New downgrade amid stumbles of junk-rated California student housing project

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Construction delays and low occupancy rates spell trouble for a bond-financed student housing project in Southern California.

Moody's Investors Service downgraded the $53 million in housing revenue bonds — already junk-rated at their 2017 issuance — to Caa2 on expectations that its builder will need to tap the debt service reserve fund to cover operation costs.

Construction delays plagued the 417-bed graduate student housing project that opened a year late in July on the Keck Graduate Institute campus in Claremont.

The Oasis KGI Commons has a long-term ground lease with Keck and was built to provide graduate student housing for Keck and Claremont Graduate University, two graduate schools that are part of a seven-school consortium called the Claremont Colleges in Claremont on the eastern edge of Los Angeles County. The project also includes 10,000 square feet of classroom space.

“Claremont Properties LLC faces negative pressure because its severely stressed occupancy of 60% generates insufficient rental revenue to fully cover monthly operating expenses and debt service obligations,” Moody’s analysts wrote in a Dec. 11 report. “We expect shortfalls to be covered by taps to the project’s debt service reserve fund.”

The $52.6 million Series 2017A tax exempt housing revenue bonds and $165,000 2017B taxable housing revenue bonds issued through the California Public Finance Authority have a negative outlook.

The tax-exempt bonds were downgraded on Dec. 5 to Caa2 from B1 and the taxables were downgraded to Caa2 from B3.

Both sets of bonds held a Ba2 rating when they were issued in April 2017, which is below the average low investment grade rating held by most of the privatized student housing Moody’s rates, said Florence Zeman, a Moody’s associate managing director.

The deal was sold as a limited offering, according to the offering documents. Raymond James was underwriter.

The project’s lessened liquidity position following the Jan. 1 and July 1 bond debt service payments will impair “the project’s ability to weather potential operating challenges or another missed lease-up session,” Moody’s wrote.

Moody’s placed the bonds under review for downgrade in October after the property only achieved occupancy of 60.3% due to significant construction delays that hampered its ability to lease up, analysts wrote. The developer had indicated that it needed a break-even occupancy of 76.8% to meet all budgeted operating expenses and bond debt service, according to Moody’s.

American Multifamily Inc., the general contractor, also filed a $5.1 million mechanics lien against the developer, National Campus and Community Development Corp., and the subcontractors have filed mechanics liens totaling $1.5 million, according to a material event filing posted on the Municipal Securities Rulemaking Board’s EMMA website.

The housing was expected to fill demand from rapid growth Keck has experienced in its doctoral pharmacy program, according to offering documents. A study conducted by the developer also found a 1% vacancy rate for rentals in the area.

But CGU has experienced a 13% enrollment decline to 1,876 students since 2014, Moody’s wrote. Growth at Keck is expected to offset declines at CGU, but the campus is also considered an unproven market for graduate housing, according to Moody’s.

The project was originally expected to open in 2018, but didn’t open until July and then had problems with its certificate of occupancy, Zeman said.

“It was supposed to be ready last year — that drove the first downgrade to B1,” Zeman said. “Then, they had some delays this year with the certificate of occupancy.”

Graduate student housing is considered riskier than undergraduate because graduate students typically have more housing options, said Thomas Song, a Moody’s analyst.

“The various agreements with the institutions were not as strong as what we have seen with other institutions,” Song said. “The agreements are typically that they won’t build competing housing and that the university will market the housing to prospective students.”

Student housing is considered to be fully occupied at 95% or higher and anything over 92% is considered good occupancy, Zeman said. “Once you get below the 80s, a project is already a little suspect.”

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