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A Tumultuous Year Presents A Major Test For U.S. Privatized Student Housing

Almost a year after most higher education institutions closed their student housing facilities to mitigate the spread of the coronavirus, significant risks persist for the U.S. privatized student housing sector. The financial strength of the privatized student housing sector is inherently weaker and more volatile than that of other public finance sectors, including the associated higher education sector. This is primarily due to the narrow scope of operations of each housing project, with the debt typically secured solely by a non-recourse pledge of net housing project revenues. Most of these projects rely on high occupancy levels to meet their financial covenant requirements, and therefore carry a fairly lean balance sheet that constrains their financial flexibility. This risk is reflected in the rating distribution in the sector, which ranges from 'CCC' to 'A+'. In addition, 50% of the 58 outstanding project ratings as of March 8, 2021, were in the speculative-grade rating category. Only a few projects benefit from additional financial support from their related institution, whether in the form of a first-fill agreement, vacancy guarantee, or university-backed lease payments.

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Chart 1

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As with several other demand-driven industries, the pandemic brought the inherent volatility in the privatized student housing sector into focus and exacerbated existing credit risks in certain cases. Over the past year, we saw an unprecedented level of rating changes and outlook revisions among the privatized student housing projects that we rate. Following the onset of the global pandemic and the introduction of stay-at-home orders in most states, higher education institutions across the country promptly transitioned to remote instruction. On March 25, 2020, S&P Global Ratings assigned a negative outlook to all student housing project ratings ("U.S. Higher Education Privatized Student Housing Projects Outlook Revised To Negative On Potential COVID-19 Impact"). Since then, we have lowered our ratings on 20 projects (34%) out of the 58 projects we rate publicly. In addition, one project defaulted (unrelated to the pandemic), and we withdrew our ratings on four projects when the associated institution purchased them, bringing them onto the school's balance sheet. As of March 8, 2021, after having reviewed each project individually, S&P Global Ratings continues to maintain a negative outlook on all ratings in the privatized student housing sector. Depending on factors such as housing demand, the need to draw on reserve funds, actual fiscal 2021 DSC levels, and support from the institutions the projects service, we anticipate rating pressures will persist for privatized student housing projects over the next year or longer.

Demand And Financial Factors Determine Credit Quality

The creditworthiness and overall financial strength of a privatized student housing project is determined by a variety of demand and financial factors. The pandemic affected each of these factors differently, and some factors partially offset others.

Chart 2

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Certain projects made up for weaker demand by receiving exceptional support from their associated institution or using existing reserves. Other projects were able to maintain their overall credit quality despite weak connectivity with the associated institution because they continued to report robust demand throughout the pandemic.

Table 1

General Credit Characteristics By Rating Category
Rating Credit characteristics
A Strong legal agreements including financial guarantees such as lease-vacancy agreement, first-fill agreement, and facilities-management agreement with a highly rated institution indicating close partnership with associated institutions
Strong oversight of project operations, with the university typically serving as manager of the project
Very strong reserve levels along with historically exceptional coverage and occupancy levels, which likely continued during the pandemic
BBB Often legal agreements such as lease-vacancy or first-fill agreements with the associated institution
Substantial external support (usually from the associated institution) during the pandemic without any legal obligation, indicating strategic partnership
Continued strong demand characteristics during the pandemic
Very strong reserve levels, even outside of a debt service reserve fund
BB Some vulnerability to nonpayment
Weak occupancy and reduced demand during the pandemic
No legal agreements with the associated university for occupancy guarantee or achieving covenant-level DSC
Annual debt service covenant violation in fiscal 2020 or expected in the near term
Expectation for a draw on reserve funds (but not the debt service reserve fund) or need for extraordinary financial support from the associated institution to make debt service payments
Received or expect to receive moderate financial support from the associated institution to offset losses spurred by the pandemic
B More vulnerable to nonpayment than projects rated ‘BB’
Faced occupancy pressures before the pandemic, indicating a fundamentally weak demand profile
No financial support expected from the associated institution through a legal agreement or extraordinary one-time support
Weak financial health with existing pressure to meet covenanted DSC that was exacerbated during the pandemic, with expectations to draw on the debt service reserve fund to meet debt service requirements
Note: This list does not represent S&P Global Ratings' rating methodology. It is only intended to provide a snapshot of the potential credit factors that may support a rating, and is not meant to be exhaustive or applicable to each project in the rating category.

