For-Profit Colleges' Uncertain Future Puts $1.8B In CMBS At Risk
Government scrutiny and poor public perception of the for-profit education industry is intensifying the risk on up to $1.88B in CMBS loans. The industry is reeling from investigations and settlements. As a result, owners of for-profits colleges have closed hundreds of locations, shuttering entire brands, like Corinthian Colleges, formerly a tenant in collateral backing $82.3M in CMBS loans. Data from Morningstar predicts about $3.2M in losses on two loans tied to Corinthian.
Eleven loans totaling $144.7M, or 7.7% of loans backed by for-profit colleges, are with special servicers, more than double the 3.7% rate of specially serviced loans for all CMBS in April. Morningstar forecasts $51.8M in losses on nine of the 11 loans.
The University Of Phoenix, owned by Apollo Education Group, is the largest for-profit education institution in the US, and a tenant at properties backing $241.6M in CMBS. The system recently closed 115 locations, as enrollment fell from 470,000 in 2010 to 179,000 in 2016. Apollo Education Group is the only tenant in its HQ on a lease that expires in 2031, which backs a $91.5M loan.
Morningstar's largest projected loss is $16.5M on the $32M Gateway Chula Vista II loan in Southern California. The collateral's second-largest tenant is San Joaquin Valley College, but Morningstar says the loss has more to due with the property's history than the college itself.
Making matters worse, for-profit tenants backing more than 13.8% of the loans, or $259.1M, have leases that expire through 2017, furthering uncertainty over for-profit exposure. The bulk of the exposure, $174.5M, is concentrated in three tenants: The University Of Phoenix, DeVry and Strayer University.
Strayer ($122.6M in CMBS), whose programs have not failed any of the government's recently implemented regulations, is a tenant in six properties with leases expiring through December 2017. While Strayer has stayed on the right side of regulations, enrollment has fallen nearly 50% since 2010, and the system closed 20 locations in 2013.
Such troubles from a once booming industry have earned it a very short leash. The government now classifies these institutions as under heightened cash monitoring. Notable for-profit institutions on the March 2016 Heightened Cash Monitoring list include campuses for Education Management Corp-owned Art Institutes ($211.3M in CMBS exposure), ITT Technical Institute ($110.2M), and Career Education Corp-owned Le Cordon Bleu ($39.2M).