NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB+' rating on approximately $127.2 million of student housing revenue refunding bonds, series 2006A and 2006B issued by the Illinois Finance Authority on behalf of the Educational Advancement Fund, Inc. (EAF) to finance the University Center of Chicago (UCC).
The Rating Outlook is Negative.
The bonds are an unlimited general obligation of EAF secured by the gross revenues of UCC, in addition to a mortgage on and security interest in UCC and the real estate on which UCC is located. Additional bondholder protections include a capital maintenance reserve funded annually at 3% of gross revenues from the previous fiscal year, 1.2x annual debt service coverage (DSC) requirement, and a historical 1.2x additional bonds test.
KEY RATING DRIVERS
DECLINING MEMBER BED COMMITMENTS: The Rating Outlook remains Negative reflecting continuing weaker overall participant bed commitments for fall 2015 and uncertainty over fall 2016. The Outlook also reflects concern over persistent enrollment declines at certain member institutions that could potentially stress occupancy levels and lead to further reductions in each participant's dormitory usage commitment to EAF.
OPERATIONAL STABILITY: The 'BBB+' rating reflects EAF's consistent positive operating performance, adequate DSC supported by stable occupancy rates at UCC and effective facilities management by CBRE, Inc. (CBRE or the project manager). In addition, the building's location in Chicago's downtown loop provides for a broad pool of prospective student occupants.
PROJECT SUPPORTS COVERAGE: The project historically generates excess operating income beyond the needs of the project. Excess income at end of the year (after all requirements of the bond indenture are made), as a practice, is disbursed back to member institutions on a pro-rata basis. Bond debt service payments are non-recourse to individual member institutions; however, the project alone has historically provided adequate DSC. Actual DSC for fiscal 2015 was 1.38x, exceeding the bond covenant requirement of 1.20x.
DIMINISHED COVERAGE: A material reduction in student room revenue from member institutions that diminishes current debt service coverage would negatively affect the rating of Educational Advancement Fund, Inc.
ENROLLMENT DECLINES AT MEMBER INSTITUTIONS: Continued enrollment declines at the member institutions would cause negative rating action of Educational Advancement Fund, Inc. given student housing needs supports project operating income.
SHIFTS IN HOUSING MARKET: The rating is also sensitive to the local student housing market in general. Should there be an influx of alternative housing options, utilization at University Center of Chicago could be negatively impacted.
EAF is a not-for-profit corporation formed to acquire land and construct, operate, and maintain UCC, a 1,720-bed college and university residential complex located in the South Loop of Chicago. Opened in 2004, UCC primarily houses upper-class students attending the downtown campuses of the three EAF member institutions. UCC is managed by CBRE, Inc. and an operating committee consisting of one or more representatives of each EAF member institution.
Usage of the UCC facilities is currently spread among four schools, including the three member institutions. Columbia College of Chicago, DePaul University, and Roosevelt University (collectively, the 'member institutions') are the sole members of EAF, with membership percentages of 40.625%, 40.625% and 18.75%, respectively. The membership percentages are relevant for voting, allocating residential facilities of the complex, and monetary distributions. Robert Morris University does not participate in the operations or management of UCC but has sub-contracted to take 250 beds annually through July 2019.
SOFTENING ENROLLMENT DRIVES OCCUPANCY
Overall student demand continued softening in fiscal 2016 (fall 2015) at the EAF member institutions: Columbia College Chicago's (Columbia)total headcount declined by 5.1%, DePaul University ('A'/Stable Outlook) remained fairly stable, and Roosevelt University ('BB+'/Stable Outlook) declined by 12.4%. Diminishing demand drove lower dormitory usage commitments to EAF by the three members for fiscal 2016; preliminary bed commitments estimates for fiscal 2017 show the trend continuing.
For 2015-16, 48 'house beds' out of 1,678 were not committed by the three members or Robert Morris. The 48 uncommitted beds were anticipated within the budget but some income was derived; 24 beds were filled for two semesters from overflow housing at DePaul. Preliminary dormitory usage commitments for 2016-2017 are down by 100 'house beds'. The commitments will be finalized in the near future. Management reported that the facility budget will be adjusted to reflect revenue from committed beds.
Fitch will monitor final member bed commitments and expected occupancy from other sources for fall 2016. The inability to meet occupancy and maintain stable coverage could negatively impact the rating. Overall, Fitch believes there is some uncertainty around member institutions maintaining bed commitment levels due to competitive pressures and enrollment challenges.
