With shared success in markets with second-tier schools, the Copper Beech portfolio is a 'perfect fit' for Campus Crest Communities.
At the end of February, Campus Crest Communities (NYSE:CCG) signed a purchase and sale agreement to acquire Copper Beech Townhome Communities, LLC and its affiliate companies. The acquisition will take place in a staged fashion over the next three years, with CCG initially investing a 48 percent equity interest in a portfolio of 35 student housing properties owned by Copper Beech. Total consideration for the initial stage of the investment is valued at $262 million, with a total enterprise value of approximately $970 million.
CCG held an equity offering shortly after its announcement of the acquisition, which raised $313 million for the company to fund the acquisition. The combined company is now the second largest owner of student housing beds in the United States according to SHB's 2012 Top Owners ranking, with ownership interests in 81 properties with nearly 42,000 beds in 57 unique markets. The highly complementary transaction, which is expected to be accretive in the first full year of ownership, creates a multi-brand platform that will allow CCG to deliver both offerings in the same markets without cannibalizing demand.
Charlotte, N.C.-based Campus Crest plans to operate Copper Beech as a separately branded division for the foreseeable future. As well, Copper Beech Founder and Senior CEO Jack McWhirter will stay on for the next two years to lead the division until the buyout is complete.
As follow up to the news, Student Housing Business had an exclusive interview with Ted Rollins, CEO of Campus Crest, and Copper Beech Senior CEO Jack McWhirter.
Art of The Deal
Like most of the industry, Rollins said he had always regarded Copper Beech's portfolio with a bit of intrigue. In the markets where the two companies co-exist, he could tell that Copper Beech's townhome model worked without knowing Copper Beech's numbers. Toward the end of 2012, a call was arranged between the two principals which ultimately led to Rollins meeting with McWhirter in State College, Pa., where they discussed ideas for a buyout or merger.
"We realized that we saw eye-to-eye on a lot of aspects," says Rollins. "From there, we started to work on a transaction because we realized that it made a lot of sense for both companies."
For Copper Beech, the interest was timely. Copper Beech had started down the path of going public in 2012, but didn't feel that was the best option for the company. McWhirter says he felt that a staged sale to Campus Crest could be a good alternative to an IPO since he sought a partner that could slowly acquire the interests of his family and his limited partners over time. The staged acquisition structure also made sense for CCG as it allows the company to take measured steps to increase its ownership and operational control without pressuring its balance sheet or operational infrastructure.
The value of CCG's initial investment in Copper Beech, including its pro rata share of debt, is about $500 million. Average occupancy at the company's 35 properties is 98.5 percent. The portfolio is also relatively young, with an average age of seven years.
"It is not your typical transaction where you buy a lot of beds and create a strain on your own organization," says Rollins. "We are getting one of the best operating platforms in the industry. The things we had in common and the way Jack and his team approached things was a perfect fit."
"As a private company, we always held our numbers close to our vest," says McWhirter. "But we could always see the numbers of others in the industry and we knew that we were operating at better margins and higher occupancy."
With property profit margins averaging 64.8 percent, Rollins says that Copper Beech's margins are among the highest in the student housing industry. The combined Copper Beech/Campus Crest portfolio will have profit margins of about 60 percent. The average occupancy rate of the combined portfolio will be about 94 percent; and pre-leasing for 2013-2014 was approximately 49 percent as of February 22, 2013.
All Copper Beech properties are owned in limited liability corporations (LLCs), which are held commonly under a roll-up entity. As part of the step transaction, Campus Crest will acquire the shares of the roll-up entity.
Because the size of the deal and the closely held nature of Copper Beech, both parties felt that the staged buyout made the best sense for both parties. Because of Copper Beech's value, it would take time for Campus Crest to acquire the company from a financial standpoint. From an organizational integration standpoint, both companies wanted to take their time integrating their operations and philosophies. This would allow each group to take the best practices from each other and emerge as a stronger, combined entity.
"We want to make sure that we accomplish this transaction in a methodical way," says Rollins. "Jack and I came up with the structure together by spending a lot of time together over the past few months. We've eaten a lot of ice cream together at the Nittany Lion Inn." [Editor's side note: The Penn State Creamery is famous for its ice cream — known mainly by word-of-mouth — which is served at the Inn.]
Rollins says that after CCG announced the deal on February 27, it began to get a bit more interest from Wall Street. Its follow on equity offering of 25.5 million shares of common stock was well received at $12.25 per share, raising the company $313 million. The proceeds of that offering, which closed on March 6, are being used to fund the Copper Beech acquisition.
"The offering was very well received," says Scott Schaevitz, chairman of Barclays' Americas Real Estate Investment Banking, which advised CCG on the transaction. "There was deep institutional demand for the shares, which traded well throughout the two day marketing period."
