DBRS Confirms Jefferies Military Housing Trust, Series 2010-XLII

DBRS has today confirmed the following class of Jefferies Military Housing Trust, Series 2010-XLII, with a Stable trend.

-- Pass-Through Certificates, Series 2010-XLII, HUNTER Project Certificates Series 2010A at B (sf)

The securitization consists of one $90 million loan collateralized by the residual cash flow interests from 12 U.S. military housing projects located on 11 bases, along with the property management and asset management fees from eight of those 12 projects. The collateral also includes developer fees, developer overhead fees and residual interests from an additional 15 military housing projects. The loan was originated in October 2010 with a scheduled maturity in October 2030 and a final maturity date in October 2045. The trust loan is interest only for the first five years through October 2015.

The rating confirmation reflects the stable performance of the portfolio since issuance, with the debt service coverage ratios (DSCRs) for the underlying loan and the Series 2010A certificates on a monthly basis generally in line with projected figures as based on the DBRS analysis at issuance. According to the servicer, the DSCR at YE2012 was 1.44x on the underlying loan and 2.22x on the Series 2010A certificates. The trailing 12 months (T-12) DSCR at February 2013 was 1.00x on the underlying loan and 1.44x on the Series 2010A certificates. The weighted-average occupancy rate for the nine properties with available rent rolls for YE2012 was 96.0%, which is directly in line with the overall occupancy rate for the portfolio at issuance. Rent rolls for Elmendorf AFB-I, Elmendorf AFB-II and Dyess AFB were not available as of press time.

At issuance, nine of the 27 projects in the collateral portfolio were under construction and the servicer has confirmed that seven of those nine are complete, with two projects scheduled for completion in 2013 and 2014.

Cash traps are present at both the loan level and the Grantor Trust level. The Series 2010B certificate is fully subordinated to the Series 2010A note, and in the event that the loan’s DSCR is less than 1.0x, funds otherwise payable to the Series 2010B certificate will be trapped for the benefit of the Series 2010A certificate. The loan structure also includes a debt service reserve in the amount of $5.625 million that was established at issuance; this figure amounts to approximately six months of debt service on the trust loan.

A cash trap has been in place since December 2012 as the DSCR for the loan fell to 1.02x for the T-12 period ending that month. In addition, in November 2012, the servicer initiated a cash trap following notice of an “uncontrollable event.” At that time, the servicer was advised by the borrower that there was a tax dispute between St. Clair County, Illinois, and the sponsor for the Scott AFB property, which is located in St. Louis, Illinois. The Scott AFB property has approximately 1,600 units and represents approximately 15% of the units in the original collateral pool. According to the notice, the dispute was initiated in 2010 when the sponsor requested a hearing to argue that the property was exempt from property taxes in accordance with the Military Housing Privatization Initiative (MHPI), which was enacted in 1996.

The sponsor was granted a favorable judgment in 2011; however, St. Clair County appealed the ruling in August 2012 and the litigation remains ongoing. In addition, the State of Illinois passed a law in August 2012 that would require the property to be subject to taxation. The sponsor has filed a complaint with the Illinois Circuit Court to contest the law’s validity and that litigation also remains ongoing. As the litigation remains ongoing, property taxes and interest will continue to accrue. If the litigation results in a ruling unfavorable to the sponsor, the cash flow at the Scott AFB property could be negatively impacted. As the situation unfolds, DBRS will continue to closely monitor the events and will include any available updates in the Monthly Surveillance Report for this transaction.

Notes: All figures are in U.S. dollars unless otherwise noted.
These ratings are endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodologies are CMBS Rating Methodology (January 2012) and CMBS North American Surveillance (November 2012), which can be found on our website under Methodologies.