Next Generation: Public Private Partnerships October 2, 2012 CACUBO Presentation Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. Copyright © 2011 Standard & Poor’s Financial Services LLC, a subsidiary of The McGraw-Hill Companies, Inc. All rights reserved. Presenters • Illinois State University – Dan Layzell, Vice President for Finance and Planning • RBC Capital Markets – Sara Russell, Vice President • Standard and Poor’s – Jessica Lukas, Associate Director, Higher Education Group Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 2. Illinois State University Dan Layzell Vice President for Finance and Planning Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 3. University Overview • Illinois State University – 1st public university in the State of Illinois, founded in 1857; one of 12 public university campuses in state – 960-acre main campus located in Normal, Illinois; midway between Chicago and St. Louis – Composed of six degree-granting colleges offering 68 undergraduate majors, 43 master’s programs, 9 doctoral program and 10 certificate programs – Fall 2012 Enrollment overview Total Headcount – 20,502 Undergraduate – 18,207 Graduate – 2,295 New Undergraduates (Freshmen and Transfers) – 4,964 – Primarily residential campus Four-semester on-campus housing requirement 5,900 on-campus beds (down from a high of ~7,500 beds in the 1970s) Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 4. University Overview • Enrollment Trends – Total Headcount – Annual on-campus enrollment target is 20,000 to 21,000 Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 5. University Overview • Enrollment Trends – Annual new undergraduate target is ~5,000, with 60/40 split between new freshmen and transfers Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 6. University Overview Long Range Housing and Dining Plan • Initiated in 2004 – Upgrade University housing and dining facilities – Strategically right size campus housing and dining capacity to accommodate future enrollment targets – Planned decommissioning of selected facilities – Rotated 400-800 beds offline each year – Project completed in 2012 • Financing – Total cost – $96M – Equity financed with cash reserves - $48M – Debt financed - $48M Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 7. University Overview • Occupancy rates & capacity – On-campus beds were reduced from 6,600 in 2009-10 to 5,900 in Fall 2012 (including 900 in new Cardinal Court complex) Note: Includes ~ 300 supplemental lounge spaces each year. Cardinal Court Fall 2012 occupancy – 99.3%. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 8. The On-Campus Housing Challenge and Decision Process • On-Campus Housing Status – Long-range Housing and Dining Plan completed in 2012 – Four-semester on-campus housing requirement – State law requiring sprinklers in all residence halls effective January 2013 – Decision NOT to renovate South Campus Complex (~1,600 beds) • Considerations – Cost and other University debt-issuance needs – No apartment-style housing on campus for undergraduates – Land availability and options – Time constraints • Options – Eliminate four-semester on-campus housing requirement – Re-densify existing residence halls – Build new residence hall – Explore public-private partnership (P3) to address housing needs Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 9. The On-Campus Housing Challenge and Decision Process • Process – Established cross-University working group to research possible P3 alternatives – Developed RFP to invite proposals for housing project – Variety of options proposed by private development teams • Key Decision Criteria – Project had to stand on its own financially – no University subsidies – Had to be completed by Fall 2012 – University needed to retain management/quality control – Reputation and track record of development team • Timeline – May 2010: Selection of ACC/CHF development team – June 2010: BOT approval of project; executed ground lease with CHF – July 2010 – February 2011 Market study Project design/costing Financing/legal issues and considerations Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 10. The On-Campus Housing Challenge and Decision Process • Timeline (cont.) – March – June 2011: Demolition and site-work – June 2011 – July 2012: Construction – August 2012: Move-in • Challenges and Observations – Changes in State procurement/legal environment – Political issues – Unpredictability of financial markets – First-time experience with P3; Some observations: Take time to determine clear goals and priorities for the project Be disciplined in evaluating and