Fitch Affirms FAU Finance Corporation, FL's 2012A Revs 'A+'; Outlook Stable

NEW YORK--()--Fitch Ratings affirms the 'A+' rating on approximately $44.5 million of capital improvement revenue bonds, series 2012A issued by the FAU Finance Corporation (FAUFC), Florida.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by pledged revenues of a 614-bed student housing facility (the project, or Parliament Hall), in addition to a cash funded debt service reserve fund. Pledged revenues include a first lien on revenues generated from the project, following the payment of operating expenses. Excess revenues generated by FAUFC's Innovation Village project (the 2010 project) and Florida Atlantic University's (FAU) housing system (the system) also secure the bonds. If available, excess revenues of the housing system first are used to supplement Innovation Village if needed, then remaining excess is available to the project.

KEY RATING DRIVERS

SOUND DEMAND: The 'A+' rating reflects continued demand for project beds, which primarily serve upperclassmen. Occupancy fell to 88% in fall 2014 (fiscal 2015) but improved to a sound 93% for fall 2015 (fiscal 2016). Management expects sustained occupancy levels based on enrollment trends and improved system management.

INTEGRATION WITH FAU: The project is managed as part of FAU's housing system (system revenue bonds rated 'A+'/Outlook Stable), which is essential to the university. FAU sets rates for this project, the 2010 project (Innovation Village) and the system. In addition, FAU no longer has the ability to issue senior lien system debt, as the lien has been closed.

STRUCTURE TIES IN OTHER HOUSING: Primary reliance on performance of the single-facility project is mitigated by the additional security from excess net revenues (after debt service) of the system and the 2010 project, which are closed liens and consistently generate excess cash flow. The project has been self-supporting to date, but this pledge enhances the security by tying project performance to FAU's overall housing system and providing adequate overall debt service coverage.

UNIVERSITY FINANCIAL PROFILE: FAU's credit profile is characterized by sound demand, a large and stable enrollment base, healthy balance sheet resources, and low leverage. GAAP-basis operating results have been negative, offset by positive cash flow and state capital support. Recent success under state performance funding metrics will improve FAU's operating appropriations and operating results going forward.

RATING SENSITIVITIES

ADEQUATE COVERAGE: A sustained decline in occupancy of Parliament Hall (the project) or Florida Atlantic University's overall housing system without commensurate expense reductions would stress debt service coverage and could negatively affect the rating.

CREDIT PROFILE

FAU is a comprehensive public university and one of the 12 institutions of Florida's State University System (SUS). In addition to its main campus in Boca Raton, FAU has five satellite campuses located throughout southeast Florida. FAUFC is a direct support organization of FAU and shares common management with the university. The project is a student housing facility opened in fall 2013 with a total of 614 beds on the Boca Raton campus, accounting for about 15% of campus bed capacity.

INTEGRATION WITH FAU; SOLID DEMAND

While separately financed, the project is managed as part of FAU's housing system, which is essential to the university. FAU sets rates and charges for all housing options on campus. At issuance, FAUFC essentially consolidated the project into FAU's existing housing system by using a portion of bond proceeds to pre-pay ground rent on the land where the project and existing housing facilities reside. In addition, FAU no longer has the ability to issue senior lien system debt, as the liens have been closed.

FAU's large enrollment base provides sound student demand for system facilities. FAU's fall 2015 headcount enrollment totaled 30,714 students, including 15,560 full-time students at the Boca Raton campus. This exceeds total campus bed capacity of about 4,182. System facilities account for 2,362 beds; the remainder is from the 2010 project and the 2012 project facilities financed through the FAUFC.

Project occupancy fell to 88% in fall 2014 but improved to 93% in fall 2015. The system experienced similar but also temporary declines in occupancy due largely to an unexpected university-wide enrollment decline, poorly enforced residency requirements and a popular residential program that was briefly discontinued. Enrollment was particularly soft in fall 2014 as FAU tightened admissions standards to promote better student quality and outcomes.

Enrollment and occupancy have both improved in fiscal 2016 based on a higher enrollment in fall 2015. A new management team over student affairs and campus housing has also improved occupancy through improved marketing, enforcement of housing policies and amenities updates to stay competitive with private off-campus alternatives. FAU expects to sustain the current sound occupancy levels based on enrollment trends and improved system management.

STRUCTURE TIES IN OTHER HOUSING

The project relies first on demand-driven revenues from a single facility to pay debt service. The underlying project is fundamentally viable on a standalone basis; project net revenues alone remain sufficient to cover debt service by at least 1x. However, reliance on the performance of a single project is riskier than that of a system. This risk is mitigated by the project's claim on the excess net revenues (after debt service) of the system and the 2010 project, which have closed liens and consistently generate excess cash flow. This enhances the security and ties project performance to that of FAU's overall housing system.

Including excess system net revenues, coverage of the series 2012 bonds from pledged revenues was sound at 2.29x on a legal basis in fiscal 2015. Management projects improved coverage in fiscal 2016 based mainly on improved project and system occupancy.

FAU's SOUND FINANCIAL PROFILE

FAU's credit profile is sound and lends support to its auxiliary enterprise, even though general university resources are not pledged to pay the housing system bonds. FAU has a large and stable enrollment base driving demand for on-campus housing.

Negative GAAP-basis operating margins largely reflect depreciation expense and are offset by positive cash flow and historically strong state capital funding. The current political environment and a statewide focus on affordability preclude tuition increases and limit revenue-raising flexibility somewhat. However, state operating appropriations are set to increase in both fiscal 2016 and fiscal 2017 based on FAU's significant improvement on state performance funding metrics. FAU was most recently tied for the top score among SUS institutions, after performing near the bottom in fiscal 2014.

FAU has good balance sheet cushion, with available funds (unrestricted cash and investments) equal to 45.8% of operating expenses and 73.8% of debt (including certain related-entity obligations). The university's low leverage and debt burden (debt service equaled 1.9% of fiscal 2015 operating revenues) reflect historically strong state capital support and provide good financial flexibility.

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

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. College and University Rating Criteria (pub. 12 May 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748013

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1003749

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Contacts

Fitch Ratings
Primary Analyst:
Tipper Austin, +1-212-908-9199
Associate Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Joanne Ferrigan, +1-212-908-0723
Senior Director
or
Committee Chairperson:
Emily Wong, +1-415-732-5620
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Tipper Austin, +1-212-908-9199
Associate Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Joanne Ferrigan, +1-212-908-0723
Senior Director
or
Committee Chairperson:
Emily Wong, +1-415-732-5620
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com