Below, we provide a more detailed look at certain key factors affecting the credit quality of privatized student housing projects.

Geography

Although the risks associated with COVID-19 have been seen nationwide, projects in some areas have been more heavily affected than others. We believe differences in state guidelines and restrictions imposed by associated institutions to stop the spread of the virus led to greater de-densification efforts by some institutions, which could have caused an uneven impact on projects. In particular, we have seen a high number of downgrades in the Northeast. Although all our rated projects took steps to ensure student safety, projects that we rate in other regions, on average, faced less-stringent regulations imposed by states or the associated institution and were able to welcome more students back to campus for fall 2020. Of the 39 projects rated outside of the Northeast, 80% of the ratings are unchanged since March 23, 2020. Health-related measures, such as social distancing, and COVID-19 infection rates continue to vary geographically. Regional factors, especially vaccine distribution, will likely continue to influence demand for student housing.

Chart 3

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Associated institution support

We view a project's connectivity with the associated institution as a key credit factor. The strength of connectivity is determined by the level of support based on the school's ability and willingness to support the project, either in the form of a legal guarantee or when the project is under financial duress. In our view, a school's demonstration of extraordinary support for a distressed project indicates solid connectivity and emphasizes the associated university's strategic partnership with the project. The associated institution often benefits from the project because it receives surplus revenues in the form of ground-lease payments when the project is able to pay required debt service payments and maintain covenanted reserve fund levels. In addition, the project is often required to be transferred back to the associated institution following the maturity of the bonds. In cases where financial guarantees or strong financial support exist, we include project debt in our analysis of institutions. If the associated institution is facing financial stress, in our view it is likely that this will affect the project as well, particularly if the school provides a guarantee to the project.

Chart 4

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Chart 5

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COVID-19 has affected universities and student housing projects alike, but the projects with associated institutions that provided financial assistance benefited substantially. Most of the projects that we rate closed in mid-March 2020 and provided students with pro-rated refunds for the rest of spring 2020. In many cases, the associated institution covered those refund payments or provided some type of financial support for the lost revenue; however, 20 of our rated projects did not receive any extraordinary financial support and lacked any financial commitment from the associated institution to support them if annual DSC fell below a certain level (typically at or near 1.0x). Included within this number are projects that may have received some financial support, but the associated institution expected repayment even to the potential detriment of the project. Out of the 20 projects that did not receive financial support, 14 were downgraded. Only six project ratings were unaffected despite the lack of extraordinary support. This was primarily due to the fact that they remained open in spring 2020 or had lower break-even occupancy, which could better sustain the loss in revenue. According to management, these six projects also worked to fill beds for fall 2020, limiting the disruption to operations.

Occupancy

In our opinion, strong demand for new housing or additional beds at the associated institution is the fundamental driver of credit strength for new privatized student housing projects. Before the pandemic, an overwhelming majority of the rated projects (85%) had occupancy levels above 90% in fall 2019. Occupancy levels at these housing projects typically moved in tandem with the underlying demand observed at the associated school. However, due to the ongoing pandemic and the abrupt shift toward remote instruction, the gap between the demand trends noted by an institution and its associated residential housing facilities has significantly widened.

