NEW YORK--(BUSINESS WIRE)--
Fitch Ratings has affirmed the rating on the $103.5 million Fort Jackson Military Housing, LLC (SC) taxable revenue bonds, 2008 series A (the bonds) at 'AA-'. The bonds have been removed from Rating Watch Negative and have been assigned a Negative Outlook.
SECURITY:
The bonds are secured by a first mortgage lien on all improvements, a pledge of all receipts of the project (which are predominantly made up of the monthly housing allowance or basic allowance for housing [BAH]) and a cash-funded debt service reserve fund.
KEY RATING DRIVERS
ADEQUATE DEBT SERVICE COVERAGE: The ratings on the bonds are being affirmed based on the 2011 debt service coverage ratio (DSCR) of 1.35 times (x) reflecting 12 months of unaudited data as of December 2011. This coverage level is just meeting that projected in the original pro forma underwriting. While rental revenues were below what was originally projected, interest earnings on construction funds were higher than what was originally projected thus mitigating the effect of lower rental revenues on net operating income.
LOWER OCCUPANCY THAN PROJECTED: The project has experienced occupancy levels that are lower than originally projected with a 2011 average occupancy of 78% for the 12 month period ending Dec. 31, 2011, which is less than the original projection of 80%. While expenses in the fourth quarter exceeded budget, management has been successful in managing overall annual expenses somewhat offsetting the lack of higher occupancy levels.
CHANGE IN SCOPE: The original project construction plan called for 119 units to receive renovations. A change in scope was implemented by the Army now calling for only 78 units to receive renovations. This change may affect how attractive those 41 units that are not being renovated will be to potential tenants which may in turn affect future overall project occupancy levels.
PROJECT MANAGEMENT CRITICAL: Management's inability to maintain and grow current occupancy levels and/or control project operating expenses in the very near term could lead to decreased net operating income (NOI) and decreased debt service coverage.
2012 BAH RATES MIXED: The 2012 BAH rates demonstrated a 5.6% decline overall for all rank levels from 2011 rates for Fort Jackson. However, for 71% of the service member tenants currently residing at the subject property, BAH actually increased in 2012 by 0.91% on a weighted average basis.
CASH FUNDED DEBT SERVICE RESERVE FUND: The bonds have a cash funded debt service reserve fund sized at maximum annual debt service. The presence of this cash reserve enhances bond holder security.
WHAT COULD TRIGGER A RATING ACTION
INABILITY TO ACHIEVE PROJECTED OCCUPANCY: The continuation of a lower than projected occupancy rate for available units in the near term will likely create negative rating momentum as capitalized interest decreases as planned and construction funds are spent no longer generating interest earnings. While the levels of key and essential employees living on base increased over the last quarter of 2011, failure to continue to grow this number will likely result in downward rating pressure.
FUTURE BAH VOLATILITY: Future BAH decreases may lead to decreased project revenue and debt service coverage. Future material decreases in BAH rates for the market area could negatively affect debt service coverage.
DELAY IN CONSTRUCTION: A delay in the construction and renovation of units as planned will negatively impact project revenue, net operating income and debt service coverage.
CREDIT PROFILE
The 2008 series A bonds were privately placed in October 2008. The proceeds were used to provide a portion of the total development costs for constructing and renovating military family housing resulting in an end-state of 850 units at Fort Jackson and funding for reserves.
Project occupancy is lower than projected and while key and essential employees are required to live on base, only 70 of them currently reside on base out of 799. Management reports that there are a number of potential service member tenants who are considered to be key and essential and do not qualify for family housing. Management has already extended the tenant waterfall for 50 units to retirees and civilians who were not part of the originally intended audience.
Interest earnings on construction funds were higher than originally projected as funds were not dispersed as quickly as originally planned given the change in construction scope. These funds will be dispersed in the near future and can not be relied upon for additional revenue. Capitalized interest will be reducing to zero as planned and therefore achieving originally projected occupancy levels is critical to reaching projected rental revenue levels and debt service coverage ratios.
While construction is on schedule, the scope of the project was reduced with the Army's Major Decision to downsize the amount of units originally planned for renovation to 78 from 119. As a result of this change in scope, a total of 41 units will not receive any work and therefore may be less desirable to potential tenants which may in turn affect occupancy and debt service coverage ratios.
Additional information is available at www.fitchratings.com' . The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in the Revenue-Supported Rating Criteria, this action was additionally informed by information from Trimont Real Estate Advisors.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', June 20, 2011;
--'Military Housing Rating Criteria,' Sept. 22, 2011.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130
Military Housing Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=651397
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