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Rating Update:

MOODY'S AFFIRMS Ba1 RATING ON NORTHEAST HOUSING LLC'S TAXABLE MILITARY HOUSING REVENUE REFUNDING BONDS, SERIES 2007 CLASS I, AND DOWNGRADES RATING ON CLASS II BONDS TO B1 FROM Ba3; OUTLOOK IS NEGATIVE

26 May 2011

APPROXIMATELY $355 MILLION OF OUTSTANDING DEBT AFFECTED; RATINGS REMOVED FROM WATCHLIST

Northeast Housing LLC
Housing
TX

Opinion

NEW YORK, May 26, 2011 -- Moody's Investors Service has affirmed Ba1 rating on Northeast Housing LLC's $284 million outstanding Taxable Military Housing Revenue Refunding Bonds, Series 2007 Class I, and has downgraded to B1 from Ba3 the rating on $71 million on Series 2007 Class II bonds.

- Series 2007 A-1 (Class I) in the amount of $259 million, affirmed at Ba1;

- Series 2007 A-2 (Class I) in the amount of $25 million, affirmed at Ba1; and

- Series 2007 B (Class II) in the amount $71 million, downgraded to B1 from Ba3.

This rating action is based on the continued weak financial performance of the project primarily due to low occupancy. The project faces pressures going forward from decreases in its Basic Allowance for Housing and rising debt service as the bonds begin to amortize in 2011. The project's debt service reserve fund is funded by a surety bond provided by Ambac Assurance Corporation (unrated by Moody's).

CREDIT STRENGTHS:

* All units of new construction and renovation have been delivered and completed by the end of the initial development period in October 2010.

* Balfour Beatty, as developer and property manager, has significant experience in privatized military housing, which is further enhanced by their actual presence and active management of the property over the past several years.

CREDIT CHALLENGES

* Financial performance of the project has weakened due to high vacancy rates and declining interest earnings for 2010. Based on year-end financial statements for 2010, debt service coverage was approximately 1.33x on the 2007A (Class I Bonds) and 1.06x on the 2007B (Class II Bonds). These debt service coverage figures incorporate expenses (incentive management fees, asset management fees) as part of the expenses due to the program. Management's calculation of debt service coverage as reflected in their Twelve Month DSCR Compliance Certificate does not incorporate these expenses and show 1.44x and 1.15x on the Class I and Class II bonds respectively. Debt service on both classes of bonds will increase in 2011 after the interest-only period ends and the bonds begin to amortize.

* The weighted average occupancy rate for the 7 bases making up the Navy Northeast Region averaged 84% for 2010. The lower than expected occupancy rate was driven by weak demand at Naval Station Newport, which represents 22% of end-state units. Occupancy averaged 71% for 2010. Naval Station Newport has had difficulty increasing occupancy due to soft market conditions in the local real estate market.

* The project received an overall decrease in the basic allowance for housing of -2.20% for 2011.

* The debt service reserve fund is funded by a surety bond from Ambac which is unrated by Moody's. In the event of rental income shortfall and insufficient moneys in operating reserve accounts, bondholders would rely on the credit strength of Ambac for debt service payment.

Outlook

The outlook is negative due to occupancy rates significantly lower than anticipated, which has impacted the financial performance of the project. The decrease in net operating income over the past year, together with the absence of a debt service reserve fund, increases the project's vulnerability to short-term operating risks.

WHAT COULD CHANGE THE RATING UP

- Improvement of financial performance and achievement of high occupancy levels for several reporting periods.

- Cash funding of debt service reserve fund, replacement of the surety provider or an upgrade of the current surety bond provider while maintaining strong financial performance.

WHAT COULD CHANGE THE RATING DOWN

- Significant decline in BAH or continued stressed occupancy levels that result in a decline in debt service coverage.

- Downsizing or closure of any of the seven naval installations that support the housing units.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Thomas Song
Analyst
Public Finance Group
Moody's Investors Service

Florence Zeman
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


Moody's Investors Service
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USA

MOODY'S AFFIRMS Ba1 RATING ON NORTHEAST HOUSING LLC'S TAXABLE MILITARY HOUSING REVENUE REFUNDING BONDS, SERIES 2007 CLASS I, AND DOWNGRADES RATING ON CLASS II BONDS TO B1 FROM Ba3; OUTLOOK IS NEGATIVE
No Related Data.
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