Howard University, Rhode Island Firm Tout New-Look P3

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Howard University and its Rhode Island-based vendor say their 40-year agreement to renovate school halls will change the face of public-private partnerships.

Howard, a historically African-American university in Washington, D.C., and East Greenwich, R.I., real estate group Corvias announced last month a $144 million private placement.

The funding Corvias raised from investors will enable 10,000-enrollment Howard to renovate and maintain two of the university's largest residence halls and manage two additional halls. The deal's structure will also enable the school to retire roughly $40 million of general obligation bonds.

Howard will retain full decision-making authority, the parties said in a joint statement, while Corvias will support residential life services in the renovated facilities.

"There was a different way we approached this and the challenges that have come with the explosion of the P3 market," said Corvias founder and chief executive John Picerne. "Contract-delivery methods often miss the third 'P,' the partnership. You don't have that alignment of interests.

"Under the preconceived notions of project delivery, Howard would no longer be in control. That didn't seem right to me."

Howard has targeted completion of the West and East towers of the Plaza Towers residence at 2251 Sherman Ave., in the District of Columbia's Northwest quadrant, by August 2017 and August 2018, respectively.

Howard will receive an investment-grade rating on the property by establishing a special-purpose entity. The university transferred the towers, plus Drew and Cook residence halls, to Howard SPE.

Moody's Investors Service assigned a speculative-grade Ba1 bank bond rating and negative outlook in June 2016 to Howard's $160 million of Series 2016 taxable bonds. The university received several downgrades over the last few years.

The renovations will enable Howard to answer a Moody's concern about "substantial deferred maintenance."

"We were working with Howard knowing they had challenges over the last several years," said Picerne. "The way we structure our P3s [public-private partnerships] with our institutions is highly flexible."

All excess cash flow will return to the university after operating expenses, debt service and reinvestment service. From that the university expects to realize about $3 million per year, equal to 70 full-ride scholarships. The school intends to divert some of the proceeds to a reserve fund for the buildings.

Corvias will base its management fees on performance.

"This partnership is an innovative solution to leveraging our assets while improving the facilities for students so they are competitive in the higher education marketplace," said Howard president Wayne Frederick. "We have to find ways to solve complicated problems, invest in the university's infrastructure and make our entire campus environment better and more attractive."

Moody's cited the potential monetization of Howard's real estate and broadcast spectrum holdings among its credit strengths.

The upfront program capital, raised through private parties, does not affect the university's balance sheet or borrowing capacity.

Moody's, in a Feb. 15 report about privatized student housing, said such project bonds over several years have performed well as debt-service coverage and occupancy rates remain solid. "The steady performance underscores the favorable operating environment for student housing projects," said Moody's, which rates the higher education sector stable and rates 40 student housing projects.

Moody's cited debt-service coverage of 1.37 times in fiscal 2015, up fractionally from 1.36 the previous year; a 98.7% occupancy rate that reflects strong demand for housing closely affiliated with a university; and construction projects mostly on time and within budget.

The largest increase in debt-service coverage in fiscal 2015, according to Moody's, was the 0.3% of Clarion University's Reinhard Villages in northwest Pennsylvania.

Moody's, which referenced a 3% rent growth that matches the previous year's level, said strong rent growth will lead to stable financial performance in fiscal 2017. A project at the University of Central Florida marked the highest increase in Moody's portfolio at 7.3%. Moody's said that reflected Orlando market strength.

According to Picerne, the Howard deal closed within 12 months, compared with the usual 18 months for such a transaction.

"It went relatively quickly with tremendous cooperation between Howard's team and our team," he said.

In a 2015 report, Moody's said university management has boosted P3 student housing projects.

"This trend generally results in projects strengthening their market position and financial performance," said Moody's. "University management can help mitigate demand risk and partly insulate the project from off-campus competition. The dynamic shifts the potential negative impact of poor operating performance from project bondholders to a university, which can absorb or subordinate a portion of operating expenses."

According to Moody's, a developer's guarantee to find alternative housing for students mitigates credit risks from construction delays. It cited the tornado-related delay last year to the opening of the Tarleton State University residence hall in Stephenville, Texas. There, the developer found off-campus housing for displaced students and rental revenue from students was pledged to pay debt service on the bonds.

Picerne founded Picerne Military Housing in 1998, eventually changing its name and expanding from military housing to higher education and state and local governments.

Ryan Conway, vice president of capital markets at Corvias Campus Living, said the Howard deal contains some provisions of military transactions and a $517 million deal the company struck with the University System of Georgia late in 2014 to develop and manage student housing for nine campuses statewide for 65 years. It marked the first time a state system initiated student housing privatization through a portfolio of campuses.

"There are a lot of similarities to what we've done with the military," said Conway. "It's a joint governance structure, with Howard maintaining control. You don't see that in P3s. Howard maintains ownership at all times."

According to Conway, enhancing the quality of dorm life at Howard is important, given the gentrification of its surrounding neighborhood. The campus sits between Georgia Avenue NW and the McMillan Reservoir, not far from the booming Shaw-Logan Circle section.

The university and the firm conducted student focus groups and incorporated comments from the university's housing market study, conducted in 2016. As a result, said Corvias, the halls will offer enhanced technology, expanded fitness rooms, expanded common areas for social interaction including a TV lounge and space for classrooms and faculty-student meetings.

Maintaining affordability and minimal annual rate increases were primary concerns for the parties.

"There's been amazing development the last 10 to 20 years, so affordable housing students is important," said Conway. "And students living on campus tend to do better."

Howard real estate executive Anthony Freeman and deputy chief financial officer Trena Drayton, the university's deputy chief financial officer, led negotiations on behalf of the university parties. Alvarez & Marsal was Howard's transactional advisor.

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