12 of the last 18 months to cover MADS by at least 1.5x. Capital needs appear manageable. The fiscal 2011-2015 capital improvement plan (CIP) totals $65.6 million or 3.4% of TAV. Underground utility work and capital improvements for the Margaritaville Resort Hotel account for the majority of the CIP. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. 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. 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 U.S. Local Government Tax-Supported Rating Criteria