P3 housing complex at Texas A&M is sent to junk
DALLAS -- Bonds for a $361 million public-private partnership student housing project at Texas A&M University lost an investment-grade rating after first-year occupancy failed to surpass half of the expected level.
Moody's Investors Service dropped the bonds to Ba1 from Baa3. They were issued in 2015 through New Hope Cultural Education Facilities Finance Corp.
They remain on Moody’s watch list for a further downgrade.
The downgrade was attributed to leasing levels that are “significantly below expectations with limited prospects for recovery of occupancy to meet originally projected debt service coverage levels for fiscal 2018.”
The apartments in College Station known as Park West have capacity for 3,406 tenants.
As of July 31, leasing was under 50%, compared to projected occupancy of over 90% used in Moody’s pro-forma analysis.
“As a result, we expect that various reserve funds will be tapped to make timely debt service,” analysts Paulina Grassano and Dmitriy Plit wrote in their Oct. 6 report.
To improve occupancy, the project is offering sizable rent discounts and move-in incentives, highlighting initial lease up difficulties. Moody’s said its review will focus on prospects for improved future occupancy, pricing, marketing plans, the operating budget for fiscal 2018, and the magnitude of expected use of reserves.
“The review could result in a multi-notch downgrade,” analysts said.
The Texas A&M University System posted a material event notice on the Municipal Securities Rulemaking Board’s EMMA Web site, notifying investors of the downgrade. The Moody’s report was also posted on EMMA.
“The Ground Lease does not contain any obligation for the Board, the System or the University to provide financial support for the Project, nor does the Ground Lease contain any occupancy or first-fill covenants on the part of the Board, the System or the University,” according to Texas A&M’s disclosure notice.
“The events referred to in the Downgrade Notice are not expected to have a material impact on the financial condition or the operations of the System, the University or the Board’s Revenue Financing System,” the notice said.
In August, the engineering and construction firm Weitz of Des Moines, Iowa called the project the largest student housing development in the United States and said completion came one week ahead of schedule.
Partners on the P3 project included Texas A&M, Irving, Texas-based developer Servitas, and Weitz.
Construction started August 1, 2015. Park West was turned over to Servitas at the end of July to operate and manage under a 30-year agreement with the university system.
The ambitious housing project was the fifth and largest part of a growing list of public-private partnerships that the university was promoting at its flagship campus in College Station.
Park West was expected to generate $600 million in revenue over 30 years to re-invest in A&M’s academic and research programs.
The largest building in the development is an eight-story structure that has more than 1,800 beds wrapped around a central parking garage, amenity deck and fitness center. Two, five-story mirrored buildings hold about 500 beds each. Townhome-style flats are located around the perimeter.
Other P3 housing projects near the campus include White Creek Apartments, U Centre at Northgate, Easterwood Airport and Century Square projects. In 2015, officials anticipated that the five together could generate nearly $1 billion over each project's lifetime, with Park West accounting for most of the revenue.
The 55 acres on which the apartments sit will always belong to TAMUS, officials said, and will be ground-leased for 30 years to National Campus and Community Development-College Station, a 501(c)(3) nonprofit organization.
NCCD is in a partnership with Irving-based Servitas to develop the property as well as manage it. NCCD paid $18.5 million to the university up front and promised a projected $20 million share of revenues annually through the duration of the lease. When the lease terminates in 2047, facilities will revert to the university.
In 2015, Servitas said monthly rent at Park West would run between $600 and $1,000 with one- to four-bedroom options. Moody’s noted that currently advertised rates show a lowest price point of $449 per month, “far below the lowest monthly rent level provided in the initial cash flows.”
“As rents are held at deeply discounted levels, even with improving occupancy, it will become increasingly difficult to achieve breakeven operations in the near to medium term,” Moody’s said.