Questions Arise About Military Housing Bonds

WASHINGTON, DC-As we reported yesterday, Defense Secretary Chuck Hagel is talking about another Base Realignment and Closure (BRAC). The possibility is enough to make local market players shudder and groan—the area has just realigned itself after the shakeup of the last BRAC round.

To be practical about it, though, much must happen between now and another BRAC round to say nothing of getting Congress to sign off on such a proposal. But other budget-cutting initiatives Hagel has discussed have a greater likelihood of coming to fruition—and have just as much potential for upheaval in the commercial real estate markets.

The proposed reduction in the US active-duty armed forces from the current 520,000 to the proposed 440,000-450,000 and the retirement of the A-10 Warthog and U-2 reconnaissance aircraft at some facilities are two examples of the latter.

These events could be negative for some military housing bonds, such as those issued by Western Group Housing LP, according to a new note from Fitch Ratings.

The retirement of the two fleets could reduce the number of active-duty personnel at Missouri's Whiteman Air Force Base, Fitch notes. Military housing at Whiteman represents 27% of the units that provide revenue in the Western Group Housing bonds.

On the other hand, Beale Air Force Base in California could lose the U-2 aircraft—but could also see the program for another of its planes, the Global Hawk, strengthened. This base includes housing units that also support the Western Group Housing bonds, accounting for 16% of the financing.

At the moment the bonds are performing well, Fitch Rating analyst Charles Giordano tells GlobeSt.com —even better than expected when the housing was first built. "However, what Hagel is proposing is a pretty sizeable decrease in personnel percentage-wise and it is something we are watching."