Chart 6

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Occupancy levels varied widely in fall 2020 across housing projects, as the associated institutions made decisions regarding their instruction modality and whether to de-densify their student housing facilities, often to abide by state and local governments' restrictions or guidelines. In addition, given that most institutions provided students with an option to take remote classes, students made their own assessment of the benefit of attending classes in person and the risk of staying in a student housing facility, where social-distancing guidelines could be more compromised. All of these factors contributed to a weakening in demand across many housing projects for the fall 2020 semester. The extent of occupancy declines varied across projects based on factors such as the mode of instruction at the associated institution, the type of housing facility (e.g., single- versus multiple-occupancy rooms, private versus shared bathrooms), and the location. The median occupancy level across the rated projects declined to 75% for fall 2020 from 96% in fall 2019. At this point, given the progress on vaccination rollout in 2021 and a more optimistic view that enrollments will return to some level of normalcy this fall, we expect that this distribution of occupancy levels across our rated projects could look slightly more positive for fall 2021 compared with fall 2020, although occupancy will likely remain below fall 2019 levels.

Debt service coverage

A key factor in our analysis of privatized housing projects is the trend in annual DSC as well as the expected annual DSC and maximum annual debt service (MADS) coverage in the future. Projects generally have covenants to maintain a certain annual DSC, with most of our rated projects requiring at least 1.2x annual DSC. The most commonly observed remedy required for a covenant violation is to hire an external management consultant, and as long as the project continues to make debt service payments (i.e., meets 1.0x annual DSC), it will avoid a default under the bond documents.

For projects with a fiscal year ending on June 30, 2020, the impact of the pandemic has been spread across fiscal years 2020 and 2021. Approximately 12% of the rated projects reported less than 1.0x annual DSC in fiscal 2020, based on operations only, after experiencing revenue declines due to the issuance of refunds. These projects had to draw upon their reserves or received support from the associated institution to meet their required debt service payments for the year.

Most projects expect to see a greater impact on rental revenues in fiscal 2021, with the effect of the pandemic lasting throughout fall 2020 and into spring 2021. Based on management's projections, a much larger 40% of the rated projects expect to report annual DSC below 1.0x solely through operations, and to draw upon various reserve funds or receive external support to meet their debt service requirements. We expect that the projected annual DSC for fiscal 2021 could be revised for several projects as management receives more definitive information about spring 2021 occupancy.

Chart 7

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Six of the 58 rated projects have a fiscal year that ends on Dec. 31. For the purpose of this report, wherever applicable, we have categorized the Dec. 31, 2019, financial results with the June 30, 2020, financial results for other projects, and the Dec. 31, 2020, financial expectations with the June 30, 2021, expectations. Although these are not directly comparable, given the vastly different distribution of the pandemic effects between the two fiscal years for these projects, we consider this a closer comparison than categorizing them based on the fiscal year (i.e., Dec. 31, 2020, financials will be less comparable with the June 30, 2020, results than with the June 30, 2021, results).

Reserve fund balances

The fairly lean operating model of privatized student housing projects, which is composed solely of the operating cash flows of one or more housing facilities, has historically never been conducive to building up material reserves. Most projects report annual DSC levels that are barely above covenanted requirements. With some variation based on the local competitive market, privatized student housing projects are typically limited in their ability to charge high rental rates, given that they serve a student population and are often marketed by the associated institution as university or college housing. After paying operating and non-operating expenses, debt service, and ground-lease payments to the associated institution, projects have limited opportunity to build up their financial reserves, unless required by bond documents to fully fund the reserve fund balances. This leads to the projects having less flexibility to withstand business interruption for a prolonged period, as we have seen during the pandemic.

Housing projects maintain various types of reserve funds. Most projects that we rate maintain a debt service reserve fund, usually with a balance equal to the MADS on the debt outstanding. Certain other reserve funds include repair and replacement funds, surplus funds, operating contingency funds, and excess bond proceeds. Historically, projects rarely drew upon these funds to meet regular operational needs, with the exception of certain projects that faced fundamental demand pressures even before the pandemic. In fiscal years 2020 and 2021, a substantial number of projects expect to draw upon some reserve funds to cover revenue losses associated with lower occupancy rates spurred by the pandemic. The availability of reserve funds to make debt service payments varies among projects, and reserve funds often carry restrictions regarding their use. For instance, a project may not be able to draw from its repair and replacement fund to cover operating revenue losses. In some cases, projects may need to receive approval from bond trustees to access certain reserves.

