In the US higher education world, unless you are one of a handful of well-endowed top-tier private universities, it is more likely than not that capital constraints are a perennial strain on competitiveness.
This reality led some colleges and universities to turn to real estate developers to aid in the redevelopment and expansion of student housing accommodation. But real estate projects in the space tend to come in small bites. And as David Mullen, general counsel for the University of Massachusetts Building Authority, put it at last July’s National Conference for Public Private Partnerships (NCPPP): “Most universities have been around 100 years and they’re probably going to be around for 100 more.”
With that in mind, it is no wonder that college boards, as one higher education project finance professional noted recently, are prone to “go to the infrastructure group at Moody’s instead of going to the real estate group to get rated”, a major shift in the last five to 10 years.
Last May, the Board of Regents (BoR) at the University System of Georgia (USG) reached financial close on the US’ first-ever multi-campus student housing procurement with an infrastructure developer – Corvias Campus Living (CCL) – through a 65-year contract.
In this month’s iteration of Building Blocks, we take a look at how the deal was done.
ADOPTING A MODEL
As former Corvias Group director of finance Jim McCurdy notes, the USG project originated in 2012, when the BoR realised it was necessary “to identify a new method to finance construction of new student housing, because the current model they were using had a lot of limitations to it”.
Not long after, a tender to finance, expand, refurbish, operate and maintain the student housing assets at nine USG campuses was initiated. The tender called for a private partner to take control of the existing 6,200 beds at the included campuses and to add capacity for 3,700 more.
Having learned early of the tender, CCL was well-prepared to bid on the project using the concessionaire model, a framework it adopted from the toll road space, and which Corvias had already been using in the military housing sub-sector for some time.
“Service concession arrangements have been widely used in DOT [Department of Transport] projects, but it’s a fairly new application within the higher education space,” says CCL partnership development associate Daniel Jellicorse. “There have been some dining hall projects done under service concession arrangements, but [it’s not] commonly used in student housing P3s.”
The service concession agreement came with two main benefits from the BoR’s perspective. The first has to do with control. “The core of it that was beneficial to [USG] was that they were able to have a lot of the controls that they wanted to have in terms of the rent-setting process, all the student-facing services and to control some of the aspects around how decisions are made through a joint governance structure,” says Jellicorse.
This control element is often not in the standard private equity-led, real estate-style student housing deals, which can lead to what Jellicorse called “exorbitant” rents. In the USG deal, he says CCL is not incentivised to drive a rental rate increase, “because it lessens the satisfaction of our students and our partners, which is ultimately [the metric guiding] how we’re compensated. So, we’re actually focused on setting and keeping rents affordable for the long-term and designing around affordable rents”.
The second benefit, he says, is that it “frees up a lot of credit capacity”. “The capital asset continues to sit on their balance sheet and the debt that was there, which was a little over $300 million of bonds, gets removed from their balance sheet and in its place is what’s called in accounting terms a deferred in-flow of resources. Basically, that’s just a liability that’s not recognised as debt,” explains Jellicorse.
From a credit standpoint, there were two main reasons why the multi-campus project was viewed favorably by ratings agencies. “What made the project financially feasible is that it was anchored by Georgia State University, which is the biggest one in the portfolio based in Atlanta [and] the diversity of those campuses and schools really helped in the financing of it, too, because you’re not tied to one location or one type of school,” says McCurdy.
As a result, the project attracted 12 institutional investors – which Jellicorse says includes pension funds, insurance companies and others – to participate in a taxable, $548 million bond private placement overseen by Goldman Sachs. That capital was used to defease the existing $300 million in debt brought into the partnership and to finance the buildout of 3,700 beds.
The equity partner in the deal is the BoR itself, Jellicorse explains, since it brought its existing equity. The latter makes up the difference between the $300 million in debt and the value of the existing housing assets, which is as yet undisclosed within the partnership.
At the core of the Corvias model is a programme built to ensure continued investment across the 65-year project lifespan through a $2.6 billion reinvestment reserve.
“After we pay all operating expenses and debt service, all net cashflow is split evenly between contingent rent, which goes back to the BoR (and that’s $2.6 billion back to them) and then the other half goes into the reinvestment reserve,” says Jellicorse. “So every year, we’re depositing half of that cashflow into the reinvestment reserve and it grows over time.”
As part of the deal, Corvias also arranged for the creation of a $500,000 a year scholarship programme for students within the institution to support local economic development. And in keeping with the community-mindedness that Corvias Group companies have shown in their other recent projects, 85 percent of the initial spend in the first 150 days post-close was awarded to local businesses. All told, USG will receive $8 billion in economic benefits over the lifetime of the project, claims Jellicorse.
While no other university systems have yet come forward with plans to privatise housing across multiple campuses using this particular framework, the BoR at USG aims to start similar procurements for its remaining 21 locations.
“The group that’s furthest along in implementing this would be Georgia again,” says CCL communications director Kelly Douglas. “So Georgia will hopefully be entering into phase two of this P3 programme. They’re in an interesting position – not only are they the first ones doing it, they’re also evaluating and going on with the next phase.”
Even outside the housing space, there is room for private operators to interact with universities, says CCL’s vice president of partnership development Geoff Eisenacher.
“Colleges and universities are looking to creative ideas and solutions,” he says. “Revenue comes in a lot of different formats and they’re starting to get honest at what they’re good at – what’s the core mission and what’s not? They’re educators and there’s a whole lot of things they’re not good at and they’re happy to let the private sector do it best.”