Military Housing Affected By Insurance, Real Estate

DALLAS — The nation's declining real estate market and the collapse of bond insurance ratings are taking a toll on private military housing credits, but the sector is still in better shape than its civilian counterpart, analysts say.

In a recent review of 23 housing developments at bases around the country, Moody's Investors Service issued nine downgrades, based mostly on the tumbling credit ratings of surety providers, said analyst Florence Zeman.

"That's probably the strongest trend," she said. "Other than that, there's not a consistent pattern. Some are doing well while others are facing more challenges."

Over the past year, Standard & Poor's has also downgraded six projects among the 65 it rates, based on surety providers, said analyst Karen Fitzgerald.

"The fact that they had debt-service reserve funds with someone who was non-investment grade led us to assume that the reserve wouldn't be there," Fitzgerald said. "But we didn't want to lower just based on that. For the most part, the projects are still performing well."

Fitch Ratings, which rates 10 publicly financed military housing projects, has taken action on one this year, placing Virginia's Hampton Roads Unaccompanied Housing Project on negative watch due in part to construction delays. The project's top rating from Fitch is AA.

One of the strongest credits on the Moody's list is San Diego Family Housing, whose $1 billion of outstanding bonds were affirmed last week at Aa2, A1, and A3 for classes one, two, and three, respectively. Moody's also maintained the stable outlook. Standard & Poor's maintains a top rating of AA-plus on the project. Fitch does not rate it.

While the surety provider on that project, National Public Finance Guarantee Corp., formerly MBIA Corp., still has an investment-grade rating of Baa1 from Moody's, the credit strength comes mostly from high coverage levels, analysts said.

The project is still in development but is expected to have 12,553 units in San Diego, Seal Beach, China Lake, Lemoore, and Ventura, all in California, as well as Fallon, Nev., when construction is complete.

Among the Moody's downgrades was Ohana Military Communities in Hawaii, whose nearly $1.4 billion of bonds in three classes fell one notch, with the class one bonds dropping to A2 from A1 and the class three bonds down to Baa3 from Baa2.

Ohana carries top ratings of AA from Standard & Poor's and Fitch.

The former MBIA was also surety provider on Ohana's class one bonds and shared the role with CIFG Assurance on the class two bonds. Moody's withdrew its ratings on CIFG last November. The surety on the class three bonds was cash.

Fort Benning Family Communities in Georgia also saw its top rating downgraded to A2 from A1 on $173 million of class one bonds, while its class two bonds fell to Baa2 from A3 and class three dropped to Baa3 from Baa2.

Fort Benning's debt-service reserve fund is provided by AIG, which carries an A3 rating from Moody's. But the downgrade also comes with a negative outlook that reflects projected project performance, low occupancy levels, and a high level of variable debt, according to the rating report.

"The lack of appeal of conveyed units combined with weak local rental market and military deployment contributed to poor performance," Moody's analysts wrote. "Once these units are renovated and quality improves, occupancy is expected to increase."

A decline in local real estate markets affects military housing in two ways. First, it makes competing housing available at lower cost. Second, it also affects the basic allowance for housing, or BAH, for members of the service and their families.

The BAH is set every December based on data collected through the year, creating a lag between actual housing values and the allowance provided to service members.

For reprint and licensing requests for this article, click here.
MORE FROM BOND BUYER