Fitch Ratings has affirmed the following bonds for Overland Park Development Corporation, Kansas (the corporation):
--$62.685 million outstanding second tier refunding revenue bonds, series 2007B (Overland Park convention center hotel project) at 'BB'.
The Rating Outlook is Stable.
SECURITY
The bonds are special limited obligations payable from a subordinate lien on the net operating revenues of the convention hotel, a senior lien on a 4.5% citywide transient guest tax (TGT), subject to annual appropriation, and a cash funded debt service reserve funded to the IRS standard. The bonds also have a leasehold interest on the convention hotel and a subordinate lien on the 1.5% TGT supporting the superior lien bonds.
KEY RATING DRIVERS
INSUFFICIENT COVERAGE FROM TAX REVENUE: The speculative grade 'BB' rating reflects the inability of the dedicated 4.5% portion of the TGT to sustain 1x coverage for debt service.
NOMINAL CREDIT FOR NON-TAX REVENUE: Fitch gives little weight in its rating to the subordinate pledge of net operating revenue from the single site convention center hotel given its erratic history and the difficulty in quantifying future revenues.
ASCENDING DEBT SERVICE: Continued revenue growth from the citywide hotel tax and/or operations of the convention center hotel is necessary to sufficiently service the ascending debt service load.
STRONG LOCAL ECONOMY: Fitch believes the city's deep and diverse economy supports sustainable long-term hotel demand despite recent weaknesses.
RATING SENSITIVITIES
CHANGES IN COVERAGE: Sustained deterioration in TGT collections would present a credit concern and could lead to a rating downgrade. Conversely, improvement leading to maximum annual debt service (MADS) coverage consistently in excess of 1x by historical pledged TGT revenues could lead to an upgrade.
CREDIT PROFILE
The corporation is a component unit of the city of Overland Park (GO bonds rated 'AAA' by Fitch), which benefits from its proximity to the Kansas City metro area. The not-for-profit corporation was created for the sole purpose of constructing and owning a 412-room convention hotel located adjacent to the city's convention center. The corporation board is comprised of six members of the city's governing body, appointed by the mayor and approved by the city council.
The convention hotel opened in December 2002 and is operated as a Sheraton hotel under a hotel operating agreement with Starwood Hotels & Resort (IDR rated 'BBB' with a Stable Outlook) that expires in November 2022. The city's convention center opened in 2002 and primarily hosts regional business and community needs in 60,000 square feet of exhibit space and a 25,000 square foot ballroom.
LEGAL STRUCTURE
Primary support for the rating is derived from the coverage generated from the first lien on the 4.5% and second lien on the 1.5% citywide TGT imposed upon the roughly 5,200 available hotel rooms located within the city. A citywide hotel tax has been levied since 1982 and is collected by the state and remitted to the city quarterly minus a 2% collection fee.
Overland Park has covenanted to budget sufficient citywide hotel tax revenues to pay the next year's debt service on the bonds pursuant to a debt service support agreement between the city and the corporation. However, the allocation of TGT revenues is subject to annual appropriation and is capped at amounts received solely from the 4.5% and 1.5% TGT. Once the city appropriates funds, the obligation is absolute and unconditional without abatement, deduction or set-off and counterclaim.
The bonds also have a subordinate pledge of net revenues from the convention hotel. Fitch gives this pledge little weight. In recent years, net hotel revenues have provided support for the superior lien bonds, thus freeing up much of the additional 1.5% TGT revenues upon which the bonds have a subordinate lien. However, the ascending debt service schedule and variability of net hotel revenues make it uncertain that this will continue to the same extent. Debt service on both series of bonds grows at a compound annual growth rate of about 2.8% through maturity in 2032. Debt service on the Fitch-rated bonds comprises 60% of total debt service.
The commitment of citywide TGT revenues can be released if debt service coverage from net revenues of the convention hotel exceeds 2.25x for three consecutive calendar years. However, these revenues would be reinstated if coverage subsequently fell below 1.75x at any time through maturity. Other legal provisions, which would only provide meaningful credit support in the unlikely event that the hotel tax commitment is released, include the crediting of all convention hotel revenues under a lockbox agreement with the trustee, and a 1.05x rate covenant.
HISTORICAL REVENUES AND COVERAGE
The citywide hotel tax experienced a compounded annual growth rate of 6.1% between 1994 and 2006, and the city in 2007 reasonably forecasted 3.7% annual increases between 2007 and 2018. Based on the 2007 forecast, available hotel tax revenues would fully cover annual debt service at least 1.4x throughout the life of the bonds. However, due to the severity of the economic recession, actual TGT revenues declined year-over-year by 17% in 2009 and 0.7% in 2010 before rebounding in 2011 with a 10.6% increase. This was followed by a 4.3% rise in 2012 and 8.6% growth in 2013; TGT revenues appear poised for a similar increase for 2014 through three quarters. Actual TGT revenues in 2013 were at 78% of initial projections for that year.
GROWTH REQUIREMENTS FOR COVERAGE
The ascending debt service schedule makes future coverage by 4.5% TGT revenues alone a challenge. The bonds are also supported by a cash funded $6.6 million debt service reserve. If estimated 2014 hotel tax revenues were held flat and no revenues were received from the net operating revenue pledge, the debt service reserve would be exhausted by 2025. Based on Fitch's calculations, 1.8% annual growth in citywide hotel tax revenues plus amounts in the debt service reserve would be necessary to sufficiently satisfy debt service in all years, relying only upon the 4.5% portion of the TGT. Annual growth of 2.6% would allow coverage without use of the debt service reserve.
COMBINED PLEDGED REVENUES COVERAGE
The rating does not take into consideration any future benefit of net operating revenues from the convention hotel. However, actual net operating revenues and other balances have enhanced debt service coverage in recent years. Total pledged revenues including surplus funds after payment of senior lien series 2007A bonds covered series 2007B debt service by 1.38x in 2011, 1.26x in 2012 and improved to 1.4x in 2013. 2013 combined pledged revenues cover maximum annual debt service in 2032 by 0.8x.
ECONOMY DRIVES FUTURE HOTEL TAX PERFORMANCE
Citywide hotel occupancy historically has been driven by individual and group business travelers. Local demand for hotels wavered somewhat in recent years due to both the protracted economic recession and Sprint Corporation's reduced presence within the city. As a positive development, several other major corporations have sublet space on the Sprint campus, which has led to increased hotel demand. Several small hotels are opening in the area.
The city encourages demand by tying economic incentives to hotel usage and a recently constructed soccer/sports complex contributes to hotel demand. An agreement between a local museum and the American Museum of Natural History is also expected to spur growth in occupancy. Additionally, there are several major economic development projects in the city and surrounding areas. Citywide hotel occupancy increased 8% year-to-date through November 2014, and the average daily room rate is up 4.7%.
STRONG LOCAL ECONOMY
Overland Park is the second largest city in the state of Kansas and located within the Kansas City metropolitan area. The region benefits from a deep and diverse local economy, an extensive transportation network, available land, and a well-educated workforce. Several Fortune 500 companies are located within the city. The financial services and professional and business service sectors account for a greater percentage of total countywide employment compared to the national average.
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, Financial Advisor.
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
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=964535
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