DALLAS — Southern Methodist University will begin a multi-year capital project to build new on-campus residential facilities with proceeds from this week’s sale of $125 million of general obligation revenue bonds.
The bonds are set for negotiated pricing on Wednesday.
The debt will be issued through Southwest Higher Education Authority Inc., which has been issuing tax-exempt bonds for SMU since the early 1980s.
The small private school will use the proceeds to begin construction on five new residential halls on its campus five miles north of downtown Dallas. Upon completion of the facilities in 2014, sophomores will be required to live in school dormitories along with first-year students.
The residential complex will provide living space for 1,250 students, and will be configured as residential commons with space for classes and social activities, and apartments for faculty and staff. A common dining hall will be built near the new dormitories.
Several of the 18 existing residential halls also will be renovated to add or enlarge classroom and meeting space and faculty apartments. The existing dormitories, including four for graduate and married students, currently have some 2,000 beds.
The university’s outstanding GO debt, which will total $424 million with the sale, is rated AA-minus by Standard & Poor’s and Aa3 by Moody’s Investors Service.
Bank of America Merrill Lynch is the lead underwriter on the SMU sale. Co-seniors include Bank of Texas, Stephens Inc., and JPMorgan.
Vinson & Elkins LLP is bond counsel. First Southwest Co. is financial adviser.
Christine Casey, Southern Methodist’s vice president for business and finance, said the school’s healthy finances are reflected by the strong ratings for its debt.
The university had an operating surplus for fiscal 2010 estimated at $96 million, or about 20% of operating revenue. Unrestricted net assets, including capital gifts and endowment appreciation, totaled $55.8 million for the year.
SMU receives 64% of its revenues from tuition and fees, 8% from auxiliary and athletic revenues, and 3% from gifts. About 94% of its debt is fixed rate with only 6% in variable-rate mode. The university terminated its only swap in fiscal 2010.
“We have a pretty conservative financial philosophy,” Casey said. “Our enrollment is very stable, we had a strong freshman class for the fall semester, and our endowment is up slightly.”
“We expect a good sale,” she added. “We certainly do.”
Casey said the latest financial statement shows the university had a 7.8% return on its $1.1 billion endowment in fiscal 2010, which ended June 30.
The investment return was a negative 24% in fiscal 2009, when the endowment fell to $1 billion.
“It was down the previous year, like everyone else’s,” she said. “But it looks like we’re back to a growth situation.”
SMU announced a $750 million fundraising campaign in September 2008. The campaign has to date raised $452 million, with $264 million of the contributions in cash.
The residence halls will cost $138 million to build, but the project also involves the relocation of some existing facilities that will be displaced by the construction. Some athletic facilities will be relocated to SMU-owned land south of the campus, which will also accommodate a new data center and utility infrastructure.
SMU will rely on university balances and private fund raising to complete the financing for the residential complex.
University officials intend to issue about $100 million of revenue bonds in fiscal 2012 to complete the project, according to Casey, including the new and relocated facilities on the site, which was formerly a bakery.
She said the school opted to sell the bonds for the entire project in two tranches.
“We wanted to issue the debt in stages to avoid having the money tied up during construction,” she said. “We also wanted to take advantage of the currently low interest rates.”
With completion of the five new residential commons facilities, Casey said, the university will be able to implement a decision by trustees earlier this year to require sophomores to live on campus.
SMU trustees voted Sept. 10 to require sophomores to live on-campus after several years of discussion. Several advisory groups, including SMU president Gerald Turner’s task force on substance abuse prevention, recommended the sophomore residency requirement.
The new student residential policy cannot be implemented before 2014 for a very good reason, according to Steve Logan, executive director of residential life and student housing.
“We won’t have the room for the sophomores until then,” he said. “We’ll be telling the prospective student who would be entering in fall 2013, and their parents, that they should expect to live on campus for the next two years.”
Occupancy levels in the existing dorms for the past five years have exceeded 95%.
The new facilities will be designed around a commons concept in which students can interact with each other and faculty members, Logan said. The halls will include classrooms and meeting areas as well as apartments for faculty and staff.
“We’ll have different configurations for the apartments,” he said. “They are being laid out in a mixture of spaces for singles as well as professors with spouses and partners and families.”
The new approach to campus living is an effort to retain students and provide a more collegial atmosphere.
“The faculty in these dorms will serve as the academic leaders of the community,” Logan said. “SMU is very highly focused on maintaining its strong national academic ranking and the best way to do that is by attracting highly motivated students.
“These halls will give students a stronger sense of belonging to an academic community and a stronger commitment to this institution,” he added. “Students will have a greater sense of being involved in the campus and that will carry on.”
SMU provost Paul Ludden said the new residential complex will create intellectual and social communities that will appeal to high-achieving students.
“The presence of faculty in residential commons will create greater opportunities for sharing ideas, informal interactions, and mentoring,” he said.
“No private university in the U.S. News & World Report Top 50 lacks the capacity to house all second-year students on campus, and no private university in that group has less than a 90% retention rate of first-year students, or less than an 80% six-year graduation rate,” Ludden pointed out.
Southern Methodist currently retains 88% of its first-year students, he said, and has a six-year graduation rate of 77%.
An SMU task force that studied and visited universities competing for those students found many had adopted the residential commons concept, Logan said.
Officials gathered information from several schools with multi-year on-campus housing, including Rice University, Vanderbilt University, Washington University, and the University of Southern California.
The complex is being built southwest of the George W. Bush Presidential Center. The university owns the land at the Bush center, but SMU is not responsible for its construction, financing, or operation.
