Fitch Ratings affirms the ratings on the $1.02 billion Class I bonds and the $200 million class II bonds, Ohana Military Communities, LLC. as follows:
–Class I series 2004, 2006 A & B and 2007 A at ‘AA’;
–Class II series 2004, 2006 A & B and 2007 A at ‘A’.
The Rating Outlook is Stable. Fitch does not rate the class III bonds.
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 BAH) and an annual debt service reserve fund in the form of a surety bonds from unrated providers.
KEY RATING DRIVERS:
DEBT SERVICE COVERAGE RATIO: The debt service coverage ratios (DSCR) of approximately 1.47 times (x) for the class I bonds and 1.20x for the class II bonds (based on the maximum annual debt service) are consistent with the respective benchmarks for ‘AA’ and ‘A’ rating categories based on the full year operations ending December 2011.
BASIC HOUSING ALLOWANCE: Current BAH has experienced decreases at almost all rank levels in 2012 which is lower than the underwriting assumptions used for BAH through the initial development period (IDP). While original underwriting assumptions for BAH included increases totaling 8% for 2008 – 2012, actual annual BAH increases were lower in aggregate for the same period of time. The annual BAH decreases in 2008 through 2012 were between .2% and 22% based on rank. Despite the decreases, total revenues have increased due to occupancy levels that were higher and a larger number of units on line during the IDP than originally planned.
ADDITIONAL NEW UNIT CONSTRUCTION ADDED: The IDP financed from the series 2006 bonds is scheduled to end Dec. 31, 2012 as planned and the phased in construction of 6,685 units will be delivered on time over the next few months. Original plans which called for 122 rehab units were changed to add these units to new construction using proceeds of cost underruns. Those units are scheduled for completion in 2014 and will not change end state number of units.
OCCUPANCY STRONG: The project continues to maintain high occupancy with 2012 occupancy exceeding 95%. Additionally, the project has a strong waiting list of over 1,200 families.
BASE HISTORICALLY SIGNIFICANT AND ESSENTIAL: The Navy and Marine bases in Hawaii continue to be a very important part of the U S armed forces due to its location and the natural deep port harbor. Pearl Harbor/Ford Island is part of the Navy base. Base closure is considered remote.
WHAT COULD CHANGE THE RATING?
–Future decreases in BAH to levels that reduce the DSCR below criteria benchmarks;
–Operating expenses increasing at a greater rate than BAH increases per annum.
The 2004, 2006 and 2007 series of bonds were issued primarily for the phased in construction of new single family homes for service members stationed in Hawaii. The goal of the Navy and the Marines was to build decent living quarters and to rebuild the housing stock on the Island of Oahu in a short amount of time. The housing was in poor condition and had not been updated in some cases since World War II. This goal has been accomplished with these financings as the IDP is winding down and the units will be delivered on time and under budget. Excess funds within the transaction were used to change the original scope of the 2007 financing and build 122 units of new construction rather than rehabilitating the units as originally planned. These units are to be delivered in 2014 and are currently ahead of schedule. Total end state number of units remains approximately 6,807.
Bonds proceeds provided funds for: loans to privatize family units at the Navy base in Ohana and the Marine base located in Kaneohe bay; the total development costs to build and or renovate 6807 units and pay costs of issuance.
The bonds are secured by a first lien on all receipts of the project, which are predominantly from the BAH after operating expenses. Receipts from the BAH are based on the local rental rates and are an integral part of compensation of U.S. military personnel.
Fitch draws comfort from the essentiality of both the Navy and Marine bases on the island and the strong demand for housing among base personnel. Structural protections include the senior/subordinate debt structure as well as the equity contributions from the Department of the Navy and the developer. The developer’s property management arm will continue to operate and maintain the facilities, which will enhance the financial stability of the project. A potential risk that limits the credit quality of the bonds is the remote possibility of base closure.
The developer for the Ohana Privatization Project is Forest City. Forest City is one of the largest military housing developers in the U.S., currently developing and or managing various housing developments for the armed forces throughout the U S. Once development has been completed for various projects, Forest City Military Housing LP will manage almost 14,000 military housing units.
Applicable Criteria and Related Research:
–‘Military Housing Rating Criteria’, dated Sept. 21, 2012;
–‘Revenue-Supported Rating Criteria’, dated June 12, 2012.
Applicable Criteria and Related Research:
Military Housing Rating Criteria
Revenue-Supported Rating Criteria