|[April 21, 2014]
Fitch Affirms Educational Advancement Fund, Inc. (IL) Rev Bonds at 'BBB+'; Outlook Stable
NEW YORK --(Business Wire)--
Fitch Ratings has affirmed the 'BBB+' rating on approximately $139
million of student housing revenue bonds issued by the Illinois Finance
Authority. The bonds were issued on behalf of the Educational
Advancement Fund, Inc. (EAF) to finance the University Center of Chicago
(UCC). UCC is a 1,720-bed student housing project (the project) located
in the South Loop of Chicago.
The Rating Outlook is Stable.
The bonds are an unlimited general obligation of EAF secured by the
gross revenues of UCC. 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 (DS) coverage
requirement, and a historical 1.2x additional bonds test.
KEY RATING DRIVERS
OPERATIONAL STABILITY SUPPORTS AFFIRMATION: The 'BBB+' rating reflects
EAF's improved positive operating performance, adequate debt service
coverage (DSC) supported by high occupancy rates at UCC and effective
facilities management by US Equities Student Housing (USE), the project
manager. Offsetting the aforementioned positive factors are declining
enrollment levels at the participant schools and limited liquidity.
PROJECT SUPPORTS COVERAGE: The project historically generates excess
operating income beyond the needs of the project. Excess income at end
of year (after all bond indenture buckets filled), as a practice, are
disbursed back to member institutions. Bond debt service payments are
non-recourse to individual member institutions; however, the project
alone provides adequate DSC. Actual DSC for fiscal 2013 is 1.35x,
exceeding EAF budgeted DSC of 1.27x.
DEMAND DRIVES OCCUPANCY: Student demand continued softening in fiscal
2013 at the EAF member institutions: Columbia College Chicago
(Columbia), DePaul University (rated 'A' /Stable Outlook by Fitch), and
Roosevelt University (rated 'BBB'/Negative Outlook). Nonetheless, demand
levels at each of the institutions support stable occupancy levels at
UCC based on each participant's dormitory usage commitment to EAF in
fiscal 2014. No significant changes are expected to these commitments
for fiscal 2015. Any marked decline in enrollment would most likely be
augmented by adjusting allotments between participants.
PRUDENT MANAGEMENT MAINTAINS MARGINS: EAF has generated improved,
positive operating margins, year-over-year for the past eight years and
is underpinned by the members' ability to reallocate rooms among member
institutions and maximize non-student-related revenue sources, namely
conference housing, food services and retail services.
OCCUPANCY CHALLENGES: Noting weaker enrollment at each participant for
fall 2013, Fitch expects persistence of this decline could result in
stressed occupancy levels leading to a reduction in each participant's
dormitory usage commitment to EAF, resulting in negative ratings
DIMINISHED COVERAGE: A material reduction in student room revenue from
member institutions without a commensurate increase in other project
revenue sources could diminish current DSC levels which may negatively
impact the rating.
EAF is a not-for-profit corporation formed to acquire land and
construct, operate, and maintain UCC, a college and university
residential complex. 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. Opened in 2004, UCC primarily houses upper-class students
attending the downtown campuses of EAF member institutions. UCC is
managed by USE and an operating committee consisting of one or more
representatives of each EAF member institution.
HIGH OCCUPANCY RATES PERSIST
UCC's average physical occupancy rate in fall 2013 remains high at 97%;
averaging 98% over the past three years. However, economic occupancy
continues at 100%, based on commitments to fill UCC's total
income-derived capacity (1,678 beds), which are paid for by each member
institution annually. Driving UCC's consistently strong occupancy
year-over-year are each member institution's enrollment levels, which,
while softening in recent years, has not affected the participants'
dormitory usage commitment or their ability to honor their bed allotment
requirement. According to management, while not final, members have
agreed to commit to the prior year's housing allotment again in fall
2014. Fitch views the currently estimated total bed commitments for
fiscal 2015 as stable and adequate to achieve the 100% economic
The operating agreements permit redistribution of beds to other members
experiencing oversubscription of the institution's on-campus housing
through the execution of side agreements. At present, Columbia has the
largest housing allotment for fiscal 2015 with 602 beds (or 36% share of
total income-derived project beds). After an anticipated transfer of 204
beds from DePaul, Columba's commitment increases significantly to 806
beds (or 48% total income-derived project beds). The side agreement with
DePaul for 204 beds is slightly lower than the prior two years annual
commitment of 275 beds; however, concern is offset by the projects
ability to maintain the committed level of beds at 100% financial
Fitch views positively the additional flexibility provided to project
participants with respect to the beds transferred between member
institutions. The ability for a member institution to take on more beds
if needed, due to limited student residential stock, provides project
revenue stability which drives DSC.
FLEXIBLE OPERATING AGREEMENTS OFFSET ENROLLMENT DECLINE
The three participating institutions have experienced lower enrollment
levels for fall 2013. The decline for the participants is not material
at this time and Fitch views the flexibility of the operating agreements
favorably as institutions can adjust to periodic fluctuations in demand.
