Scrutiny on For-Profit Colleges Could Spike CMBS Default Risks


Government scrutiny and poor public perception of the for-profit higher education industry could intensify default risks on up to $1.88 billion in commercial mortgage-backed securities, according to analysts at Morningstar Credit Ratings. A series of Federal Trade Commission investigations and settlements have resulted in a 28 percent decline in enrollments between September 2011 and September 2015.

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Eleven loans totaling $144.7 million, or 7.7 percent of the loans backed by for-profit colleges, are specially servicedmore than double the 3.7 percent rate of specially serviced loans for the entire CMBS universe in April.

Losses are forecasted on nine of the 11 loans, and could total $51.8 million, according to Morningstar. This includes a $9.6 million loss on a $24.5 million note collateralized by three University of Phoenix office buildings, at 4150 South Riverpoint Parkway and 3125 East Wood Street in Phoenix, Ariz. and 517 North Westhill Boulevard in Grand Chute, Wis. The school served as the sole tenant in the properties, and vacated in 2013.  The note comprises 1.13 percent of the Citigroup-sponsored CD 2005-CD1 conduit. The collateral’s latest appraised value of $17.9 million is 60.7 percent less than the original 2005 appraised value of $45.5 million.

University of Phoenix is the largest for-profit higher education institution in the U.S. and currently under scrutiny over its marketing and recruiting practices, according to published reports. The university is also a tenant at properties backing $241.6 million of CMBS debt. Since 2012, it has closed 115 locations.  Its enrollment was 179,600 in February, less than half of its 470,800 students during its peak in 2010. Enrollment is expected to continue to dip to as low as 140,000 this year, according to January earnings call remarks made by Greg Capelli, the chief executive officer of Apollo Education Group, which owns the university.

Amid the declining enrollment, Apollo Education Group will become a private company by the end of this year. The group was publicly traded for 22 years, and was sold earlier this year to a trio of private investors;  Apollo Global Management, The Vistria Group and Najafi Companies. “This new structure will allow Apollo Education Group the flexibility and runway it needs to complete the transformational plan at University of Phoenix, which will enable us to serve our students more effectively during a period of unprecedented volatility within our industry,” said Mr. Capelli in a release regarding the move, earlier this year.

The group is the sole tenant at its headquarters building, which backs a $91.5 million loan in CGCMT 2015-GC29, and has a lease which expires in 2031. The property, also located in Phoenix, Ariz. currently has an appraised value of $183 million, however if it were to be vacated by Apollo, or “go-dark”, the appraised value would dip to $122 million.