Fitch Affirms Hampton Roads PPV, LLC (VA) 2007 Ser A Military Hsg Tax Revs; Outlook Positive

NEW YORK--()--Fitch Ratings has affirmed the ratings on the following classes of Hampton Roads PPV, LLC military housing taxable revenue bonds (Hampton Roads Unaccompanied Housing Project), 2007 series A (the bonds):

-Approximately $210 million class I at 'A-';

-Approximately $58 million class II at 'BB';

-Approximately $9 million class III at 'B+'.

The Rating Outlook is revised to Positive from Negative.

SECURITY

The bonds are special limited obligations of the issuer and are primarily secured by a first lien on all receipts from the operation of the unaccompanied housing project known as Hampton Roads, located at Norfolk Naval Complex. The absence of a cash-funded debt service reserve fund limits protections afforded bondholders.

KEY RATING DRIVERS

SUFFICIENT DEBT SERVICE COVERAGE: The affirmation of the ratings reflects the 2015 debt service coverage ratios (DSCRs) of 1.58x, 1.22x, and 1.17x, which are increased from the 2014 respective DSCRs of 1.41x, 1.09x, and 1.05x.

INCREASED BAH: The revision to a Positive Outlook reflects the strong Basic Allowance for Housing (BAH) increases the project has received in the last two years as well as the expected improvement these increases should provide to revenues and net operating income moving forward. BAH rates have increased 8.44% in 2016, which should provide the project with higher revenues moving forward. This increase follows an 8.91% increase in BAH received in 2015.

STRONG OCCUPANCY: The project maintained an average occupancy of 95% for 2015 and 96% for 2014. Additionally, the project currently has a 97.5% occupancy level.

HIGH TURNOVER LEVELS: The project continues to experience high turnover levels as a result of deployments, which puts negative pressure on the project's operations.

ABSENCE OF CASH RESERVE: The absence of a cash-funded debt service reserve fund detracts from bondholder security for all classes of bonds; however, the Class III bonds are most vulnerable.

RATING SENSITIVITIES

BAH INCREASES: Future increases in BAH, combined with stable operations, could put positive pressure on the ratings and may result in an upgrade. Conversely, future decreases in BAH could put negative pressure on the ratings.

DECREASED OCCUPANCY AND/OR INCREASED EXPENSES: Management's inability to maintain high occupancy levels and control operating expenses could put negative pressure on the ratings.

CREDIT PROFILE

BASE INFORMATION

Hampton Roads/Norfolk Naval Complex (HRNC), located in southeastern Virginia about 90 miles from Richmond and 185 miles from Washington, D.C., is the largest naval base in the world. It covers approximately 4,631 acres. HRNC consists of a number of installations primarily located in the Norfolk and Sewells Point areas and extends to sites in Norfolk, Virginia Beach, Suffolk, Chesapeake, Portsmouth, Hampton, and Newport News. HRNC is surrounded by many navy installations such as Naval Weapons Station Yorktown/Cheatham Annex, Little Creek Naval Amphibious Base, Norfolk Naval Shipyard, Naval Air Station Oceana/Dam Neck Annex, and Naval Security Group Activity Northwest.

PROJECT INFORMATION

The housing project located on Norfolk Naval Complex base in Virginia (known as Hampton Roads) provides apartment residences for single (i.e. unaccompanied) U.S. Navy enlisted personnel. As part of the original development plan, 1,190 new units were added and 722 existing residential units were renovated.

DEBT SERVICE COVERAGE LEVELS

The project finished 2015 with DSCRs of 1.58x, 1.22x, and 1.17x, respectively. These DSCRs are an increase from 2014 DSCRs of 1.41x, 1.09x, and 1.05x, respectively, and primarily reflect the project's increased BAH rates in recent years. The project is expected to demonstrate higher coverage ratios in 2016 as BAH increases should enhance project revenues and net operating income.

Fitch views unaccompanied military housing projects as having more risk than military family housing projects given the varied profile of the respective tenant bases. Unaccompanied housing projects tend to be subject to higher levels of physical wear and higher annual turnover which leads to higher operating expenses. Therefore, Fitch expects that the DSCRs for an unaccompanied project will be higher than those of military family housing transactions at the same rating level.

PROJECT OCCUPANCY LEVELS

Despite two declines in occupancy from deployments in 2015, the project experienced an average occupancy rate of 95%. The average occupancy in 2014, which also experienced a decline in occupancy due to a deployment, was 96%. Additionally, management reports that the current occupancy level for the project is 97.5%. Fitch believes that project management will continue to be challenged by the potential for future deployments and the need to reoccupy units.

BAH RATES

BAH rates increased 8.44% in 2016, which followed an 8.91% increase in 2014. Despite previous volatility in BAH rates, the project has demonstrated two consecutive years of strong BAH increases, which is expected to improve project revenues and net operating income moving forward. The revision to a Positive from Negative Outlook primarily reflects the unexpectedly significant BAH increases the project has received over the last two years. These increases should provide the project with higher net operating income and DSCRs moving forward. Therefore, future BAH increases, mixed with stable operations, could put positive pressure on ratings which may result in an upgrade.

BRAC RISK

The first Base Realignment and Closure Commission (BRAC) recommendations were made in 1988, and U.S. Navy facilities in and around Hampton Roads were not included in any of the commission's recommendations. However, since the second BRAC review in 1991 and recommendations made in 1993, 1995, and 2005, the BRAC Commission has proposed to relocate Navy activities, ships, personnel, operations, and infrastructure to HRNC.

It is clear from a review of the Navy's recommendations to the BRAC Commission and the BRAC Commission's recommendations to the President since 1988 that the HRNC, including the Naval Shipyard, Norfolk, Naval Station, Norfolk, Naval Air Station, Oceana, Naval Amphibious Base, Little Creek, Naval Weapons Station, Yorktown, and the related operations and infrastructure in around them are vital to the U.S. Navy. None of these key facilities have been recommended for closure by the Navy. Consequently, Fitch expects that HRNC will continue to serve the U.S. Navy and retain its status as the largest naval complex in the world.

DEBT SERVICE RESERVES

The bond debt service reserve fund is satisfied with an AMBAC surety bond sized at maximum annual debt service. Fitch does not assign any value to the AMBAC surety bond and the ratings reflect this. In addition, there is an excess collateral agreement in place in the amount of $6.5 million which acts as a line of credit to the project from Merrill Lynch (rated 'A/F1') with a wrap from AIG (rated 'A-'). At this time, the surety bond provider has had its creditworthiness downgraded and subsequently withdrawn completely since the issuance of the bonds. As a result, Fitch no longer views this as a credit strength.

PROJECT MANAGEMENT

Hampton Roads LLC is managed by American Campus Communities, Inc. (ACC). ACC has traditionally managed student housing properties and currently has 200 properties with approximately 130,000 student housing beds under its management. The Hampton Roads property financing is the first arrangement where ACC is acting as manager for a military housing project.

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=1000121

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1000121

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Ryan J. Pami
Associate Director
+1-212-908-0803
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Charles Giordano
Senior Director
+1-212-908-0607
or
Committee Chairperson
Maura McGuigan
Senior Director
+1-212-908-0591
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Ryan J. Pami
Associate Director
+1-212-908-0803
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Charles Giordano
Senior Director
+1-212-908-0607
or
Committee Chairperson
Maura McGuigan
Senior Director
+1-212-908-0591
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com