Struggles for two bond-financed student housing projects

Two Florida student housing deals that went to market in 2024 with speculative-grade ratings are showing signs of distress.

Moody's downgraded Florida Capital Projects Finance Authority student housing revenue bonds issued for the PRG-UnionWest Properties LLC project to Ba3 from Ba1 on Dec. 11 and revised the outlook to negative from ratings under review, where the bonds were placed in November.

The proceeds of the 2024 bonds, sold a year ago with the Ba3 rating, were used to purchase and renovate a 15-floor mixed-use building, called UnionWest, in Orlando. It serves students of the University of Central Florida and Valencia College, the region's community college.

Separately, the borrower for Florida Development Finance Corp. student housing revenue bonds, SFP-Tampa I LLC, drew on reserves and subsequently posted about the draw to the Municipal Securities Rulemaking Board's EMMA website on Dec. 4.

SFP-Tampa I LLC used the proceeds from the 2024 bonds primarily to purchase The Henry building in Tampa near the University of Tampa, a private school, and the University of South Florida's Health Services campus.

Fitch Ratings rated the senior SFP-Tampa I bonds BB-plus at issuance in June 2024. It lowered its outlook to negative from stable in April.

The PRG-UnionWest bonds consist of $100.5 million of series 2024A-1 senior tax-exempt bonds, $8.8 million of series 2024A-2 senior taxable bonds and $28.4 million of series 2024B subordinate tax-exempt bonds. Moody's only rates the 2024A and B bonds. The subordinate bonds are expected to have an accreted value at maturity in 2062 of $210.4 million and are unrated.

The SFP-Tampa I bonds include $113.5 million of series 2024A-1 senior tax-exempt bonds, $13.1 million of series 2024A-2 taxable bonds and $29 million of series 2024B tax-exempt subordinate bonds. The subordinate bonds are unrated.

"The PRG-UnionWest Properties deal is following the pathway that reflects underwhelming occupancy versus projections. The reasons presented [by PRG] don't seem to get to the core of what is or is not driving demand," said Muni Credit News Publisher Joseph Krist.

"Looking at the primary source of occupancy, the current mix of residents would seem to have been more vulnerable to economic issues or changes in student loan access," Krist said. "Coming after a below target pre-leasing result, there's not a lot of room for error. The prospect of additional supply targeting the same if not similar market segments is a concern."

The sole member of PRG-UnionWest Properties is Provident Resources Group.

"The future performance of the project in 2026 and forward will prove the error in Moody's downgrade," said Steve Hicks, chairman and CEO of Provident Resources Group.

"UnionWest is an essential platform for student housing, academic, and training facilities for both University of Central Florida and Valencia College," said Chris Hicks, PRG president. "Provident remains committed to the project, working with our partners at UCF as well as our managers at Yugo, with the goal of ensuring the long-term success of the project."

UnionWest contains 10 floors of student housing, five floors of academic spaces and a ground floor of retail and academic space and parking. There is also a nine-level attached parking space. In fiscal 2024 about 77% of the revenue was derived from the student housing portion of the project and 11% from the academic space, with the remainder from retail.

PRG used the 2024 bond proceeds primarily to purchase and renovate UnionWest.

PRG, a nonprofit organization, was founded in 1999 and has acquired, developed, and financed facilities providing more than 27,750 beds of student housing in 13 states and the District of Columbia.

Moody's said its downgrade of the senior PRG-UnionWest bonds "to Ba3 reflects the sharp decline in fall 2025 occupancy, which was 68% compared to 94% [in fall 2024], primarily due to resident no-shows, skips, and evictions," Moody's said. PRG made the Dec. 1 debt service payment with money from the bond fund and operating contingency accounts. All escrow accounts except for the debt service reserve fund have been "largely depleted," Moody's said.

"Operating revenues and the remaining contingency funds will likely not be enough to cover the June 1, 2026 payment, which will result in a draw on the debt service reserve fund," Moody's said.

In a posting to EMMA on Dec. 1, PRG-UnionWest said it expected occupancy at 71.3% by February though this estimate doesn't account for possible "no-shows" or evictions.

Moody's said its negative outlook on the PRG-UnionWest bonds reflects the project's "ongoing liquidity decline and persistent occupancy challenges, which are expected to continue over the outlook period. A further downgrade is likely upon a tap to the debt service reserve and/or if financial performance fails to materially improve during the 2026-2027 academic year, resulting in significant additional reserve draws."

Strategic Family Partners, an Ohio nonprofit, is the borrower for the SFP-Tampa I bonds.

Its building, The Henry, has 23 stories, 188 apartments, and 537 student beds. It was completed in 2021 and SPF acquired it in 2024 with bond proceeds.

"There have been no draws on the senior debt service reserve funds; the most recent draw was on the subordinate debt service reserve fund," said Richard Rieth, president of SFP. "The draw was required as a function of the timing of cash flows within the fiscal year, but the project is not expected to make further draws on debt service reserve funds and the borrower anticipates refilling debt service reserve funds."

In its April report, Fitch said its negative outlook on the SFP bonds was due to the "significantly weaker than expected occupancy rates at the student housing facility in fiscal 2025 which raise uncertainty regarding how quickly occupancy will ramp up and at what level it will stabilize." Fitch had assumed in its rating case a 93% occupancy but there was expected to be an 81% occupancy in fiscal 2025.

The opening of another new student housing facility contributed to lower occupancy, Fitch said. SFP reached an affiliation and marketing agreement with University of South Florida and University of Tampa in June 2024, after most students had already entered into lease agreements. Additionally, delays and technical issues with the 2025 Free Application for Federal Student Aid process also contributed to lower occupancy rates, Fitch said.

Some of these effects are no longer relevant and pre-leasing rates were improved compared to the same point in April 2024, Fitch said. However, unless the occupancy improves beyond 90% in the current fiscal year, it said there would likely be downward pressure on the rating.

Fitch said its rating reflected the "small, single facility nature of the project and its desirability and marketability to both upperclassmen at University of Tampa and graduate students at USF's health services campus." The project also benefits from below market pricing.

To make the Dec. 1 payment on the subordinated bonds, SFP drew $678,744 from the subordinate debt service reserve fund, $1,108 from the operating reserve fund, and $106 from the repair and replacement fund.

Moody's has an Aa2 issuer rating with a stable outlook on the University of South Florida, citing, among other things, "solid student demand." Students from USF and University of Tampa are the primary renters of space at SFP's The Henry building.

The ratings agency assigns the University of Central Florida an issuer rating of Aa2 with a stable outlook. UCF students are among the main tenants of PRG's UnionWest building.

Moody's retains a negative outlook on the higher education sector, citing demographic factors and threats from the federal government.