Coronavirus shadows student housing bonds as students vacate early

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Developers of bond-financed student housing say it's been difficult to obtain reliable information to share with their investors as the coronavirus crisis closes college campuses.

“It’s extraordinarily challenging,” said Greg Eden, chief executive of National Campus and Community Development Corp. “Every hour the environment changes. Until we can get much greater clarity of what’s going on, anything I say could change tomorrow.”

Provident Resources Group plans to deliver its $132 million residence and dining hall to the University of Massachusetts Dartmouth in the fall.

Steve Hicks, president of Provident Resources Group, which has bond-financed student housing across the country, is compiling questions from investors and plans to provide answers through the Municipal Securities Rulemaking Board’s EMMA website on April 6.

The company posted a notice on EMMA March 24 alerting bondholders that the company was working to address concerns.

“We do our dead level best to maintain total transparency and an open door to all of our investors,” Hicks told The Bond Buyer. “I was getting a flood of phone calls on my office and cellphone. My assistant was getting emails and phone calls. A week ago Friday, we closed the office, and we’re all working remotely. I made the decision last week I want an EMMA posting.”

Since the posting, the phone calls have dropped off sharply, Hicks said.

Among the questions, bondholders have asked are: “What is your policy on refunds? Where is the money coming from on refunds? How does lease-up look for fall 2020?”

Hicks said he and his lawyers and staff would provide as many answers as possible on April 6 but did not want to answer off the cuff.

Among the most urgent concerns is Cross Village at the University of Oklahoma in Norman, which was in hot water long before coronavirus reared its head.

It was downgraded to junk when leasing fell short of expectations and the university canceled its parking and commercial leases in the complex after just one year. That led to a lawsuit on behalf of Provident Oklahoma Educational Resources, a standalone nonprofit.

After the lawsuit was filed, the parties attempted mediation, but that ended about a week ago. That meant the case was going to court while the status of the courts amid the COVID-19 outbreak is uncertain, Hicks said.

“The court systems are shut down because of COVID-19, and we’re told it could be between one to two months before we get a response from the university,” he said.

While OU has announced refunds or rebates to residents of other halls, that did not include Cross Village, built on the campus with a 50-year ground lease with an upfront payment of $20 million.

“We have not required residents to leave,” Hicks said. “We are not in a position to offer a refund or rebate. We have to be responsible to our bond buyers who invested more than $200 million in this project.”

On Friday, $1.5 million of bonds for Cross Village with 5% coupons rated CC by S&P Global Ratings and maturing in 2037 and 2047 sold for about 40 cents on the dollar, per EMMA.

Hicks and Eden said that their companies and others in the sector have been holding conference calls each Tuesday to share information that might allow them to plan a response to the crisis.

“Mostly, we just cry in our soup,” said Hicks, who started Providence Resources Group in Baton Rouge, Louisiana, after 25 years in public finance law.

Shutting down just one of Provident’s complexes at a major state university represents a loss of $85,000 per day or $500,000 per week, Hicks said.

With the $2 trillion federal relief package signed into law, the managers and developers of the public-private projects don’t know how much financial support they might be getting.

About $14 billion was allotted to colleges and universities, but advocates for higher education said that amount is far short of what is needed.

“While this legislation is an improvement from where the Senate started, the amount of money it provides to students and higher education institutions remains woefully inadequate,” said Ted Mitchell, the president of the American Council on Education, which represents more than 1,700 colleges and universities.

“Campuses are losing staggering sums after closing for safety reasons and refunding tuition, room and board, and other auxiliary revenues,” Mitchell added. “If these needs are not met, students are going to suffer financially and may drop out.”

Student housing projects financed through public-private partnerships were already showing weakness due to demographic trends when the pandemic closed college campuses in March.

Now, the outlook is decidedly negative in the view of analysts who rate the sector’s bonds.

“The negative outlook reflects expected challenges facing the industry due to a sudden and potentially prolonged decline in student housing occupancy and associated loss of rental revenue, as many colleges and universities have moved to remote learning,” S&P Global Ratings analysts Jessica Wood and Laura Kuffler-McDonald wrote in a March 25 report.

S&P rates 63 private student housing projects, with ratings between A-plus and CC.

“Approximately 76% of our overall ratings are investment-grade and about 24% of our ratings are in the speculative-grade category — a higher percentage than a few years ago,” the analysts said.

Robert Labes, partner at law firm Squire Patton Boggs, said the pandemic will have short-term effects on higher education and possibly long-term changes, such as an upsurge in online education.

“Students might be required to vacate, but if the student housing is operated by the developer, students may be able to stay in their living units even though the university is shut down,” he said. “This could impact both the revenue side and the expense side for student housing developers and operators.

“Clearly there’s been growth with online degrees in higher education,” Labes noted. “While there are still the benefits to the in-person student attraction and ‘going off to college,’ we may see major higher-education institutions make it easier to earn an undergraduate degree online.”

As universities and their partners try to strategize through the crisis, some P3 student housing projects are nearing completion.

Provident plans to deliver a $132 million residence and dining hall to the University of Massachusetts Dartmouth this fall. The new facility, which will house approximately 1,210 mostly first-year students, will include a dining hall and space for student activities and academic support. The residence hall will replace an existing dormitory, built in the 1970s, which the university will demolish once the new facility is opened.

Gilbane Development has multimillion-dollar projects on the boards at the University of Maryland and Western Michigan University that will provide thousands of apartments for students with bond financing.

In Sacramento, California, Sacramento State University expects a $164 million student housing project called Hornet Commons to open in 2021, two years after groundbreaking. Greystar Real Estate Partners is developing the project under an 85-year ground lease with the California State University System.

"While we expect to know more in the next few months about fiscal 2020 operations, there is still uncertainty around fall occupancy," the S&P analysts noted. "Many student housing projects will be more susceptible to near-term operating pressure associated with decreased occupancy and potential rental revenue refunds, and could require the use of reserves to meet debt service payments in full and on time."

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