choosing the right P3 partner/team Bring in experienced legal and financial advisors – it’s worth the added cost Involve local government(s) in planning Don’t underestimate the time required on the part of your institution during the transaction to ensure a successful outcome Don’t leave the details to others; be hands-on in working with P3 partners Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 11. RBC Capital Markets Sara Russell, Vice President Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 12. Project Location The Project is situated on the previous Cardinal Court Apartment site located on the main campus of the University, an approximately 10 - 15 minute walk from the academic quad. Project Site Wright Hall Haynie Hall Wilkins Hall Bone Student Center Manchester Hall Hewett Hall Student Rec Center Whitten Hall Atkins Hall Hamilton Hall Quad Colby Hall Existing residence halls are labeled in blue. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 13. Watterson Towers Project Description & Amenities # of Units # of Beds Sq Ft Per Unit 2012-13 Monthly Rent 2012-13 Semester Rent Unit A | 2 Bedroom / 2 Bath (Single Occupancy) 8 16 720 $806 $4,836 Unit B | 4 Bedroom / 4 Bath (Single Occupancy) 64 256 1,223 $641 $3,846 Unit C | 2 Bedroom / 2 Bath (Double Occupancy) 12 48 924 $575 $3,450 96 989 $605 $3,630 96 989 $575 $3,450 96 384 1,053 $605 $3,630 228 896 Unit Type Unit D | 3 Bedroom / 2 Bath (Single Occupancy) 48 3 Bedroom / 2 Bath (Double Occupancy) Unit E | 4 Bedroom / 2 Bath (Single Occupancy) Total • The project provides replacement housing and enables ISU to “right-size” campus housing options. • The community provides both private and semi-private bedroom and bathroom accommodations for students. • A 15,000 square foot community center provides for student recreation, food service, residence life programming and outdoor amenities. • Resident amenities also include on-site parking, bicycle racks and a campus shuttle bus stop. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 14. Transaction Overview Developer Conduit Issuer Trust Indenture Loan Agreement Ground Lease Management Agreement Dining/Café Sublease Development Agreement Architect Bond Trustee Architect Agreement Borrower CHF-Normal, L.L.C. Bonds Bond Proceeds Construction Contract Underwriter Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 15. General Contractor Structural Finance Considerations – Market Study • August 2010 - CHF engaged CDS Market Research to conduct an independent market feasibility study to evaluate the overall need for additional housing at ISU – Survey and analysis - evaluation of existing housing facilities both on and off campus, the demand for additional housing, and the type of units and pricing that would best fulfill students needs • The market contains approximately 8,000 rental units in approximately 1,000 buildings – The complexes most immediately adjacent to campus are approximately 97% - 100% occupied, though renters pay a premium price for the proximity to campus as compared to some of the larger garden style units available further away. • After project completion and the decommissioning of existing housing units, ISU’s total housing stock will be approximately 6,000 beds (approximately 5,000 residence hall beds and 1,000 apartment beds) Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 16. Structural Finance Considerations – University Support Ground Lease Support Provisions Management Agreement Dining/Café Sublease • Agreement to treat project as part of ISU’s housing stock, on an equal basis with other facilities • Agreement coterminous with the Ground Lease • Covers a portion of the community center used for dining/café operations • Students cannot be directed or assigned to other facilities in preference over the project • Assumption of responsibility for rent collection and managing a series of restricted accounting funds to administer the Flow of Funds established by the Trust Indenture • Initial term of 10 years with an option to terminate by ISU after 5 years • Agreement to decommission certain buildings as further required by Illinois Fire Sprinkler Dorm Act • Assumption of responsibility for project operations, payable from project revenue • Agreement to a market verification covenant before any future housing facilities are constructed • Agreement to subordinate reimbursement for overhead and management fees • Assumption of responsibility for furnishing and operation of the space and receives all revenues from operations • Agreement to maintain current policies for student payment delinquencies • Fixed annual sublease payments Source: Official Statement | Illinois Finance Authority Student Housing Revenue Bonds (CHF-Normal, L.L.C. – Illinois State University Project) Series 2011, February 10, 2011. