Fitch Affirms Northern Group Housing, PA's $221.5MM Ser 2013 Taxable Military Housing Revs at 'AA'

NEW YORK--()--Fitch Ratings affirms the 'AA' rating on the Northern Group Housing, LLC, PA's taxable military housing revenue bonds, series 2013 (Air Force Northern Group Privatization Project) consisting of:

--$208.8 million 2013 subseries A-1;

--$12.7 million 2013 subseries A-2.

The Rating Outlook is Stable.

SECURITY

The bonds are limited obligations of the project owner secured by a lien and security interest in the properties and improvements pursuant to the trust indenture, six separate mortgages (or deeds of trust) granted to the project owner for the benefit of the trustee and the collateral pledged by the project owner under the lockbox agreement and the indenture.

All rental receipts of the project are predominantly derived from the basic allowance for housing (BAH) (after payment of project operating expenses) from U.S. military service members stationed at Minot, Grand Forks, Mountain Home, Ellsworth, Cannon and Cavalier Air Force Bases (AFBs) in the following states, North Dakota, Idaho, South Dakota and New Mexico. The bonds are also secured by a cash funded debt service reserve fund sized at maximum annual debt service.

KEY RATING DRIVERS

SOUND DEBT SERVICE COVERAGE: Fitch has affirmed the ratings on the bonds based on the actual and projected debt service coverage ratios (DSCR). Audited financial statements for 2014 demonstrate 2.9x coverage (2.7x when revenue from non debt sized units is excluded) and the project is expected to demonstrate no less than 2.0x coverage following the Initial Development Phase (IDP) for the remainder of the life of the transaction.

LIMITED LOAN GUARANTY: The presence of a limited loan guaranty which upon a threshold event (30% reduction in personnel due to base closure, reduction or deployment and a resultant failure to pay debt service) mitigates concerns as it regards potential BRAC/essentiality issues for all bases, but it is especially significant for the Grand Forks and Ellsworth bases.

BASE ESSENTIALITY: The high essentiality of Cannon and Minot bases lessens the possibility of closure for these sites and contributes to bondholder security.

GOVERNMENT CONTRIBUTION AND DEVELOPER EQUITY: Contributions include a $116 million Government Direct Loan (GDL) from the Air Force in the form of an unrated subordinate loan which is funded over six years as new units are delivered and developer equity in the amount of $22 million. The first phase of the GDL is expected to be delivered in October 2015.

IDP END DATE UNCHANGED DESPITE CONSTRUCTION REVISIONS: While management reports that the project IDP end date remains consistent with the original plan, there have been construction schedule revisions at five of the six bases largely due to weather delays. Per a February 2015 letter from the developer to the Air Force, the schedule was off by 192 units which represented only 4% of the overall units.

CONSTRUCTION RISK MITIGATED: Construction risk is mitigated by the significant number of units online during the IDP generating revenue, the low complexity level of the single family construction, the presence of a payment and performance bond during construction and the developer's sound history of developing military housing units. Balfour Beatty Communities (BBC), through its affiliates, is developing and managing the properties and currently manages 56 military housing communities with over 42,000 homes.

DEBT SERVICE RESERVE FUND: A cash funded debt service reserve fund sized at maximum annual debt service contributes to bond holder security and remains untapped.

BAH RATE FLUCTUATION: The BAH rates for the subject bases saw fluctuations in 2014 and 2015. For the two-year period, four of the bases experienced positive trends and only one base (Mountain Homes), representing 20% of the transaction, had a negative two year trend. Relative to original BAH increase assumptions, the BAH increases at several bases have mostly offset the declines on an aggregate basis netting only a 1% decrease in BAH off of originally projected revenue when all increases and declines are aggregated.

RATING SENSITIVITIES

CONSTRUCTION DELIVERY: Developer's ability to maintain on line units during construction and deliver end state units on time as set out under the IDP;

MANAGE OCCUPANCY AND EXPENSES: Management's ability to maintain high occupancy levels and manage operating expenses during IDP and throughout the life of the transaction;

FUTURE BAH RATES: Future annual declines in BAH rates for the respective locations of the six bases;

LIMITED LOAN GUARANTY: Bond holder representative and trustee's ability to properly monitor for guaranty threshold events and file claims on a timely basis. TriMont is the bondholder representative and has a primary servicer rating of 'CPS2+' which was upgraded from 'CPS2' in April 2014.

CREDIT PROFILE

PROJECT INFORMATION

The bonds were issued to finance the project which is comprised of 4,546 end state military housing units at six separate Air Force installations: Minot, Grand Forks, Mountain Home, Ellsworth, Cannon and Cavalier Air Force Bases. BBC Military Housing - Northern Group, LLC, is the sole member of the project owner and its affiliates will develop, manage and maintain the units which at end state will be made up of 965 new units, 365 renovated units and 3,216 units retained in their current state.

