Corvias Group had a big win at the end of 2014 when the University System of Georgia announced the firm would build a number of student housing projects across several campuses. Corvias’s John Picerne reveals more about the company and its mission.
Interview by Randall Shearin
Corvias Group has had a quick rise in the student housing industry, but it hasn’t been without a lot of study and preparation. After entering the sector in 2012, the company, whose roots are in multifamily and military housing, has quickly made a name for itself in student housing. In late 2014, Corvias was awarded the contract to develop, construct, manage and maintain student housing for the University System of Georgia (USG). The deal is one of the largest public-private partnerships to date, covering multiple campuses across the USG system, and it represents the first time a state system has initiated the privatization of student housing through a portfolio of campuses.
SHB recently interviewed John Picerne, Corvias’s dynamic leader, who discussed the USG deal, as well as the company’s growth plans for in the student housing business.
SHB: Can you tell us about your career, as well as the history of Corvias?
Picerne: I got started in my family’s real estate development business in the 1980s, Picerne Real Estate Group. In the mid-1990s, after living through several recessions, I realized I didn’t want to be in a project transactional-based business. I wanted to grow a company that was more recession-resistant and less transaction- based, and more forward thinking. We came across the military housing initiative through a lawyer friend of mine, who introduced us to several players that had been working to try and shape the field. I was fascinated by it and it seemed like a great opportunity. I knew every real estate developer in the world wouldn’t be chasing after it; it was a good niche business. We started going down that path and it took nearly four years for the business and industry to get going, and for us to win our first major job. That was at Fort Meade back in 2000. By 2005, we had four partnerships, our portfolio was just over 15,000 units and my family and I decided the businesses were more dissimilar than similar and we needed to separate them. In 2005, I purchased all of my family’s interests in the military housing business and sold them all of my interests in their business. Between 2004 and 2005, we won five more bids with the military and another 10,000 units. We started to expand into other military product lines, such as barracks and on-post senior unaccompanied housing. That’s what prompted the name change from Picerne Military Housing to Corvias Group.
SHB: How did you decide to enter the student housing business?
Picerne: We looked at several business lines and tried to utilize what we had really learned in working with the Department of Defense. Most importantly, what I learned was that although we were in the building and property management business, these were just functions of what we do. The real business we were in was the partnership business. Finding solutions for challenges that the government has through some form of partnership is really what we learned how to do.
We then looked into other industries, including public housing, veterans housing and seniors housing; campus housing just kept coming back to me and really sparked my interest. I spent probably just a few minutes thinking about apartments for students off-campus, because while I think it’s a good business and of value to the students and the campuses, they reminded me too much of the world I came from. It was conventional apartments for kids. It didn’t thrill me as something new. I’m always looking for what’s next and trying to stay ahead of the pack. That’s what I learned in my early years. We were thinking that what would really interest us is, on-campus. A lot of campuses and colleges had said, ‘Developers help us by building apartments across the street from us, and help us push our overflow over to you and make us appear pleasing and of high value to students and competitive.’ I realized their infrastructure on-campus was not getting improved. When I looked at that and then thought about what we learned from the military, there were tremendous similarities. The military had relied on the open market; they allowed the bases to provide housing and the only people who live on-base were key essential personnel. The product was really not good. They were eerily similar.
SHB: In many cases, the systems to operate on-campus student housing have aged.
Picerne: Those systems have aged, you’re right. They are not on pace with the private sector.
SHB: Why is developing on-campus more important to you than off-campus?
Picerne: We didn’t talk about the benefits to the students. We will provide more quality housing to students living on campus, which studies have shown leads to higher GPAs, faster and higher graduation rates, and more alumni giving. I think the idea of going to college wasn’t just to live in an apartment complex across the street with a heated pool and tanning salon. The idea of college was to meet friends, learn, grow up and become a well-rounded citizen, and I think you get more of that living on-campus than you do off. I’m not saying the world should become exclusively on-campus, but I do think it shouldn’t be freshman-only. It will be a little while before we start to see the benefits of more on-campus housing, but I do think it will help schools who are struggling with retention rates. Improving the quality and availability of on-campus housing will improve retention rates and help provide more students with a better college experience.