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 17. Financing Summary Par Amount $59,610,000 Conduit Issuer Illinois Finance Authority Borrower CHF-Normal, L.L.C., the sole member of which is Collegiate Housing Foundation, a 501(c)(3) organization. Structure / Ratings Fully amortizing, tax-exempt student housing revenue bonds with a 32-year final maturity. Underlying ratings of “Baa3” by Moody’s and “BBB-” by Standard & Poor’s are assigned. Ground Lease Long-term ground lease with a stated expiration on the 40th anniversary of the Commencement Date or upon the full repayment of the financing, with an option for ISU to acquire the project at any time. Payment Dates Interest is paid semi-annually on each April and October 1st. Principal payments or sinking fund redemptions will be made annually, on each April 1st, commencing April 1, 2013. Optional Redemption On or after April 1, 2021 at a redemption price of par, plus any accrued interest. Construction Period Approximately 18 months, with the project delivered on time and on budget in August 2012. Security for the Bonds The Bonds are secured solely by the revenues and assets of the project. Reserve Funds Bond proceeds funded capitalized interest through construction and stabilization and a debt service reserve fund. Annual deposits to an R&R Fund will be made from project cash flows. Management / University Involvement As Manager, the University will be responsible for the ongoing operation and maintenance of the Project, including the collection of revenue and payment of operating expenses from such revenue. The willwill administer Flow of net, Funds within the Indenture University The University enter intothe an absolute bond type lease, which willby be creating sufficient certain to coverrestricted debt accounting funds into which Project revenue will be deposited and transferred monthly to the Trustee service on the bonds and related expenses. for debt service payments and to an Operating Account for operating expenses. Source: Official Statement | Illinois Finance Authority Student Housing Revenue Bonds (CHF-Normal, L.L.C. – Illinois State University Project) Series 2011, February 10, 2011. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 18. Financing Results Sources of Funds Par Amount of Bonds Original Issue Discount Original Issue Premium Total Uses of Funds Construction Costs Capitalized Interest Fund Debt Service Reserve Fund Estimated Issuance Costs Total Financing Statistics Bond Arbitrage Yield ** All-In TIC ** Max Annual Debt Service Total Net Debt Service NPV of Surplus Cash Flow Minimum DSCR $ $ $ $ $ $ $ 59,610,000.00 (838,165.60) 58,771,834.40 45,132,679.03 7,683,144.76 4,863,050.00 1,092,960.61 58,771,834.40 7.02% 7.19% 4,863,050.00 152,242,021.77 20,305,811.00 1.25 Operating Assumptions Occupancy Rate 95% Lease Term 12 months Operating Expenses Per Bed $1,628 Subordinated Expenses Per Bed $637 Starting R&R Fund Deposit Per Bed $175 Revenue/Expense Growth 3% ** Bond pricing on February 10, 2011 amid tumultous market conditions. 30-year MMD rate equaled 4.94% at the time of pricing and the muni market was seeing a dramatic widening of credit spreads, wide spread selling and fund outflows. Net Rental Revenue Board Sublease Payments Interest & Other Income Total Revenue 2013 * 5,226,824 37,224 102,250 5,366,298 2014 6,460,354 37,224 202,579 6,700,157 2015 6,654,165 37,224 205,738 6,897,127 2016 6,853,790 37,224 208,992 7,100,006 2017 7,059,404 37,224 212,344 7,308,972 Salaries, Wages & Benefits Repairs & Maintenance Utilities Marketing & Leasing Insurance General & Administrative Project Finance / Reporting Fees Total Operating Expenses 336,089 330,500 609,120 19,000 30,000 71,361 62,500 1,458,570 346,172 340,415 627,394 19,570 30,900 73,502 62,500 1,500,452 356,557 350,627 646,215 20,157 31,827 75,707 62,500 1,543,591 367,254 361,146 665,602 20,762 32,782 77,978 62,500 1,588,023 378,271 371,981 685,570 21,385 33,765 80,317 62,500 1,633,789 Net Operating Income 3,907,728 5,199,705 5,353,536 5,511,983 5,675,183 Annual Debt Service ** Debt Service Coverage Breakeven Occupancy 678,046 5.76 36.98% 4,158,275 1.25 80.23% 4,283,325 1.25 80.25% 4,406,225 1.25 80.19% 4,531,700 1.25 80.11% Subordinated Expenses Repair & Replacement Fund Borrower Fee Management Fee University Overhead 156,800 79,936 266,454 224,000 161,504 98,485 328,284 230,720 166,349 101,440 338,132 237,642 171,340 104,483 348,276 244,771 176,480 107,617 358,724 252,114 Surplus Cash Flow 2,502,492 222,437 226,649 236,889 248,548 * First year revenue based on an initial 10-month period based on project delivery and planned lease cycle. * Debt Service is shown net of capitalized interest. Source: RBC Capital Markets and Official Statement | Illinois Finance Authority Student Housing Revenue Bonds (CHF-Normal, L.L.C. – Illinois State University Project) Series 2011, February 10, 2011. