Fitch Affirms Jefferies Military Housing Trust XLI Series 2010 A Fort Sill Project Certificates

Fitch Ratings affirms the 'A' rating on the following federally taxable military housing project certificates:

-$110.7 million Jefferies Military Housing Trust XLI, Fort Sill Project Certificates, series 2010 A at 'A'.

The Rating Outlook is Stable.

SECURITY

The certificates are secured by a first mortgage lien on all improvements, a pledge of all receipts of the project (consisting predominantly of the monthly housing allowance or BAH), and a cash-funded debt service reserve fund.

KEY RATING DRIVERS

ADEQUATE DEBT SERVICE COVERAGE: The affirmation primarily reflects the 1.41x debt service coverage ratio based on 12 months of unaudited data ending January 2014. This coverage ratio is slightly higher than the 1.35x coverage ratio expected in the original pro forma and reflects increased BAH rates.

CONSTRUCTION AHEAD OF SCHEDULE: The developer is currently delivering units ahead of the initial construction schedule and is maintaining construction costs below original pro forma expectations.

STABLE OCCUPANCY: Management has maintained strong occupancy rates for the project which were maintained above 96% for the 2013 calendar year (CY).

INCREASED BAH RATES: The 2014 Basic Allowance for Housing (BAH) demonstrated a weighted average increase from 2013 (based on current rank distribution) of 8.3% for Fort Sill which should contribute to higher operating revenues going forward.

STRONG BASE ESSENTIALITY: Fort Sill is not expected to be negatively affected by any future base realignment and closure (BRAC).

SOLID MANAGEMENT: Corvias Military Living (formerly Picerne Corp.) has demonstrated its ability to deliver units on-time and has maintained strong occupancy rates at Fort Sill.

RATING SENSITIVITIES

DECREASED OCCUPANCY/INCREASED EXPENSES: Management's inability to maintain occupancy rates and/or control project operating expenses could negatively impact debt service coverage levels and put negative pressure on the rating.

BAH CHANGES: If BAH rates continue to increase at higher than expected levels and the debt service coverage ratio is maintained at a level above the original pro forma level there could be positive pressure on the rating. Conversely, any future decreases in BAH rates may lead to lower operating revenues and debt service coverage levels which could put negative pressure on the rating.

CREDIT PROFILE

BASE INFORMATION

Fort Sill is located in Oklahoma and added approximately 2,000 civilian jobs after the 2005 base realignment and closure. Fort Sill's role as an active U.S. Army installation dates back to the South Plains Indian Wars that followed the American Civil War. Established in 1869, it served as a garrison for Army personnel and units that were conducting security and peace keeping operations along the western border settlements. Fort Sill took on a new role for the Army after the frontier era ended as a training center. In 1911, it was selected as the U.S. Army's Field Artillery School, a mission that continues today.

PROJECT INFORMATION

The bond proceeds are being used to build 510 new units, complete 332 historic home renovations, and perform medium renovations to 476 family housing units and build three community centers. In addition the property manager will maintain the 432 recently built units during and after the development period. The 1,728 end state units represent approximately 15% of the military personnel currently stationed at the base.

DEBT SERVICE COVERAGE LEVELS

The affirmation primarily reflects the 1.41x debt service coverage ratio based on 12 months of unaudited data ending January 2014. This coverage ratio is slightly higher than the 1.35x coverage ratio expected in the original pro forma and reflects increased BAH rates. Additionally, this debt service coverage ratio represents a significant increase from the 1.12x coverage the project had in December 2011. The project is expected to maintain a minimum 1.25x coverage level once Initial Development Period (IDP) is complete.

PROJECT OCCUPANCY LEVELS

The project has experienced stable occupancy levels and management has increased average occupancy to above 96% in CY 2013 from 95% in CY 2011. The project is expected to maintain at least a 95% occupancy level for the remainder of the IDP. Additionally, management reports a strong waiting list for the project as well as a relatively short average duration to refill vacant units.

BAH RATES

The 2014 BAH demonstrated an average increase amongst all ranks of 7.3% and a weighted average (based on current tenant rank distribution) of 8.3% for Fort Sill which should contribute to higher operating revenues going forward.

PROJECT CONSTRUCTION

Construction risk is mitigated by Corvias' management keeping the delivery of new units on or ahead of schedule and maintaining strong occupancy levels while managing the renovation of existing units. Construction of the new units is currently 8 units ahead of schedule and historic renovations are also 8 units ahead of schedule. Management expects the project to be completed with their original IDP of 2016.

BRAC RISK

Of the Army's 97 installations, Fort Sill was ranked 19th 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. The four prior BRAC rounds did not consider Fort Sill for realignment or closure. The 2005 BRAC commission recommendations for Fort Sill provided a net gain for the installation. Fitch does not expect Fort Sill to be negatively affected by any future BRACs; however, in the unlikely event the base is affected there could be negative pressure on the rating.

DEBT SERVICE RESERVES

The certificates have a cash-funded debt service reserve fund sized at maximum annual debt service. The presence of this cash reserve enhances bondholder security.

PROJECT MANAGEMENT

The units are managed by Corvias (formerly Picerne) during and after the development period. The property manager currently manages approximately 25,000 affordable housing units at 13 various military installations around the U.S. and has an experienced management team in place.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Corvias Military Living.

Applicable Criteria and Related Research:

--'Rating Criteria for Military Housing' (Sept. 17, 2013);

--'Revenue-Supported Rating Criteria' (June 3, 2013);

--'Military Housing Snapshot' (Nov. 15, 2013).

Applicable Criteria and Related Research:

Rating Criteria for Military Housing - Effective Sept. 23, 2010 to Sept. 20, 2012

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=557825

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499

Military Housing Snapshot (U.S. Military Housing Portfolio Demonstrating Stability)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=721956

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=826646

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