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Fitch Affirms Capmark Mil Hsg Trust XXXIX, AMC West Proj 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 privatized family housing units at Fairchild Air Force Base (AFB), Washington, Tinker AFB (Oklahoma) and Travis AFB, California after operating expenses have been satisfied.

KEY RATING DRIVERS

STRONG DEBT SERVICE COVERAGE: The debt service coverage ratio (DSCR), as calculated by management using 12 months of trailing operating data was 2.24x as of Sept. 30, 2018. The DSCRs for the years ended December 2017 and 2016 were 2.17x and 2.05x based on the audits for the respective years. 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 for 2018 increased at both Travis and Fairchild AFBs when compared with 2017 and 2016 levels, while 2018 rates at Tinker AFB are modestly lower than those of the prior two years. However, rates have surpassed the 10% aggregate increase assumption that was used at underwriting for each the three bases, an improvement since Fitch's last review in 2016.

STRONG OCCUPANCY: Management reports that the project has an occupancy rate of 97% as of the first week of November 2018 with occupancy rates of 98% at Fairchild AFB, 97% at Travis AFB and 96% at Tinker AFB. The project averaged a 95% occupancy rate in 2017 and a 96% rate in 2016. Management has reported that it has rented 48 units to authorized non-active duty personnel defined as other eligible tenants.

RATING SENSITIVITIES

BAH DECREASES: Sustained decreases in BAH over time may lead to lower operating revenues and debt service coverage levels, which could put negative pressure on the rating.

DECREASED OCCUPANCY AND/OR INCREASED EXPENSES: Management's inability to maintain high occupancy levels and/or control operating expenses could negatively affect debt service coverage levels and put negative pressure on the rating.

BRAC EXPOSURE: While not expected in the near term, base realignment and closure risk cannot be eliminated over the long term. Significant personnel reduction, declining base essentiality or complete closure could have a severe negative impact on the project's operations and financial performance, thereby reducing DSC and ultimately negatively weighing on the project's bond 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 6,600 active duty and 2,800 reserve component personnel are stationed at Travis. The installation supports almost 13,700 military dependents and employees and about 3,000 civilians. 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 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 U.S. Air Force (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 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 about 1,500 civilians and has more than 2,700 active duty and 1,600 reserve component personnel on base. Total end-state units at Fairchild are 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 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 in the 10 years prior to the start of the project. 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 140 units that were initially scheduled to be demolished have been retained to generate additional revenue for the project and are anticipated to be retained in the inventory until 2027, when a decision on their continued inclusion in the project's inventory will be made.

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 $14.0 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 2016 and 2017 were 2.05x and 2.17x based on the respective audited financial statements. Management reports a 2.24x DSCR base as of the end of September 2018 based on 12 months of trailing operating data. 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 96% in 2016 and 95% for in 2017. As of the first week in November, the occupancy for the project was 97%. Management has reported that 48 housing units have been rented to other eligible tenants that are non-active duty personnel, reflecting the USAF's goal of a 98% occupancy rate at its privatized housing projects.

BAH RATES

BAH rates for the three installations now surpass those forecast in 2009. 2018 BAH rates for the Travis AFB area increased an average of 10.5% from 2016 levels across all paygrades. In the Oklahoma City area surrounding Tinker AFB, BAH rates declined. Rates declined an average of 3.6% from 2016 rates across all ranks, with only one paygrade benefiting from an increase. When compared with 2017 rates, 2018 rates declined an average of 1.6%, but paygrade levels of E-1 through E-7 received modest increases. The BAH rates for the Spokane area near Fairchild AFB increased an average of 7.9% across all paygrades for 2018 when compared with the 2016 rates. As was the case at Travis AFB, all paygrades stationed at Fairchild received BAH rate increases in both 2017 and 2018.

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. The last BRAC review was held in 2005 and to date a new BRAC has not been authorized by the Congress.

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.

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 45,000 military housing units at 55 U.S. Army, U.S. Navy and U.S. Air Force installations nationwide. It brings a strong management team capable of strategic decision-making regarding the development's upkeep and rental stream.
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Publication:Daily the Pak Banker (Lahore, Pakistan)
Date:Jan 17, 2019
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