Copper Beech's Unique Model
While Copper Beech has largely stayed out of the spotlight since its inception in 1994, the company's purchase by Campus Crest has somewhat forced it into the public spotlight. Founded by Penn State chemical engineering professor Dr. Jack McWhirter and his wife, Jeanette, the company was purportedly named after a tree in the couple's backyard. What started out as an investment hobby buying duplexes and apartment complexes turned into big business as Copper Beech sold those holdings and developed a townhome style product and grew to be the fifth largest owner of student housing properties over the years. The company has been one of many endeavors for McWhirter, who returned to Penn State, his alma mater, in 1986 to teach after a highly successful career at Union Carbide Corp. McWhirter is also the founder of two chemical engineering firms. But student housing was a safe bet that fueled other endeavors. Especially after he and his wife created the formula for their success in the field.
"After building and buying our way to 50 to 60 duplexes and small apartment complexes in the State College market, my wife and I sat down with a blank sheet of paper and designed what we thought was the ultimate student rental," says McWhirter. "The result was the model for the Copper Beech townhome."
The company's signature townhome-style student communities were first popular in the State College, Pa., market, then spread to other university markets in the Southeast and East. The product itself is unique, says McWhirter.
"The size of unit we give students for the price is way above what anyone else in our markets does," he says. "Our costs are low because our property design is sound, unique and cost effective. The three-level townhome design provides a lot of square footage and a lot of privacy for the student. We're giving a lot of value for the rent dollar, and students recognize that and appreciate it."
Always privately held, the company operated with a tight-knit, small staff from its headquarters in Boalsburg, Pa., and concentrated most of its staff at the property level.
Copper Beech financed most of its growth through its own balance sheet, building project by project. As of Oct. 31, 2012, the company had projects near 18 campuses, according to research conducted by Student Housing Business. They include Penn State, Purdue University, James Madison University, Indiana University of Pennsylvania, Georgia Southern University, Central Michigan University, Radford University, Grand Valley State, and Texas State University. McWhirter says his focus in choosing markets was to find colleges like Penn State: a big school in a small town. That focus has led Copper Beech to many growing second tier schools in recent years.
Rollins agrees that the second tier university focus of both companies is a positive trait that the two portfolios share.
"There continues to be a great value in the schools we both serve," he says. "As we see parents and students look for value in education, we are squarely in those markets."
Campus Crest, meanwhile, has been actively building its Grove branded properties in secondary university markets. The company went public in 2010, and has doubled in size in the past two years to become the fourth largest owner of student housing according to Student Housing Business's 2012 Top 25 Owners list. Now with this transaction, it is nearly doubling again. The Grove properties share many similar characteristics to Copper Beech's townhome communities, according to Rollins. First and foremost, all of Copper Beech's properties are branded with the company's name, similar to Campus Crest's Grove brand. Rollins views this as similar to the hotel industry, where an industry leader like IHG has five to six brands across different price points and amenities operating in a market.
"The Copper Beech portfolio allows us to have a second brand and a second offering in the markets we serve," says Rollins. "It creates a dual brand that can co-exist; it also helps us pick up a segment of the market that we don't have already."
The two brands give Campus Crest a chance for expansion in many markets where one brand has properties and the other does not. Currently, there are 18 markets being served by Copper Beech; Campus Crest has Grove properties in six of those markets. Rollins says he has noticed in markets where there is a Grove and a Copper Beech there is a natural progression of students as they get older to move to a more residential, independent lifestyle offered by the townhome design. "Kids look for that 'front door-back porch' living experience," says Rollins. "It is natural to see the migration to the townhomes as students progress through their education."
"We intend to have a Grove community in most of the other 12 markets where Copper Beech is active," says Rollins. "Conversely, we want to put a Copper Beech in the 39 other markets where there is a Grove. We get some great operating leverage that way and better market share."
"The idea is to continue to grow both brands separately, not grow them into one brand," says McWhirter.
"We think townhomes are a smarter answer to the cottage business," adds Rollins. "We like the Copper Beech model better than the cottage model because it is more efficient and less capital intensive; you can get closer to campus and build more units."
The average Copper Beech property is 1.2 miles from campus.
Combined, the company will have 81 properties in 57 markets. It will also have the youngest portfolio in the industry, with an average of 4.9 years old. Like CCG's portfolio, Copper Beech also built and managed all of its properties. The operating platform is strong and solidly in place.
While McWhirter will remain part of the team running Copper Beech, and will retain the title of Senior CEO of Copper Beech, he also admits that part of the transaction alleviates succession planning for the company. McWhirter says he will use some of his time gained by streamlining operations to concentrate on his chemical engineering businesses.
"It is a gradual integration of the two organizations," he says. "In that time, I'll find enough to do."
"Jack embodies the entrepreneurial spirit," says Rollins. "I am sure we won't see any grass growing under his feet. I am glad that he has agreed to be a part of the team over the next two years. He is a great business partner and a great friend."
