Fitch Dwngrs Houston Hsg Corp.(TX) Long Drive Apts Sect 8 1996 Bnds to 'BBB-'; Outlook Negative

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings downgrades the Houston Housing Corp. No. 1 (TX) (Long Drive Apartments Section 8) 1996 bonds to 'BBB-' from "BBB+".

The Rating Outlook is Negative.

The reduction in debt service coverage demonstrates reduced project financial performance.

APPROACH:

Fitch's approach to rating bonds backed by a single-asset multifamily Section 8 project includes a review of the following: debt service coverage ratios; occupancy, rent levels, management and reserve levels.

KEY RATING DRIVERS:

--Management Drives Occupancy and Expenses: The project manager's ability to maintain high occupancy and control expenses plays a key role in preserving sufficient debt service coverage.

--Rent Increases Necessary: The project rents are currently below HUD's Fair Market Rent (FMR) for the Houston area and therefore should be successful in petitioning for increases to keep pace with project operating expenses.

--No Legal Obligation for Deficit Funding: There is a lack of any legal obligation on the part of the corporation to fund project deficits; however, the issuer has a demonstrated history of doing this in the past.

WHAT COULD TRIGGER A RATING ACTION:

--Failure to maintain full project occupancy at current levels (100%);

--Failure to manage project operating expenses;

--Inability to secure future rent increases from HUD.

SECURITY:

Bonds are limited obligations of the issuer. The primary security for the bonds is the Section 8 subsidy for all of the units which is governed by the remainder of a 40-year project-based Housing Assistance Payments (HAP) agreement which expires in 2021. In addition to the Section 8 rental subsidy, the bonds are further secured by tenant rents and a first lien on and security interest in the project and improvements.

CREDIT PROFILE:

The project is currently demonstrating debt service coverage of 1.28 times (x) as of the Dec. 31, 2010 audited financial statements. Coverage levels for the project have declined since 2009 when it demonstrated coverage of 1.43x. The remaining debt service schedule for the bonds (which mature in 2020) demonstrates a declining amortization schedule which should help coverage levels, assuming management can maintain occupancy and expenses over the remaining life of the bonds.

During 2011, the project suffered from 11 down units due to foundation repairs which resulted in average occupancy of 88% for the seven months ending July 2011. The corporation reports that the repairs are complete and the project is currently 100% occupied. However, debt service coverage for 2011 is expected to be affected negatively.

Based on the 2010 FMR rates for the Houston Metro area, all of the units maintain rents below FMR. Historically, the corporation has been successful in obtaining rent increases from HUD for units below FMR and it received the most recent rent increase in April 2011.

Currently, all reserve and maintenance funds are fully funded and provide additional security to bondholders in the event of future property financial difficulties.

The corporation suffers from less than adequate asset management and high staff turnover. As the project ages and cost pressures increase, management could potentially complicate the issuer's ability to maintain an investment grade rating on these bonds.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

'Revenue-Supported Rating Criteria', dated June 11, 2011.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.