Eastern Michigan University makes P3 play to transform student housing
6 min read
Eastern Michigan University’s efforts to bolster its student appeal with a housing makeover reach a financing milestone this week with the expected pricing of a $210 million insured issue.
To limit financial risk and keep the borrowing off balance sheet, the university turned to a public-private partnership. The revenue bonds will sell through the Public Finance Authority, a Wisconsin-based national conduit agency, on behalf of Eastern Michigan University Campus Living LLC for the university’s Welcome Home 2025 Plan.
The university wants to overhaul nearly all of its student housing stock after what the university says is decades of neglect that has hurt its appeal in attracting students, retaining upperclassmen, and attracting graduate students to live on campus.
“This is a critical milestone for the university and the quality of our students’ experience, and I cannot wait to see how these new spaces will foster student growth and success for years to come,” Eastern Michigan University President James Smith said in October at the project’s groundbreaking.
The school in Ypsilanti, 40 miles west of Detroit, is the second-oldest of Michigan’s 15 public universities. It opened in 1849 as a teachers’ college, and evolved into a comprehensive undergraduate and graduate institution with operating revenue of more than $385 million in 2022 and an enrollment of 14,000 in the fall — down sharply from 19,000 in 2018.
A $210 million series of tax-exempt paper offers a mix of serial and term bonds with maturities in 2042, 2047, 2052, and 2055 with a small $709,000 taxable series that matures in 2025 that will fund a portion of the reserve fund and some cost of issuance.
Barclays is senior manager on the deal pricing Thursday. Rieth Jones Advisors is the project advisor and Ponder & Co. is financial advisor. Build America Mutual will provide insurance coverage.
Moody’s Investors Service assigned the bonds an underlying Baa2 project revenue bond rating based on the bond structure, which has some “speculative” elements, and the university’s A3 rating and stable outlook, which it affirmed. Eastern Michigan has $330 million of outstanding debt.
S&P Global Ratings rated the bonds AA based on the BAM insurance.
The primary backing for the off-balance sheet borrowing comes from a pledge of net project revenues, but the university also provides under an occupancy agreement a pledge of subordinated unsecured general revenue in case project revenues fall short of meeting a 1 times debt service coverage covenant.
EMU Campus Living’s sole member is Community Facility Public Private Partnership. The project team includes Gilbane Development Company as developer with Gilbane Building Company, Michigan-based Clark Construction, and AVB Inc. as design-builders.
“This is a first-of-its-kind, truly holistic campus modernization project,” said Edward Broderick, chief executive officer of Gilbane Development Company. The firm was selected through a competitive selection process.
Under the structure, EMU will lease the land housing the facilities to the not-for-profit borrower for up to 35 years.
“EMU carefully considered the advantages and disadvantages of self-funding the $200 plus million needed to upgrade its student housing facilities, but rejected such an approach for several reasons,” according to the deal’s online investor presentation.
“Self-financing this transformational student-focused initiative would require EMU to absorb a significant debt burden of more than $200 million that would negatively impact the University’s credit rating. Through this financing partnership, the 501(c)(3) entity will assume that debt burden,” according to the presentation.
Taking on the annual debt burden would have forced the school to “drastically cut spending on academic and other core functions” and a phased construction approach to overhauling the housing stock would have driven up construction costs and delayed the benefits.
The University’s Board of Regents approved the final lease agreement and other documents in June paving the way for the bond issue. Under the agreement, EMU Campus Living will design, build, renovate, maintain, improve, and operate most aspects of the buildings in the University’s housing system for 35 years.
The university in 2018 undertook a student survey, housing market study, and engaged faculty as it explored housing changes.
The university paused the planning process in 2019 due to a request from faculty and paused again in 2020 to deal with the COVID-19 pandemic. The school resumed planning last year selecting Gilbane as the system operations partner.
The project ran into some faculty criticism late last year when some faculty questioned whether the university was privatizing its housing through the public-private partnership.
Under the lease terms, housing rates will be approved by a review committee comprised of university representatives, EMU Campus Living, and the Gilbane property manager.
The deal rating “reflects the large scope of the project, first lien on net project revenues, essentiality of it to the university’s long-term strategic plan, and subordinate unsecured nature of the occupancy payment from the university in case of net revenue shortfalls to make debt service payments,” Moody’s said.
“Due to the university’s commitment to make occupancy payments, the rating is strongly linked to the credit quality of the university and its commitment to the project,” Moody’s said. The debt structure provides a debt service reserve fund that offsets the potential for temporary operational disruptions and the university’s occupancy payment is prior to tapping of the reserve.
The two-notch distinction between the university’s rating and the bonds reflects the riskiness of the project, which has speculative elements given the limited pledge and enrollment challenges of the university, as well as the subordinated pledge of unsecured revenue of the university to make occupancy payments equivalent to a thin 1 times debt service coverage, the rating agency said.
Multiple years of annual enrollment losses are negative for the school’s credit profile and high leverage with modest debt amortization over the near-term, and the potential for future support to the EMU Properties housing project, weighs on the school’s balance sheet.
Moody’s expects the university’s margins will remain in the low double digits in fiscal 2023 resulting direct debt service coverage of at least 1.5 times and that incoming class sizes will remain stable and full-time enrollment losses will remain in the low single digits in fall 2023, and the housing project construction and delivery will meet expected timelines and cost estimates.
The overhaul will transform nearly all of the university’s housing stock with the exception of one recently renovated building.
The project calls for the construction of two new on-campus apartment buildings, renovations and upgrades to eight existing residential halls and apartments and the demolition of seven existing facilities. The completed project will reduce the number of beds to 3,041 from 4,307. A market study showed demand for at least 3,500 beds.
Most buildings were constructed in the 1960s and haven’t seen upgrades in three decades.
“EMU’s Welcome Home 2025 Plan is an equity initiative that will transform on-campus student housing to ensure that EMU students have access to quality and affordable housing with modern technology that meets the demands of today’s academic world,” the school says of the project on its website. The aim to have facilities open for the fall 2024 class.
“Recent and anticipated enrollment declines reflect the lower high school graduate population in Michigan and the competitive landscape of higher education in the region,” the investor presentation said. The school has sought to turn the tide by better engagement with community colleges, an expansion of online programs, and targeting international students.
CreditSights views the enrollment declines as worrisome and a risk factor for future downgrades even though it considers default risk low. The use of a conduit outside Michigan also reduces demand from in-state borrowers.
“We don’t doubt that improving housing will add to EMU’s appeal for future recruits, but we worry the decline is severe enough to permanently dent EMU’s appeal and operations,” CreditSights said in its new issue report.
“The risk of a downgrade and the lack of an in-state tax-exemption suggests to use that while the BAM insurance wrapper will help support future secondary market liquidity, prospective investors should demand incremental spread to protect against future ill-liquidity,” the report’s authors John Ceffalio, senior municipal research analyst; Patrick Luby, senior municipal strategist; and Sam Berzok, analyst, said.
“Between the revenues, the debt service reserve, the EMIU guarantee, the AA bond insurance, a default on these bonds is exceptionally unlikely,” they wrote.
CreditSights also views questions over the university’s handling of sexual assault allegations relating to fraternities negatively because it raises “governance issues and the bad press is a negative for recruitment of students and faculty.”
EMU is being sued in federal court by individuals who accuse the school of covering up their reports of alleged sexual assault. The school has denied any wrongdoing involving the incidents and argues it properly handled the complaints.
