A True Credit Improvement Story
Updated: Oct 31, 2018
Colorado metropolitan (metro) district bonds provide investors unique deleveraging characteristics that are hard to find in other sectors of the municipal bond market and are only available in a handful of states. Backed by a quality stream of property tax revenues, metro districts pay down debt over time as property values rise. This deleveraging scenario offers investors a true credit improvement story. Additionally, metro districts are relatively simple to analyze, offer exposure to Colorado’s real estate market, and come without pension issues common to other municipal issuers.
Consider Vista Ridge Metro District located 13 miles east of Boulder, Colorado. Spanning over 900 acres, the master-planned community is expected to include 2,275 residential units and 78 acres of commercial property at full build-out estimated in 2022.
Investors were first introduced to Vista Ridge Metro District bonds in June 2001 before any homes were built. The district sold $27 million in non-rated bonds at a 7.625% tax-exempt yield. At this early stage of development, investors require significantly higher yields to compensate them for development and liquidity risk.
By 2006, 1,540 homes were constructed, allowing the district to refinance the high-cost debt and borrow additional funds. With construction well underway, development risk had been significantly reduced but not yet eliminated. The new issuance, with Aa3-rated Radian insurance, was still non-rated on an underlying basis. The 30-year bond was issued to yield 4.68%, notably less than the earlier stage borrowings. At this point, the district had close to $45 million in total long-term debt with only $26 million in assessed value.
During the recession that began in 2008, new home sales and construction slowed in many districts, including Vista Ridge. In certain cases, this volatile period presented knowledgeable investors with attractive buying opportunities.
Once the effects of the recession began to wear off, housing prices rebounded in dramatic fashion and made their way into assessed values. Colorado’s economy, in particular, outperformed the nation and benefited tremendously from in-migration. This recovery period marks a noteworthy change in district finances. By 2016, the district refinanced again at even lower yields and with unlimited general obligation status. The 30- year bond priced at 4.25%. Moody’s took notice of the credit improvement and gave the district an investment grade underlying rating of Baa1.
While it may take another three to five years to develop the remaining residential and commercial parcels, the district has matured. Investors are no longer exposed to the early-stage development risks from years prior. Now with over $73 million in assessed value and $40 million in debt, the debt-to-assessed value ratio is fast approaching 50%. This is a significant milestone for many metro districts. In most cases, a ratio of less than 50% allows districts to convert to unlimited general obligation status.
In Colorado, there are hundreds of metro districts in various stages of development with bonds outstanding.The sector makes up over 7% of Colorado’s $69 billion municipal bond market. From an investor’s perspective,a simple general obligation structure that can de-lever over time as assessed values rise remains attractive. Considering the real estate cycle, Equus favors more mature districts, like Vista Ridge, with lower leverage.
This report is for informational purposes only and should not be considered a solicitation to buy or sell any security. Neither Equus Private Wealth nor any other party guarantees its accuracy or makes warranties regarding results from its usage. Nothing herein is intended to provide enough information to make an investment decision. Redistribution is prohibited without the express written consent of the Equus Private Wealth Management, LLC. Data for this report was obtained from EMMA disclosures, Colorado Department of Local Affairs, and internal analysis. For questions about this report call Matt Owings at (970) 963-5810.