NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'A' rating on the following federally taxable military housing project certificates:
--$107.5 million Jefferies Military Housing Trust XLI, Fort Sill Project Certificates, series 2010 A.
The Rating Outlook is revised to Negative from Stable.
SECURITY
The certificates are secured by a first mortgage lien on all improvements, a pledge of all receipts of the project (consisting predominantly of the monthly Basic Allowance for Housing (BAH), and a cash-funded debt service reserve fund.
KEY RATING DRIVERS
SUFFICIENT DEBT SERVICE COVERAGE: The affirmation reflects the 1.62x debt service coverage ratio (DSCR) the project demonstrated in 2015. While this ratio is higher than the 1.25x coverage expected in the original pro forma (starting in 2016), Fitch anticipates the DSCR to be nearer to the 1.25x original pro forma expectation as turnover occurs and recent BAH decreases begin to take effect.
DECREASED BAH RATES: The 2016 BAH demonstrated a weighted average decrease from 2015 (based on current rank distribution) of 2.03% for Fort Sill. This decrease follows a weighted average decrease of 8.0% in 2015 from 2014 BAH levels. The Negative Outlook primarily reflects the challenges the project will have in meeting the 1.25x coverage as turnover occurs.
STRONG BASE ESSENTIALITY: Fort Sill is currently not expected to be negatively affected by any future base realignment and closure (BRAC). Additionally, management expects Fort Sill to receive two new battalions (approximately 800 soldiers) by the end of 2017, which mitigates concerns over the 400 civilian and military positions that are expected to be lost due to budgetary pressures.
ON-TIME CONSTRUCTION EXPECTATION: The developer expects all new units and rehabilitation units to be completed under budget and before the initial development phase (IDP) end date of December 2016.
STABLE OCCUPANCY: Management currently reports occupancy rates of 93.5% for the project and maintained an average occupancy rate of 92.1% for calendar year 2015.
RATING SENSITIVITIES
BAH DECREASES: If BAH rates decrease further it would likely have a negative impact on project revenues and may result in debt service coverage levels that are insufficient for its current rating level. If BAH decreases coupled with material turnover, coverage could quickly deteriorate and put negative pressure on the rating.
DECREASED OCCUPANCY/INCREASED EXPENSES: Management's inability to maintain occupancy rates and/or control project operating expenses could negatively impact debt service coverage levels and put negative pressure on the rating.
CREDIT PROFILE
BASE INFORMATION
Fort Sill is located near Lawton, Oklahoma and added approximately 2,000 civilian jobs after the 2005 base realignment and closure. Fort Sill's role as an active U.S. Army installation dates back to the South Plains Indian Wars that followed the American Civil War. Established in 1869, it served as a garrison for Army personnel and units that were conducting security and peacekeeping operations along the western border settlements. Fort Sill took on a new role for the Army after the frontier era ended as a training center. In 1911, it was selected as the U.S. Army's Field Artillery School, a mission that continues today.
PROJECT INFORMATION
The bond proceeds are being used to build 510 new units, complete 332 historic home renovations, perform renovations to 476 family housing units and build three community centers. In addition, the property manager will maintain the 432 recently built units during and after the development period. The 1,728 end-state units represent approximately 20% of the military personnel currently stationed at the base.
DEBT SERVICE COVERAGE LEVELS
The affirmation of the 'A' rating on the project certificates primarily reflects the 1.62x DSCR the project experienced in 2015 which is significantly higher than the 1.25x coverage level expected during the original pro forma (starting in 2016). Although this DSCR is higher than pro forma levels, Fitch anticipates coverage levels to be nearer to the 1.25x original pro forma coverage projection as recent BAH rate decreases are expected to reduce future revenues of the project as units turn over.
PROJECT OCCUPANCY LEVELS
The project has experience stable, albeit reduced, occupancy levels. Management reports occupancy rates for the project are currently 93.5% and was 92.1%, on average, in calendar year 2015. Additionally, management reports a waiting list for the project as well as a relatively short duration to refill vacant units.
BAH RATES
The 2016 BAH rate demonstrated an average decrease among all ranks of 2.23% and a weighted average (based on current rank distribution) of 2.03% for Fort Sill, which is expected to decrease operating revenue moving forward. This 2016 BAH rate decrease follows a 2015 average decrease of 5.1% and a weighted average decrease of 8.0%. If BAH rates decrease any further it would likely impact project revenues and may result in coverage levels that are insufficient for its current rating level.
PROJECT CONSTRUCTION
Construction risk is currently mitigated by Corvias' experience as both a property manager and property developer. Management expects all new construction and renovations to be completed before the original IDP end date of December 2016.
BRAC RISK
Of the Army's 97 installations, Fort Sill was ranked 19th in terms of military value during the 2005 BRAC process. This assessment places the post in the top 25% of the Army's domestic infrastructure. The four prior BRAC rounds did not consider Fort Sill for closure. The 2005 BRAC commission recommendations for Fort Sill provided a net gain for the installation. Fitch does not expect Fort Sill to be negatively affected by any future BRACs; however, in the unlikely event the base is affected there may be negative pressure on the rating.
DEBT SERVICE RESERVES
The certificates have a cash-funded debt service reserve fund sized at maximum annual debt service. The presence of this cash reserve enhances bondholder security.
PROJECT MANAGEMENT
The units are managed by Corvias (formerly Picerne) during and after the development period. The property manager currently manages approximately 25,000 affordable housing units at 13 various military installations around the U.S.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Military Housing Rating Criteria (pub. 18 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=870678
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=999483
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=999483
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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