Fitch Affirms Fort Jackson Housing, LLC (SC) Tax Revs 2008 Ser A at 'AA-'; Outlook Stable

Fitch Ratings has affirmed the rating on the $103.5 million Fort Jackson Housing, LLC (SC) taxable revenue bonds, 2008 series A (the bonds) at 'AA-'. The Outlook for the bonds has been revised to Stable from Negative.

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 BAH) and a cash-funded debt service reserve fund.

KEY RATING DRIVERS

ADEQUATE DEBT SERVICE COVERAGE: The rating on the bonds is being affirmed and the Outlook revised to Stable. Debt Service Coverage (DSC) is based on the 2013 debt service coverage ratio of 1.39x reflecting 12 months of unaudited data as Dec. 2013. This coverage level is slightly above the original proforma underwriting of 1.35x.

OCCUPANCY MEETING EXPECTATIONS: The bonds are being assigned a Stable Outlook as the project has experienced occupancy levels that are in line with originally underwritten projections. In 2013 average occupancy of 95% for the 12 month period ending Dec. 31, 2013 was achieved albeit with a small amount of tenants from the retiree and defense contractors (waterfall tenants) in the mix. The project is expected to continue to perform at or above the 95% occupancy rate throughout 2014 based on sound demand. Occupancy was 87% without the waterfall tenants.

PROJECT MANAGEMENT CRITICAL: Management's ability to maintain and grow current occupancy levels, reduce the amount of waterfall tenants and control of project operating expenses are critical.

2014 BAH RATES INCREASE: The 2014 Basic Allowance for Housing (BAH) rates demonstrated an average 15% increase overall from 2013 rates for Fort Jackson. The current 2013 occupancy rate of 95% with the 2013 BAH rate produced DSC to 1.39X for the 12 month period November 2012 to December 2013.

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.

CONSTRUCTION COMPLETE: The final construction was completed on time. While the scope had to be amended due to environmental abatement cost issues, the final delivery was on time and on budget.

SENSITIVITIES

INABILITY TO MAINTAIN PROJECTED OCCUPANCY: A lower than projected occupancy rate for available units and/or an increase in units rented to retiree and defense contractors in the near term will likely create negative rating momentum.

FUTURE BAH VOLATILITY: Future BAH rate changes may lead to decreased project revenue and debt service coverage.

EXPENSE MANAGEMENT: Management's ability to control operating expenses may affect debt service coverage and if unable to control expenses it may put pressure on the rating.

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.

The project is experiencing an average occupancy of 95% based on the end state 850 unit count. This occupancy statistic includes the 8% (down from 14% at last review) of units that are being rented to individuals from the tenant waterfall which include retirees and department of defense civilians who were not part of the originally intended audience.

In 2014 capitalized interest will be reduced to zero as originally planned and debt service will increase from approximately $7.3 million to $7.7 million. Therefore, achieving high occupancy levels with tenants from the originally intended audience is critical to reaching projected rental revenue levels and debt service coverage ratios. Fitch projects debt coverage will be approximately 1.45x for the 2014 fiscal year based on 95% occupancy, a 15% BAH increase and a 15% expense escalation combined with the debt service commencing with principal amortization.

Construction was completed on schedule. The scope of the project was reduced twice by Major Decisions from the Army to downsize the amount of units originally planned for renovation to 38 from 119. As a result of this change in scope, a total of 81 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. However, demand for the on post units is present as evidenced by the 95% occupancy which includes approximately 8 % from waterfall tenants.

Additional information is available at www.fitchratings.com'.

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, 2013);

--'Rating Criteria for Military Housing' (Nov., 2013).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499

Rating Criteria for Military Housing - Effective Sept. 23, 2010 to Sept. 20, 2012

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=557825

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=815463

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