NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed its 'BBB-' rating on the following series of bonds issued on behalf of Touro College and certain affiliated entities (Touro, or the college):
--$56 million Dormitory Authority of the State of New York (DASNY) revenue bonds, series 2014A (Touro College Obligated Group);
--$38.3 million DASNY revenue bonds, series 2014B (federally taxable) (Touro College Obligated Group);
--$24.4 million City of Henderson Public Improvement Trust (HPIT) revenue bonds, series 2014A (Touro University Nevada);
--$11.9 million HPIT revenue bonds, series 2014B (taxable) (Touro University Nevada);
--$17.5 million California Municipal Finance Authority revenue bonds (Touro University), series 2014.
The Rating Outlook is Stable.
General, joint and several obligation of the Touro College Obligated Group (OG) pursuant to a master trust indenture (MTI) and payable from the gross revenues of the OG. Gross revenues include all tuition, fees, receipts, revenues, income and other moneys received by or on behalf of the OG unless otherwise restricted. Additional bondholder protections include mortgages on various OG-owned properties and cash-funded debt service reserves calculated separately for each series of bonds. The OG represented about 70.2% of Touro's fiscal 2014 consolidated unrestricted operating revenue.
KEY RATING DRIVERS
MISSION-DRIVEN INSTITUTION: Touro College is a mission-driven institution with a track record of enrollment growth, despite recent declines in certain undergraduate and graduate programs such as education and law; and successfully opening new programs and schools that are fueled by geographic and student diversity.
HEALTHY DEMAND TRENDS AT OG: Stable student demand trends for the OG's existing program offerings, primarily in medicine and the health sciences, partially mitigates concern over projections of enrollment growth and recent declines in other Touro programs outside of the OG.
FINANCIAL PROFILE OF OG: The OG has a recent track record of generating operating surpluses; adequate balance sheet liquidity; and a moderately low debt burden, with solid debt service coverage. These strengths are tempered by its limited operating history as an OG and inclusion of new campuses and programs that require enrollment growth, various start-up costs, and accreditation approvals.
SUPPORT OF NON-OBLIGATED GROUP OPERATIONS: The OG is leaned upon to provide annual financial assistance to non-OG operations of Touro. While not legally subordinate, this assistance is expected to be distributed subsequent to the OG satisfying debt service and various financial covenants. On a consolidated basis, Touro has limited financial flexibility, with a thin balance sheet cushion, tuition revenue concentration, a moderately high debt burden, and lackluster fundraising.
AGGRESSIVE GROWTH STRATEGY: Touro's traditionally aggressive growth strategy will likely result in additional capital and borrowing needs as it continues to expand, both within and outside of the OG. Diligent business and strategic planning on the part of Touro's committed board of trustees and senior management team partly offset concern over potential future leverage.
INCREASED LEVERAGE: Any future increase in financial leverage without commensurate growth in available financial resources could negatively pressure the rating.
INTEGRATION OF NEW PROGRAMS: Continued successful integration of new programs into the Touro College and University System, coupled with achievement of annual enrollment targets, particularly within the OG's schools and programs.
Founded in New York City in 1970, Touro is a private, religiously affiliated institution whose initial mission was to serve the Jewish community through higher education and career development, primarily centered on the health sciences. Since its founding, it embarked on an aggressive growth strategy, significantly expanding program offerings and broadening its mission to serve all students. While originally founded with a religiously-driven mission, Touro also views its mission as workforce development and is spread primarily throughout the New York metropolitan area, as well as owning campuses in Vallejo, CA and Henderson, NV. It provides undergraduate bachelor and associate degree programs; graduate programs; and professional schools.
The OG was formed in 2014 and includes Touro College, Touro University (TU), Touro University Nevada (TUN), and NYMC. With regards to Touro College's participation in the OG, only the revenues derived from its College of Osteopathic Medicine (TouroCOM; Harlem and Middletown campuses), College of Pharmacy, and School of Health Sciences are pledged under the MTI.
SOUND STUDENT DEMAND, DESPITE SOME PROGRAM DECLINES
Touro's expansion led to steady enrollment growth over the past few decades, although overall headcount enrollment declined for a fourth consecutive year in fall 2014. Based on preliminary figures, fall 2014 headcount enrollment across all Touro schools and programs fell 1.6% to 18,077 from 18,377 in fall 2013, and is down 6% since fall 2009. However, while fall 2014 full-time equivalent (FTE) enrollment is not yet available, Fitch notes that fall 2013 FTEs remained stable at about 15,200 students.
Enrollment declines have primarily been at the graduate education school and at the law school which continue to be pressured. Declining demand for law and graduate education programs is consistent with trends still being observed nationwide. These declines were partially offset by growth at TouroCOM due to the successful opening and accreditation of the new Middletown, NY campus in August 2014. Touro's senior management team also has a demonstrated track record of managing weakening enrollment patterns through various budgetary measures, such as adjusting staff levels, and tuition increases.
