ResponsiveEd Gains Support in the Financial Community for its Approach to Growth

This story also appeared in the Dallas Morning News, follow link to read there.

Rising up next to Interstate 35 in Corinth, Texas, is a new school building. Designed to accommodate 600 students, the new construction is a sign of the rapid growth in North Texas as companies like Toyota and FedEx move their U.S. headquarters to the business-friendly region, bringing with them thousands of new families.

What sets this multi-million dollar project apart is that it will be home to a new classical charter school and is a part of a $65 million bond package funded in June by Texas charter operator ResponsiveEd. Making this project even more unusual is that ResponsiveEd applied no philanthropy to the project. The bond package is supported by the company’s S&P BBB rating (the highest given to any Texas charter organization) and the state’s $29 billion Permanent School Fund (PSF), which leverages Texas’ AAA rating. Those ratings have helped the company secure a 4.0% interest rate, one of the best rates a Texas charter organization has received in the past five years.

To put the company in such a strong financial position, ResponsiveEd’s leadership team and board of trustees have applied a very different strategy from most of their Texas charter peers. Instead of relying on philanthropy to build or acquire new schools, ResponsiveEd employs a cycle of lease, grow, purchase, and expand to fuel the growth of the two charter districts the company runs.

“One of our guiding principles is to be good stewards of the state funds we receive. When we start schools at the request of the communities we serve, we begin carefully. We always launch and operate within the funds we are allotted. When you build, you have to be sure the school will survive academically and financially, or you will have serious challenges down the road,” CEO Chuck Cook explained.

When it came to issuing the bond package, the strategy is paying dividends for its investors.

“We proved you can provide a quality school experience without a significant initial investment. I understand some operators want to have a big impact right out of the gate, but I believe starting small leads to a great deal of flexibility and financial stability down the road. It’s a model more charters should emulate,” he said.

The new school under construction, Corinth Classical Academy, followed this growth model. Founded as a college-preparatory elementary school in nearby Hickory Creek in 2007, the school has leased a facility since it was launched. From the beginning, parents have been impressed with its intimate family feel, and it did not take long for them to begin asking for a middle and high school program. Corinth Classical Academy will now be expanded to a K-12 school in its new location.

The June bond package used to fund this project was underwritten by RBC Capital Markets (RBC) and issued in two series. ResponsiveEd will use the proceeds to build two new schools, expand four others, and make improvements on a number of their other campuses. When fully utilized, the bond money will allow ResponsiveEd to serve more than 23,000 students in schools across Texas.

Company CFO James Taylor believes the charter operator’s approach to growth and school offerings has made a real difference in the eyes of potential investors.

In addition to its cash reserves and strong credit rating, ResponsiveEd has diversified its school portfolio into several distinct school lines, further solidifying investor confidence. After starting credit recovery schools in 1999, the company launched its first college-preparatory elementary schools eight years later. Now, ResponsiveEd operates six distinct school models in more than 60 locations throughout Texas. Mr. Taylor believes this was attractive when RBC marketed the bond package.

“Like all investors, those interested in us wanted to reduce their risk. While other charters rely on a single academic model, we have a number of different options. When a school or network with one way of running an academic program fails, it can impact the entire charter organization. We always plan to ensure our schools will be successful, but as it turns out, diversification strengthens our position,” he said.

Innovation does not stop with the development of multiple school models. The charter organization has even pushed innovation down to the lease level, creating conditions from the beginning that foster success. Texas charter schools are funded through an average daily attendance (ADA) allotment of several thousand dollars per student. Early on, Mr. Cook and ResponsiveEd’s COO Robert Davison began seeking variable lease agreements that based lease payments on attendance levels. As the number of students at a school increases, the amount of revenue lessors generate from the agreement increases as well. Since Texas does not currently provide funding to charter schools for buildings, this approach allowed the charter organization to keep its costs in line with its operating budget.

“The ADA lease has been a successful strategy. It allows us to test the demand in a market and also gives our landlords a stake in the school. They have an incentive to promote the school and invest in the facilities. We don’t use this approach in every location, but generally, it has helped us launch schools quickly and provides us with options if the school isn’t the right fit for the community or the space,” Mr. Davison explained.

This is what ResponsiveEd has experienced in communities like Amarillo, Brownsville, Waco, and Corinth.

“When we launched our Corinth campus in the nearby Hickory Creek community in 2007, it wasn’t because we imagined an opportunity or established a strategic growth plan. Families in the community asked us to offer a college-preparatory elementary school option. We still had to sell it, and as it turns out, the demand was there, helping us feel confident that a permanent school building would be sustainable,” Mr. Taylor said.

Finding different ways of doing things was baked into the charter guidelines when the state updated its education code in 2001. While many charter schools are still trying to figure out how to keep their doors open and where to raise the millions in philanthropy they need, ResponsiveEd appears to have figured out an extremely effective way of establishing a sustainable and fiscally responsible approach to growth that will lead to many more school construction projects like the one in Corinth in the years to come.

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Bridget Weisenburger

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