The housing and improvements for the six bases is broken down as follows: Minot AFB represents 45% of the total loan amount; Cannon AFB represents 27%; Ellsworth AFB represents 13.5%; Mountain Homes AFB represents 11%; Grand Forks AFB represents 4%; and Cavalier Air Force Station represents .3% of the units.

This financing includes significant contributions from its participants. At closing, BBC made a $22 million developer equity deposit to the transaction. The Air Force is also making a substantial contribution to the project in the form of the $116 million GDL from the Air Force that is phased in during the IDP as specific construction milestones are met.

The A-1 bonds are fully amortizing with a final maturity of 40 years (2053). The A-2 bonds are interest only and have a six-year term with a 2019 maturity date. The A-2 bonds will be paid at maturity with the proceeds from the final advance under the GDL. The underlying property leases have 50-year terms and expire in 2063.

PROJECT CONSTRUCTION

As of first quarter 2015, 193 of 965 new units, 3 of 3 major renovations and 59 of 364 intermediate renovations were completed as reported by the bond holder representative. Also, 515 of 1,014 demolitions are complete and new construction is on schedule along with renovations. While Balfour reported some minor delays due to weather over the last 12-18 months, the project IDP end date remains consistent with the original plan. These delays have prompted construction schedule revisions at five of the six bases. In February 2015, the schedule was reported to be off by 192 units which represent only 4% of the overall units.

DEBT SERVICE COVERAGE LEVELS

Audited financial statements for 2014 demonstrate 2.9x coverage (2.7x when revenue from non debt sized units is not included) which is strong and the project is expected to demonstrate no less than 2.0x coverage following the Initial Development Phase (IDP) for the remainder of the life of the transaction.

PROJECT OCCUPANCY LEVELS

In 2014, the average occupancy for all units for the six bases was 94.3%. For first quarter 2015, the bond holder representative reports that average occupancy was 95.4%.

BAH RATES

BAH rates for 2014 and 2015 demonstrated fluctuations. In 2015, 59% of the occupied units saw a decline. For the two year trend for occupied units from 2014-2015, 41% of the units increased at a level of 4% or higher, 33% declined and 26% increased but at a level below 4%. Relative to original BAH increase assumptions, the BAH increases at several bases have mostly offset the declines on an aggregate basis netting only a 1% decrease in BAH off of originally projected revenue when all increases and declines are aggregated.

LIMITED LOAN GUARANTY

The Subseries A-1 bonds have the benefit of a limited loan guaranty. The guaranty is between the U.S. Government and the guaranteed lender, U.S. Bank NA (also the trustee for the bonds). Pursuant to the guaranty, the government will purchase part or all of the guaranteed loan (equal to the Subseries A-1 bond amount) upon a 30% or greater reduction in the number of eligible personnel due to base closure, reduction or deployment and a resultant failure to pay debt service on the bonds caused by the reduction. Any claim payment under the guaranty will be used towards a mandatory redemption of the bonds in whole or in part. The government will only make a payment under the guaranty if it determines that the mortgage payment default was the direct result of a guaranty threshold event. Upon this determination, the payment would be made within approximately 180 days. There have been no threshold events or draws to date.

DEBT SERVICE RESERVES

The bonds have a cash-funded debt service reserve fund sized at maximum annual debt service. The presence of this cash reserve enhances bondholder security.

BRAC RISK

While base essentiality is a key rating driver for a military housing transaction, for this military housing transaction there is a limited loan guaranty which somewhat mitigates essentiality concerns as it regards potential BRAC issues for all bases in the transaction. This is especially significant as it regards the Grand Forks and Ellsworth bases. The subseries A-2 bonds are not covered by the guaranty as the A-2 bonds will be paid at maturity in 2019 with the proceeds from the final advance under the GDL.

PROJECT MANAGEMENT

The units are being managed by BBC AF Management/Development LLC, which is owned by Balfour Beatty. The property manager currently manages approximately 42,000 affordable housing units at 56 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 source(s) of information identified in the Master Criteria, this action was additionally informed by information from Trimont Real Estate Advisors as bond holder representative.

Applicable Criteria

Military Housing Rating Criteria (pub. 22 Sep 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=774288

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=986552

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=986552

Endorsement Policy

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

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
Maura McGuigan
Senior Director
+1-212-908-0591
Fitch Ratings, Inc.
33 Whitehall
New York, NY 10004
or
Secondary Analyst
Ryan Pami
Associate Director
+1-212-908-0803
or
Committee Chairperson
Charles Giordano
Senior Director
+1-212-908-0607
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Maura McGuigan
Senior Director
+1-212-908-0591
Fitch Ratings, Inc.
33 Whitehall
New York, NY 10004
or
Secondary Analyst
Ryan Pami
Associate Director
+1-212-908-0803
or
Committee Chairperson
Charles Giordano
Senior Director
+1-212-908-0607
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com