Importantly, Fitch notes that enrollment within the OG, where the pledged revenues securing the series 2014 bonds are derived, continued to grow. Preliminary fall 2014 enrollment for the OG totaled 7,033, up 7.7% from 6,532 in fall 2013, and up 21.7% since fall 2009, reflecting demand for Touro's medical and health sciences-related programs. Student selectivity varies among Touro's different schools and programs. The medical schools remain the most selective, with most of the medical and pharmacy schools accepting about 10% or less of applicants, reflecting the continued demand for various medical and health science-related professions, and management's strategy of focusing on job placement and workforce development. Touro aims to keep undergraduate tuition affordable, which is made possible by the majority of its enterprise consisting of mostly full-paying graduate and professional students.
STABLE FINANCIAL PERFORMANCE
Typical of many private colleges and universities, Touro has limited revenue diversity. Tuition and fees make up the majority of revenues (78% in FY14), followed by patient service revenues (11%) and grants and contracts (7%). The latter two are derived from NYMC via faculty physician practices and modest research activity. Importantly, due to enrollment growth and a largely graduate student population that results in minimal overall tuition discounting (8%-9%), Touro's net tuition and fee revenue grew measurably (48% from fiscal years 2010-2014, or a healthy average annual growth rate of 10%). The OG's revenue mix is similar to that of the consolidated entity. Tuition discounting is an even lower 2.5% at the OG level, as the OG is comprised primarily of graduate programs.
On a consolidated basis, Touro's operating margin has been somewhat volatile as the organization continued to grow and add programs, although the margin has been generally breakeven to positive for the past four fiscal years; negative 0.8% in fiscal 2014. At the OG level, margins have been strong at 11.6% and 12.8% in fiscal years 2014 and 2013, respectively. While this demonstrates a solid level of performance by the OG, it is tempered by a limited track record of three years, only two of which include a full cycle with NYMC's operations. Touro expects most of its programs to be self-supporting, with the exception of its two Yeshivas and Lander Colleges, which are subsidized by the rest of its operations. Touro's consolidated fiscal 2015 budget forecasts financial results similar to that of fiscal 2014, based on operating revenues of $454 million (excluding investment income).
LIMITED BALANCE SHEET LIQUIDITY
On a consolidated basis, Touro's balance sheet cushion remains thin. Available funds totaled $121.7 million as of June 30, 2014, covering fiscal 2014 operating expenses ($452 million) and outstanding debt ($353.7 million) by a low 26.9% and 34.4%, respectively, similar to the prior year's level. Touro's investment portfolio is fairly conservative, with moderate exposure to alternative asset classes.
At the OG level, balance sheet liquidity is slightly stronger. Available funds of $86.8 million covered fiscal 2014 operating expenses ($278.4 million) and outstanding debt ($191.1 million) by 31.2% and 45.4%, respectively, which Fitch considers adequate for the rating level. Debt includes revenue bonds, notes payable, capital leases and non-cancellable operating leases.
MANAGEABLE DEBT BURDEN
The series 2014 bonds are fully-amortizing, fixed-rate debt, with generally level debt service through final maturity in fiscal 2044. On a consolidated basis, Touro's total maximum annual debt service (MADS) equates to about $33.7 million. MADS includes debt service on revenue bonds, notes and mortgages payable, and capital leases. MADS for the OG totals approximately $10.4 million occurring in fiscal 2018, with average annual debt service equating to a similar $9.7 million.
On a consolidated basis, Touro's debt burden remains moderately high, with total MADS consuming 7.5% of fiscal 2014 operating revenues. Institutional MADS coverage from operations was thin at 0.9x in fiscal 2014, compared to 1.0x in fiscal 2013. Leverage metrics are much stronger at the OG level, with a moderately low 3.3% MADS burden and healthy institutional coverage of 5.4x from net available income of about $56 million.
Fitch assumes that Touro may have additional debt needs over time as it continues to grow. Touro may issue debt under the MTI for both OG and non-OG purposes, which Fitch views as a credit negative since it could potentially dilute the strength of the OG. However, any debt issued under the MTI for non-OG purposes is expected to bring with it payments from the non-OG beneficiaries of any debt-financed projects to offset the additional debt service imposed on the OG. Various financial covenants under the MTI are also expected to prevent Touro and the OG from significantly over-leveraging.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 16, 2014);
--'U.S. College and University Rating Criteria' (May 12, 2014);
--'Fitch Rates Touro College's (NY) Series 2014 Revs 'BBB-'; Outlook Stable' (April 1, 2014).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. College and University Rating Criteria