— Randall Shearin
Is The Industry Consolidating?
Consolidation might not exactly be the most accurate word to describe what's happening to the ownership of America's purpose built student housing. It is, after all, still a highly fragmented industry, coupled with the problem of how to count all the places where students live during college.
American Campus Communities' numbers, for example, over the past few years of the Student Housing Business Top 25 rankings have steadily increased. ACC reported owning 62,031 beds in 2010 and 68,271 in 2011. The number jumped to 85,670 beds as of Oct. 31, 2012. The REIT acquired 6,579 beds in one transaction with Campus Acquisitions and 12,049 beds in other transactions. ACC CEO Bill Bayless has said one of his goals for ACC was to be an industry consolidator.
According to William Talbot, ACC's chief investment officer, ACC grew by 51 properties in 2012, a total of 23,400 beds (including its publicized transaction with Kayne Anderson). After those acquisitions, ACC owns 160 properties totaling 98,800 beds.
"Therefore, ACC has a dominant share of the defined student housing ownership, but that is only a small fraction of the total demand for off-campus housing," Talbot says. "College enrollment is projected to reach approximately 23 million by 2020, and universities only house 23 percent of students on campus."
While ACC controls a majority of purpose built student housing and has been actively acquiring, it isn't on par with other real estate investment trusts serving older, more sophisticated sectors.
"We are the largest student housing company in terms of beds and market cap by at least two times," Talbot says. "However, we are only a mid-cap REIT compared to all other publicly traded real estate companies."
The news that Campus Crest Communities will double in size as it merges with Copper Beech further signifies a trend of growing portfolios among the larger companies. But some say these types of transactions are likely to be rare.
"There aren't that many sizeable portfolios that we would expect to come to market," says Paula Poskon, senior research analyst at Robert W. Baird & Co.
"This is a growth sector in every connotation of the meaning. These are all young companies in a young sector. The management teams are all visibly building their own platforms, and no one's ready to cash in. The industry's companies are led by young CEOs in their 40s, and no one's ready to step aside."
While there is one less company on the roster of the top owners, one that didn't fit that prototype to a T, many say investors would be in favor of more than three REITs in the near future.
"My guess would be that within the next two years, you might have at least one and possibly as many as three new REITs come on the student housing scene," says Al Rabil, managing partner and CEO of Kayne Anderson Real Estate Advisors. "I agree with the assessment that there is significant consolidation coming. It would surprise me if 10 years from now the top 10 owners didn't own at least 10 percent of the total off-campus housing market."
According to Rabil, the top 10 owners in student housing own approximately 4.3 percent of the off-campus beds. The industry's fragmentation makes it difficult to declare whether student housing is becoming consolidated as a whole or if the industry's largest companies are simply growing larger as the demand for off campus student living rises. Poskon notes that ACC, for example, is growing and is taking market share, but that doesn't necessarily mean the industry itself is becoming consolidated.
"A good analogy is what we've seen in the self storage space," Poskon says. "We have a little better data there. It is estimated that there are probably 60,000 self-storage facilities in the United States. There are four publicly traded REITs and one other public entity, and those five companies combined control about 10 percent of that market, or 10 percent of those 60,000 facilities. Ten years ago, when these companies were much smaller, they still controlled about 10 percent of the market. They've grown in line, with the same pace of growth, as the industry itself. The data is not as clear for student housing, so it's a little harder to know."
Large companies with experience and easier access to capital will be the key to any type of consolidation, which if achieved, Talbot says, would bring a higher level of respectability to student housing in terms of investors, equity and debt.
"Size matters in this business," says Rajen Shastri, chief investment officer for Campus Acquisitions. "Especially for the public companies. The larger firms have a clear cost of capital advantage as well as an operational advantage from having experience in so many different markets. With the large amount of capital chasing our product type, there is no better time than the present to raise capital for such acquisitions or mergers."
Shastri says he expects large transactions to continue, and that Campus Acquisitions keeps the concept of consolidation and the end of the cycle in mind when pursuing new projects, which are almost always adjacent to campus with a strong focus on design.
Looking ahead to the rest of 2013, the growth of student housing's top companies is expected to continue.
"2012 was a record year for student housing in terms of transactions," Talbot says. "Per both CBRE and ARA's year-end review, transactions totaled more than $3.7 billion, not including our combined $1.4 billion acquisitions of the Campus Acquisitions and Kayne Anderson portfolios. This volume was driven by the tax changes occurring in 2013, loan maturities and developers deciding to capitalize their recent developments.
"2013 is looking to be another strong year in terms of acquisition opportunities as cap rates remain strong in the sector for quality product and developers look to sell the new product that was delivered in 2012 or is being delivered in 2013. ACC plans to be an active acquirer in 2013."
— Lynn Peisner