SHB: What was your idea in entering on-campus development to bring it up to the modern age? What kind of programs could Corvias bring to the table for colleges?
Picerne: We looked at it from various angles. We tried to break the whole business down into its smaller parts. From a financing standpoint, we tried to look at how colleges had typically been financing these programs beforehand. Some are tax-exempt financing, some is through matched donations and some have used a foundation for support. Not a lot of continuity in that. It was all falling back on the financial officers’ ability to tap into the capital markets, and unfortunately, most colleges have limited access to a wide variety of capital markets. They have one lane. Most of them work with a tax-exempt bonding authority and look at one line on their income statement or balance sheet to say, ‘This is how much you can afford to hold on your books of debt.’ That’s one thing we’ve tried to address. What we’ve done is develop a model where we take their housing stock in our formal partnership, and look at it as a standalone business with its revenue source, expenses and net operating income. We then take that and go to our capital sources who are interested in secure cash flows, and we find out how much can we borrow against that stream of income alone. It doesn’t sit on the same place on the schools’ books and therefore gives them more latitude. We also don’t take part in any of the cash flow from the deals. We put all the cash flow back into the hands of the university to either invest back into the housing or into other facilities on their campus. The only thing we earn is a construction fee, developer fee and property management fee, and they are all incentive-based fees. All cash flow goes back into the project or into the school’s general fund. The other thing we do that is different from the traditional P3 model is, if there are project savings, they go back into the project and not our pocket.
SHB: It’s very attractive for universities both large and small.
Picerne: The reason it’s important that you put the money and savings back in is because it is incredibly rare that schools have all the money they could ever need to do all the things they want. By continuing to put money back into the programs, they are sustaining the buildings for the long term. They’re always going to be modern, they’re always going to be in great shape for 40 or 50 years, or whatever the length of our partnership is. By putting the savings back in, schools can choose to either build more or use the capital for other things.
SHB: The USG deal is a huge feather in your cap. It’s a game changer for the industry, more so than many people realize. It’s a different kind of project.
Picerne: Absolutely, I think it’s a game changer. First, because it’s a variation on the P3. We’ve taken what we’ve learned from all of the bad P3 models across the world and in America and turned the bad parts into good parts, such as the sharing of the exclusive rights of savings and cash flow, which now makes P3s that much better for college campuses going forward. I give the Board of Regents of the University System of Georgia kudos for having the guts to pioneer this. They are basically saying, ‘Don’t look at any of what you’re doing in a single-silo, one-off basis. Look at what you’re doing in the aggregate.’ You will see the value from growing these types of economies when you aggregate things. I think it changes the way things are done, both in the aggregation of financing and in the aggregation of design, construction and management; its partnership at a higher level. You have to give credit to the first public system to actually privatize a housing portfolio. What people in the industry are realizing, and now hopefully what people in the public sector are realizing, is that you can’t be great at everything. You need to figure out what your core mission is and stick to what you do extremely well, and then find others who do the other stuff extremely well.
SHB: Have you had other schools approach you since this announcement?
Picerne: Yes. We are actively having conversations with several other states. We responded to a request for information from Louisiana, and there have been others from South Carolina, Michigan, Ohio, Colorado and California.
SHB: We know this will work at large public schools, but what about small private schools?
Picerne: I believe our next project is 1,000 beds at a 1,200- to 1,300-student school in the Northeast. It will work very well. They need 300 new beds and 700 existing beds upgraded. They have some debt on their books and we’ll be able to raise enough capital to help pay off their debt and build new and renovate existing beds. They will also have freed up debt capacity to do other things on their campus. They’ve taken their housing challenge and turned it into a housing opportunity.
SHB: How are you able to do this differently than other companies? Is it the structure or are you leaner, meaner? How do you position that when you’re in conversations?
