Fitch Affirms Capmark Military Housing Trust XXXIX, AMC West Project Certs; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'AA' ratings on the following series of Capmark Military Housing Trust XXXIX, AMC West Project certificates (the certificates):

--Approximately $14.1 million series 2009A-1a;

--Approximately $202.3 million series 2008A-1a.

The Rating Outlook is Stable.

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 the privatized family housing project at Fairchild Air Force Base (AFB), Washington, Tinker AFB (Oklahoma) and Travis AFB, California.

KEY RATING DRIVERS

STRONG DEBT SERVICE COVERAGE: The debt service coverage ratio (DSCR) averaged 2.08x as of Oct. 31, 2016 on a year-to-date basis. The DSCRs for the years ended December 2014 and 2015 were 1.55x and 1.81x respectively. The coverage level is calculated on all outstanding parity debt and is consistent with the current rating level.

BASIC ALLOWANCE HOUSING (BAH) RATES ON TARGET: BAH rates have surpassed the original underwriting assumptions for two of the three bases, an improvement since Fitch's last review in 2014. While trending positive, overall BAH rates were mixed for the three bases with robust increases across paygrades at Travis, mixed results at Tinker and anemic increases in the lower paygrades and declines for the remaining paygrades at Fairchild over 2014 rates.

STRONG OCCUPANCY: The three projects have a weighted average occupancy of 96% as of the end of August 2016. The project manager reports a 97% occupancy rate at Fairchild AFB and a 96% occupancy rate at both Tinker and Travis AFBs based on the number of on-line units at each installation.

RATING SENSITIVITIES

DECREASED OCCUPANCY AND/OR INCREASED EXPENSES: If management is unable to maintain high occupancy levels or control operating expenses negative pressure could be put on the ratings.

BAH DECREASES: Future decreases in BAH could put negative pressure on the rating.

CREDIT PROFILE

BASE INFORMATION

AMC West is comprised of three AFBs. Travis AFB is located in Solano County which is east of Fairfield, CA. Approximately 7,000 active duty personnel are stationed at Travis, and more than 7,000 civilians are employed at the base. Travis is home to the 60th Air Mobility Wing and handles more cargo and passengers than any other military air terminal in the U.S. Total end-state units at Travis are projected to be 1,134, or 47% of the transaction.

Tinker AFB is a major AFB in Oklahoma City, OK and its mission is to handle the ongoing maintenance demands of the airframes and engines of many of the sophisticated USAF aircraft. Military and civilian employees make up more than 26,000 persons living on and working at Tinker. Total end state units at Tinker are projected to be 660, or 27% of the transaction.

Fairchild AFB is located in the Spokane, WA area and is home to an air refueling mission and the USAF survival school among other units. The base employs more than 800 civilians and has more than 3,000 active duty military on base. Total end-state units at Fairchild are projected to be 641, or 26% of the transaction.

PROJECT INFORMATION

Bond proceeds provided funds for loans to privatize family housing units at the Travis, Tinker and Fairchild AFBs; funded the total development costs to build new units and renovate or rehabilitate existing units as determined by the U.S. Air Force (USAF); funded reserves and paid costs of issuance. The project encompassed the construction of 837 new units and renovation of 914 units. In addition, the project included the assumption of the operation and maintenance of 684 housing units built by the USAF over the last 10 years. The combined new construction, renovation and assumption of the existing units total 2,435 family housing units. The project was completed in December 2015. Approximately 160 units that were initially scheduled to be demolished have been retained to generate additional revenue for the project. The property manager reports that 20 of these will be demolished by the end of June 2017. The remaining 140 units will be retained in the inventory for an additional 10 years.

The certificates were structured with level debt service for the 40-year term after the interest-only period during the initial development period, or IDP. In addition to the bond proceeds, the U.S. Air Force phased in a GDL to pay off the construction loan as units become available for rent over the IDP and the developer has provided a $13.6 million equity contribution. The 2008 and 2009 A-1a certificates also benefit from a DSRF sized at MADS.

