SHB interviews the largest owner and manager of student housing both on and off campus, American Campus Communities president and CEO Bill Bayless, who disucsses his firm's busy 2012 and role as a consolidator and leading acquirer of assets.
Student Housing Business recently caught up with Bill Bayless, president and CEO of American Campus Communities. Ranked Number 1 on this year's top 25 owners of student housing, ACC has over 98,800 beds in its owned portfolio (gaining 13,000 since our survey was conducted) and more than 121,300 beds under management. During the past two quarters, the company has closed two major acquisitions: the purchase of 15 properties from Campus Acquisitions for $627 million in the third quarter, and 19 properties from Kayne Anderson's student housing portfolio for $862.8 million in the fourth quarter1. We spoke to Bayless during the National Multi-Housing Council's Student Housing meeting in Phoenix in October and then followed up after the Kayne Anderson deal was announced.
SHB: Since we last caught up with ACC, you have had several years of acquisition and growth.
Bayless: It's been a time of meaningful external growth through both development and acquisitions and continued internal value creation through our operating platform. In Q3 of 2012, we placed $1.25 billion of new assets into service with acquisitions of approximately $835 million and development openings at $381 million. The quality of these assets is spectacular. The average age is less than three years and the average distance to campus is inside of a quarter of a mile. From an internal value creation perspective, we announced our third-quarter industry leading occupancy coupled with strong rental rate growth of 3.4 percent. We couldn't be more pleased with our team's execution of the strategic business plan and corresponding value creation.
SHB: How did the Campus Acquisitions deal come about?
Bayless: That transaction exemplifies the opportunity for consolidation in the sector with nearly a half dozen portfolios nearing values between a half billion to a billion dollars of assets. The CA deal was not marketed but rather a direct negotiation. We really like the CA transaction. Campus Acquisitions did a great job in market selection — the University of Southern California, University of Michigan, University of Illinois, Purdue — and then developed a small, boutique, differentiated product typically ranging from 120 beds to 500 beds. It's a nice niche play within each one of those markets. I don't want to speak on their behalf, but I think to some degree, they were at a point as developers where they had achieved a level of critical mass where the intensity of ongoing operations while continuing to develop was challenging. They harvested the value they created and are now off to that next round of development. It was a great opportunity for us, and a great opportunity for them.
SHB: There is always talk about deals like this. How do you respond to those who might say you overpaid for this portfolio?
Bayless: We paid a fair market cap rate on in-place revenue that we underwrote at 92.6 percent occupancy. It's not often that you can pay a market cap rate on in-place revenue and have the level of upside and value creation the CA portfolio provides us. We are targeting a 6.4 percent nominal cap rate upon stabilization, which is very attractive for a portfolio of such high quality and pedestrian locations.
SHB: Does this deal set a high bar on valuation and pricing for the industry overall, or is it a bit of an anomaly being a whole portfolio?
Bayless: No — not all. There have been many one-off transactions that have traded at lower cap rates and higher per bed pricing without the upside that CA provides us. On a portfolio perspective, we haven't seen a large trade like this since GMH in 2008, which did not have as high a level of asset quality and was consummated in a completely different time in the earlier stage of the sector's cap rate maturation.
SHB: Some are entering the business that have some depth in the industry, who are developing one and two properties with the intent to sell those because the cost of capital and the exit cap rate. They are counting on that as the thing to take them out. What do you think about that?
Bayless: Part of our growth plan is to be there as the take out for those players. We want to be there for those folks. Our mezzanine equity program is set up to facilitate this process. For example, we just closed a deal this quarter with Landmark Properties on a cottage product at Texas State where we invested mezzanine equity with an option to purchase. If developers meet our investment criteria, we are very interested in being their take-out. The other thing that's attractive is our ability to provide American Campus stock as currency. In lieu of taking all cash, sellers can take a portion of the proceeds in operating partnership units in the REIT. Over the years, the sellers who took stock have done even better after the sale when you factor in the tax deferral benefit and ACC's historical shareholder return. Many of the Royal portfolio owners took ACC stock back in 2006 at $23.50 and GMH shareholders in 2008 when it was near $28.00 per share. When you look at the price today around $45 and factor in the dividend paid beyond just the stock appreciation, those sellers made a lot of money beyond the sale taking ACC shares.
SHB: Do you expect more consolidation, from you and others as well?
Bayless: Yes, we do and we believe we have positioned the company to be the industry consolidator. However, we have never grown for the sake of growth. Our goal has never been to be the biggest but to be the premier company in the space.
SHB: Do you have any fear or joy in controlling all of the student housing in a few markets?
Bayless: We never really control all the student housing in any given market, but we do take joy in owning the best housing in many markets. We are definitely benefitting from our scale and the fact that we have the lowest cost of capital in the sector. When you look at the number of markets that we're now in, we certainly have a competitive advantage in expanding in the markets where we're already doing business.
SHB: You re-entered Austin this year. What does it mean for the company? Are your employees excited to have a stake in your backyard?
Bayless: We're really excited about our re-entry into the Austin market. That's a case where we sold our Austin assets before development overheated in the mid 2000's. We always knew we would return to Austin after the bulk of development took place and occupancy and rental rates stabilized to a level where consistent NOI growth could be sustained. We've come back largely through acquisitions and the selective development of our Callaway House product that opens next fall. We'll have 4,100 beds in our hometown. In the absence of owning assets we have remained very active locally in a philanthropic way through American Campus Charities Foundation, supporting the Rise School of Austin, a school for special needs children, LifeWorks, an organization that supports youth in need, and other local charities. We also focused on being a good neighbor to our friends at the University of Texas.
