Trouble in Dodge City: Student Dorm Bonds Flunk Pandemic Restructuring

The pandemic is expected to crush on-campus enrollments and turn the vast universe of municipal housing into potentially dangerous investments.

It’s not just students who must tough it out through college these days. The dorms that house these collegians – and the bonds that financed these structures – now also struggle to earn passing grades. Last week, the University of Florida announced that Midtown Campus Properties LLC, a luxury on-campus university dorm developer, would file for Chapter 11 bankruptcy reorganization in the face of the nationwide COVID-inspired shutdown of on-campus education. 

The news drove the value of Midtown’s $77.8 million in municipal bonds down by roughly 60 percent. The bonds were first sold to investors just 16 months ago. 

University officials blame the bankruptcy not only on lost student tuition, but missing lucrative on-campus dorm rent and revenues generated by retail shopping facilities, gyms, and on-campus food and beverage businesses.

According to administrators and alumni at several major universities we spoke with, the direct financial damage to the University of Florida will probably be limited. The University, like other large educational institutions, has the clout to force third-party developers, like Midtown Campus, to take most of its financial risk. Examination of the underwriting paperwork confirms that Midtown Campus is the legal issuer of the bonds. Therefore it insulates the university from much of the financial exposure in case of default.

But a closer look at the vast student housing bond market reveals that many schools do not carry the financial power of the University of Florida. They cannot lever third-party developers to assume a building’s construction risk and therefore are forced to directly finance their own infrastructure. 

Small schools and colleges are often directly responsible to bond holders for interest payments in case of default. 

As schools digest record-low occupancy rates for the coming 2020 semester, hundreds of millions of municipal dorm bonds from smaller schools have morphed into dangerous deals.

Bond Trouble in Dodge City

In 2009 the Municipal Securities Rulemaking Board created the Electronic Municipal Market Access or EMMA data portal. EMMA lists the underwriting structure, pricing information and, when available, credit ratings for the vast universe of municipal paper. EMMA makes it simple enough to study the student residence bonds that might have COVID-19-related exposure. 

As an example, we dug into the bonds issued by Dodge City Community College, located just outside of Dodge City, Kansas. Dodge City Community is relatively small by community college standards. Only about 1,500 students are enrolled, compared to about 6,300 found in the average community college. Back in 1935, during the last great depression, the college was housed entirely on the third floor of the Dodge City High School. 

Then, in 1965, legislation was passed to turn college management over to local elected county officials. Where, immediately, political will was found to issue no less than $2.5 million in bonds -- that’s about $20.5 million today -- to buy the old James Mooney Ranch, from Mr. Mooney himself. By 1970, “DC3,” as it came to be called, took occupancy of a new 145-acre prairie home. And thus began decades of construction that would produce 20 structures, a 1.5 acre artificial lake stocked with catfish, bass, and trout, a rodeo practice arena, an astronomy center, and four residence halls, where most students can splurge on a private room.

We counted 16 significant bond offerings from the municipality of Dodge City, including 5 rounds of funding for the community college. All the bond offerings we examined obscure the community college’s obligation in case of default. 

Take, for example, the $1.3 million in Student Union and Dormitory System Revenue Bonds sold in 2016. They feature a clear disclaimer that the school has no direct obligation for these bonds. But Dodge City Community College remains the sole issuer of the bonds. According to bond traders active in the municipal bond markets, the school’s exact obligation in case of legal default can only be discovered through careful examination of the covenants of a specific bond and the overall financial health of the school. 

Dodge City Community College, like most small schools, tells a fairly frightening financial story. 

It claims roughly $40 million in total assets on its balance sheet. That’s offset by about $17 million in capital leases and bonds payable. That $40 million in assets earns $10.9 million in operating revenues, with $2.8 million coming from student tuition and $4.1 million coming from federal aid. Finally, there’s a cool $2.4 million from dorm rent, campus store sales, and food services.

But what makes for trouble in Dodge City, is the costs involved in running a small school, with lots of buildings: There is $4.5 million in the cost for teachers. It costs $3.1 million a year to serve students, and $1.5 million to keep the buildings managed, the food served and the bookstore open. 

The whole shebang yielded a numbing $16.6 million operating income loss for 2019. The shortfall is made up from a mix of $4.0 million in state funds, $450,000 in grants and gifts and $11.8 million in local sources, which appears to include county and local appropriations, what are called allowable expenses from college grans and contracts and other receivables. 

All that uncertainty is before the potential effects of COVID-19 that reasonably has to affect most every dollar on these financial statements. Dodge City Community College canceled its graduation and in-person classes. Dodge City itself is stuck in Phase 1 of a reopening plan. Some of the college dorms are being used as housing for covid first-response workers. 

Exactly what happens when September comes with fewer students and revenues is anybody’s guess. The group of lenders who specialize in dorm financing argue the effects will be minimal. Others say Federal Reserve dollars will flow to and support the college’s municipal debt. Still others speculate that a collapse is looming, a la the municipal debt in 2008. 

But despite all these questions, Dodge City Community’s bonds are still trading at, or close to, their original face value. Meaning for the professional investor anywhere close to municipal debt, it’s time to be sure something like a Dodge City Community College will still be around to pay its bills.