OREANDA-NEWS. Fitch Ratings affirms at 'A+' the $53.6 million Harford County, MD Aberdeen Proving Ground (APG) military housing project 2009 bonds, federally taxable military housing bonds.

The Rating Outlook is Stable.

SECURITY
The bonds are secured by a first mortgage lien on all assets of the project. The bonds are also secured by a pledge of all receipts of the project supported by the rental revenue stream derived from the military servicemen's Basic Housing Allowance (BAH) after operating expenses. The rental revenue comes initially from 372 housing units with an option to rent up to an additional 457 units should the project not maintain 1.25 times (x) debt service coverage.

KEY RATING DRIVERS

RENTAL REVENUE STREAM: The ability to rent the 372 end state units and keep the surplus units on line and rented (Patriot Village) to support the bonds during and after the Initial Development Period (IDP) is very important to meeting cash flow debt service covenant of 1.25x. Debt service coverage was 1.93x at June 2015.

MARKET CONDITIONS: Strong real estate market conditions in and around Aberdeen Proving Ground, MD support the continuation of the BAH at its current level, which is sufficient to support the debt service payments after paying operating expenses.

BASE CLOSURE RISK: While the likelihood of base closure was deemed low based on the last base realignment and closure (BRAC) in 2005, the U.S. Army announced reduction projections in July of 2015 and 126 positions are projected to be cut from APG, a 5% reduction. Going forward the Army is looking to cut personnel and should there be a drastic reduction of military and civilian personnel at APG, the demand for the facilities would likely weaken.

CASH FUNDED DSR: The debt service reserve fund is cash funded and sized at the maximum annual debt service payment amount.

SCOPE CHANGE REQUESTED: The developer is requesting an IDP extension of one year to February 2017 from the initial construction schedule and has requested a change in scope to increase the number of renovations and to modify the original combination unit scope. The developer projects that the scope change will reduce total construction cost by approximately $6.6 million and will still deliver 372 end state units as originally planned. All of the 210 new units in the original scope were delivered on time and are currently occupied.

RATING SENSITIVITIES

DSC MAINTENANCE: Property manager's ability to maintain a minimum Debt Service Coverage (DSC) ratio above 1.25x throughout the life of the bonds. At current unit mix less operating expenses based on Fitch projections and assuming current occupancy, the property manager will need to keep online, maintain and receive rental revenue from at least 120 additional units over and above the end state 372 units in order to meet the 1.25x DSC.

SURPLUS UNITS MUST REMAIN ON LINE: The surplus units need to remain on line as an important component to the APG project. A conservative Fitch estimate of revenue from only 372 end state units will not achieve 1.25x debt service coverage ratio (DSCR). That coverage ratio must be maintained as stipulated in the Loan Agreement with the requirement that surplus units will not be demolished unless that DSCR covenant can be maintained.

TIMELY DELIVERY OF UNITS: The ability of the developer to continue to deliver renovated units on budget following the Army's approval on the revised scope is a rating factor. All new units have already been delivered on time.

CREDIT PROFILE
The affirmation of the bonds' rating is primarily based on the continuation of the revenue stream of the project which incorporates both the revenue from the military housing units and the surplus units being made available to private contractors employed at the post.

BASE INFORMATION
Aberdeen Proving Ground (APG) is a U.S. Army installation located in Hartford County, Maryland. Situated on the Chesapeake Bay along the Interstate 95 corridor between Wilmington, Delaware and Baltimore, Maryland, APG is one of Army's principal research and development, test and evaluation, and acquisition facilities for weapons systems, munitions and military equipment. Presently the amount of military personnel and civilian jobs has remained relatively constant with approximately 1,900 soldiers permanently assigned to the post and over 13,000 civilians, most of which work directly for the Department of the Army, making it the leading employer in Hartford County, Maryland.

PROJECT INFORMATION
The bonds provided funds to privatize family units at APG, fund the total development costs to build new units and renovate existing units as determined by the U.S. Army, build a community center, and fund reserves and costs of issuance. Specifically, funds were originally expected to be used to build 210 new units, combine 140 units into 70 large units and perform major renovations to 92 historical family housing units.