It is important to note that, in the absence of demand from another
member, bed allotments remain the ultimate responsibility of the member
to which they were originally assigned. Bed allotments may be filled by
an EAF member only through direct sub-agreements with other EAF members
or through master lease agreements by the project with non-EAF member
institutions. The presence of each school's president and senior
management representative on the Board of EAF, and UCC's desirable venue
and location - all within walking distance of each campus - together are
noted as significant positives to help offset fluctuation in demand.
Starting in fiscal 2013, a non-member institution, Robert Morris
University (RMU), contracted with EAF for 250 beds annually, and
recently extended this commitment for three additional years through
2017. This extended commitment is viewed favorably by Fitch and provides
stability in student housing income through this period.
MARGINS CONTINUE TO IMPROVE
Fiscal 2013 operations generated a high 15.2% operating margin, compared
to 14.9% in fiscal 2012, the highest since inception of the project. EAF
revenue sources, in addition to student housing and food services
include non-student-generated revenues, namely conference housing and
retail operations. All of these sources have reflected growth year over
year, except food services, which dipped slightly in fiscal 2013. UCC's
retail space is leased to tenants via multi-year leases with staggered
terms and continues to be a stable source of income.
The operating budget for 2014 contemplates another year of positive
operations. Although EAF does not provide mid-year interim operating
data, management expects to achieve results in fiscal 2014 similar to
the previous year, based on UCC's high occupancy levels.
NEW PRICE STRUCTURE IN FISCAL 2015
The project historically generates excess operating income beyond its
needs. Excess income at end of year (after all bond indenture buckets
filled), as a practice, are disbursed back to member institutions. The
distribution to each member has increased in the last several fiscal
years due in part to an increase in conference and summer internship
housing revenues. The fiscal 2013 true-up (made after fiscal year end,
in Dec. 2013, and after evaluating working cash/capital objectives) was
distributed pro-rata in the amount of $2.3 million among the three
members, up from $1.55 million disbursed in fiscal 2012 and $1 million
disbursed in fiscal 2011. Since its inception, a total of $10.35 million
in disbursements has been made to members.
Commencing in fiscal 2015, EAF has changed the annual cost basis on
which members commit to beds from the current annual contract rate to
the lower academic yearly rate. As such, it is anticipated that the
lower cost basis for members will generate lower student housing
revenues, which translates to lower distributions or rebates back to
members. According to management, this new pricing structure will allow
EAF to free up more beds for summer internship and conference housing
which is growing in demand. It is anticipated that members will get
usage of beds for a 10-month period under the new structure instead of
the 12-month period they are currently allocated, with the ability to
contract for summer beds in addition to the 10-month academic year.
Fitch notes that while the amount of student room revenue collected by
EAF is expected to diminish by approximately $1 million under this new
pricing structure, it is expected to be adequately offset by the lower
distribution back to members, in addition to increased summer
internship/conference housing revenue from the addition of free beds
during the summer months, as well as increased dining revenue under a
new food services contract under negotiation. However, a material
reduction in student room revenue from member institutions without a
commensurate increase in other project revenue sources could diminish
current debt service coverage levels, which may negatively impact the
HIGH DEBT BURDEN AND WEAK LIQUIDITY BY DESIGN
EAF's strong operating profile is offset by a high debt burden with
maximum annual debt service of $11.4 million consuming 40.1% of
operating revenues in fiscal 2013 and weak balance sheet liquidity.
Fitch notes these characteristics are 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; however, the project alone provides
adequate DSC which drives the current rating. Actual DSC for fiscal 2013
is 1.35x, exceeding EAF budgeted DSC of 1.27x. EAF's estimated DSC for
fiscal 2014 reflects stability at 1.35x.
Fitch will continue to monitor DSC levels but expects management will be
able to maintain levels above the 1.2x coverage requirement even after
the cost basis changes to member institutions given the project's strong
occupancy levels and strong management. Fitch views positively the
renewal of the facility manager contract with USE for an additional five
years as USE has been instrumental in managing the project which
generates surpluses year over year.
As of fiscal year end 2013, EAF's available funds, or cash and
investments not restricted, increased to $10.8 million, up from $9
million in fiscal 2012. As a percentage of fiscal 2013 operating
expenses ($24 million) and debt ($139.1 million), available funds
represented an improved 45% and 7.8%, respectively.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
-- 'Nonprofit Institutions Rating Criteria', (June 7, 2013);
-- 'U.S. Colleges and University Rating Criteria', (May 10, 2013);
--'Fitch Affirms Educational Advancement Fund, Inc. (IL) Rev Bonds at
'BBB+'; Outlook Stable' (May 3, 2013).
Applicable Criteria and Related Research:
U.S. College and University Rating Criteria
U.S. Nonprofit Institutions Rating Criteria
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