Dogwood Housing Inc., MD 2016A Revenue Bond Rating Lowered To 'BBB+(sf)' From 'A-(sf)' On Financial Performance

NEW YORK (S&P Global Ratings) March 13, 2019--S&P Global Ratings has lowered 
its rating on Public Finance Authority, Wis.' series 2016A multifamily housing 
revenue bonds, issued for Dogwood Housing, Inc., Md.'s southeast portfolio 
project, one notch to 'BBB+(sf)' from 'A-(sf)' and removed the rating from 
CreditWatch, where it was placed with negative implications Dec. 21, 2018. The 
outlook is stable.

At the same time, S&P Global Ratings affirmed its rating on the authority's 
series 2016B bonds, issued for the project, at 'BBB(sf)' and removed the 
rating from CreditWatch, where it was placed with negative implications Dec. 
21, 2018. The outlook is stable.

"The downgrade is based on our view of the project's financial performance, 
which is in line with that of transactions rated 'BBB+(sf)' for the senior 
bonds, as well as the owner's lack of formal financial policies, and an 
inability to demonstrate consistent, thorough loan acquisition and portfolio 
monitoring practices," said S&P Global Ratings credit analyst David 
Greenblatt.

The ratings reflect our opinion of the project's:
  • Highly vulnerable loss coverage assessment, with available funds to cover about 13% and 7% of the outstanding principal for series 2016A and 2016B bonds, respectively, and a higher loan-to-value ratio of 113.5% than those of similarly rated transactions;
  • Adequate, informal financial policies and practices of the project owner, Dogwood Housing, Inc., an affiliate of National Foundation for Affordable Housing Solutions, Inc.; and
  • Vulnerable strategic planning process of the project owner, with no multiyear financial and operational goals, or a succession plan.
We believe somewhat offsetting these weaknesses are what we consider the 
project's:
  • Extremely strong operating performance based on its high and stable calculated occupancy rate of 97.9% for all properties as of fiscal year-end 2017, and a reported 98.5% occupancy rate as of June 2018; and
  • Asset quality, which we view as strong based on the average property age of 37 years, the moderate rehabilitation incurred over the past five years, and the high average score from the U.S. Department of Housing and Urban Development's Real Estate Assessment Center inspection of 95 out of 100.
The stable outlook reflects our opinion of the revenue stream's likely 
stability due to the long-term Section 8 housing assistance payments contracts 
in place and strong historical occupancy. The project has demonstrated strong 
financial performance when incorporating withdrawals from reserves for 
maintenance and repair items. However, the project owner indicated there are 
informal policies and practices that govern its operations. We have found 
there is a correlation between stable operating and financial performance and 
stable debt service coverage (DSC) when owners and managers have formal, 
written strategic plans and specific policies and procedures that address 
adverse situations and solutions.

Since the transaction closed in 2016, the project has demonstrated strong 
financial performance. Should the properties sustain financial strength with a 
high DSC relative to those of similarly rated peers for multiple years, as a 
result of operational cost savings, while vacancies remain low and reserve 
balances increase, we could consider raising the ratings or revising the 
outlook to positive. In addition, the demonstration of formal, specific 
policies and practices would improve our assessment of the project owner, and 
may result in a positive rating action.

Should operating expenses significantly increase, either due to increased 
maintenance, administrative, or personnel costs, or if vacancies significantly 
rise, the project's DSC may fall below 1.10x maximum annual debt service. In 
this scenario, with a highly vulnerable loss coverage and DSC below 1.10x, we 
would lower the rating on the bonds. A decrease in occupancy to below 95% 
without an offsetting decrease in expenses could also lead us to consider a 
negative rating action.