Although we consider a draw on any reserve fund to pay for operating expenses to be an indication of financial pressure, we particularly view a draw on the debt service reserve fund as warning sign of exceptional financial distress. In addition, as indicated by the operational constraints in building up substantial reserves, we expect that projects will find it difficult to replenish reserves after drawing from them during the pandemic. We assess the strength of reserve levels in combination with other factors such as the historical and expected trend in DSC levels and the connectivity with the associated higher educational institution. We also incorporate the project's ability to regularly fund its repairs and replacement funds into our analysis.

Looking Ahead--The Road Back Will Become Clearer As Pandemic Risks Recede

Although the path ahead will continue to present challenges for privatized student housing projects, there is reason to believe demand will improve from fall 2020 as the risks associated with the pandemic decrease. However, questions remain about the future credit strength of these projects because many have already had to tap into their reserves or plan to do so in fiscal 2021. Because coverage levels often depend on high occupancy and, in many cases, increases in room rates, in our opinion it will be difficult for projects to replenish those reserves in the near term, making them more vulnerable to financial stress.

In addition, there is uncertainty about whether student demand will continue to be at or near where it was before the pandemic. Many universities have relied heavily on remote instruction during this time, and while many students still want an on-campus experience, others may prefer a virtual experience in order to avoid housing costs if higher education entities continue to make online learning as accessible as it has become. There are also ongoing demographic challenges in many regions that we expect will persist, spurring lower demand at many associated institutions. As schools deal with these challenges, we believe that they are likely to prioritize university-owned student housing that they depend on for their own auxiliary revenue over privatized student housing.

Throughout the pandemic, we have observed that projects that have been most successful are those that are structured with lower break-even occupancy, which provides additional flexibility when demand wanes; demonstrate strong connectivity with their associated institutions; maintain higher reserve levels; and have conservative debt service schedules that give the project more flexibility. New projects may require more support from associated institutions, higher mandatory reserve levels, and more conservative DSC projections.

