OREANDA-NEWS. Fitch Ratings affirms the 'AA' rating for the $185 million Western Group Housing, LP Taxable Military Housing revenue bonds, series 2012 A-1 & A-2 (Airforce Western Group Privatization Project).

The Rating Outlook is Stable.

SECURITY
The bonds are limited obligations of the project owner. They are secured by the following: a lien and security interest in the properties, improvements pursuant to the trust indenture, four separate mortgages, and deeds of trust granted to the project owner for the benefit of the trustee and the collateral pledged by the owner under the lockbox agreement and the indenture.

All rental receipts of the projects are predominantly derived from the basic allowance for housing (BAH) (after payment of project operating expenses) from U.S. military service members stationed at Whiteman, F.E. Warren, Malmstrom and Beale Air Force Bases (AFBs) in the following states: Missouri, Wyoming, Montana and California. The bonds are also secured by a cash-funded debt service reserve fund sized at maximum annual debt service (MADS).

KEY RATING DRIVERS
SOUND DEBT SERVICE COVERAGE: The ratings on the bonds are being affirmed with a Stable Outlook based on the debt service coverage ratios (DSCR). Audited financial statements for 2014 demonstrate 1.64x coverage and 1.84x based on 12 months of unaudited operating data as of June 2015, both of which exceed the original pro forma projection of 1.63x.

BAH RATES: Changes to 2016 BAH rates from 2015 levels were largely positive for most rank levels at all four bases; when all changes were considered in aggregate based on current occupancy by rank, the net effect is a 3.35% annual increase in revenue. For the four-year period from 2012 to 2016, 60% of the units have met or exceeded the projected BAH increases that were originally projected.

STRONG PROPERTY OCCUPANCY: Occupancy for online units is strong, averaging approximately 96% as of June 2015 and 97% as of October 2015. The current number of units online (2,955) exceeds the required minimum of 2,700 during the initial development phase (IDP).

GOVERNMENT DIRECT LOAN FUNDING: Contributions to the original financing include a $142.5 million Government Direct Loan (GDL) from the Air Force in the form of an unrated subordinate loan which is funded over five years as new units are delivered along with a developer equity component in the amount of $16.6 million. The GDL schedule has occurred as planned and $108 million has been funded to date.

CONSTRUCTION PROGRESSING AS PLANNED: Construction risk is mitigated by the significant number of units required to be online (minimum 2,700) and generating revenue during the IDP, the low complexity level of the single-family construction, and the presence of a payment and performance bond during construction, and the developer's history of successfully developing military housing units. Balfour Beatty, the developer, reports that construction is approximately 70% complete and on schedule for March 2017.

DEBT SERVICE RESERVE FUND: A cash-funded debt service reserve fund sized at MADS contributes to bond holder security.

RATING SENSITIVITIES
BAH RATE FLUCTUATIONS - Future declines in BAH rates for the respective locations of the four bases.

MEETING IDP SCHEDULE CRITICAL - Developer's ability to maintain on-line units during construction and deliver end-state units on time as set out under the IDP.

OCCUPANCY AND EXPENSES DRIVE COVERAGE - Management's ability to maintain high occupancy levels and manage operating expenses during IDP and throughout the life of the transaction.

CREDIT PROFILE
PROJECT INFORMATION
The bonds were issued to finance the project, which consists of 3,264 end-state military housing units at four separate Air Force installations: Beale, F.E. Warren, Malmstrom and Whiteman Air Force Bases. BBC Military Housing - Western General Partner , LLC, is the general partner of the project owner, and its affiliates will develop, manage and maintain the units which at end state will be made up of 714 new units, 506 renovated units and 2,044 units retained in their current state.

The housing and improvements for the four bases is broken down as follows: Malmstrom AFB represents 34% of the total loan amount; Whiteman AFB represents 27%; F.E. Warren AFB represents 23%; and Beale AFB represents 16% of the units.

The A-1 bond's debt structure includes fully amortizing debt with a 45-year term maturing in 2057. The A-2 bonds have a five-year term, paying interest only and maturing in 2017. The underlying property leases have 50-year terms which begin after the IDP and will expire in 2062.

PROJECT CONSTRUCTION
Balfour Beatty, the developer, reports that construction is approximately 70% complete and on schedule for March 2017. As of September 2015, 86% of new construction units are complete, and 71% of major renovations and 67% of minor renovations are complete.
Construction risk is mitigated by the significant number of units that are required to be online (minimum 2,700) during the IDP generating revenue, the low complexity level of the single-family construction, the presence of a payment and performance bond during construction, and the developer's history of successfully developing military housing units.

DEBT SERVICE COVERAGE LEVELS
Audited financial statements for 2014 demonstrate 1.64x coverage and 1.84x based on 12 months of unaudited operating data as of June 2015, both of which exceed the original pro forma projection of 1.63x.

PROJECT OCCUPANCY LEVELS
Occupancy for online units is strong at approximately 96% as of June 2015 and 97% as of October 2015. The current number of units online (2,955) exceeds the required minimum of 2,700 during the initial development phase (IDP).

BAH RATES
Changes to 2016 BAH rates from 2015 levels were largely positive for most rank levels at all four bases; when all changes were considered in aggregate based on current occupancy by rank, the net effect is a 3.35% annual increase in revenue. For the four-year period from 2012 to 2016, 60% of the units have met or exceeded the projected BAH increases of approximately 8% that were originally projected.

DEBT SERVICE RESERVE FUNDS
A cash-funded DSCR sized at MADS contributes to bondholder security.

PROJECT MANAGEMENT
A limited-liability company, BBC (Balfour Beatty Co.) Military Housing - Western General Partner, LLC, is the sole general partner of the project owner. Balfour Beatty and its affiliates will develop, manage and maintain the 2,984 end-state military housing units at the four separate military installations. The end-state will be made up of 714 new units, 506 renovated units and 2,044 units retained in their current state. Balfour Beatty has held an ownership interest in, and has operated through subsidiaries, 20 military family housing privatization projects, covering 54 bases (representing the Army, Air Force and Navy) in over 20 states.