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 19. Fixed Rate Municipal Market Update Municipal Yields Municipal yields are near all time historical levels Current 1 Month Ago 1 Year Ago ISU Pricing 09/27/2012 08/27/2012 09/27/2011 02/10/2011 0.20% 0.20% 0.23% 0.37% 0.36% 0.37% 0.47% 1.14% 0.62% 0.70% 0.97% 1.92% 1.71% 1.76% 2.09% 3.38% 2.88% 2.90% 3.52% 4.94% Maturity 1-Year 3-Year 5-Year 10-Year 30-Year AAA Historical Municipal Yields “AAA” MMD is the composite yield curve comprised of “AAA” rated general obligation municipal issues by which other municipal issues are benchmarked. 30-Year US Tsy 30-Year Muni-to-Tsy 2.84% 101.41% 2.76% 105.07% Source: TM3 | AAA MMD GO Index 6.00% 5.50% 5.00% 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 01/02/01 01/02/02 01/02/03 01/02/04 01/02/05 01/02/06 01/02/07 30 Year AAA 01/02/08 01/02/09 01/02/10 01/02/11 10 Year AAA Source: RBC Capital Markets Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 20. 01/02/12 3.07% 114.66% 4.77% 103.56% A Rating Agency Perspective Jessica Lukas, Associate Director Standard and Poor’s Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 21. Current Debt Trends Public University Median Debt per FTE By Rating Category 2011-2007 2011 2010 2009 2008 • 2007 50,000 45,000 40,000 35,000 General Characteristics • Debt Issuance Increasing • Deferred maint. growing • Issuers remain conservative 30,000 25,000 20,000 Private University 15,000 10,000 5,000 Median Debt per FTE By Rating Category 2011-2007 0 AAA AA A BBB 2011 2010 2009 2008 2007 180,000 • Types of Debt and Structure • No major trend changes in security types • Direct purchase bonds • Century bonds • Off-balance sheet bonds* 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 AAA Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 22. AA A BBB Traditional vs. Private Housing • Difference between traditional housing and private housing – Connectivity: university management, ownership or oversight – Location: on-campus/ off-campus • Credit Risk Relationship Model – University’s long term viability and credit rating – Economic interest and control – Demand for housing – Linkage to university – Stand alone or housing system Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 23. S&P Criteria • Criteria that Standard and Poor’s follows: – Location – Management – Rate covenants and bond test Cash flows – Reserves and insurance – Occupancy rates and breakeven levels – Construction risk – Debt structure – Long term rating of institution WICHE = Western Interstate Commission for Higher Education. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 24. Current Debt Trends Off Balance sheet debt • Characteristics – Avg actual cov. across all ratings 1.9x – Avg beds +2000 (1460 BBB+ and below) – Avg cov require 1.2x – System pledge 2/3’s of deals Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 25. CHF-Normal, LLC – Rating Strengths Overview of OBS Rating (from Standard and Poor’s Perspective) • ISU's (A+/ Stable) solid demand for university-owned housing, which operates at over 96% of capacity • New project beds are substantially replacement stock • The bonds' adequate security features • High connectivity between ISU and the project, as demonstrated by the project's oncampus location, ISU's management, oversight, and active role in marketing the new housing as part of its own housing stock, and eventual ownership of the project once the bonds are repaid • The project's assumed break-even (1.0x) occupancy levels of 83.6%, which we consider manageable • ISU's stable enrollment and demand trends - with fall 2011's enrollment of 21,080, 71% freshman selectivity, and 36% matriculation rate. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 26. Connectivity – University support for the project • The new housing facility represents a small portion of total on-campus beds (approximately 15%) at ISU • Replacement Housing - as the new housing becomes available, the university plans to take approximately 1,774 beds offline • Ground lease - contains provisions outlining the university's support for the project, which includes the decommissioning of the aforementioned existing housing facilities • The new apartment complex will be located on campus; a natural pathway will connect the facilities with the main campus. