APPROXIMATELY $1.6 BILLION IN DEBT AFFECTED
NEW YORK, Jun 3, 2011 -- Moody's has affirmed the ratings assigned to the $1.6 billion sale of Army
Hawaii Family Housing Trust Certificates (Army Hawaii Family Housing LLC). The
2005 Series Class I, II and III have been affirmed at the ratings of A1, Baa1
and Baa3 respectively. The outlook on the bonds is stable.
The rating affirmation is based on the financial performance of the
privatized military housing project financed with the bonds, the
continuing importance and essentiality of the US Army Garrison Hawaii and the
experience of the projects development team.
* US Army Garrison Hawaii is a highly essential installation that is an
important and strategic area for the Army thereby reducing the likelihood of
either a base closure or downsizing.
* 68% of units will be new construction units which will be superior in terms of
design and amenities in relation to the competition in the local real estate
* 66% of the units are geared to E1 to E6 personnel.
* Project was initially structured to maintain 90% occupancy during the initial
development period and 95% at stabilization. As of 5/31/11 the project was 95%
occupied maintaining well above the 90% occupancy threshold during IDP.
* Construction continues to be ahead of schedule, with 3,282 new homes online
compared to the contract schedule of 2,975 new homes resulting in a positive
variance of 307 new homes.
* Military families residing in this housing receive the Basic Allowance for
Housing (BAH). The rents are set at the BAH levels, correlating with market
* The legal documents enumerate the number of units that are expected to be on
line at the end of each month during the initial development period. If the
minimum number of expected units is not achieved in any month, liquidated
damages are assessed on the developer - Actus Lend Lease. Currently, the
minimum-units-online requirement is ahead of schedule.
* Actus Lend Lease as the developer and property manager is a strong participant
with significant experience in military privatization efforts and real estate
development in general.
* An approximate 29% of bonds are variable rate (13% of the bonds are auction
rate securities - Class III bonds).
* Diminished credit quality of the surety provider is a credit concern should
unexpected declines in net operating income and shortfalls occur.
* Management is discussing a modified scope plan with the Army to address a
projected shortfall in projected NOI.
DETAILED CREDIT DISCUSSION
STRUCTURE OF TRANSACTION AND SECURITY FOR THE BONDS
The borrower is Army Hawaii Family Housing LLC. The borrower is a for-profit
limited liability company with two voting members, an affiliate of Actus Lend
Lease (the Managing Member) and the United States of America represented by the
Secretary of the United States Army. The developer, Actus Lend Lease, is a
majority-owned subsidiary of the Lend Lease Corporation - an
Australian-domiciled international group with three core businesses: Bovis Lend
Lease, Integrated Property Development, and Real Estate Investment. Lend Lease
Corporation has assets in excess of $7 billion and a senior unsecured rating of
Baa2 ( on watch for possible downgrade). Actus has been involved in
approximately 60 military housing projects composing more than 16,000 units with
a value of more than $1.5 billion.
Pursuant to the Ground Lease, the Operating Agreement, and the Design/Build
Agreement, the borrower has agreed to undertake the project as described above.
The Class I, Class II, and Class III Certificates are being issued to finance
the demolition, construction and renovation of the housing units. The
Certificates will distribute payments from the underlying bonds that are secured
by the trust estate that includes a pledge of the revenues and all other funds
held under the indenture, the Lock-Box Agreement, and the mortgaged property. In
addition, a Project Reinvestment Subaccount will be funded from a portion of
surplus cash flow. The monies in this account are to be used for the long term
recapitalization of the housing units (in addition to the traditional repair and
replacement reserve) during the 50 year term of the ground lease. Although the
monies in this Account are to be used for this purpose and are released from the
lien of the indenture, it can be used to pay debt service if sufficient funds to
pay debt service are not available.
This transaction has been structured with three tranches of debt - Class I,
Class II, and Class III. The interests of the Class II and Class III certificate
holders are subordinate in priority of payment to the interests of the Class I
certificate holders. A failure to pay scheduled debt service on the Class II
Certificates prior to final maturity date is not an event of default unless
amounts sufficient for such payment are on deposit in the Class II debt service
accounts as applicable.
VERY STRONG REAL ESTATE FUNDAMENTALS
Moody's believes that this financing has very strong real estate
fundamentals including excellent location, strong demand by military
families who receive the Basic Allowance for Housing (BAH), superior
new construction product at the end of the initial development period, and a
very tight surrounding real estate market with a dearth of rental product.
The seven military communities are all situated on the Island of Oahu from three
to 22 miles from downtown Honolulu. Moody's believes that the location of these
communities will serve to bolster demand for this housing. It is Moody's
opinion, based on the market demand study, that there is very strong demand by
the military for the housing in these communities. The Army reports that
Hawaii's military population includes approximately 65,000 persons who
are supported by the Army, including 16,000 active military personnel and 25,000
family members. The vast majority of military personnel are posted to the Island
The project continues to perform well as indicated by strong occupancy (95% as
of May 31, 2011) and June 30, 2010 audited financial statements. The project is
relying on net operating income (NOI) from the housing units on line during the
initial development period (IDP) of 10 years to generate funds to pay for a
portion of the cost of completing the project. Moody's-adjusted audited
financial statements ending June 30, 2010 exhibited strong coverage
levels approximating 2.01/1.95/1.88 times for the Class I, II and III bonds,
respectively. The Class II and III bonds are floating rate components of the
bond deal and as such reflect significantly improved debt service coverage. The
LIBOR indexed Class II and auction rate (ARS) Class III bonds benefit from the
continued low interest rate environment and as such reflect debt service
coverage ratios significantly exceeding proformas. This structure however, does
bare inherit risk as the interest rate environment dictates performance and debt
service coverage. Interest rate risk remains a key concern. While the Class II
bonds are LIBOR indexed floaters, the Class III Bonds (ARS) are subject to a 17%
Management has presented a modified scope plan extending IDP to 2020, increasing
the construction period to an approximate total of 15 years. Extending the IDP
will enable management to contain surplus revenues thereby mitigating against
any projected shortfalls. Construction for new units is currently ahead of
While BAH increases have been strong at initial issuance of the project (22% in
2005), recent years have been stagnant, gaining little or no increase in years
2008, 2009, 2010 and 2011 (-.01%, -2.39%, 3.27% and 1.27% respectively).
The outlook is stable due to Moody's expectation that the strong
financial performance of the project will continue due to solid credit
fundamentals and excellent management.
WHAT COULD CHANGE THE RATING UP
- Continued improvement of financial performance while achievement of high
occupancy levels for several reporting periods; and
- Cash funding of debt service reserve funds at the maximum annual debt service,
replacement with an appropriate rated surety provider or an upgrade of the
current surety bond provider while maintaining strong performance.
WHAT COULD CHANGE THE RATING DOWN
- Significant decline in BAH or occupancy levels that result in a decline in
debt service coverage;
-Low debt service coverage upon completion of the IDP;
-Downsizing or closure of the army facilities; or
- Further downgrade of the surety provider.
The principal methodology used in assigning the rating was "Global
Housing Projects", published in July 2010.
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.
Ferdinand S. Perrault
Public Finance Group
Moody's Investors Service
David A. Parsons
Public Finance Group
Moody's Investors Service
Journalists: (212) 553-0376
Research Clients: (212) 553-1653
"REVISED" MOODY'S AFFIRMS RATINGS ON THE ARMY HAWAII FAMILY HOUSING TRUST CERTIFICATES CLASS I, II & III; OUTLOOK FOR EACH TRANCHE IS STABLE
Moody's Investors Service
250 Greenwich Street
New York, NY 10007