Fitch Affirms Florida Atlantic University's Housing System Revs at 'A+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'A+' rating on the following revenue bonds issued on behalf of Florida Atlantic University (FAU):

--$21.7 million Florida Board of Education, FAU housing revenue bonds, series 2003;

--$23.0 million State of Florida Board of Governors, FAU housing revenue bonds, series 2006A;

--$17.2 million State of Florida Board of Governors, FAU housing revenue bonds, series 2006B.

The Rating Outlook is Stable.

SECURITY

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

KEY RATING DRIVERS

ESSENTIALITY AND SOLID DEMAND: The 'A+' rating reflects the housing system's importance to FAU and solid demand for on-campus student housing. Occupancy rates fell to 88% in fall 2013 and fall 2014, but recovered to 96% in fall 2015. FAU expects to sustain the current sound occupancy levels based on enrollment trends and improved system management.

ADEQUATE DEBT SERVICE COVERAGE: The system maintains adequate debt service coverage. Coverage fell to a still-adequate 1.26x in fiscal 2015 due to lower occupancy but is projected to improve to historical levels in fiscal 2016 based on higher occupancy.

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: Rating stability for Florida Atlantic University's housing system depends on its ability to maintain adequate debt service coverage based on enrollment levels, occupancy trends and good financial management.

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. The housing system is a component auxiliary enterprise that finances and operates the majority of on-campus student housing facilities on the Boca Raton campus.

ESSENTIALITY AND SOLID DEMAND

The housing system is essential to FAU, which serves primarily undergraduate students. In addition to meeting student demand, on-campus housing is aligned with FAU's mission and strategy. FAU can provide enhanced academic support and student services through on-campus housing, which improve both student outcomes and state funding tied to associated performance funding metrics. Essentiality is also expressed in FAU's residency requirement; incoming freshmen are required to live in the housing system if they live more than 30 miles from campus.

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 compared to total campus bed capacity of about 4,178. System facilities account for 2,362 beds; the remainder are in non-system facilities financed through the FAU Finance Corporation (FAUFC), a related direct support organization of FAU (FAUFC housing bonds series 2010A and series 2012A rated 'A+'/Outlook Stable by Fitch).

System occupancy fell to 88% in fall 2013 and fall 2014 but has since recovered to a sound 96% in fall 2015. Management attributes the prior declines to an unexpected but temporary university-wide enrollment decline, poorly enforced residency requirements and a popular residential program that was briefly discontinued. The yield of freshmen, who mainly live in system facilities, 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 larger fall 2015 class and stable enrollment. A new management team over student affairs and campus housing has also improved occupancy through improved marketing and enforcement of housing policies. FAU expects to sustain the current sound occupancy levels based on enrollment trends and improved system management.

ADEQUATE DEBT SERVICE COVERAGE; FAU FINANCE CORP

The system maintained adequate debt service coverage despite lower enrollment. Coverage fell to a still-adequate 1.26x in fiscal 2015 due to a second year of lower occupancy. FAU managed lower occupancy levels effectively, including concentrating vacant beds in and temporarily closing part of one facility to reduce costs. Coverage is projected to improve to historical levels (generally around 1.5x or better over the past five years) in fiscal 2016 based on higher occupancy.

As of March 24, 2010, the senior lien on housing system revenues was closed. Since that time, FAUFC has financed expansion and renovation of on-campus housing. These financings are secured by the revenues generated by their specific projects. However, excess revenues of the system facilities, following the payment of system expenses and debt service, are available to pay debt service on FAUFC bonds. To date, these revenues have not been necessary to supplement debt service on either the series 2010A Innovation Village project or the 2012A student housing project (now known as Parliament Hall).

Fitch recognizes that FAU management is closely involved in all financings undertaken by FAUFC. FAU manages its campus housing without distinction between system and non-system facilities, is responsible for setting rates and charges for all beds located on campus, and enforces a freshmen residency requirement.

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

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1003752

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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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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