Fitch Affirms Capmark Military Housing Trust XXXII (TX) 2008 A-1 Ctfs at 'AA'; Outlook Negative

NEW YORK--()--Fitch Ratings affirms the 'AA' rating on the on the $78.2 million Capmark Military Housing Trust XXXII Lackland AFB Phase II Privatization Project (TX) series 2008 A-1 certificates.

The Rating Outlook is remains Negative.

SECURITY

The certificates are special limited obligations of the issuer and are primarily secured by a first lien on all receipts from the operation of privatized family housing units at Lackland Air Force Base (AFB). The certificates have a cash-funded debt service reserve fund sized at maximum annual debt service that further enhances bondholder security.

KEY RATING DRIVERS

SUFFICIENT DEBT SERVICE COVERAGE: The affirmation reflects the 1.65x debt service coverage ratio (DSCR) based on 12 months of unaudited data ending June 2016. The lower DSCR is largely due to the project operating at less than 95% occupancy and operating expenses that are 24% higher than what was originally expected.

INCREASED BAH RATES: The 2016 Basic Allowance for Housing (BAH) for the San Antonio area increased an average of 6% from 2014. Consequently, revenue projections for 2016 based on current rank distribution for Lackland AFB tenants demonstrate a weighted average increase from 2014 of 5.7%.

ADEQUATE OCCUPANCY: Management has maintained adequate occupancy rates for the project which averaged 95% for the first six months of 2016 and 93% for the 2015 calendar year. This percentage is up from 2014 when the project experienced 91% occupancy. While occupancy has improved, management reports that it has had difficulty in renting the two- bedroom older units and that some of the units are currently occupied by eligible persons from the tenant waterfall.

RATING SENSITIVITIES

BAH DECREASES: Any future decrease in BAH rates may lead to lower operating revenues and debt service coverage levels which could put negative pressure on the rating.

DECREASED OCCUPANCY AND/OR INCREASED EXPENSES: Management's inability to maintain current occupancy levels and control operating expenses could negatively impact debt service coverage levels and put negative pressure on the rating.

CREDIT PROFILE

BASE INFORMATION

Lackland AFB is located southwest of San Antonio, Texas. It is the only installation that conducts entry level military training for US Air Force (USAF) recruits. Currently, the base has a population of approximately 40,000; 23,000 of whom are permanent party military personnel. Lackland's mission changed from flight training shortly after World War II to entry level or basic military training for all USAF enlisted personnel, a mission that has continued to the present. At Lackland, advanced training in ground combat skills, security operations, law enforcement and special operations, among others, enables the USAF to provide its personnel with the specialized skills vital to its commitments around the world.

PROJECT INFORMATION

The military housing privatization project at Lackland AFB involved the conveyance of 829 family housing units, the demolition of 308 of the conveyed units, the construction of 362 new units and the renovation 101 of existing units. Construction was completed on time in December 2013 and units were delivered as planned.

DEBT SERVICE COVERAGE LEVELS

The debt service coverage of approximately 1.65x for the 12 months ending in June 2016 for the A-1 certificates is below the original pro forma expectation of 1.74x for 2015 and the 1.77x for 2016 but is still consistent with the 'AA' rating category. The project is performing below pro forma levels largely due to higher than anticipated operating expenses and less than 95% occupancy. These factors are somewhat mitigated by increased BAH rates and additional units on line generating revenue.

The Negative Outlook reflects the challenges the project faces in maintaining high occupancy rates and controlling operating expenses that directly impact the debt service coverage ratio.

PROJECT OCCUPANCY LEVELS

The project demonstrated an average occupancy of 95% for the first half of 2016. The average occupancy rate for 2015 was 93% and 91% for 2014 when Fitch last reviewed the certificates. Management reports that it has had difficulty renting its older two-bedroom units and that 70 units are occupied by eligible non-active duty families in the tenant waterfall. It also reports a strong waiting list of over 100 families for its three- and four-bedroom properties. Other challenges include other rental options off-base that have rents which are lower than the current BAH rent. When that is the case, service members often opt for the off-base option and retain the difference between what they receive in BAH and what they pay in rent. However, the subject property is still attractive to many, as the project's three- and four-bedroom units are difficult to find in the nearby rental market and also offer many amenities including a K-12 school on-base.

BAH RATES

The 2016 BAH rates for military personnel stationed in the San Antonio area increased an average of 4.7% from 2015 and 6% from 2014. These increases build upon earlier increases during the initial development phase. BAH experienced cumulative increases from 2008-2013 that exceeded the underwriting assumptions used for BAH through the IDP. While original underwriting assumptions for BAH included increases of 10% in total for 2008-2013, actual annual BAH increases were in excess of 20% in aggregate on a weighted average basis for the same period. The annual BAH increases from 2008-2013 were between 19% and 29% based on rank - making BAH revenues in excess of the underwritten increases of 10%.

BRAC RISK

Lackland AFB has not been negatively affected by any of the previous five BRAC commission recommendations. Departing from the four previous BRAC commission recommendations, the 2005 BRAC commission recommended a realignment of Lackland AFB. Neither the USAF nor the DoD made any recommendations that negatively affected Lackland's core basic-training mission or technical training mission for USAF-specific skills. Fitch believes Lackland AFB's long-standing role as a training center for the USAF and that the USAF has made no recommendations to the BRAC commission to alter that mission indicate that Lackland will retain its current mission for the foreseeable future.

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 being managed by Lackland Family Housing, LP which is jointly owned by Balfour Beatty Corporation and the Air Force. The property manager currently manages approximately 45,000 affordable housing units at 55 military installations around the U.S. and has an experienced management team in place.

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 Reis, Inc.

Applicable Criteria

Military Housing Rating Criteria (pub. 18 Sep 2015)

https://www.fitchratings.com/site/re/870678

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/site/re/750012

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Contacts

Fitch Ratings
Primary Analyst
Ronald P. McGovern, +1-212-908-0513
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Ryan J. Pami, +1-212-908-0803
Associate Director
or
Committee Chairperson
Mario Civico, +1-212-908-0796
Senior Director
or
Media Relations
Alyssa Castelli, New York, +1-212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Ronald P. McGovern, +1-212-908-0513
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Ryan J. Pami, +1-212-908-0803
Associate Director
or
Committee Chairperson
Mario Civico, +1-212-908-0796
Senior Director
or
Media Relations
Alyssa Castelli, New York, +1-212-908-0540
alyssa.castelli@fitchratings.com