Fitch Affirms San Diego Unified Port District, CA's Rev Bonds at 'A+'; Outlook Stable.
KEY RATING DRIVERS
The rating reflects the district's status as a secondary west coast port, with a majority of revenues derived from lease-supported real estate operations, and a focus on serving medium-sized vessels in its maritime operations. As most of the port's revenues are reliant on hotel and tourism activities, real estate operations are exposed to economic cycles, but this is somewhat mitigated by the port's strategic location in San Diego and the economic strength and popularity of the area. The district benefits from high average rating case coverage over 6x on senior debt and a strong cash position which produces negative average rating case leverage, indicating unrestricted cash exceeds net debt outstanding.
Mix of Maritime and Real Estate Activities - Revenue Risk (Volume): Midrange
As a secondary port of call, the district faces competition from larger west coast seaports, and maritime operations are moderately reliant on particular tenants and certain types of cargo. Additionally, as the majority of the district's revenues are derived from hotel and tourism activities, real estate operations are exposed to economic cycles. This is somewhat mitigated by the port's strategic location in San Diego and the economic strength and popularity of area, which maintains a high volume of tourists and visitors.
Diverse Revenue Sources - Revenue Risk (Price): Midrange
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 account for more than half of total operating revenues.
Limited Future Capital Needs - Infrastructure Development and Renewal: Stronger
The port's five-year capital improvement plan (CIP) requires approximately $28.5 million, is manageable, and budgeted to be fully funded through grants, excess cash flow, and capital reserves. The port does not plan to issue additional debt in the near to medium term to funds its CIP.
Sound Debt Structure - Debt Structure: Stronger
The district's rated debt is senior, fixed rate and fully amortizing with stable annual debt service requirements. Structural features include a 1.25x rate covenant and additional bonds require 1.25x coverage of projected maximum annual debt service. A 100% cash funded debt service reserve fund is maintained.
The district maintains robust financial metrics with average Fitch-calculated rating case coverage on senior debt at 6.4x. Though not rated by Fitch, subordinate debt coverage remains strong and average of 2.7x. Net debt-to-cash flow available for debt service (CFADS) is negative, averaging -4.4x in Fitch's rating case as a result of the district's strong cash balances, which also contributes to a healthy liquidity position averaging 245 days cash on hand (DCOH).
Port of San Francisco, CA (A/Stable) is a comparable peer to the district in terms of rating level, financial metrics, business focus, and status as secondary port of call. Like the Port of San Francisco, the district receives the majority of revenues from real estate operations. However, San Diego has a significantly smaller capital plan than San Francisco.
Future Developments That May, Individually or Collectively, Lead to Negative Rating Action:
A material shrinkage in the district's revenues, significant deterioration in liquidity, or a substantial addition of debt that results in a sustained reduction in debt service coverage below 2.2x or increased leverage over 5.0x could lead to a negative rating action.
Future Developments That May, Individually or Collectively, Lead to Positive Rating Action:
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 at this time.
Total metric tons of cargo decreased 2.9% to 2.8 million tons in 2017. However, cargo tonnage has declined overall since 2006, evidenced by a 10 year CAGR of -1.3%. Overall vehicle units decreased 11.3% in 2017, despite seeing consistent growth since 2009; the port's management team expects to recoup the lost volume in 2019. Containers, measured in 20-foot-equivalent units (TEUs), saw growth, increasing 2.9%. Nearly all the TEU activity at the port is attributed to Dole Fresh Fruit Company. Dole Fresh Fruit is the port's main anchor tenant at Tenth Avenue Marine Terminal and has seen stable to increasing volume levels from both domestic and international shipments.