Picerne: We come at it differently than they do. First, we understand the value of what we bring to the table and we charge only performance-based, market rate fees. We have perfected this model through working with the military and we know it works. It’s innovative, yes, but it’s not a secret, and it’s not something others can’t figure out. This is what we’ve done for the last 15 years and we do it extremely well. In addition, we do something that more than 90 percent of the real estate developers in the world have never even thought about doing. We work on 50-year-long outlook plans. We sit down and figure out, what are we going to build or fix today? What are we going to do to that product 10, 20, 30, 40, 50 years from now? That helps us reduce the cost of construction and development upfront because you don’t have to build something that is indestructible. You have to build product you know you’re going to fix or replace. Most real estate companies develop apartment complexes for students off-campus, and try to sell it within two or three years. Conversely, our business model focuses on long-term returns. We’re more in the slow and steady, ‘coupon clipping’ business than the real estate development business. That’s also why our model is recession resistant.
SHB: You want slow and steady rather than one-time fees?
Picerne: I would be more than happy to be doing slow and steady on several hundred campuses across the country.
SHB: What’s your plan for growth?
Picerne: We’ve looked at the nation as a whole and we see this need that if it’s not universal, it’s pretty close. There are very few colleges or universities who have all the money and infrastructure they could ever need. When you break down the market, there are 3,000 or so four-year schools that have more than a couple thousand students and a 3 million-bed base. We’re looking at growing into about 10 to 15 percent of that base. Geography is not a challenge for us. We have offices in Alaska, all the way to the panhandle of Florida. We’re looking for motivated clients who are looking to be in really enduring partnerships. I know the word partnership is abused nowadays, but partnerships are like marriages to us. We want to be in long, sustainable, valued partnerships for 30 to 65 years.
SHB: How are you building your organization and team? Are you hiring from the student housing side or the military side?
Picerne: A little bit of both. We have people who grew up in our military organization and really understand the value of partnership. That’s a key factor. We have some people who have been on the campus side, whether they worked for schools themselves or for other student housing companies. We’ve also hired from some companies that have done outsourcing on-campus. We can always find people who understand housing. What’s important is that we find people who understand our values, our principles, what we’re trying to do and really understand the value in the long-term aspect of our partnerships. Probably the single most limiting factor to our scalability and growth will be being able to find really qualified, capable, good people that are smart, hardworking and productive.
SHB: What types of projects have been the most fulfilling to work on?
Picerne: My top three would have to be Fort Bragg in North Carolina and redeveloping 6,500 homes across thousands of acres of land there. It was like redeveloping a major city, or a master Rubik’s Cube. Military bases used to be one long run-on sentence of housing with no sense of cohesion or community. Remedying that was one of the greatest highlights of my career. The second was working with the Air Force; this was the first portfolio of projects we worked on. The Air Force brought together six installations across five states. Working with six different commands was like working with six different university presidents. It taught me about how to manage several masters at once. That leaves the most recent: the University System of Georgia program. This will go down for me as one of the most groundbreaking, innovative, creative programs that we could have ever come across. We got into it almost by accident. We told them this really isn’t a construction program, it’s a long-term value program. Thankfully for us they listened. Lo and behold, we won and now we are getting to help them shape their program, and will hopefully shape more of these programs in the future.
SHB: What’s your hope for the USG deal in 5, 10, 15 years?
Picerne: I don’t think there’s any shame in me saying that I hope we are their only true development partner for their entire portfolio. I’d like the opportunity to work with the University System of Georgia to transform their housing program.
SHB: What drives you to go to work everyday?
Picerne: I probably have the coolest job in the world. I get to affect people’s lives in a really positive way through our organization. I get to give great service to our customers. I get to develop an organization where people love coming to work and I have an entire staff that wants to give back to their communities. I never thought I’d be in the position where I could truly impact the world in a meaningful way, but now I am because I didn’t buy into the real estate developers’ idea that building a shopping center or an apartment complex is making the world a better place. As long as I can keep doing that, I will keep getting up at 5 a.m. every morning and working as hard as I can