WASHINGTON — With the initial development period for privatizing housing for military personnel winding down, coping with uncertainty was the theme at the Bond Buyer’s Military Housing Privitization conference Tuesday.
The great unknown is budget-cutting. Military cuts to the Department of Defense could total $720 billion over the next 10 years under the Budget Control Act of 2011. Other looming factors range from the presidential election in November to stricter underwriting standards.
Florence Zeman, associate managing director for Moody’s Investors Service, said that while financings in general were “very safe,” some signs of volatility loomed, notably budget reductions under President Obama’s proposed reduction under basic realignment and closure, or BRAC, procedures. Other pressures include utility costs and bond amortization.
“The biggest cloud out there is the budget and how it could impact military housing,” she said.
Rhonda Hayes, chief of capital ventures for the U.S. Army, has noticed a change in the investor climate. “Deals are totally different,” Hayes said at conference held at the Embassy Suites hotel. “There’s no appetite for risk out there in any way, shape or form. There’s always a request, whether it’s cash traps, liens on investment accounts — whatever it takes to protect the interests of bondholders.”
Since Congress created the military housing privatization initiative, or MHPI, in 1996, the military has privatized more than 85,000 homes for on-base personnel and their families through bond revenues.
The military has built 27,000 units, or 85% of its targeted total homes, and renovated 28,000 homes, or 75%.
Short-term challenges include the flat-lining or reduction of the base allowance for housing or BAH, which supports the revenue stream to back the bonds; rising utility and insurance rates; and a shrinking size of the Army.
Moody’s maintains 24 related financings with $10 billion in bonds outstanding. Its median rating is Baa1. According to Zeman, Moody’s weighs financial and market positions, BAH and expense levels, base essentiality, occupancy rates and the condition of the units.
According to Guy LeBas, managing director for fixed income strategy at Janney Capital Markets in Philadelphia, BAH has statutory protections. “BAH is one of the safer components of military housing, from a macroeconomic perspective,” he said.
LeBas said Janney categorizes housing by five tiers of base essentiality, a credit factor he said will be increasingly essential. Bases in Hawaii, for instance, rate the highest.
“Focus on location and essentiality,” said Scott Andreson, senior vice president and head of municipal research for Hartford Investment Management Co. “We do like the sector because of its relative value and strong credit characteristics.”
Ivan Bolden, chief of the U.S. Army’s public-private initiatives division, said not all is doom and gloom. “We’re turning over homes among some difficult economic times, and we’re making the homes efficient,” he said.
“We’re still letting the dust settle,” Bolden said. Then, in an obvious reference to the presidential election, he added: “If I were a betting man, there will be more information sometime after late fall, early winter. ... Get my drift?”
Charles Giordano, a senior director at Fitch Ratings, said rating factors remain the same, although he noted that the wind-down of the initial period means construction risk will minimize or even disappear.
A senator from U.S. territory Guam emphasized the importance of military housing privatization to the successful redeployment of U.S.Marines to that South Pacific island from Okinawa, Japan, under a 2006 agreement between the U.S, and Japan.
“Guam, the federal government and the Department of Defense can create a win-win-win scenario,” said Vicente (Ben) Cabrera Pangelinan, who is serving his ninth term in Guam’s Senate. Guam, across the international date line, is eight-miles wide with a population of 160,000.
Pangelinan urged military officials to modify projects to incorporate local input, such as concerns over the installation of a firing range on culturally sensitive land, and use creative means such has integrating military housing throughout the island, “rather than build a city behind fences.”