Favorably, EAF can adjust bed allotments among member schools and offer excess capacity to other institutions (such as Robert Morris). This flexibility has driven economic occupancy of UCC and supported financial performance and debt service coverage. Economic occupancy is predicated each year on the commitment of 1,678 beds (excluding staff beds). UCC remained 99% economically occupied in 2015-2016.
The project continues to perform well due to its diversified revenue streams and housing demand from non-member institutions. Fiscal 2015 revenues were comprised of student housing (59%), food services (24.1%), conference/internship housing and meeting room income (8.4%) and retail leasing (1.2%).
EAF has a history of positive operations over the past 10 years. Fiscal 2015 generated another strong margin of 14.4%, down from a high of 17.7% in fiscal 2014. For fiscal 2015, student room revenue was down 2% from fiscal 2014 but was mitigated by growth in food service and conference housing income. In addition, UCC's retail space is leased to tenants via multi-year leases with staggered terms and continues to be a stable source of income.
Although EAF does not provide mid-year interim operating data, management expects to achieve results in fiscal 2016 similar to the previous year.
The operating budget for fiscal 2017 is expected to be finalized in mid-May. As in prior years, management expects to be able to market the uncommitted 100 beds to other institutions or sell them as year around conference beds to achieve at least the covenanted 1.2x DSC.
HIGH DEBT BURDEN; ADEQUATE DEBT SERVICE COVERAGE
EAF's positive operations are offset by a very high debt burden with maximum annual debt service of about $11.4 million consuming 36.9% of operating revenues in fiscal 2015. Fitch notes this is not uncommon for a single-purpose entity created to operate a self-supporting project.
The series 2006 bonds debt service payments are non-recourse to individual member institutions. The project alone provides adequate DSC which drives the current rating. Actual DSC for fiscal 2015 is 1.38x, exceeding the 1.2x coverage requirement. EAF's management expects DSC for fiscal 2016 to meet or exceed this level.
Fitch will continue to monitor the impact of any reductions in student room revenue on DSC levels in fiscal 2017 due to pressured enrollment at member institutions. Fitch expects management will offset any decline with increases in other project revenue sources or budget accordingly. Inability to maintain DSC at or near the current level would negatively impact the rating.
WEAK BALANCE SHEET LIQUIDITY BY DESIGN
As a single-purpose entity EAF is not designed to build up cash reserves; its operating focus is facility maintenance and meeting DSC. EAF covenants to meet or exceed 1.2x DSC but historically generates higher coverage.
As of fiscal year end 2015, EAF's available funds, or cash and investments not restricted, increased to $12.7 million, up from $11.5 million in fiscal 2014. This amount excludes substantial trustee-held funds, including a debt service reserve and renewal and replacement funds. As a percentage of fiscal 2015 operating expenses ($26.3 million) and debt ($130 million), available funds are weak at 48.3% and 9.5%, respectively.
Under the bond indenture, EAF must deposit 3% of gross revenues into a trustee-held Capital Maintenance Reserve Fund annually. EAF is currently funding at 6% gross revenues with 3% in the trustee held account and 3% in an EAF board restricted (self-directed) account (EAF Maintenance Fund). As of March 30, 2016 the trustee-held and self-directed fund had balances of $4.8 million and $10.2 million, respectively.
The self-directed maintenance fund was created in April 2011. Approximately $250,000 per month is being contributed to the trustee-held capital maintenance reserve fund. The EAF Maintenance Fund cannot be used until the trustee fund is depleted (which can be used for renewal and replacement only, as described in the Bond Indenture). Management reports that the current level of reserves exceeds the amount needed for capital improvements over the next three to five years with no deferred maintenance. As such, there is discussion on reducing the self-directed balance via a special distribution to the three member institutions.
While a draw down in the self-directed fund is uncertain at this time, Fitch believes EAF currently holds sufficient cash to fund unexpected expenses. EAF's inability to maintain coverage at current levels, combined with lower resources as a result of a drawdown in reserves could negatively impact the rating.
Additional information is available at 'www.fitchratings.com'.
Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
U.S. Nonprofit Institutions Rating Criteria (pub. 05 Jun 2015)
Dodd-Frank Rating Information Disclosure Form