Florida issuer bringing speculative-grade college housing bonds

In the context of a struggling higher education sector but high demand for high-yield paper, Florida’s Capital Projects Housing Authority is pricing $144 million in speculative-grade and unrated housing revenue bonds on Thursday.

PRG – UnionWest Properties LLC Project is the borrower, and the senior bonds are rated Ba1 by Moody’s Ratings.

Provident Resources Group Inc. — the sole member of the borrower — was founded in 1999 and has acquired, developed, and financed facilities providing more than 27,750 beds of student housing in 13 states and the District of Columbia, according to the preliminary official statement. Provident is a nonprofit 501(c)(3) organization.

BofA Securities is the underwriter on the deal.

The proceeds will be used primarily to purchase and renovate an existing 15-floor mixed use building in Orlando, called UnionWest, containing 10 floors of student housing, five floors of academic spaces, and a ground floor of retail and academic space and parking. There is also a nine-level attached parking garage.

High-yield deals have seen high demand this year in the municipal primary market.

The municipal high-yield sector has dramatically outperformed all other sectors this year, returning 8.31% year-to-date while investment grade munis are 2.82% in the black so far in 2024, according to Bloomberg indices.

“With credit spreads being very tight, anything with extra yield (and a new name) will end up a food fight,” said John Mousseau, CEO at Florida-based Cumberland Advisors, who added that Cumberland doesn’t buy speculative grade credits.

“Higher speculative grade is an appropriate rating for this credit,” said John Hallacy, president of John Hallacy Consulting Inc. “The lack of a mandatory housing requirement makes the numbers more challenging to obtain. On the other hand, student housing appears to be sound with a 95% occupancy rate. The location downtown and the availability of free transportation is also a plus.”

The bonds will come as $108.4 million in Series 2024A-1 senior tax-exempt bonds, $7.5 million in Series 2024A-2 senior taxable bonds, and $28.6 million in Series 2024B subordinate tax-exempt bonds. The 2024B bonds will operate initially as capital appreciation bonds and are unrated. At a “conversion date” they will be transformed into current interest bonds but the POS doesn’t specify the date.

The Series 2024A-1 will have serial maturities from 2033 to 2044 and term maturities in 2049, 2054 and 2058 and a 10-year par call. The Series 2024A-1 will mature in 2027, 2029, 2033. Finally, the Series 2024B will have a single maturity in 2062. The latter two bonds will have make-whole call provisions.

For concerns associated with its Ba1 rating on the senior bonds, Moody’s said inflation had the potential to increase operating expenses, particularly because property insurance rates have been on the rise. Also, the reliance on parking and retail revenue adds potential volatility to revenue. There is an above average debt which is still in collection. Finally, Moody’s also raised a concern with the “open-loop” structure of the flow of funds.

Moody’s doesn’t rate the subordinate bonds.

For credit strengths Moody’s noted the building’s housing component was opened in 2019 and, outside of the pandemic year of 2020, has had an average 95% fall semester occupancy. Residential leases are for 11.5 months and noncancellable. The two schools served by the building, University of Central Florida and Valencia College, have made long-term commitments to lease space in the facilities and to point students to the potential housing.

Moody’s also noted a “well-integrated decision-making framework” among UCF, the lessor UCF Real Estate Foundation, and the soon-to-be property owner Provident Resources Group. UCF has also promised marketing and leasing support, free transportation to its Orlando campus, and direct oversight through membership on the project’s advisory council.

The 2024A bonds are to be paid solely from the borrower’s revenues from the building.

According to an online investor presentation about the deal, debt service coverage has been structured based on a minimum coverage level of 1.20 times for the Series 2024A-1 and A-2 bonds. There will be a debt service reserve fund pledged for the Series 2024A bond funded to the least of maximum annual debt service for the Series 2024A bonds, 125% of the average annual debt service for the Series 2024A bond, and 10% of the original proceeds of the Series 2024A-1 bonds.

The University of Central Florida is a state university and Valencia is the local community college, which offers students a direct admission path to UCF.

The apartments are an anchor for a downtown Orlando campus that is a joint venture of Valencia and UCF. The main UCF campus is 14 miles east.

“Some potential demand vulnerability is introduced by serving a price sensitive student population that is majority drawn from a community college and a satellite campus of the primary university,” Moody’s said in its rating report.

UCF and Valencia have combined enrollment of about 120,000 students.

UCF has signed to lease a total of 46,000 square feet and Valencia has agreed to lease 55,000 square feet from the facility for education or education support services, with both leases terminating in 2059. The building also has 12,302 square feet of retail space and 641 bedrooms.

In 2024, about 77% of the revenue is derived from the student housing portion of the project and 11% from the academic space, with the remainder from retail, the investor road show says.

In 2023, the UnionWest building had $9.78 million in revenues and $5.74 million in net operating income. The borrower projected this year would end with $5.64 million in net operating income.

The project agreement prohibits the UCF from entering into an agreement with anyone other than the developer for any other student housing project serving the downtown campus until 2039. Moody’s rates UCF Aa2.

The borrower projects net operating income debt service coverage for the senior bonds in the years from 2025 to 2037 at a minimum value of 1.23 times and a maximum value of 1.37 times. During those same years the senior/subordinate debt service reserve including funds in operating reserves is projected to be 1.05 times every year.

UCF fall 2020 enrollment was 71,913 and in fall 2024 was 70,161.

“Current pricing is competitive and the units offer good amenities for students, as well as parking and retail,” Moody’s said. UCF has not only agreed to market the project but it has a “strategic and financial interest in the project as it will revert to the university after bonds mature.”

Moody’s said that while environmental considerations are an important factor for the obligor due to high exposure to hurricanes, the risk is mitigated by the presence of business interruption insurance and property insurance. The bonds benefit by PRG’s background as an experienced owner and operator of student housing and multiuse facilities.

Bryant Miller Olive is the deal’s bond counsel.

The bond will price as the credit outlooks for the nonprofit college sector is gloomy. On Tuesday Fitch Ratings said its deteriorating outlook on the sector would “intensify” in 2025. “Public funding has flattened as states return to normalized revenue growth expectations, and net tuition growth prospects are modest at best,” said Senior Director Emily Wadhwani. “This revenue trajectory is unlikely to be sufficient to fully offset still-elevated labor and wage costs, rising capital needs, and a sharply uncertain legislative landscape.”

“The freshman enrollment pipeline has softened with no relief in sight amid wider softness in college-going rates,” Fitch said.