Fitch Affirms University of Central Florida's Housing Revenue Bonds at 'A+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'A+' rating on approximately $105.4 million of housing revenue bonds issued by the State of Florida Board of Governors and Florida Board of Education (Formerly Florida State Board of Regents) on behalf of the University of Central Florida (UCF).

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a net revenue pledge of UCF's housing system (the system).

KEY RATING DRIVERS

ADEQUATE COVERAGE FROM OPERATIONS: The 'A+' rating reflects the system's history of adequate coverage from operations, fueled by strong student demand, and lack of additional housing debt plans. Mitigating factors include a high debt burden and limited financial cushion.

STRONG ENROLLMENT BASE DRIVES DEMAND: UCF's large and modestly growing enrollment base drives strong demand for and consistently full occupancy of limited on-campus housing facilities.

UCF's CREDIT STRENGTH: Although the university's resources are not pledged, the housing system benefits from UCF's strong demand and enrollment, generally positive operating performance, diverse revenue streams, healthy balance sheet, and moderate debt burden.

RATING SENSITIVITIES

WEAKER COVERAGE: Substantial weakening of debt service coverage from pledged housing system net revenues would negatively pressure the rating.

ADDITIONAL DEBT: Additional housing system debt not accompanied by a commensurate increase in pledged revenues would pressure the rating.

UCF OPERATIONS: While not expected, a deterioration of the university's credit profile could negatively pressure the rating.

CREDIT PROFILE

The University of Central Florida, part of the State University System of Florida, is one of the largest universities in the United States, enrolling approximately 59,770 students across 12 campuses during fall 2013, including the main campus northeast of downtown Orlando.

STRONG DEMAND DRIVES POSITIVE MARGINS

The housing system's operations are consistently positive, producing a solid margin of approximately 15% in fiscal 2013. The system's operating performance is largely attributable to very strong demand for a limited supply of on-campus housing. Despite increases in the housing stock over the past five years, fall semester occupancy rates have consistently exceeded 99%. Current occupancy is over 100%, and housing applications for fall 2014 are trending ahead of the prior year.

Management notes recent growth in private student-oriented housing facilities near the main campus, and considers the area somewhat overbuilt. Fitch believes, however, that the system's limited supply and competitive advantages (on-campus locations, integrated academic and community programming, and favorable academic year rates) will continue to support robust demand.

ADEQUATE COVERAGE OFFSETS HIGH LEVERAGE

Not atypical for a standalone university auxiliary, the system has a high debt burden and high leverage, with a minimal financial cushion. MADS accounts for a high 34.4% of operating revenues. Available funds, defined by Fitch as cash and investments less restricted net assets (net of unspent bond proceeds), were $13.7 million at June 30, 2013. While improved in recent years due to surplus operations, the system's available funds still provided limited cushion, covering 62.8% of operating expenses and a very low 12.4% of system debt. Positively, UCF deposits 3% of annual revenues into a Housing System Maintenance and Equipment Reserve Fund for the benefit of the system. The balance available in the fund ($5.7 million) can be used for atypical maintenance or replacement expenses without diluting the system's limited liquidity. Still, Fitch recognizes that the system's ability to amass significant reserves will be constrained by the capital intensive nature of its operations.

Fitch also notes, however, that weak balance sheet metrics are somewhat offset by a track record of adequate coverage from positive operations. Pledged net revenues covered maximum annual debt service (MADS) of $8.8 million by an acceptable 1.3 times (x) in fiscal 2013. While this is lower than in prior years, coverage remains consistent with original projections. Further, coverage is expected to improve somewhat as the 2012A project facilities and an additional housing facility came online in fall 2013 (fiscal 2014). While UCF's long-range strategic plan calls for adding some capacity on the main campus, management is not pursuing new projects at this time. Fitch views management's flexibility and regular assessment of housing needs positively.

UNIVERSITY OF CENTRAL FLORIDA

While UCF's financial resources are not legally pledged to the housing bonds, the university's credit strength is an important consideration given the strong connectivity between the university and its housing system.

Headcount enrollment remained effectively flat in fall 2013, at 59,770, and is expected to resume modest growth going forward. UCF's stable enrollment indicates sustained demand despite tuition increases in recent years, which were primarily the result of sizeable cuts in state funding support. Due to reduced appropriations, fiscal 2013 operating performance reflected a -0.9% GAAP-based operating margin, which was atypical for the university (the university's operations remained soundly positive on a cash basis). With funding restored and increased in fiscal year 2014 (and most likely for fiscal 2015), however, UCF is expected to return to its characteristic positive GAAP-based margins.

UCF's overall leverage, including component unit debt effectively guaranteed by the university, is manageable. MADS coverage dipped to 1.2x in fiscal 2013 due to the appropriation cuts noted above, but has typically been a solid 2x or better and should improve in fiscal 2014. The MADS burden was moderately higher but manageable at 6.4% of operating revenues in fiscal 2013. UCF's available funds of $368.2 million also provide sound financial cushion, representing 47% and 70% of operating expenses and pro forma debt, respectively.

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

Applicable Criteria and Related Research:

--'U.S. College and University Rating Criteria', dated May 12, 2014

Applicable Criteria and Related Research:

U.S. College and University Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748013

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=833459

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Contacts

Fitch Ratings
Primary Analyst
Tipper Austin
Analyst
Fitch Ratings, Inc.
+1-212-908-0723
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Joanne Ferrigan
Senior Director
+1-212-908-0723
or
Committee Chairperson
Maura McGuigan
Senior Director
+1-212-908-0591
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Tipper Austin
Analyst
Fitch Ratings, Inc.
+1-212-908-0723
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Joanne Ferrigan
Senior Director
+1-212-908-0723
or
Committee Chairperson
Maura McGuigan
Senior Director
+1-212-908-0591
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com