Table 2

Privatized Student Housing Project Ratings Lowered (March 23, 2020-March 8, 2021)
Rating as of
Organization Project Associated institution State March 8, 2021 March 23, 2020 Reason for rating action
CHF Collegiate Housing College Station I LLC White Creek Apartments Texas A&M University System - College Station TX BB+ BBB- Declining occupancy leading to debt service coverage below 1.2x in fiscal 2021 without university support.
Maryland Economic Development Corp. West Village and Millennium Hall Towson University MD BB+ BBB Increased competition, lack of significant university support, and debt service coverage ratio below covenant levels.
Maryland Economic Development Corp. Fayette Square Project University System of Maryland - Baltimore MD BB+ BBB- Highly competive environment, lack of university support, lower reserve levels, and debt service coverage below covenant level.
Monroe Community College Association Inc. Monroe Community College Project *Monroe Community College NY BB+ BBB- Weak projected debt service coverage well below 1.0x in fiscal 2021 due to de-densification efforts.
Onondaga Community College Housing Development Corp. Onondaga Community College Project *Onondaga Community College NY BB+ BBB Weak projected debt service coverage well below 1.0x in fiscal 2021 due to de-densification efforts.
Provident Commonwealth Educational Resources University of Massachusetts Boston Student Housing University of Massachusetts System - Boston MA BB+ BBB- Increasing pressures on demand and lack of university support leading project to use surplus fund to meet debt service requirements in fiscal 2020.
Student Services Inc. Millersville University of Pennsylvania PA BB+ BBB- Very weak occupancy in fall 2020 due to predominantly virtual instruction & de-densification which will pressure fiscal 2021 operations.
CHF Chicago LLC University of Illinois at Chicago IL BB BBB- Very low occupancy levels, expected to lead to less than 1.0x debt service coverage before the use of excess bond proceeds.
Lock Haven University Foundation Evergreen Commons Lock Haven University PA BB BBB- Below break-even occupancy in fall 2020 with the anticipation of continued occupancy pressure.
National Campus & Community Development Corp - Orange Coast Properties LLC *Orange Coast College CA BB BBB- Operating pressure due to opening at 35% occupancy in the fall and the campus operating with virtual instruction.
Provident Commonwealth Education Resources II University of Massachusetts Dartmouth Student Housing University of Massachusetts System - Dartmouth MA BB BBB- Low occupancy in the fall with expectations spring occupancy will remain low, leading to weak operations and less reserves.
CHF Dover LLC Housing & Dining Facility Delaware State University DE BB- BB+ Credit pressure of the associated institution coinciding with a significant decline in occupancy and projected debt service coverage below 1.0x.
Foundation for Indiana University of Pennsylvania Phase II Indiana University of Pennsylvania PA BB- BBB Debt service coverage below 1.0x in fiscal 2020 with continued pressure in fiscal 2021 without university support and weak occupancy.
Provident Group - Howard Properties LLC College Street and Bryant Street Residence Halls Howard University DC BB- BB+ Students vacated the facility beginning in March, leading to a lack of revenue covered by surplus funds and a potential for a debt service coverage violation.
West Campus Housing LLC West Campus Village New Jersey City University NJ BB- BB+ History of weak occupancy levels and debt service coverage with credit deterioration at associated supporting institution.
Foundation for Indiana University of Pennsylvania Phase III Indiana University of Pennsylvania PA B BBB Debt service coverage below 1.0x in fiscal 2020 with significant pressure in fiscal 2021 without university support and weak occupancy.
Provident Group - Kean Properties LLC Kean University NJ B BBB- Anticipated operating pressure due to lower occupancies with an anticipated draw on debt service reserve fund.
Provident Group - Rowan Properties LLC Holly Pointe Commons Rowan University NJ B BBB- Substantially reduced rental revenue, debt service coverage projections below covenanted levels, and expected draw from reserves, which are already modest.
Nevada State College – State Campus Village (A Division of Public Finance Authority) State Campus Village Nevada State College NV B- BB Construction delays and very weak opening occupancy levels at about 11%, coupled with limited reserves.
Texas Student Housing Corp. Jefferson Commons University of North Texas TX CCC B Below break-even occupancy and an anticipated draw on an already underfunded debt service reserve fund to make coverage in fiscal 2021.
*Community College.

