Fitch Ratings downgrades Cheyenne Housing Authority's (the authority)
$2.5 million series 2004 housing revenue bonds (Foxcrest II Project) to
'BBB-' from 'BBB'.
The Rating Outlook is Negative.
The bonds are secured by the Foxcrest II project revenues and reserves
pledged to the bond trust estate and are special obligations of the
KEY RATING DRIVERS
INCREASED VACANCY/DECREASED NOI: The downgrade reflects increased
project vacancy largely due to turnover and decreased net operating
income which has caused an increased reliance on financial support from
the issuer to maintain covenanted debt service coverage in dramatically
higher amounts from 2010 to 2012.
MARKET CONDITIONS: The maintenance of the Negative Outlook is based on
the expectation of increased new competition that is reported to be
coming on line later in 2013.
AUTHORITY PLEDGE REFLECTED: The 'BBB-' rating reflects the authority's
covenanted pledge to maintain 1.30x debt service coverage and the
presence of a fully cash funded debt service reserve fund at 10% of
bonds outstanding (exceeding maximum annual debt service on the bonds).
Additionally, the Authority has increased the amount of unrestricted
assets related to the property in 2012.
INCREASED COMPETITION: Additional new competition from other senior
living facilities in the area and/or the existing new competition lowers
it rent levels to compete with the subject.
DECREASED DEMAND: Decreased demand for senior living units which could
put negative pressure on project occupancy levels, net operating revenue
and debt service coverage levels (prior to issuer transfers).
FLAT RENTAL RATES: Failure to raise rental rates or an inability to
raise rental rates due to market conditions may prevent project revenue
from keeping pace with increased project expenses.
AUTHORITY'S FAILURE TO HONOR COVENANT: Failure on the part of the
Authority to honor its pledge to transfer funds to maintain a minimum of
1.3x debt service coverage.
Fitch's rating approach for housing bonds secured by the revenue from a
single multifamily housing project involves the analysis of the
following: the pledged revenue and historical debt service coverage
ratio for the project; the competitive operating environment for the
subject property; the debt profile and legal structure of the
transaction; and a qualitative analysis of management oversight.
The 32-unit senior housing project built in 2004 is located in Cheyenne,
WY. The units are available to tenants at or below 110% of area median
income; the project does not receive any federal or state subsidy and
the mortgage is not insured. The project's debt service coverage ratio
for 2012 (without the issuer transfer) was 1.13x, which is a decrease
from the 2011 ratio (without issuer transfer) of 1.17x.
The issuer has covenanted to maintain 1.30x coverage and when the issuer
transfer is factored into the net operating income, the coverage was
1.32x in both years. The authority transfer amount increased to $33,500
from $29,000 in 2011. Management reports that it expects a 2013 transfer
will be made in the approximate amount of $33,500. The most recent
housing authority audit dated March 31, 2012 reports unrestricted net
assets of $7.1 million which is down from $8.4 million in 2011. However,
the amount of unrestricted assets related to this project increased in
2012 to $170,821.
Pledged revenues also include a debt service reserve fund currently
sized at 10% of bonds outstanding and totals $287,517. There is also a
replacement reserve fund currently sized at $101,289 with annual
contributions of 5% of rental revenue set aside. This replacement fund
amount is equal to $2,979 per unit and can be used for repairs and
replacements on a regular basis.
The subject property reported 94% occupancy in 2012-2010, averaging two
or three units vacant per month over these three years. The project was
96% occupied in 2009. Management reports that vacancies were largely due
to turnover from move-outs to properties that offer assisted living
units. There is currently one unit vacant (97% occupancy) and there is a
waiting list of 5 potential tenants; management reports that many of
these potential tenants need to sell their homes before they move in and
are having difficulty due to the downturn in the U.S. housing market.
The current rent per unit at the project is $825 and this rent level has
not been increased in the last four years.
Management reports that a new senior housing development with
approximately 78 units (38 independent unit and 40 assisted living
units) is being constructed two blocks away from Foxcrest II. It is
scheduled to be complete in the calendar year and amenities include a
movie theater, wellness center, and an assembly hall. Rent levels have
not been determined yet.
This new project is in addition to the 70 unit project that was built
four years ago across the street from the subject. This development
offers independent living and assisted living units with meals included.
While the current rent level for this property is significantly higher
than that of the subject property, management believes that the new
competition has had an impact on occupancy and they have increased
marketing and advertising for the subject property as a result.
The bond trust indenture includes a rent covenant whereby the issuer
agrees to maintain 1.30x annual debt service coverage either through
raising rents or using unrestricted funds to supplement income. Failure
to maintain 1.30x however, will not constitute an event of default on
The property maintains property insurance and personal injury insurance
up to $1 million per occurrence for each. There is no provision in the
trust indenture for the project to maintain business interruption
The authority was established in 1971 and is governed by a five-member
board of commissioners appointed by the mayor and subject to city
council approval. It serves as property manager for over 800 units and
administers over 1,500 Section 8 vouchers. The authority has a
demonstrated history of transferring funds to the bond trust indenture
to maintain the 1.30x coverage level. The authority itself is not rated
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.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 12, 2012).
Applicable Criteria and Related Research
Revenue-Supported Rating Criteria
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