Operating revenues were strong in fiscal 2017, growing 6.3% to $170.4 million, marking a fifth year of growth. This was primarily driven by strong real estate operations, which made up 56.6% of operating revenues. Real estate revenues were stated at $102.7 million in 2016 and appear considerably lower in 2017 due to parking revenues being separated from the real estate operations revenue composition in 2017. The port expects real estate revenues to continue to rise over the next few years due to the ongoing construction of new hotels and sustained high demand for parking near the port. Real estate revenues have grown 1.8% in the nine months year-to-date (YTD) 2018. Maritime revenues made up 23% of 2017 revenues and grew 5% due to a retroactive rent payment from an industrial tenant, and increases in storage space rent. As of FY 2017, parking is no longer reported as part of real estate operations but is now a self-standing business division due to its recent growth and size. Parking income grew 13.4% in 2017. The addition of Sundays as a metered parking day, an increase in metered parking hours (ending at 8pm instead of 6pm), upgrades to parking space and meter technology, and increasing meter rates to be in line with city rates have all contributed to parking revenue growth. Nine month YTD parking revenues have grown 12.6%. Harbor Police revenues decreased by 4.5% in fiscal 2017, due to parking citation revenue being transferred to the port as a service profit center, and nine month YTD revenues are up 5.5%. Overall, the port expects steady future growth for all revenue divisions in the coming years.
In FY 2017, overall operating expenses increased to $188.3 million vs. $145.9 million in 2016. The primary reason for the increase in operating expense was due to an accounting adjustment related to GASB guidance for the standard retirement age; this alone resulted in a $24.7 million increase; excluding this cost, expenses increased 12.2%. Fiscal 2016 marked the fourth year of real estate operating expenses with a decrease of 0.6%. The decline was due to a decrease in legal contingencies of approximately $2.2 million, the prior year completion of Americans with Disabilities Act (ADA) improvements at various locations along the tidelands, and an accounting adjustment from the implementation of GASB 68 along with other cost-cutting initiatives. With the exception of fiscal 2012, real estate expenses have been trending downward. Maritime expenses in 2016 grew 1.8%. The increase was primarily due to consulting fees for the National City Marina District Balanced Land Use Plan project, and savings related to the Tenth Avenue Marine Terminal storm water, legal, and fire system maintenance costs. Harbor Police personnel expenses have decreased in recent years due to reduced personnel costs and vacancy management efforts but grew 12.6% in 2016 from changes in the recording of GASB 68 and OPEB accrual Workers' compensation and retirement expenses also increased.
Financial metrics remained robust in FY 2017. Fitch-calculated 2017 DSCR on rated debt remained strong at 9.8x from 11.6x in 2016. Although the port's revenues grew in FY 2017, total expenses were elevated because of higher incurred consulting fees related to various upcoming projects. Additionally, an adjustment was made to operating expenses related to the new GASB guidance for the standard retirement age, resulting in a $24.7 million increase in operating expenses; the GASB adjustment is a non-cash expense. All of the above contributed to a 14.3% reduction in CFADS in 2017 to $33.2 million.
The port's five year capital improvement plan (CIP) totals $28.5 million, which is anticipated to be funded with a mix of grant and operating revenues. The port does not plan to issue additional debt in the near to medium term to finance its CIP.
Fitch's base case used YTD 2018 data to project its first year and uses the port's budget information for 2018 data. Thereafter, revenues and expenses are based on management's conservative expectations of future performance, as well as Fitch's own growth assumptions. Cash was grown to maintain a historical average liquidity level of 340 DCOH. Given these factors, total revenues are expected to grow at a CAGR of 4.2%, while expenses grow at a 1.3% CAGR. This produced an average senior DSCR of 12.1x and negative average leverage.
Fitch's rating case grew all revenues at a CAGR of 1.6%, based on the net effect of stresses and recovery applied to the base case. Operating expenses were stressed 50 basis points above base case expenses. Cash was held flat at the 2017 level and resulted in reduced liquidity of 245 DCOH. This profile produced a much narrower average senior DSCR of 6.4x while average leverage remained negative.
Authority debt has raised questions about the scope of protections provided by Chapter 9 of the U.S. bankruptcy code to bonds secured by pledged special revenues. Fitch's rating criteria treat special revenue obligations as independent from the related municipality's general credit quality. The outcome of the litigation could result in modifications to Fitch's approach. For more information, see "What Investors Want to Know: The Impact of the Puerto Rico Ruling on Special Revenue Debt" at www.fitchratings.com.
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|Publication:||Daily the Pak Banker (Lahore, Pakistan)|
|Date:||Aug 13, 2018|
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