New Assignment
People:
Boston Andes Capital (BAC) is an international real estate portfolio company with domestic offices in Boston, MA, and international offices in Buenos Aires, Bogota, and Argentina and a portfolio totaling $545MM. BAC has partnered with Endeavor Schools to acquire and lease on a triple net basis four existing school facilities in Mount Pleasant, SC, a suburb (bedroom community) of Charleston, SC. BAC raises funds from high net worth individuals internationally, creating individual LLC’s to hold its various investments. For this transaction, two schools are being acquired by a newly formed subsidiary, BAC CDC III & IV, LLC to hold the collateral assets. BAC was formed in XXXX by James Hughes, whom previously was Managing Director of Boston Financial Group, and arranged financing for over 500 properties valued in excess of $4B. Renzo Pisa (guarantor) joined BAC in 2013 and became an equity partner in 2015, previously he was a analyst at Merrill Lynch Real Estate Investment Banking Group, NY, NY. Marcos Flegmann joined BAC in 2012 and became an equity partner in 2014, and serves as CFO and is primarily responsible for underwriting various transactions for presentation to partners and investors worldwide.
Endeavor Schools was founded by Richard Campo in 2012 and is headquartered in Miami, Florida and has grown to the 11th largest privately-owned company of its type in the US. It is structured as an education management company and fundamentally based on the Reggio Emilio and Montessori educational principle. Endeavor acquired the Children’s Discovery Center locations in Mt Pleasant, SC. Children’s Discovery Center’s are a Toledo based educational company founded in 1982, with a presence in Mt. Pleasant since opening in 2012, then expanding to a second campus in 2015. Endeavor has been a party to multiple equity raises over the past 5 years at Leeds Capital, as it expands its national footprint to 13 states, providing high quality K – 12 education under a variety of licenses including Cranfield Academy, Cranium Academy, Creative Child Learning Centers, Children’s discovery Center , Children’s Garden, and CarpeDiem to name a few. Endeavor will also guarantee our debt, as will Renzo Pisa.
Purpose:
The proceeds of the loan funded the acquisition of two locations in Mt. Pleasant, SC with a PP of $7,230,000 and other fees and costs of $438,535, for a project cost of $7,668,535. The project will be funded with $2,968,535 in equity and $4,700,000 in debt with IFB. The loan is structured as a 10 Year Commercial Term Loan, with monthly payments of P&I based on 30 year amortization (approved policy exception) and interest rate of LIBOR plus 2.76%, which the borrower has entered into a fixed rate swap at 4.652% for the term of the debt. Net of expenses, equity equals $2,530,000 or 35% of the PP.
Protection:
The loan is secured by a FDOT on two improved commercial properties:
1) 1100 Venning Road – this 2 acre (MOL) commercial site is improved with an 11,872 SF day care center, which was last appraised by CBRE as of August 15, 2019, with a market value of $3,500,000 based on the Leased Fee Interest. Both the sales and income valuation approaches were well supported by market data from recent transactions, with moderate adjustments especially on the income approach which supports the leased fee basis of our transaction.
2) 3300 Stockdale Street – this 2.25 acre (MOL) commercial site is improved with an 12,747 SF day care center, which was last appraised by CBRE as of August 15, 2019, with a market value of $3,750,000 based on the Leased Fee Interest. Both the sales and income valuation approaches were well supported by market data from recent transactions, with moderate adjustments especially on the income approach which supports the leased fee basis of our transaction.
The aggregated value of the real estate is $7,250,000 and the resultant LTV is 65%, which is consistent with the LTC indicating no premium was paid for the existing business (and imbedded in the real estate) which were purchased through a separate transaction.
Payment:
The subject is a 15 year term, with three - 5 Yr renewal options and base annual rent of $22.76 PSF on a triple net basis, commencing on 09/01/2019, with 3% annual escalations. This results in an annual base rent of $560,327, and a NOI of $559,096 based on the NNN lease basis, 100% occupancy and no management fees (which is used in the appraisal). The rent coverage Ratio is 1.65X, while the EBITDAR model based on the OCF of the schools increase the coverage to 2.54X.
Endeavor Schools Parent LLC provided its unlimited corporate guarantee of the debt and for the year ended June 30 2019, the recently consolidated operations of the company reflect gross revenues of $87,024M and A Net Loss of $10,703M. EBITDA generation was calculated at $20,190M and the DSCR was calculated at 1.19X. Balance sheet shows only modest liquidity with Cash of $3,243M,and assets concentrated in fixed assets Totaling $172,989M, of total footings of $263,613. This is supported by $202,395M in Liabilities and $61,218M in Net Worth; however, Tangible Net Worth is ($21,762M) due to substantial Goodwill and Intangible assets associated with the acquisition of schools and on-going operations.
Problems/Prospects/Conclusions:
The bank risk rates the loan Pass, based on the strong proforma debt service coverages, acceptable LTV of a single purpose property, solid management team on both the educational and property management sides, and the association with a larger nationally proven education brand. Both of the collateral properties were being operated currently, which mitigates start-up risks. The ‘elephant in the room’ remains the impact of COVID on early learning centers and educational facilities as a whole. The continuing needs for distance learning, the on-going ‘work from home’ status of the workforce, and the negative economic impact on families leaves many facilities of this kind in limbo and effects long term cash flow generation and the ability to service debt going forward. The parent operating company Endeavor Schools does not have the strongest balance sheet, with modest liquidity and high leverage due to a large finance lease obligation associated with long term leases associated with the operation of brick and mortar school.
The borrower has not sought relief under COVID and the Cares Act. Absent interim operating statements and FYE 6/2020 FS, the overall impact that COVID has had on the company is unknown. The borrower has remained current during the pandemic. Given these facts, the reviewer recommends a continued Pass rating until such time as updated F/S are received and reviewed.