Fitch Affirms CDFI Phase I, LLC (TN) Revs at 'BBB-'; Outlook Stable
--$65.9 million student housing revenue and refunding bonds, series 2015.
The Rating Outlook is Stable.
The series bonds are secured by and payable solely from gross project revenues related to the student housing facilities. Additional security includes a cash funded debt-service reserve fund and a mortgage on the facilities. Bonds are non-recourse to the University of Tennessee at Chattanooga (UTC) and to the University of Chattanooga Foundation (foundation).
KEY RATING DRIVERS
SOLID DEMAND DRIVES ADEQUATE COVERAGE: The 'BBB-' rating reflects continued solid demand for and high occupancy of project facilities, which drive adequate debt service coverage. UTC's overall stable enrollment supports consistent full occupancy of the project facilities and other campus housing. Debt service coverage on an economic basis was 1.3x in fiscal 2015 and improved to 1.5x in fiscal 2016 (unaudited) after debt refinancing.
ESSENTIALITY AND HIGH CONNECTIVITY WITH UTC: The project is essential to UTC and accounts for more than half of UTC's campus housing stock. Management of the project is integrated with university and foundation management, and facilities are operated as part of the university's housing system. The bonds are nonrecourse to UTC and the foundation, but these organizations have strong incentives to support the project if stressed.
LIMITED FINANCIAL FLEXIBILITY: The project is primarily reliant on student housing rental charges and related fees, with limited capability to increase top-line revenue. Further, balance sheet resources provide minimal financial cushion. Limited operating flexibility is mitigated by adequate security provisions which support an investment-grade rating.
ENROLLMENT AND OCCUPANCY: A material decline in enrollment at the University of Tennessee at Chattanooga or a decline in occupancy of the CDFI Phase I, LLC project facilities would stress debt service coverage and negatively pressure the rating.
ADDITIONAL PARITY DEBT: Additional debt on parity with bonds could dilute debt service coverage and lead to negative rating action.
CDFI Phase I, LLC is a subsidiary of Campus Development Foundation Inc. (CDFI), which was formed by the foundation to acquire real estate and to construct, manage, and operate housing for UTC students on the university's south campus. CDFI constructed the bed project in three phases, with the final phase opening in 2004. The south campus' total capacity of 1,749 beds makes up 55% of total campus housing.
UTC ENROLLMENT STABLE
Stable enrollment trends support solid occupancy of student housing facilities on campus. UTC is a metropolitan university located near downtown Chattanooga, TN. The majority of its 11,533 students are full-time in-state undergraduates.
UTC is adjusting effectively to potential competition for freshman and sophomore students related to the Tennessee Promise program, which provides scholarships to cover two years of community college. The fall 2016 admissions cycle showed solid application growth and a rebound in matriculating students following a softer fall 2015 cycle. UTC is focusing on academically prepared students and is emphasizing the four-year campus experience as a differentiating factor in marketing. In addition, UTC is expanding articulation agreements with community colleges to attract additional transfer students.
STRONG OCCUPANCY DRIVES ADEQUATE COVERAGE
Occupancy rates have been strong for all campus housing in recent years, including consistent 95% or better occupancy of project facilities. The project facilities were constructed in the early 2000s; the layouts and amenities are generally more modern than the university's remaining housing stock, which is older.
Management does not expect a new university-owned campus housing facility to affect demand for the project facilities. The new facility, slated to open in fall 2018, will largely address stretched capacity driven by UTC's freshman housing requirement. Management also conducts periodic market studies and surveys area private facilities to gauge overall student housing demand and to maintain competitive rates and processes.
Strong occupancy of project facilities drives adequate debt service coverage on an economic basis. Fitch estimates that coverage improved to 1.5x in fiscal 2016 (unaudited) from about 1.3x in fiscal 2015. The improvement reflects steady housing-related revenues, good expense management and savings achieved through the refinancing in 2015.
ESSENTIALITY AND HIGH UTC CONNECTIVITY
The project is essential to UTC and accounts for over half of UTC's campus housing stock. Management of the project is integrated with university and foundation management, which provides necessary strategic alignment. Further, project facilities and other campus housing are operated together by the university as one housing system with no student-facing differentiation.
The bonds are nonrecourse to UTC and the foundation, but these organizations have strong incentives to support the project if stressed. The university does not fill project facilities preferentially, as overall occupancy has remained very high. However, management states that it would address unanticipated lower occupancy rates by concentrating vacancies in an older, debt-free building to maintain higher occupancy across the project and newer university-owned facilities. The project also carries the implicit support of the foundation, which formally supported the project through its initial phases.
LIMITED FINANCIAL FLEXIBILITY
The project relies 97% on student housing charges and fees, highlighting the importance of strong occupancy to cover operating expenses and the project's high debt burden (typically over 40% of operating revenue). Stand-alone ability to increase revenue is limited, as very low vacancy rates preclude housing substantially more students in existing facilities. While UTC has authority to set prices for student housing, market considerations and a mission-driven commitment to affordability constrain rate increases. The project manages operating expenses well, but has very limited balance sheet cushion.
Balance sheet resources are very slim and provide minimal financial cushion. Unrestricted available funds equal a very low 21% of operating expenses and 3% of debt as of June 30, 2016 (unaudited). While the project has generated adequate cash flow in recent years, excess funds are periodically transferred out to the foundation.
ADEQUATE DEBT STRUCTURE
The series 2015 bonds are the only debt outstanding for the project. The bonds are conservatively structured with fixed rates and level debt service over thirty years. Additional bondholder protections include a 1.2x debt service coverage covenant, 1.35x additional bonds test, debt service reserve fund (cash-funded to maximum annual debt service), and required contributions to a repair and replacement fund. Gross project revenues are transferred to the trustee monthly, resulting in large payments to the trustee near the beginning of each semester and well ahead of the bonds' payment dates. There are no additional debt plans at this time.