DEBT SERVICE COVERAGE LEVELS

Debt service coverage ratios (DSCRs) for 2014 and 2015 were 1.55x and 1.81x, respectively. The 2016 year-to-date average for the period ending October 2016 is 2.08x. These DSC levels are consistent with the current rating. These ratios exceed the original projections which anticipated a minimum DSCR of 1.50x on the certificates after the IPD.

PROJECT OCCUPANCY LEVELS

Each of the projects at the three bases has had a history of maintaining strong occupancy levels. Management has reported that it has been successful in maintaining occupancy rates of 97% in 2015 and 96% for the eight months of 2016.

BAH RATES

For the last few years, BAH rates for the three installations trailed the rates expected at underwriting. The BAH rates for 2016 at Travis and Tinker AFBs now surpass those forecast in 2009. However BAH rates for the Spokane area, relevant to Fairchild AFB, are still slightly to moderately behind those originally expected for most paygrades.

2016 BAH rates for the Travis AFB area increased an average of 19.8% from 2014 levels. The Travis AFB area experienced BAH increases of 20% or more for paygrades E-1 through E-7 and well over 15% for company grade and warrant officers during the 2014-2016 period.

In the Oklahoma City area surrounding Tinker AFB, BAH rates were mixed. While rates increased an average of 7.98% since 2014 across all ranks, those at paygrade levels of E-1 through E-5 received an over 25% increase, senior non-commissioned officers and junior commissioned and warrant officers benefited from small increases, the remaining paygrades experienced decreases.

The BAH rates for the Spokane area near Fairchild AFB declined an average of 0.61% across all paygrades for 2016 when compared to the 2014 rates. As was the case in its sister installations the lower pay grades levels of E-1 through E-6 benefited from small increases of just over 1% during this period, but almost all of the remaining paygrades experienced decreases of between 0.35% to just under 2%.

BRAC RISK

Travis, Tinker, and Fairchild AFBs have not been negatively affected by any of the five BRAC commission recommendations to the president (in 1988, 1991, 1993, 1995 and 2005), although the commission recommended moving some units to and from Fairchild in the 1993 report, the overall number of personnel moved was minimal. Since 1993, Fairchild has not been the subject of any BRAC action. Fairchild's role as a refueling installation and the additional air National Guard units now on base indicate the USAF's view that it is a mission-essential facility for its operations and training.

DEBT SERVICE RESERVES

The series 2008A-1a and series 2009 A-1a certificates are further secured by a cash-funded debt service reserve fund (DSRF) sized at MADS. The DSRF is invested in a guaranteed investment contract with ATB Financial.

PROJECT MANAGEMENT

The projects will be managed by BBC AF Management/Development LLC which is an affiliate of the developer, Balfour Beatty Communities LLC (Balfour Beatty). Balfour Beatty entered the military housing sector at the beginning of the Military Housing Privatization Initiative (MHPI) in 1996. Balfour Beatty manages over 43,000 military housing units at 55 U.S. Army, U.S. Navy and USAF installations nationwide. It brings a strong management team capable of strategic decision-making regarding the development's upkeep and rental stream.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Reis, Inc.

Applicable Criteria

Military Housing Rating Criteria (pub. 16 Nov 2016)

https://www.fitchratings.com/site/re/889956

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

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

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1015561

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+1-212-908-0513
Fitch Ratings, Inc.
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New York, NY 10004
or
Secondary Analyst
Ryan J. Pami
Associate Director
+1-212-908-0803
or
Committee Chairperson
Vincent J. Barberio
Managing Director
+1-212-908-0505
or
Media Relations
Peter Fitzpatrick, +44 20 3530 1103
peter.fitzpatrick@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Ronald P. McGovern
Senior Director
+1-212-908-0513
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Ryan J. Pami
Associate Director
+1-212-908-0803
or
Committee Chairperson
Vincent J. Barberio
Managing Director
+1-212-908-0505
or
Media Relations
Peter Fitzpatrick, +44 20 3530 1103
peter.fitzpatrick@fitchratings.com