NEW YORK--()--Fitch Ratings has affirmed the 'AA-' rating on the $103.5 million Fort Jackson Housing LLC's military housing taxable revenue bonds (Fort Jackson, South Carolina) 2008 series A and in addition, assigns the bonds a Negative Outlook.
The 2008 series A bonds were privately placed in October 2008. The proceeds were used to provide a portion of the total development costs for constructing and renovating military family housing resulting in an end-state of 850 units at Fort Jackson and funding for reserves.
The Negative Outlook is based on 1) an anticipated shortfall in construction funds to pay all construction costs; 2) a revised construction schedule which is slightly off the original schedule by 15 units; and 3) project occupancy levels that remain low.
RATING RATIONALE:
--The Negative Outlook is based on an anticipated shortfall in the adequacy of the Construction Fund to pay all costs of construction and equipping the project, as a result of a ruling from the South Carolina Department of Health and Environmental Control reversing its previous position regarding asbestos abatement requirements. The shortfall is anticipated to cost the project $4.7 million. While the developer is currently discussing with the Army the following options to address this shortfall - sale proceeds from sale of excess land owned by Army; additional cash flow contributions to the construction account due to better than expected growth in the Basic Allowance for Housing (BAH) from 2008-2009; project contingency funds; or a reduction in the scope of work - it is unclear at this time how the shortfall will be remedied.
--Additionally, the developer reports that the construction schedule has been revised due to delays related to the abatement issue and some service member relocation issues resulting in a total delay off the original schedule by 15 units.
--Occupancy levels remain below projections. Poor housing conditions at Fort Jackson continue to result in weak demand for housing due to unit availability disruptions caused by demolition activity - occupancy as of June 2010 was 68% for marketable units. Additionally, there is a disconnect between BAH rates and market rents due to the softening of the real estate market in the surrounding area. The project has been and continues to keep units off line in preparation for new construction/renovation. In December 2009, the tenant waterfall was extended to allow for the available units to be rented to retired military personnel and Department of Defense or Federal Agency civilians.
--The rating affirmation is based on debt service coverage that slightly exceeds underwriting projections. Actual debt service coverage (based on nine months annualized unaudited operating data) as of June 30, 2010 demonstrates coverage of 1.38 times (x), which exceeds the original underwriting projection of 1.35x coverage largely due to the BAH increases that occurred in 2009.
--BAH, which is a strong and reliable source of revenue, received large increases in 2009 for 2010 which far outpace the underwriting assumptions used for BAH through the Initial Development Phase. While BAH decreased in 2010 by 3.6% on a weighted average basis, the increases of 2009 which were implemented in 2010 still allow for revenue amounts that exceed original projections.
KEY RATING DRIVERS OR WHAT COULD TRIGGER AN UPGRADE/DOWNGRADE:
--Failure to address the construction shortfall in a way that does not have a material effect on the number of units delivered or amenities planned which could result in diminished demand for the units and/or project revenue.
--Further delays in the construction of units.
--Failure to increase project occupancy for available units.
--Future large BAH decreases.
SECURITY:
The bonds are secured by a first mortgage lien on all improvements, a pledge of all receipts of the project (which are predominantly made up of the monthly housing allowance or BAH) and a cash-funded debt service reserve fund.
CREDIT SUMMARY:
In addition to the bond proceeds, the U.S. Army provided an equity contribution of $58.9 million and the developer will contribute $3 million in capital for the project. The combined equity amount relative to the amount of debt being issued is particularly large compared to other military housing transactions and shows a deep commitment on the part of the participants.
The developer for the Fort Jackson family housing project is Balfour Beatty Military Housing Development LLC. Balfour Beatty is one of the largest military housing developers in the U.S., providing its services to 17 military housing privatization projects comprising 32,000 end-state units on 44 military bases. Fort Jackson Housing will be managed by Balfour Beatty Military Housing Management LLC (BBMHC) which is an affiliate of the developer. BBMHC has historically been a manager of military housing facilities and it brings a strong management team capable of strategic decision-making regarding the development's upkeep and rental stream. Once development has been completed for various projects, BBMHC will manage over 32,000 military housing units.
Additional information is available at 'www.fitchratings.com'
In addition to the sources of information identified in the Revenue-Supported Rating Criteria, this action was additionally informed by information from Trimont Real Estate Advisors, Inc., Private Contractor.
Related Research:
'Rating Guidelines for Military Housing Bonds', dated Feb. 14, 2006.
'Revenue-Supported Rating Criteria', dated Aug. 16, 2010.
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548606
Rating Guidelines for Military Housing Bonds
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=264808
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