Q & A with Kayne Anderson’s Al Rabil

Armonk, N.Y. Kayne had been planning for a consolidator to buy properties when fund started in ’07.

25Twenty near Texas Tech in Lubbock is among the 19 properties ACC will acquire from Kayne Anderson. This property was developed in a joint venture between Kayne Anderson and Asset Plus Companies. It opened in summer 2011.Armonk, N.Y. — The 19-property portfolio American Campus Communities will acquire from Kayne Anderson Capital Advisors for $862.8 million is one of the largest trades in student housing to date. It enforces the industry’s definition of core asset and, with the recent $627 million purchase of 15 of Campus Acquisitions’ properties, sets ACC apart as a consolidator in student housing.

The acquisition of the existing properties, which is expected to close in December, consists of the assumption of approximately $396.2 million of outstanding mortgage debt and $466.6 million in cash.

SHB spoke with Al Rabil, Managing Partner at Kayne Anderson, about the history of this student housing mega deal, and what it might mean as the industry grows up.

SHB: Describe the history of this transaction.
Rabil: We went out in April with a 32-property portfolio. At the end of June, we had identified ACC as the buyer we wanted to go with. We agreed mutually to focus on 20 of the 32 properties in the portfolio. We signed the purchase and sale agreements on Sept. 4.

SHB: What will this mean for your investors?
Rabil: Of the 20 properties that ACC is acquiring, seven are from Fund I and 13 are from Fund II. The metrics are very good for fund investors. There are still properties left in Fund I, some of which we are going to market for sale, and the 13 properties in Fund II represent about 27 percent on a cross basis of the total equity commitment for $575 million. We continue to invest in Fund II. It will be business as usual. We will invest the remainder of the money in Fund II. About $150 million of that is already invested with a pipeline and agreement in place on an additional $100 million, approximately.

SHB: Does this transaction represent a shift in Kayne Anderson’s strategy as it relates to student housing?
Rabil: No. This is exactly what we said we would do. When we launched Fund I in December 2007, we said that we would use capital expertise and entrepreneurial capability to accumulate a very high quality portfolio that we expected to sell at a premium exit price to a larger buyer — a consolidator — somebody who was looking for scale who has lower cost capital.

This is exactly what we told our investors we would do, and that’s exactly what we did. There’s no shift in strategy, we’re continuing to execute on that strategy going forward.

SHB: Making future acquisitions, will Kayne Anderson continue to look for the same “core” qualities that drew ACC to this portfolio, such as close to campus, class A, etc.?
Rabil: We certainly feel that what we want to buy are Tier 1 assets in barrier-to- entry markets that are best-in-class properties. I do see some caution flags. There is some over-building, and I think we need to discipline new capital.

The important aspect of that is acquiring those type of assets at a price point that makes sense. You can certainly go out and buy beautiful, highly amenitized, Class A, Tier 1 assets, but if you overpay, you’ll have a very beautiful but low-returning portfolio. It’s not rocket science and there’s no great epiphany in that.

We’ve established ourselves in the space not just as well capitalized, but as a creative entrepreneurial buyer who looks for solutions, and we do a lot of repeat business.

A lot of sellers in joint venture partners that we deal with recognize that we bring problem solving mentality to the table. Obviously, we bring capital as well. I think it’s the combination of those things that has led to our success.

SHB: Do you see any possible caution flags in consolidation?
Rabil: As industries mature, they consolidate. I think it’s the natural course of things. The transaction volume in student housing, the number of interested buyers and the institutional interest in the space all bode very well for student assets. I think any yellow flags have to do with capital discipline and the potential for over-building. Student housing has historically been very recession-resistant, and I think it will continue to be so.

I don’t think that should be an accepted sound bite, however. I do think that if we had an extended economic malaise, it would impact people’s ability to pay for student tuition and housing. You can’t just rely on historical metrics and point to the fact that enrollment may be going up, or that the percentage of full-time students is high, and therefore you can expect a supply-constrained market.

We are seeing that in some markets students are commuting from farther and farther away. Over time, you have to be cognizant of distance learning and the Internet and what types of educational opportunities those methods offer. All that leads up to us wanting to be at schools that we feel will not be negatively impacted by these trends.

SHB: Putting on your industry analyst hat, what do you see ahead?
Rabil: I think ACC could see some new competition, both privately and publicly, going forward, but this market remains highly fragmented still. Only 4.5 percent of the 5.6 million off-campus beds, plus or minus, are controlled by the top 10 owners in student housing.

— Rich Kelley and Lynn Peisner

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