NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded Ft. Huachuca/Yuma Proving Ground Communities II, LLC, AZ's taxable military housing revenue bonds, series 2009 (the bonds) to 'A' from 'AA-'.
Fitch has also removed the bonds from Rating Watch Negative and assigned a Negative Outlook.
The bonds are special limited obligations of the issuer and are secured by a first lien on all receipts of the project, the majority of which comes from the basic allowance for housing (BAH). BAH is a cash allowance based on local rental rates and is part of the compensation of U.S. military personnel. The bonds are further secured by a cash funded debt service reserve fund sized at maximum annual debt service.
KEY RATING DRIVERS
BAH DECLINE: The downgrade reflects the 7% to 13% decline in 2015 basic allowance for housing (BAH) rates year over year which varies by rank. This is in addition to the aggregate five-year BAH decline when compared to original pro forma. The original pro forma projections called for an aggregate 10% increase.
LOWER DEBT SERVICE COVERAGE RATIO: Management expects the 2015 BAH rates to support a coverage ratio between 1.28x (budget) and 1.4x (forecast) at December 2015. Expectation at bond issuance was for the BAH to meet all operating costs and provide a budgeted (DSCR) to approximate the 1.5 times(x) coverage after initial development phase (IDP).
PROJECTED DECREASE DSCR AFTER UNITS TURN: The future DSCR is expected to decrease as housing units turn over and lower BAH revenue is generated by 100% of the units. Unit turnover approximates 33% each year and over the next 2 and a half years all units will pay lower rent as the new 2015 BAH rates are phased in. While the trailing 12 month coverage as of March 15 is 1.43x, this ratio does not incorporate the future results of the BAH rates upon unit turnover.
REINVESTMENT ACCOUNT FUNDED: Construction of all new and rehab housing units was completed approximately one year ahead of the IDP schedule and reinvestment account is being funded.
BRAC RISK: There have been no new developments relating to closure or realignment of Ft. Huachuca or Yuma Proving Ground. The previous four BRAC rounds did not mention Ft. Huachuca. Given the land mass of Yuma and remote location used for testing, it would be difficult to replace the Yuma testing site.
BASIC ALLOWANCE FOR HOUSING DECREASES: If the Basic Allowance for Housing rates at Ft. Huachuca/Yuma Proving Ground continue to decrease and the debt service coverage ratio (DSCR) continues to decline this may lead to lower operating revenues and lower debt service coverage levels that could further stress the current rating.
DECREASED OCCUPANCY/INCREASED EXPENSES: Management's inability to maintain occupancy rates and/or control project operating expenses at Ft. Huachuca/Yuma Proving Ground could also negatively impact DSCR and put negative pressure on the rating.
Fort Huachuca is a U.S. Army installation that is located in the Huachuca Mountains in Arizona, 15 miles north of the Mexican border and 50 miles southeast of Tucson. The Fort is home to the Army's intelligence community and its information services and systems management commands and serves as a test center for electronic warfare systems.
Yuma Proving Ground (YPG) is one of several test centers of the Developmental Test Command, a subcommand of the U. S. Army Test and Evaluation Command. YPG conducts developmental and operational testing of artillery, mortars, mines, ground and aircraft weapons. YPG is a US Army installation that is located 25 miles north of the City of Yuma, Arizona on US Highway 95.
The bonds are primarily secured from the revenue generated by the completed project. The initial development period (IDP) is now over and 2015 is the first full year of operations after IDP completion. The privately managed units consist of 1,064 and 105 end state units at Fort Huachuca and Yuma Proving Ground, respectively, for a total of 1,169 units. The project also includes two community centers with one at each installation. The IDP was scheduled to end March 2014 and the housing units were completed early in March 2013, approximately one year ahead of schedule. The community center(s) were completed on time.
DEBT SERVICE COVERAGE LEVELS
DSCR projections for this year's approved budgets (March 2015) demonstrates a coverage expectation of 1.28x. However, the project experienced a better than expected 2015 first quarter which moves expectations up to approximately 1.4x for year end December 2015, but still not expected to reach the original pro forma 1.5x DSCR.
At bond issuance, BAH rates were expected to increase 2% each year. That expectation did not materialize over the life of the IDP and this year's 2015 BAH rates declined materially. The full effect of that 7 to 13 percent decline will be absorbed as the units turn over. Each year approximately one-third of the units are assigned to an incoming service member and that is when the new (lower) BAH rate will be paid to the project. Fitch expects that the DSCR will decline over the next two years as a result.
Management expects units to turn at approximately 33% per year so the higher BAH rates should remain on 66% of the units in 2015, 33% of the units in 2016 and then none of the units in the 2017 fiscal year and a prime reason for the negative outlook.
The Army approved the project budget projected which demonstrates 1.28x coverage for 2015. After 2015 first quarter actual results were posted, that projection will most likely be exceeded at Dec. 2015 to between 1.28x and 1.4x DSCR.
DEBT SERVICE RESERVES
The project has a one year cash funded debt service fund enhancing bondholder security.
Both locations are managed by Michaels Management Services which is an affiliate of the developer for the project, Michaels Military Housing (MMH). The Michaels Organisation and its affiliated companies currently manages 35,000 affordable housing units and over 10,500 units as of May 2015 at various military installations around the U.S. and has an experienced management team in place.
The project is currently experiencing sound occupancy levels at approximately 94%. Occupancy has not been a credit concern and the property manager maintains a waiting list.
Additional information is available at 'www.fitchratings.com'.
Military Housing Rating Criteria (pub. 22 Sep 2014)
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)