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Fitch Affirms University of West Florida Foundation, Inc. Dormitory Revs at 'A+'; Revises Outlook
[December 11, 2014]

Fitch Affirms University of West Florida Foundation, Inc. Dormitory Revs at 'A+'; Revises Outlook


Fitch Ratings has affirmed the 'A+' rating on $53.5 million of outstanding Escambia County Housing Finance Authority, FL bonds issued on behalf of the University of West Florida Foundation, Inc. (UWFF). UWFF manages the university's housing system and is a direct support organization of the University of West Florida (the university).

The Rating Outlook is revised to Negative from Stable.

SECURITY

The bonds are secured by a pledge of net revenues of the dormitory system (the system).

KEY RATING DRIVERS

OUTLOOK REVISED TO NEGATIVE: The Outlook revision is primarily due to the system's narrowing operating performance leading to lower than projected debt service coverage over the past two fiscal years. Little improvement is projected for fiscal 2015, with projections adjusted downward over the forecasted period. In addition, shifting enrollment strategies have a direct effect on student housing and a significant reorganization of senior level management over the past few months remains untested.

RATING AFFIRMATION: The 'A+' rating reflects the system's track-record of slimming but still positive operating performance, which has supported the generation of adequate debt service coverage. Offsetting factors include the system's limited revenue pledge and lower occupancy.

WEAK DEBT SERVICE COVERAGE: The system's annual debt service coverage declined below projected levels in fiscal 2014, near the 1.2x covenant requirement.

SOFTENING HOUSING DEMAND: Fall 2014 and 2013 semester occupancy rates are down from historical levels in the past two years, after consistently reaching nearly full occupancy in prior years. This decline is due to weakening demand for the universities housing services, based on enrollment trends.

UNIVERSITY ATTRIBUTES: While not pledged to the bonds, the university's credit strengths include a good market position and large regional presence, healthy financial cushion and relatively low debt burden. Counterbalancing the aforementioned strengths is student demand volatility, a challenging state funding environment (Florida GOs rated 'AAA' with a Stable Outlook by Fitch,) and a history of pressured operating performance which has shown recent signs of improvement.

RATING SENSITIVITIES

INADEQUATE COVERAGE: The rating is sensitive to a decline in system debt service coverage below projected levels presented to Fitch.

ADDITIONAL DEBT: Any increase in housing system debt that is not supported by increased system cash flow could drive lower coverage levels and negatively impact the rating on the dormitory bonds.

CREDIT PROFILE

The system's existing housing stock includes eight facilities capable of housing 1,990 students. The university, one of 12 members of the Florida State University System (revenue bonds rated 'AA' by Fitch), is a regional, comprehensive, four-year university located in Pensacola, FL.

HOUSING DEMAND SOFTENING

Demand for on-campus housing is closely linked to the university's enrollment. Housing occupancy rates in fall 2014 and 2013 were about 92.9% and 95.6%, respectively, after nearly full occupancy in prior years. This decline is related to the university's shift in enrollment priorities which include improving student quality and its focus on retention and graduation rates.

Favorably, in fall 2014, an increasing number of freshmen resided on campus, about 58%; however, the total number of residing undergraduate students declined. While a change in recruitment strategies increased freshmen residents from the surrounding region, the university has historically attracted a non-traditional student base, particularly community college transfers and part-time students which does not produce the same demand for on-campus housing options as a traditional population.

Fitch views the ability to attract a more traditional student population as a key driver of improvement in system demand but expects any improvement will be gradual given the university's competitive regional market and increasing competitionamongst the state public universities. Further, the university's lack of a freshmen residency requirement may aid in hampering occupancy levels.



Fitch will continue to monitor changes in occupancy and the impact on system operations. Management is expected to offset the decline in occupancy levels by taking beds off-line from its older facilities and reducing related expenses.

NARROWING SYSTEM OPERATIONS


The system's operating performance remains positive, but narrowed to a margin of 3.7% in fiscal 2014, which is primarily driven by sound financial management and continued housing demand given the system's limited competition for on-campus student housing. Fitch anticipates similar operating performance in fiscal 2015 based on another year of reported lower than historic occupancy and continued prudent management of operations.

THIN DEBT SERVICE COVERAGE

The system's trackrecord of favorable operating performance has supported the generation of slim but adequate debt service coverage. Fiscal 2014 and fiscal 2013 net income available for debt service (approximately $5.7 million and $6.3 million, respectively) covered pro-forma maximum annual debt service (MADS), (approximately $4.7 million) by a weak but acceptable 1.23x and 1.35x, respectively. The outlook revision to Negative reflects low coverage in these years, falling below management's original projections.

Based on revised projections provided to Fitch, pro-forma MADS coverage is expected to gradually strengthen over the next few years, reaching 1.48x by fiscal year-end 2019. Anticipated growth in net income available to cover debt service is based on several underlying assumptions, including steady average increases in housing rental rates of approximately 6% and demand for the system's housing inventory based on actual fill rates. Fitch views the budgeted annual rate increases as necessary to maintaining adequate debt service coverage levels.

Fitch will continue to monitor the system's ability to meet its revised projections and failure to do so could result in negative rating action. Fitch believes management's revised projections are attainable given historical demand for the system's housing stock, limited competition from off-campus housing, and senior leadership's demonstrated ability to carefully manage system-related expenses.

THE UNIVERSITY

The system continues to benefit from the university's healthy market position although growth in total headcount enrollment has slowed in recent years. Headcount grew 8.9 % over the past five years, reaching 12,599 in fall 2014. Recent improvement in the number of freshmen matriculants and the freshmen-to-sophomore retention rate should provide further system support.

The university's GAAP operating margin has historically been negative on an accrual basis, largely due to Fitch's inclusion of the non-cash expense of depreciation and exclusion of state capital appropriations in its calculation of financial results. Several years of state funding cuts and tuition freezes (a trend consistent with the state's public institutions) further eroded margins. Though deficit operations continue, the margin improved in fiscal 2014 to -2.2%, from -9.7% in fiscal 2013, primarily due to a substantial increase in state operating appropriations. The State Legislature and Florida Board of Governors continue to freeze university tuition increases.

Weak operating performance is offset by strong level of financial flexibility. Available funds grew to $92.1 million at fiscal year-end 2014, representing 49% and 173% of operating expenses and pro-forma debt (inclusive of the UWFF's non-recourse debt), respectively. No additional debt is planned at this time, except for a potential refunding of existing foundation debt. Recent Legislative changes should allow steady annual increases to support the campus master capital plan. Improvement in capital support from the state university system in fiscal 2014, in the form of Public Education Capital Outlay and Capital Improvement Trust Fund funding, is viewed positively.

The university has recently undergone a major reorganization at the senior level. The new structure is largely focused on improving academic performance tied to state's performance-based funding metrics. The university did not achieve enough points to receive enhancement monies, and the state withheld $3.8 million.

Management has submitted an improvement plan for fiscal 2015 and believes they completed all required components of the plan which should release the $3.8 million withheld funds in fiscal 2015. Further, the university is in the process of reaffirming its SACS accreditation, due Dec. 2015. Fitch will continue to monitor both its progress on achieving performance metrics and accreditation.

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

Applicable Criteria and Related Research:

--'U.S. College and University Rating Criteria' (May 12, 2014);

--'Fitch Affirms University of West Florida Foundation, Inc. Dormitory Revs at 'A+'; Outlook Stable' (Dec. 19, 2012);

--'Fitch Rates State University System of Florida Revs 'AA'; Outlook Stable' (April 25, 2014).

Applicable Criteria and Related Research:

U.S. College and University Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748013

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=948935

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.


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