Table 3

Privatized Student Housing Project Ratings Maintained (March 23, 2020-March 8, 2021)
Organization Project Associated institution State Rating
Buffalo State College Housing Corp. Student Apartment Complex (STAC) Buffalo State College NY A+
Upstate Properties Development Inc. Geneva Tower Upstate Medical University NY A+
Abby Lane Housing Corp. Centennial Hall College of Environmental Science and Forestry NY A
Empire Commons Student Housing Inc. Empire Commons University at Albany NY A
Purchase College Foundation Housing Corp. Alumni Village Purchase College NY A
Ridgecrest Student Housing LLC Ridgecrest North & Ridgecrest South University of Alabama AL A-
Portage County Improvement Corp. Northeast Ohio Medical University College of Medicine OH BBB+
CDFI Phase I LLC South Campus Apartments The University of Tennessee at Chattanooga TN BBB
CHF Wyoming LLC Bison Run Village University of Wyoming WY BBB
Feather River College Foundation Feather River College Residence Halls *Feather River College CA BBB
Purchase Housing Corporation II Wayback Purchase College NY BBB
Beech International LLC Beech International Apartment Complex Temple University PA BBB-
Beyond Boone LLC Appalachian State University NC BBB-
CHF Ashland LLC Raider Village University of Southern Oregon OR BBB-
CHF Collegiate Housing Denton LLC Parliament Village Texas Woman's University TX BBB-
CHF Collegiate Housing San Antonio I LLC Esperanza Hall Texas A&M University System - San Antonio TX BBB-
CHF Cullowhee LLC Noble Hall Western Carolina University NC BBB-
CHF Toledo LLC Honors Academic Village University of Toledo OH BBB-
Housing Northwest Inc. Goose Hollow Portland State University OR BBB-
Longwood University Real Estate Foundation Longwood University VI BBB-
Maryland Economic Development Corp. Christa McAuliffe Student Housing Bowie State University MD BBB-
Maryland Economic Development Corp. Edgewood Commons Student Housing Frostburg State University MD BBB-
Maryland Economic Development Corp. Entrepreneurship Living-Learning Community Bowie State University MD BBB-
Maryland Economic Development Corp. Morgan View Student Housing Morgan State University MD BBB-
Maryland Economic Development Corp. University Village at Sheppard Pratt Towson University MD BBB-
North Carolina A&T University Foundation Inc. Aggie Terrace Project North Carolina A&T State University NC BBB-
North Carolina A&T University Real Estate Foundation Inc. Campus Edge and the Pointes North Carolina A&T State University NC BBB-
University of Wisconsin-Platteville Real Estate Foundation Inc. Roundtree Commons University of Wisconsin - Platteville WI BBB-
University Park at Evansdale LLC University Park West Virginia University WV BBB-
Allegany College Housing LLC Willowbrook Woods *Allegany College of Maryland MD BB+
CHF Collegiate Housing Island Campus LLC Miramar Texas A&M University System - Corpus Christi TX BB+
National Campus & Community Development Corp - Hooper Street LLC California College of the Arts CA BB+
Housing Northwest Inc. Clifton House Portland State University OR BB-
CHF DeKalb II LLC Northern Illinois University IL B+
CHF Collegiate Housing Corpus Christi II LLC Momentum Village Phase II Texas A&M University System - Corpus Christi TX B
CHF Collegiate Housing Corpus Christi I LLC Momentum Village Phase I Texas A&M University System - Corpus Christi TX B-
CHF Cook LLC Northeastern Illinois University IL B-
National Campus & Community Development Corp - College Station Properties LLC Park West Texas A&M University System - College Station TX CCC
*Community College.

Privatized Student Housing Projects: Other Rating Actions

In 2020, two universities acquired existing projects from the non-profit entity that previously owned them: Texas A&M University System acquired three projects associated with Tarleton State University, and East Stroudsburg University acquired one project. We expect that four more rated projects will likely be acquired in the coming months by the Texas A&M University System, three associated with Texas A&M University-Corpus Christi and one associated with Texas A&M University-San Antonio.

Table 4

Additional Rating Actions (March 23, 2020-March 8, 2021)
Rating as of
Organization Project Associated institution State March 8, 2021 March 23, 2020 Reason for rating action
Maryland Economic Development Corp. Thurgood Marshall Project Morgan State University MD BBB- N/A New issuance - Cross collateralized with existing Morgan State University Project
Provident Oklahoma Education Resources Inc. Cross Village University of Oklahoma OK D CC University defaulted on existing debt
CHF Collegiate Housing Stephenville I LLC Heritage Hall Tarleton State University TX NR BBB- University paid off existing debt
CHF Collegiate Housing Stephenville II LLC Integrity Hall Tarleton State University TX NR BBB- University paid off existing debt
CHF Collegiate Housing Stephenville III LLC Traditions & Honors Hall Tarleton State University TX NR BBB- University paid off existing debt
University Properties Inc. East Stroudsburg University PA NR BBB- University paid off existing debt
NR--Not rated. N/A--Not applicable.

Steven Sather and Pranay Shah contributed research to this report.

This report does not constitute a rating action.

Primary Credit Analysts:Ruchika Radhakrishnan, Toronto + 1 (647) 297 0396;
ruchika.r@spglobal.com
Sean M Wiley, Chicago + 1 (312) 233 7050;
sean.wiley@spglobal.com
Secondary Contacts:Gauri Gupta, Chicago + 1 (312) 233 7010;
gauri.gupta@spglobal.com
Jessica L Wood, Chicago + 1 (312) 233 7004;
jessica.wood@spglobal.com
Laura A Kuffler-Macdonald, New York + 1 (212) 438 2519;
laura.kuffler.macdonald@spglobal.com

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