The 372 end state units represent approximately 25-35% of the military families projected to be stationed at the location in 2015. Importantly, because of the sizable civilian workforce, the demand for the surplus units should remain into the foreseeable future.

CONSTRUCTION
The developer recently requested a change of scope in construction from the Army and is awaiting approval. This change was due to the historic renovations which cost more than planned and the combination unit conversions being less than cost effective and not providing the best use of capital according to Corvias group, the project owner, property and development manager. If approved, the IDP will be extended by a year to renovate other military housing units. This scope revision has been submitted to the Army, and the developer reports that approval is expected to be granted.

DEBT SERVICE COVERAGE LEVELS
As originally planned, the development will reduce the housing units for the military families on post to 372 from over 1,000. However, based on Fitch's conservative projections the project will have to maintain and rent at least an additional 120 units to maintain the covenanted 1.25x debt service coverage ratio (DSCR) over the next few years. That projection assumes the rental revenue of the military housing units remain the same as 2015 actual and increases operating expenses by 1% each year over the next five years. Additionally, the debt service coverage ratio DSCR factors in the debt service of an additional $700 thousand per annum starting in 2016.

The bonds are structured with a fairly level debt service for their 30 year term. DSC levels are maintained at over 1.25x over the life of the 2009 bonds under stress scenarios. The ground lease with the U.S. Army runs for 50 years, while the Bonds mature in 2040.

The 2009 bonds are secured by a first lien on all assets of the project. Revenues are predominantly comprised of the BAH deposited to a lockbox and are available for debt service after operating expenses. The BAH is a cash allowance adjusted annually based on local rental rates and is an integral part of the compensation of U.S. military personnel. During and after the IDP, the project developer can use units scheduled for demolition at the end of the project to provide revenue, providing a cushion to the project. The current DSCR for the trailing 12 months is 1.93x. When the maximum annual debt service is applied the DSCR is 1.62x

DEBT SERVICE RESERVES
Bondholder security is enhanced by a full-year cash-funded DSRF sized at the maximum annual debt service.

BAH RATES
Aberdeen remains a strong project and is capable of handling various stress scenarios including stresses amongst: BAH rates, operating expenses, and occupancy rates. Utilizing the current revenues from the weighted average BAH rate with no increase and revenue from the 372 end state units with operating expenses increasing by 1% per year show DSC would demonstrate 1.0x in FY 2020, which is only sufficient for the current rating by adding on the surplus units that are needed and covenanted to maintain 1.25x DSCR.

BRAC RISK
APG is one of the Army's major R&D and test and evaluation facilities. Of the Army's 97 installations, APG was rated 18th in terms of military value during the 2005 BRAC process. This assessment places the post in the top 25% of the Army's domestic infrastructure. APG's rating as a top-tier installation has resulted in mostly net gains from the BRAC process. However, this does not rule out the fact that the Army is looking to downsize the number of service members and any and all posts could be affected. Latest projections point to another BRAC commission possibly commencing in 2017.

OCCUPANCY
Occupancy for APG was 90.8% as of June 2015 and increased to 92.5% for September 2015.

Original pro forma expected to utilize a declining amount of surplus units through the fiscal years 2016 to 2020. Based on current data, surplus units' average rental income per month is approximately $1,500 per unit. Corvias management maintains that they have no plans to reduce the amount of surplus units as there is continued demand for those units.

MANAGEMENT
The owner, property and development manager for the project is Corvias group during and after the development period. The property manager currently manages over 17,000 military housing units over six various U.S. Army military installations around the U.S. and has an experienced management team in place.

Corvias has the option to utilize rental income from approximately 457 surplus units located on post, also known as Patriot Village, to provide cash flow during and after the construction period. As covenanted in the loan agreement, an undisclosed amount of surplus units are expected to remain on line after the initial development period in order to maintain a minimum of 1.25x coverage as required in the loan agreement.