Fitch Affirms FAU Finance Corp., FL's 2010A Revs at 'A+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'A+' rating on the following series of capital improvement revenue bonds issued by the FAU Finance Corporation (FAUFC), Florida:

--$2.6 million series 2010A (tax-exempt);

--$112.5 million series 2010A (taxable Build America Bonds).

The Rating Outlook is Stable.

SECURITY

The series 2010A tax-exempt and series 2010A Build America Bonds (the bonds) are secured by pledged revenues generated by Innovation Village, a 1,218-bed housing project (the project), and by a subordinate pledge of net revenues generated by Florida Atlantic University's (FAU) existing housing system (the system). In addition, a debt service reserve fund has been established.

KEY RATING DRIVERS

SOUND DEMAND: The 'A+' rating reflects continued demand for project beds, which primarily serve upperclassmen and affinity groups. Occupancy dipped slightly to 93% in fall 2014 (fiscal 2015) and has improved to a sound 95% for fall 2015 (fiscal 2016). Project occupancy remained stronger than general system occupancy over this period, and 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 2012 project (Parliament Hall) 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 two-facility project is mitigated by the additional security from excess net revenues (after debt service) of the system, which has a closed lien and consistently generates 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 Innovation Village or Florida Atlantic University's overall housing system without commensurate expense reductions could negatively affect the rating as debt service coverage would be stressed.

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 consists of two student housing facilities opened in fall 2011 with a total of 1,218 beds on the Boca Raton campus, accounting for just under a third 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 lien has 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 4,178. System facilities account for 2,362 beds; the remainder is from the project or another facility financed through the FAUFC.

Project occupancy dipped slightly to 93% in fall 2014 but improved to a sound 95% in fall 2015. The system experienced larger 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 primarily relies on demand-driven revenues from only the two financed facilities 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, which has a closed lien and consistently generates excess cash flow. While the project has always covered debt service from its own net revenues, 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 2010 bonds from pledged revenues was an adequate 1.26x in fiscal 2015. Management projects improved coverage closer to 1.4x in fiscal 2016 based mainly on improved system occupancy and resulting growth in excess net revenues available to pay the 2010 bonds.

As of March 24, 2010, the senior lien on housing system revenues was closed, a credit positive for the 2010 bonds. Subsequent to the 2010 Innovation Village project, the FAUFC financed the 2012 student housing project (Parliament Hall). The 2012 bonds are primarily secured by the 2012 project's revenues. However, excess revenues of the 2010 project facilities and the FAU housing system (subordinate to the claim of 2010 bonds), following the payment of expenses and debt service, are available to pay debt service on the 2012 bonds.

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

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1003750

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1003750

Endorsement Policy

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

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Contacts

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

Contacts

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