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 27. Management & Flow of Funds Why is this important? • Who will manage the housing units? • Who will market the housing units? • Will the housing units be connected to the campus computer system? • Will they have the benefits of university campus parking and police services? • What type of housing contract will be used? And, will it enforce the same terms and conditions as other university housing? • Who will collect monthly all housing rental payments and who will transmit revenues to the trustee to provide for the funding of debt service payments and other financing related expenses? • What will happen to any surplus funds, after debt service coverage has been met? Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 28. CHF Transaction – Flow of Funds Student Rental Payments collected by the University under the Management Agreement and held by the University in restricted accounts Revenue Fund On the last business day of each month, the University shall make transfers for: On the 20th day of each month, the University shall make the following disbursement to the Trustee for the Bond Fund: amounts remaining after monthly transfers Bond Fund Reimbursement of Overhead amount equal to 1/6th of interest and 1/12th of principal for the next succeeding payment due On the 20th day of each month, the University shall make the following disbursements: 3 Issuer & Trustee Fees amount then due and payable Operational Expense Fund amount shown in the Annual Budget for Op Ex for the next succeeding month Debt Service Reserve Fund amount of any replenishments necessary Repair & Replacement Fund $175/bed/year escalating annually at 3% Payment of Borrower Fees if funds are available Payment of Management Fees if funds are available Operations Contingency Fund all amounts remaining Replenishment of Funds Bond Fund, Operational Expense Fund, Debt Service Reserve Fund, R&R Fund On June 30th of each year, the University shall deposit monies remaining in the Operations Contingency Fund into: Surplus Fund Amounts remaining in the Surplus Fund at the end of the Fiscal Year are retained by the University as Ground Rent provided that the Release Test is met. Source: Official Statement | Illinois Finance Authority Student Housing Revenue Bonds (CHF-Normal, L.L.C. – Illinois State University Project) Series 2011, February 10, 2011. Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 29. CHF-Normal, LLC – Offsetting Characteristics Rating Limitations: • Nonrecourse security pledge of project net revenues • New construction risk • Financial projections that indicate a 1.0x (not including debt service reserves) inground maximum annual debt service (MADS) coverage with expected MADS of $4.9 million on projected fiscal 2014 net operating income (first full year without any capitalized interest) of $4.9 million • A management agreement that includes equal treatment of the housing project within ISU's student housing program; however, there is no priority assignment or "first fill" requirement Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 30. Finance Structure = Investment Grade Credit • Approximately $60 million fixed rate bond issuance • Nonrecourse security, self retirement of debt through project cash flows • New construction risk • Capitalized interest & replacement reserve funds • Adequate debt service coverage • University supported contracted services agreement • Solid enrollment and expected student demand S&P rating of BBB- / Stable Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 31. Cardinal Court Before…. After…. • Project construction commenced in March 2011 and was completed by August 2012 • Construction was on time and on budget • Student demand for the property is strong, with fall 2012 occupancy of 99% Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 32. Question & Answer Session Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 33. Contact Information Jessica Lukas (312) 233-7004 Jessica_lukas@standardandpoors.com Dan Layzell (309) 438-2775 Dlayzel@ilstu.edu Sara Russell (410) 625-6119 Sara.russell@rbccm.com Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s. 34. www.standardandpoors.com Copyright © 2011 by Standard & Poor’s Financial Services LLC. All rights reserved. No content (including ratings, credit-related analyses and data, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). 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