MACQ–Tennessee I LLC, DC's 2019 Student Housing Bonds Rated 'BB+'; Outlook Stable

CHICAGO (S&P Global Ratings) May 10, 2019--S&P Global Ratings has assigned its 'BB+' long-term rating to the Arizona Industrial Development Authority's (AZIDA) series 2019 student housing revenue bonds (University of Memphis-Southern Avenue), issued for MACQ–Tennessee I LLC (MACQ-TN), D.C. The outlook is stable.
MACQ–Tennessee I LLC was established as a limited liability company under Delaware law, of which MACQ Holding LLC is the sole member. MACQ-TN was established to acquire, pursuant to a financing agreement between AZIDA and the MACQ-TN, a student housing facility comprised of two existing fully furnished four-story buildings, consisting of 136 units with approximately 435 beds and 137 parking spaces, called 'Gather at the Southern' (the project).
"The rating reflects our assessment of good connectivity between the University of Memphis and the project with the project being on university owned land, marketed on-par with all other university on-campus housing along with having all amenities of university housing," said S&P Global Ratings credit analyst Gauri Gupta. "These positive factors are offset with the use of a third-party manager that could limit oversight as daily operations are being outsourced." At the same time, while the project has a priority fill commitment from the university of 100% beds, the university has pre-existing commitment of priority fill for 70% (or 1,592) on-campus beds, which could lead to fill-up risk in the future. The project have experienced high occupancy while it was off-campus, the series 2019 transaction brings this project on-campus as a part of the long-term strategic vision of the university. UofMemphis has been a historically commuter campus with low freshmen capture rate and the project is open to all students ranging from freshmen to graduate students with families. The uncertainty of the intended occupants coupled with UofMemphis' s history as a commuter school also adds to the occupancy risk and our overall assessment of the rating.
Although S&P Global Ratings reviewed University of Memphis's (UofMemphis) finances and market position to understand the resulting demand for the project, S&P Global Ratings does not rate UofMemphis, and the rating on the project bonds should not be construed as a rating on the university itself.
Total par amount for the series 2019 bonds is approximately $35 million. Bond proceeds will be used to finance the cost of acquisition of the project, fund required reserves, including a debt service reserve fund, and paying the cost of issuance. MACQ-TN will acquire the project and deed it to the university. Pursuant to a master lease agreement, the university will lease the project to MACQ-TN for operations. In addition, RISE Residential LLC will be the manager of the project under a management agreement. A leasehold mortgage and all revenues of the student housing project, secure the series 2019 bonds. Project ownership will revert to the university after the bonds are fully repaid.
The stable outlook reflects our expectation that, during the one-year outlook period, the project will generate at least breakeven occupancy level. We would also expect that third-party manager to manage and control the project expenses such that project has sufficient net revenues available to pay annual debt service.
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