Innovative Student Housing is making a push in third-party management by starting a NOI-based fee approach. It's also becoming an owner.
What started as the idea for a new way of student housing management has turned into one of the fastest growing companies in the industry. Adding almost 5,000 beds to its portfolio in just over two years, Houston-based Innovative Student Housing has begun a change in the way that some managers charge for student housing.
Innovative Student Housing was formed in 2010 after principals Doug Sherman and David Neef saw a change was needed in how to realize investor return on student housing properties. Both had come from other student housing companies — Sherman from Aspen Heights and Neef from Asset Campus Housing.
"We set out to provide the best value proposition in the industry for investors, students and their families," says Sherman. "That colors everything that we do."
Innovative Student Housing has a three-pronged approach to student housing: development, acquisitions and management. The company manages its own properties and does third-party property management. The company created an infrastructure and team and spent 2010 hiring and getting software and processes in place to create a best-in-class, one-of-a-kind platform. It saw a need for a more intensive, on-the-ground management that optimizes net operating income.
"Student housing is one of those industries where the difference between market and best practice creates a significant difference in net operating income," says Sherman. "You can see an improvement upwards of 20 percent by having better management in place at the market level."
Innovative created a cost-plus management fee structure where it ties a portion of its management fee to net operating income rather than top line revenue, which is the industry norm.
"We felt that this brings us a unique alignment with our management and the owner," says Neef. "The premise allows us to think like an owner and it makes us develop our operating systems as the most efficient possible."
NOI is the benchmark of the company; from the top down, all managers are incentivized based on the controllable NOI of properties.
"Everything from our financial reporting to our overall goals ties back to net operating income and that NOI benchmark," says Neef. "We think that message resonates well with owners and we are proud to say that other companies are now following this approach."
The method has created results. The first property that Innovative began to manage involved replacing a well-known national company. The NOI of that property has risen 40 percent over two years. While these results aren't going to happen at every property, Neef and Sherman say this property adds proof to the pudding.
"It is a picture of what an NOI-focused manager can do as opposed to what a fee-driven manager will do," says Sherman.
Since early 2010, the company has added almost 5,000 beds to its management and ownership portfolio. Innovative ultimately would like to have ownership interest in about 35 to 50 percent of its portfolio.
"We aren't aspiring to be the largest third-party property manager in the country," says Neef. "We want to be a hands-on manager, with an executive team that's involved at the property level."
As investors in other student housing properties, owning was also a goal for Sherman and Neef through Innovative. In May 2012, the company acquired its first student housing property, The Gates at Rexburg, near Brigham Young University-Idaho. Innovative partnered with Harrison Street to acquire the 612-bed property. In December 2012, the company closed on the acquisition of a 288-bed luxury student housing property called Taylor Bend in Oxford, Mississippi. Innovative plans to add more beds to this project through an expansion in the future. In February 2013, Innovative will close on a 1,000-bed student housing development in Rexburg, Idaho, and another acquisition in Valdosta, Ga.
Innovative does extensive market research with student focus groups. That has given the company a wealth of understanding of student needs and wants. The company conducts these focus groups in every market to find the nuances of each student population. That helps it create the best development in the market.
With its acquisitions, Innovative wanted to be able to provide strong properties for the markets. It wanted its capital partners to be able to acquire properties that weren't being widely marketed, so they could acquire great assets without entering a bidding war with other investors.
"If we could acquire properties off-market, we knew we could provide more upside potential," says Sherman.
Similarly, it looks for development and redevelopment projects that provide strong additions to the market, and strong deals for investors.
"We want to develop projects that will be the best value proposition in the market from both the operator standpoint and the investor standpoint," says Sherman. "The product has to be superior and achieve top ranks from the student population. That equates to above-market returns with a better yield for investors."
The company is in the process of closing on its first development site, also in Rexburg, Idaho, which will have just over 1,050 beds.
— Randall Shearin