Fitch Affirms $185MM Western Group Housing, LP (PA) Taxable Military Hsng
Revs Ser 2012 'AA'
NEW YORK -- January 23, 2014
Fitch Ratings has affirmed the 'AA' rating for the $185 million Western Group
Housing, LP Taxable Military Housing revenue bonds, series 2012 A-1 & A-2
(Airforce Western Group Privatization Project).
The Rating Outlook is Stable.
The bonds are limited obligations of the project owner. They are secured by
the following: a lien and security interest in the properties, improvements
pursuant to the trust indenture, four separate mortgages, and deeds of trust
granted to the project owner for the benefit of the trustee and the collateral
pledged by the owner under the lockbox agreement. All rental receipts of the
projects are predominantly derived from the basic allowance for housing (BAH)
(after payment of project operating expenses) from U.S. military service
members stationed at Whiteman, F.E. Warren, Malmstrom and Beale Air Force
Bases (AFBs) in the following states: Missouri, Wyoming, Montana and
KEY RATING DRIVERS
SOUND DEBT SERVICE COVERAGE: The affirmation of the ratings and Stable Outlook
is based on the debt service coverage ratio (DSCR) of 1.82x, based on 12
months of unaudited operating data as of Dec. 2013, which exceeded the
original proforma projection of 1.40x.
BAH REVENUE: While there were declines in the 2014 Basic Allowance for Housing
(BAH) rates for some rank levels at all four bases from 2013 levels, when
considered in aggregate with the 2014 BAH increases, the net effect is a less
than 1% decrease in revenue.
STRONG PROPERTY OCCUPANCY: Occupancy for online units is strong at 97% as of
Dec. 2013. The current number of units online (3,096) exceeds the required
minimum of 2,700 during the initial development phase (IDP).
GOVERNMENT AND DEVELOPER CONTRIBUTIONS: Contributions to the original
financing include a $142.5 million Government Direct Loan (GDL) from the Air
Force in the form of an unrated subordinate loan which is funded over five
years as new units are delivered, and a developer equity component in the
amount of $16.6 million.
CONSTRUCTION RISK MITIGATED: Construction risk is mitigated by the following:
the significant number of units that are required to be online (minimum 2,700)
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 history of developing military housing
units. Balfour Beatty, the developer, reports that construction is on
CASH FUNDED RESERVE FUND: A cash funded debt service reserve fund sized at
maximum annual debt service contributes to bond holder security.
BAH FLUCTUATIONS: Future declines in BAH rates for the four bases which
generate housing revenue and serve as the main source of funds for the
repayment of the bonds.
MEETING IDP SCHEDULE CRITICAL: Developer's ability to maintain on line units
during construction and deliver end state units on time as set out under the
OCCUPANCY AND EXPENSES DRIVE COVERAGE: Management's ability to maintain high
occupancy levels and manage operating expenses during IDP and throughout the
life of the transaction.
BASE DOWNSIZING OR CLOSURE: Given the budget uncertainties related to
sequestration, the likelihood of cuts to the Department of Defense military
budget over the next decade grows. Some or all of the bases that support the
Western Group financing may be subject to downsizing or closure as a result of
future spending reductions. If one of more of the bases are subject to
reduction or closure, these bonds would likely be subject to downgrade from
their current rating level.
A limited liability company, BBC (Balfour Beatty Co.) Military Housing -
Western General Partner, LLC, is the sole general partner of the project
owner. Balfour Beatty and its affiliates will develop, manage and maintain the
2,984 end state military housing units at the four separate military
installations. The end-state will be made up of 714 new units, 506 renovated
units and 2,044 units retained in their current state. Balfour Beatty has held
an ownership interest in, and has operated through subsidiaries, 18 military
family housing privatization projects, covering 43 bases (representing the
Army, Air Force and Navy) in 20 states.
In this transaction there are substantial contributions from participants in
the form of a $142.5 million GDL from the Air Force which is phased in during
the IDP as specific construction milestones are met. The first disbursement of
the GDL was made in the amount of $58 million in Dec. 2013. The next
disbursement from the IDP is scheduled for July 2014. Additionally, Balfour
Beatty made a $16.6 million developer equity deposit at closing which serves
as an additional contribution to the transaction.
The properties unaudited operating statement demonstrates strong DSCR of 1.82x
for the twelve month period ending Dec. 2013. This DSCR exceeds the original
projection of 1.4x coverage. Strong occupancy levels of 97% at all four bases
as of January 2014 are contributing to the sound DSCR.
The A-1 bond's debt structure includes fully amortizing debt with a 45-year
term maturing in 2057. The A-2 bonds have a five-year term, paying interest
only and maturing in 2017. The underlying property leases have 50-year terms
which begin after the IDP and will expire in 2062.
Additional information is available at www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria'(June 3, 2013);
--'Rating Criteria for Military Housing' (Sept. 17, 2013).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
Rating Criteria for Military Housing - Effective Sept. 23, 2010 to Sept. 20,
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Maura McGuigan, +1-212-908-0591
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Ron McGovern, +1-212-908-0513
Charles Giordano, +1-212-908-0740
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
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