Dive Brief:

• Grand Canyon Education is being "selective" as it seeks out a handful of additional university partners, CEO Brian Mueller told analysts on a call Wednesday to discuss the company's fourth-quarter earnings. "We are less and less likely to do a deal for the sake of doing a deal," he said.
• Mueller, who is president of the university in addition to his role at GCE, also indirectly addressed recent criticism of the company's relationship with Grand Canyon University.
• He said GCU had $250 million in cash and nearly $400 million in assets as of the end of last year. It generated $100 million in operating cash flows in the second half of 2019.

Dive Insight:

A report last month from a noted short-seller suggested GCE might be funneling expenses and liabilities to the university while disproportionately benefiting from its revenue. 

GCU and GCE separated in mid-2018. Since then, GCE has provided educational services to the university in exchange for about 60% of its revenue from tuition and other sources. 

Mueller appeared to push back on the report on Wednesday's call. "Some observers who predicted" that the relationship would benefit GCE over GCU were "very, very wrong," he said.

Still, the $875 million senior secured note issued to GCE that financed the separation and is secured by all of GCU's assets has made it "very difficult for the university to get financing from any other source" than GCE, Mueller acknowledged. GCU is able to fund its own capital expenditures going forward, he said, and the agreement requires GCE to provide GCU with funding for short-term cash flow purposes.

GCE estimates it will generate $59.2 million in interest income from the note in 2020, compared to $59.3 million last year.

The U.S. Department of Education mentioned that note in its letter to GCU that explained why it declined the university's request to be recognized as a nonprofit institution for the purposes of receiving federal student aid. The department said the requirement to repay the loan in order to break the contract early is "an arguably prohibitive termination fee."

It also cited Mueller's "obviously conflicting loyalties" as the head of both GCU and GCE in its reasoning for not approving the change.

Mueller told analysts during Wednesday's call that talks with the Ed Department to regain GCU's nonprofit status are "making progress." In a note shared with Education Dive, analysts from BMO Capital Markets said that while the situation "does add political risk," they don't think the school is at risk of violating federal regulations for for-profit institutions.

For-profit colleges cannot get more than 90% of their revenue from Title IV funds, although military education benefits do not fall under this rule. About 73% of GCU's revenue subject to that rule came from Title IV funds, according to GCE's latest quarterly earnings report. 

Meanwhile, GCE continues to look for three or four university partners in the Midwest or Northeast. During a call with analysts last August, GCE executives said the company could launch programs through these partnerships as early as the fall of 2020. But Mueller was cautious speaking with analysts Wednesday.

"We won't do it unless it's a comprehensive approach that scales the number of students so that something fundamental about their business plan changes," Mueller said, suggesting that GCE isn't inclined to make significant upfront investments in their partner colleges — an approach some OPMs take.

Trace Urdan, managing director at investment bank and consulting firm Tyton Partners, said that based on what GCE has said it wants out of these relationships, "it's a pretty short list of folks that could be the partner they need," he said. The situation with GCU and the Ed Department could be complicating the process, he added.

"(Mueller) has, and so as a consequence the organization has, a very specific idea in mind, and they've spent now more than a year trying to execute against that idea," Urdan said. While "there's a clock on GCE" to find other partners, he added, for now GCE's "fortunes are tied to GCU."

Meanwhile, GCE expects to grow its healthcare-focused Orbis business from around two-dozen locations to 34 by the spring of 2021. It is vying for 70 locations in the next seven years, Mueller told analysts.

As of Dec. 31, 2019, GCE programs enrolled 106,861 students, with about 96% coming from GCU. Those represent year-over-year increases of 9.8% overall and 5.9% for GCU. 

BMO analysts pointed out that GCE's enrollment figures are strong. But Mueller told analysts on the call that the spread between enrollment and revenue growth "is going to continue."

"If we open the floodgate today and say, 'We'll take a bunch of high-risk, 30-year-old students who want to come back to school and try it again,' and those students produce low graduation rates, stack up debt, don't get any payoff," he said, "that way to grow, based upon that level of churn, is not something we're interested in."