Student Housing Business talked with Michael Baird, managing director of municipal finance at RBC Capital Markets, regarding the pandemic’s impact on funding for public-private partnership developments and potential long-term changes in the industry moving forward.
SHB: How would you characterize lender receptiveness to public-private partnership student housing deals across 2020? Has it changed as the year progressed?
Baird: P3 student housing has had a solid track record as a well-performing asset class for many years. While the global pandemic has negatively impacted many sectors, higher education — and specifically P3 student housing — has been particularly hard hit with many universities being forced to send their students home last spring, resulting in high vacancy rates at many student housing facilities. As such, many new construction projects were put on hold and our focus turned to working with universities, project owners and investors to manage the COVID-19 impact on existing housing projects. We have recently seen steady movement back to financing new projects, starting in July when we financed the acquisition of an existing housing facility at the Alabama College of Osteopathic Medicine. Since then, we have closed on a non-rated new construction project for the LSU Health Foundation, priced an investment-grade new construction project at Morgan State University and are scheduled to finance six P3 student housing projects over the next six months. We are definitely seeing positive momentum as the market looks forward to putting the COVID crisis behind us in the coming year.
SHB: Have deal terms changed?
Baird: There has definitely been an adjustment to underwriting standards with rating agencies and investors looking for higher coverage levels, additional university support and increased liquidity. Maintaining the minimum 1.20-times debt service coverage ratio may no longer be enough to ensure an investment grade rating on a pure project finance basis. In addition, investors are demanding additional reserves — either funded at closing with bond proceeds, or annually out of surplus cash flow — to provide additional liquidity to weather unexpected events like a global pandemic. To accommodate some of these changes, financing features like subordinate bonds and turbo-call features are being incorporated to enable senior bonds to be rated and compensate the subordinate bondholders for any additional risk.
SHB: How much student housing will you wind up funding in 2020? How strong is your pipeline for 2021 and beyond? And when do you predict activity will pick up?
Baird: For this year, we are on track to close five P3 student housing financings totaling over $300 million. For 2021, we are on track to finance 10 projects totaling more than $600 million. As more universities return to the procurement processes that they abandoned when the pandemic struck, we anticipate more opportunities in the coming years.
SHB: Having finished 2020, have you seen any long-term positives emerge for the student housing sector? Conversely did the pandemic reveal any red flags to you?
Baird: With the perspective that the current pandemic is anticipated to come to an end next year, a long-term positive is that student housing is expected to return to more normal operations and continue to be a consistently performing asset class. Going forward, we anticipate incorporating many of the newly revised underwriting standards, and incorporating stronger coverage requirements and liquidity reserves to ensure the these projects can better weather any future storms. With that said, the university’s role and level of support will remain as the primary credit factor in evaluating these public-private partnerships.
— Katie Sloan
This article originally ran in the November/December 2020 issue of Student Housing Business magazine. To subscribe, please click here.