CHICAGO (S&P Global Ratings) March 25, 2020--S&P Global Ratings revised the outlook to negative and affirmed its ratings on all U.S. higher education privatized (off balance sheet, or OBS) student housing projects in the wake of the COVID-19 pandemic and the uncertainties surrounding the ultimate economic fallout (see list below). The negative outlook reflects our belief that all projects in the sector are facing negative economic or fundamental business conditions that could result in lower ratings over the next one-two years. In addition, the negative outlook reflects expected challenges facing the industry due to a sudden and potentially prolonged decline in student housing occupancy and associated loss of rental revenue, as many colleges and universities have moved to remote learning. This situation is evolving, with uncertainty around the potential effects. Given this and the lack of clarity around the possible duration of the COVID-19 outbreak, in our opinion, fall 2020 enrollment at U.S. colleges and universities will likely be weaker than expected, and occupancy in privatized student housing projects could be negatively affected. The outlook on projects that already maintain a negative outlook due to project-specific reasons will not change.

As of March 25, 2020, S&P Global Ratings maintained 63 public ratings on privatized student housing projects in the U.S. While the majority of these projects are secured by a non-recourse pledge of net housing project revenues, a small number benefit from additional financial support from their related underlying institution, whether in the form of a first-fill agreement, or a lease-vacancy guaranty. Our ratings on these housing projects range from 'A+' to 'CC'. Approximately 76% of our overall ratings are investment-grade and about 24% of our ratings are in the speculative-grade category--a higher percentage than a few years ago.

A negative outlook is not necessarily a precursor to a rating change and we could revise the outlook to stable over the outlook period. We will review all ratings individually with respect to a project's specific exposure to, and ability to mitigate against, declining occupancy and loss of rental revenue. We could revise the outlook on specific ratings to stable on a case-by-case basis in the near-to-medium term (between three months and one-two years) as we assess risk mitigation. At the same time, we could lower the ratings, some of which could be multi-notch downgrades. In our opinion, while we expect to know more in the next few months about fiscal 2020 operations, there is still uncertainty around fall occupancy. Many student housing projects will be more susceptible to near-term operating pressure associated with decreased occupancy and potential rental revenue refunds, and could require the use of reserves to meet debt service payments in full and on time. Other projects may receive financial support from their sponsor institutions, which we would view positively.

Since these projects' bonds are typically secured solely by project cash flows non-recourse to the sponsor institution, they rely upon student occupancy and rental revenue generation, and are most vulnerable to missed revenues. With universities encouraging or mandating that students leave campus for their own safety, student housing occupancies are declining.

In the past couple of weeks, some of the universities where these projects are located have made announcements to their communities allowing students to terminate or cancel their lease arrangements without charging a cancellation fee or rent after the student has vacated the unit. Many of the privatized student housing projects on these campuses will likely be compelled to also issue rental proration and refunds. In certain cases, the sponsor institutions have agreed to pay the privatized student housing projects the rent they would have received under the terminated or cancelled lease agreements upon submission of appropriate documentation. In our view, this extraordinary university support is a positive credit factor that mitigates the projects' operating risk in the short term. However, even in these cases, we believe there is medium-term risk related to fall 2020 enrollment and related housing occupancies, and the future ability or willingness of these sponsor institutions to help support the projects.

Significant enrollment and occupancy losses in fall 2020 could affect even facilities that have experienced strong occupancy historically and received demonstrated financial support from their sponsor institutions. The effects on these projects could be disproportionate, as the situation may vary from campus to campus. For all credits, an extended COVID-19 duration, and correspondingly more severe economic fallout, has the potential to result in diminished occupancies in student housing that, in the long term, could be inconsistent with current rating levels, in our opinion. It is clear that the current situation is fluid and that the longer-term implications of COVID-19 might not be manifest in the short term.

The outlook period is two years for investment-grade ratings and one year for non-investment grade ratings. Overall, the negative outlook for individual privatized student housing financings will be resolved over time, as we complete individual reviews and the financial and operating impact from COVID-19 can be better estimated. In particular, S&P Global Ratings will be evaluating, among other things, the following credit factors:

• The timing of each project's debt service payments and its ability to pay debt service in full and on time from operations;
• The role the sponsor institution plays in supporting the project;
• The impact of lost rental revenue or prorated rental refunds on fiscal 2020 financial results, if applicable;
• Fiscal 2020 debt service coverage (DSC) levels and any use of reserves;
• For new construction projects, any delays resulting in negative financial impact on the project;
• Summer and fall 2020 occupancy levels and fiscal 2021 financial projections; and
• Management teams' strategies for addressing potential revenue declines.

Credit factors that could lead to a negative rating action in the near term include net project operating revenues that pressure DSC levels or impede the project's ability to make on-time and in-full debt service payments. In the medium term, lower-than-targeted occupancy in fall 2020 that stresses fiscal 2021 operations and DSC levels could also lead to a lower rating. Although we understand COVID-19 to be a global risk, we could consider a negative rating action during the outlook period should unforeseen pressures related to the pandemic materially affect demand, finances, DSC, or the trajectory of the project.

We could revise the outlook to stable for projects that are able to demonstrate extraordinary support in the form of financial backing from their university sponsor or alternative revenue sources that mitigates pressure on net project operating revenues, indicating the ability to maintain DSC levels and to make on-time and in-full debt service payments for fiscal 2020 and projected fiscal 2021. We would also consider the strength of the project's capital reserves and assess the project's ability to maintain them at the required covenant levels. In the medium term, projects that achieve target or higher occupancy in fall 2020 that benefits fiscal 2021 operations, reserves, and DSC levels would be viewed positively.

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