Fitch Ratings has affirmed the following classes of Hampton Roads PPV, LLC military housing taxable revenue bonds (Hampton Roads Unaccompanied Housing Project), 2007 series A (the bonds) as part of its continuous surveillance effort:
--Approximately $210 million Class I at 'AA';
--Approximately $58 million Class II at 'A';
--Approximately $9 million Class III at 'BBB'
The Rating Outlook is Negative.
RATING RATIONALE:
--The rating affirmations reflect Fitch's assessment of the project's ability to continue making its debt service payments in the near term under various cash flow scenarios, even without use of the respective debt service reserve funds. This assessment is supported by the fact that project construction was approximately 94% completed as of December 2009 and occupancy is currently sound for on-line units.
--The continued application of the Negative Outlook is based on the expectation that Basic Allowance for Housing (BAH) rates, which are based on local rental market trends, may decline or remain flat over the next several years given the local rental market trends. While the project experienced a negative BAH rate for 2009 for the area, this was slightly mitigated by an increased BAH rate in 2010 leading to a combined BAH increase of 1.7% which is now below original growth projections for the project by 2.3%.
The Negative Outlook is also supported by lower than anticipated earnings on the float fund given the cancellation of an AIG guaranteed investment contract and reinvestment of funds in lower yielding Treasuries, while project operating expenses and bad debt amounts are higher than originally anticipated.
WHAT COULD TRIGGER A DOWNGRADE:
--Stagnation or declines in future BAH rates which cause revenue and debt service coverage to decline;
--Further increases in project operating expenses and/or bad debt without corresponding offsetting revenue increases causing debt service coverage to decline below originally projected levels.
SECURITY:
The bonds are primarily secured by a first-lien security interest in all project revenues, the majority of which comes from the monthly housing allowance (BAH) deposited into a lock box.
CREDIT SUMMARY:
In the course of this review, Fitch determined that project construction is on schedule, and the underlying project is performing near original expectations, making the likelihood of a draw on the respective debt service reserve funds in the near term remote. However, the 2009 basic housing allowance (BAH) for the Norfolk/Portsmouth area where Hampton Roads is located experienced a 3.6% decline from 2008 BAH levels. While in 2010 the BAH rate for the area increased by 5.3%, combining the BAH rate for 2009 and 2010 result in rates which fall short of aggregate original growth projections which were anticipated at 2% BAH growth per year. While the debt service coverage ratios for the transaction are currently near original underwriting projections, flat or decreasing BAH rates in the next few years may cause coverage levels to decline below those projections. Current trends for the Norfolk apartment market are negative according to Property & Portfolio Research, Inc. (PPR), with rents expected to fall by 3.7% in 2010 and 4.0% in 2011 as apartment supply is reaching peak levels at the same time the economy is suffering a severe recession. Since BAH rates are set based on the private sector rental housing market in the surrounding area (see Fitch's Special Report 'Understanding BAH as the Cornerstone Security for Military Housing Transactions,' dated Feb. 20, 2007), there is a high likelihood that the BAH may be stagnant or decline in the near term. This situation may be somewhat mitigated if the property achieves near full occupancy (greater than the 95% rate assumed at underwriting) and/or operating expenses are lower than originally projected. While the property is currently demonstrating sound occupancy levels for units on line, operating expenses are running approximately 31% higher than anticipated as of fall 2009.
Additionally, the Department of Defense has the ability (but is not required) to distribute a higher percentage of the BAH to the service members who occupy this project. As part of its review, Fitch reviewed construction progress reports and updated BAH rates and conducted discussions with project management to obtain an understanding of the current condition of the project and operations. Fitch will continue to monitor construction progress, lease-up efforts, BAH rates and operating performance for the property on a regular basis.
Applicable criteria available on Fitch's website at 'www.fitchratings.com':
--'Rating Guidelines for Military Housing Bonds' (Feb. 14, 2006).
Additional information is available at 'www.fitchratings.com'.
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Contacts:
Fitch Ratings, New York
Maura McGuigan, 212-908-0591
Charles
Giordano, 212-908-0607
or
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212-908-0526
Email: cindy.stoller@fitchratings.com