Military Housing Privatization Capital Markets Considerations August 7, 2012 Andrew Chintz National Public Finance Guarantee Corporation

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2012 ADC ANNUAL CONFERENCE| PAGE 4 4 MHPI Program Overview  Obsolete housing in poor condition and short supply. Traditional methods (MILCON) would require $16 billion over 20 years  Military Housing Privatization Initiative (MHPI) authorized under the National Defense Authority Act of 1996 to partner with private sector developers  Existing housing and land conveyed to public/private partnership under 50-year ground lease  Optimal number of end-state housing units is determined based on need and market supply.  Private developer replaces, renovates and manages housing over the 50-year term  Financed primarily through private bond market using long-term financings Leverage Basic Allowance for Housing (BAH) thereby avoiding the need for direct appropriation and replacing it with a debt obligation to creditors  Creditors incur development, construction and operational risk as well as BAH appropriation risk over the long term

ADC ANNUAL CONFERENCE| PAGE 5 National’s Role as Bond Insurer Provides additional credit support to bond investors by guaranteeing project’s ability to pay debt service National is the largest municipal-only bond guarantor with $5.7 billion in claims paying resources and $398 billion gross par insured as of March 31, 2012 Underwrites project as a lender/investor – creditors are aligned Pricing of insurance driven by underlying ratings and capital charges Military Housing fits into overall portfolio strategy of insured municipal bonds Provides additional oversight through ongoing monitoring to provide early identification of adverse credit trends. Partner with project company. Credit deterioration and rating downgrades increase insurer’s cost of capital. Initial pricing does not reflect credit deterioration

ADC ANNUAL CONFERENCE| PAGE 6 National’s Underwriting Approach Military Essentiality Considerations - Primary underwriting driver  Function - military value  Location  Infrastructure - available alternatives & costs to replicate/relocate  Community support vs. encroachment  Alternative use potential Real Estate / Project Risk Considerations  Market demand/competition – provide 30% of need  Project scope – unit quality and competitiveness, geographic diversity  Construction risk mitigation – GMP, incentive fees, 90% units on line  Developer capability/strength  Equity contribution and appropriate leverage levels  Reserves – debt service reserve, replacement reserve, reinvestment account  Environmental risk

TRANSACTION ORIGINAL PAR INSUREDSERVICEDEVELOPER Fort Carson$137,405,000ArmyBalfour Beatty Fort Hood Phase$275,075,000ArmyActus Lend Lease Pendleton/Quantico$1,117,900,000Navy/MarinesHunt/Lincoln/Clark Fort Drum Phase$355,680,000ArmyActus Lend Lease Army Hawaii$1,347,500,000ArmyActus Lend Lease Fort Leonard Wood$101,000,000ArmyBalfour Beatty Navy Mid-Atlantic$583,795,000Navy/MarinesLincoln AMCC Camp Lejeune$692,075,000Navy/MarinesActus Lend Lease McGuire Air Force Base/Ft. Dix$274,000,000Air Force/ArmyUnited Communities Navy Ohana$921,235,000NavyForest City Pacific Beacon$307,220,000NavyClark San Diego Family Housing$1,034,495,000NavyLincoln/Clark Tierra Vista (Tri-Group)$254,050,000Air ForceActus Lend Lease Navy Northwest$225,985,000NavyForest City Navy Southeast$587,415,000NavyBalfour Beatty Total $8,214,830,000 National’s Military Housing Portfolio Average rating ‘A’ to ‘AA’ Top Tier Operators Focus on essentiality National insured $8.2 Billion of Military Housing bonds across 15 transactions

2012 ADC ANNUAL CONFERENCE| PAGE 8 8 Program Performance Minimal effects on occupancy from housing crisis Strong demand, wait lists, occupancy is not employment driven Debt service coverage - generally in line at essential bases Granular – diversified by locations and neighborhoods Rental waterfall used Consistently stable Basic Allowance for Housing (BAH) 2012 BAH increased 2% despite housing market weakness BAH decreased in 2011, but only a 0.59% decrease Compounded early increases in BAH mitigates occupancy fluctuations Many projects at IDP completion stage. Construction risk declining and loan amortization is beginning. First 10 years of initial development completed; next 40 years of redevelopment and property management Accelerated out year development in strong performers Generally high ratings concentrated in the “A” – “AA” range. Ratings based on essentiality, market demand, construction risk mitigation, sophisticated management, military partnership support

Not without Pitfalls….  Project scope challenges – changing strategies and demographics resulting in “down-sizings”  Leverage  Housing market stress in select locations -- rising BAH could be a double- edged sword  Construction funding deficits due to investment performance  Actual operating expenses and development challenges not uncovered during project planning stages  Increased utility expenses. Solar energy implementation  Risk of loss of property tax exemption  Challenges in accessing the capital markets due to financial crisis. New phases have proceeded with equity only Program Performance

….But proven military support  Pitfalls successfully addressed by Government, Operators and Creditors  Aided by flexible project scope and structure  Tools used to address pitfalls: –project downsizing / deleveraging by purchasing bonds –additional equity –defer project scope to out years –sale of under utilized assets –bondholder representative and creditor oversight/ strategy  Continued focus on project success maintains credit quality for bond insurer and bondholders

Conclusion National is a partner in the privatization with interests aligned with the project company Direct funding appropriations have been exchanged with debt obligations. Responsibility to maintain credit strength and value to creditors (bond insurers and investors) Sector has performed well with challenges addressed by project company when necessary BRAC decision makers need to be well-informed about the financing obligations the military services have incurred as partners in privatized housing projects. The potential effects on outstanding bonds (or future bond issues) from closures or downsizings should be made a part of the BRAC assessment process. GOAL: Maintain credit quality to maintain interest from the credit markets to fund new projects!