SHB: Do you ever consider being over-weighted in a market?
Bayless: Typically we never have more than five to seven percent of our net operating income in any one market. Usually, it's around one to three percent. We also look to diversify our product holdings so that the various products we own in a marketplace together appeal to the broadest overall enrollment base with products that don't compete with each other.
SHB: Is the industry in a development or over-development boom?
Bayless: It's a market-by-market situation. That's why we focus on Tier 1 submarkets with barriers to entry. American Campus is focusing on developing at affordable price points. We have some concern with some planned and on-going developments of urban high-rise concepts in markets that are rural land grant institutions. It will be interesting to monitor the stabilization of high-rise product with smaller units and a $200 per bed rental rate premium over quality pedestrian products with larger units. We're not sure urban high-rise will be accepted in non-urban universities. What we don't want to see is a repeat of 2006-2007 when people were making their pro-formas work with very high rental rates that just were not achievable or sustainable.
SHB: The number of Tier 1 schools is limited. Does the company have any focus on Tier 2 schools?
Bayless: We're still focused on the Tier 1 institutions. There are scores of markets we've yet to enter. When you look at a Tier 2 school with an enrollment of less than 17,500 with more of a commuter student base versus a Tier 1 residential campus — the barriers to entry and long term growth prospects are usually not as attractive and valuations and cap rates are appropriately lower. We also find that the Tier 2 schools tend to be more susceptible to changes in the economy that can affect demand.
SHB: Are international markets of interest to you?
Bayless: Right now there is so much opportunity in the United States that we have not had an international focus. It's possible, but it has not been an initiative to date.
SHB: What are you hearing from universities about building on campus?
Bayless: Conversations are broadening regarding the roles the private sector can play. We believe that privatization of an entire campus like EDR's takeover at Kentucky will be few and far between. However, one-off deals and partial privatization where collaboration and partnering that enhance a university's existing housing system will continue to flourish utilizing both the equity-based models and 501(c)3 project-based financing models. We let our university clients pick whatever financing model best serves their needs. Another evolution has been colleges and universities with debt capacity who have a cost of capital lower than the private sector are using their own money but bringing in the private sector to develop housing, given our core competency in market research, program and product design, and development and construction efficiencies. That's what is taking place right now as we're developing at Princeton. They are self-funding and will own the community, but they hired us to bring all the benefits of our core competencies. They want the best product for their students at affordable rents, delivered in the most cost effective and efficient delivery model.
SHB: Is there still something of an arms race among universities to better their housing stock?
Bayless: There has been plenty of good, market-based, on-campus product added over the past 10 years but there is still much that needs to be replaced. Most campuses still maintain some product of the 1950s and 1960s' residence halls as part of their overall housing. Many of those assets continue to be functionally obsolete, have millions in deferred maintenance and aren't attractive to the grandchildren of the students for whom they were originally designed.
SHB: What does the Kayne Anderson transaction bring to ACC in terms of growth?
Bayless: The KA portfolio was consistent with American Campus's high quality diversified growth strategy. It is a key component of the bigger picture. We believe we are in the midst of a 24-month period that represents the highest quality growth in the company's history. If you look from fall 2011 to fall 2013 and you include the Campus Acquisitions and the Kayne Anderson transactions, coupled with our own new development, we will have added 67 new class A assets to our portfolio with an average distance to campus of 0.36 miles. That growth alone is larger than any of our competitors. Forty-five of those assets are through acquisitions and 22 are through development. It is really a balanced mix.
SHB: Do you see your appetite for acquisitions as a way of industry consolidation?
Bayless: Student housing continues to be one of the most highly fragmented sectors in real estate as it relates to ownership. Since we went public in 2004, we have been and continue to be well positioned to take advantage of this fragmentation. We benefit from having the lowest cost of capital in the sector, the only investment grade-rated balance sheet, and our access to the capital markets gives us a significant advantage in the consolidation play. We are also the only company in our sector to successfully close a large portfolio acquisition.
SHB: American Campus Communities remains the only investment grade-rated company in the entire sector. What does that say?
Bayless: When you look at the apartment sector, there are nearly a dozen well-capitalized multifamily companies that are publicly traded REITs with investment grade balance sheets. In addition, there are also dozens and dozens of well-capitalized private companies with good access to equity and proven, scalable operating platforms. We are very fortunate at American Campus to be one of the few players in our space with those attributes. It's a significant competitive advantage as a partner and service provider to investment grade colleges and universities and as an industry consolidator.
SHB: ACC has acquired a lot of properties this year. Will you manage all these properties?
Bayless: Yes, managing assets under our proprietary operating platform is a key to our value creation. One of the unique opportunities for us in the Kayne Anderson acquisition is that Kayne Anderson as an institutional investor used six different student housing management companies. By bringing these assets under a centralized, operations, asset management and ownership structure we can create significant efficiency and effectiveness within the portfolio.
SHB: Will you be making any additional improvements to any of the properties in the Kayne Anderson portfolio?
Bayless: We will be investing about $12 million in the assets — upgrading their curb appeal and some of their amenity offerings to assist in driving up occupancy and rental rate. It's less per bed than we have spent on many of our other acquisitions but most of the assets were new, high-quality development and required little to no deferred maintenance.
— Richard Kelley and Randall Shearin