SHB Interview: Alex O’Brien, CEO of Cardinal Group Cos.

You might have noticed that Cardinal Group Companies has been making moves. Over the past five years, the company has grown its third-party management business — a lot. Now managing more than 70,000 beds, the company has moved from Number 15 in 2015 to Number 4 in 2020 on SHB’s ranking of the Top 25 student housing managers. 

In addition, Cardinal partnered with TPG Capital to acquire a portfolio of six student housing properties from Preferred Apartment Communities (PAC); a portfolio that was not only the largest group of assets to trade thus far in 2020, but was also very sought after by a range of institutional buyers. 

As if that weren’t enough to make headlines, Cardinal named Alex O’Brien, one of the company’s four original partners, to the CEO post in April, elevating him from president and chief operating officer. SHB recently spoke with O’Brien about his new role, as well as the continual growing presence of Cardinal Group in the industry. 

SHB: Let’s start with the most recent development for Cardinal Group. How did the transaction with TPG come about?

Alex O’Brien: We have continued to expand our capital relationships over the past few years. Although we have always been an owner/operator, we have started to build a bigger reputation as an operator. But our management assignments have led us to more investment opportunities. We had been working with TPG on a different strategy, where we were focused on investments in college towns, but not student housing related. That allowed them a peek behind the curtain into student housing, however, with our operation. I think they saw our commitment to the business, and to our equity partners. The other investment opportunity didn’t come to fruition. As the Preferred Apartment Communities portfolio became available again, we chose to work on acquiring that together. It was a crazy year to do a large transaction, but I think it really highlights the strength that TPG brings to the table and our student housing expertise. We made quick work out of the due diligence, and the transaction itself went very smoothly. 

SHB: Can you tell us about getting a deal like this done this year, during the pandemic? 

O’Brien: COVID, to some extent, reduced the number of groups that could get a transaction like this done. A sponsor like Cardinal Group with an equity partner like TPG is a strong combination. Jaclyn Fitts and her team at CBRE did an amazing job of representing the seller. Eric Frank, our chief investment officer, and Greg Martini, our vice president of acquisitions, know the student housing markets inside-and-out. They also knew this portfolio and what we were getting. Their knowledge helped the seller choose us. 

SHB: This portfolio had been on the market before and didn’t transact. Did you get a discount?

O’Brien: No. This is great real estate. PAC did an amazing job of compiling these properties into a portfolio. These properties are very well run; their team did a great job. There was no COVID discount. This was a hard year to push rents because of COVID. In a normal year, this portfolio would have been able to achieve rent growth. We probably received a perceived discount based on the inability to push rents last year due to COVID. The student housing industry in general is seeing a flight to quality in terms of markets and assets. 

SHB: Where is the value-add in these properties?

O’Brien: These properties range from 2009 to 2018 in age, so there are some newer assets that are in great condition and some older ones. We are going to invest some additional capital in some of the properties. We’re going to rebrand them and invest some money in units and common area improvements. It’s the same playbook we’ve run since we’ve started. All of these properties are in good markets and are strong performers. With normalcy, we expect to add value to these properties through operations. I would describe the portfolio as core-plus, with some value-add opportunity. 

SHB: Cardinal started as a small investor in student housing. Can you walk us through your history?

O’Brien: We like to joke internally that we are an overnight success 10 years in the making. We’ve always been operators at heart; that is unique to the DNA of Cardinal Group. Some companies are developers that happen to do property management or an investor that does property management. We have always seen the value that you can add in niche real estate through operations. That’s our business plan. We make smart decisions and we’ve built a platform of scale. We started as an owner/operator because we only trusted ourselves to operate the properties we owned. In hindsight, when we started our third-party management division, it was a crazy decision knowing what we now know about the importance of scale and the ability to attract talent. When we started to get a little growth, we realized we had to scale our management business in order to keep the lights on. If, at any point, we wanted to sell our holdings, we would have had to drastically reduce the talent on our management and operations teams. While we’ve grown an unbelievable culture and team, we really view it as just getting started. There’s so much opportunity in front of us. With great performance, we think more opportunity will come our way.

SHB: All of your original partners are still active in the business as well, yes?

O’Brien: That is one of the most unique things about our company; the founding partners are still together, still friends, and still running the business. A lot can change between being an entrepreneur and being a large, successful company with hundreds of employees. You generally don’t have the same partners the whole way through, so it has been rewarding to still be together after 14 years. I would attribute that to our humility and putting our team first. The four of us have stayed aligned in our business plan. We rarely sit down and all four agree on something, but that is ok. We’ve always agreed that the best idea wins. We started as a partnership that did that, so it’s no surprise that mantra is alive and well at Cardinal today. We set the example that, regardless of your leadership position, you don’t just get to snap your fingers and get whatever you want done. There is a real team component and collaborative process here. That is how the best decisions are made. Today, Eric Frank and Jason Luker are focused on the overall company platform, particularly our investment platform. They’ve really been patient and stayed true to our investment thesis in a time when there was incredible growth in our industry. They’ve really taken a backseat to the management and operations platform, which Del De Windt and I have really focused on for the past five years. Our whole organization has been focused on the growth of our management and operations platform, and where you focus is where your resources go. 

SHB: How does Cardinal operate its management company to differentiate itself?

O’Brien: When we were building our management company, we questioned a lot of what we did, especially why we were doing it. It is a low margin business. We always recognized, however, that management was where a lot of the value was that we were creating in our student housing properties. It is such an operationally intense business. Our management philosophy has a few components. The first is that everyone is better in a team than as an individual. In other management situations, everyone always pointed to the regional manager as the fail point. If you had a strong regional, things were great; if you had a bad one, they weren’t so good. We think that people with the right resources and training will do a great job. We didn’t want that hub-and-spoke model; we wanted to strengthen the entire team so that every regional manager could be successful. That led to our management theory of having as many resources as close to the field level as possible. Our model creates more of a cell of managers rather than a hub-and-spoke with the regional manager at the center. Others in the industry have started to copy that model, and we’re happy about that. Second, we have a great people-centric culture here. We think that a better human capital model is going to win the day for us. In order to pull that off, you have to have a better culture. You can have better tools, better training and better support, but all of that only works if the team cares about each other. Just because you wear the same jersey doesn’t make you a team. I credit Del De Windt for that, because he realized early on that we are in the people business and culture had to be at our center. That’s a continual goal of ours; we have a trophy case full of ‘best places to work’ awards. A culture engine that attracts talent in a business that depends on people has been a winning recipe for us.

SHB: You have attracted a lot of new talent this year. 

O’Brien: What was discovered about companies in the Great Recession was that companies who had a strong culture rebounded quicker. In 2020, as people took a step back and assessed where they were, Cardinal’s culture really shined and industry leaders like Jenn Cassidy, Carlos Gonzalez and Madison Meier all decided they wanted to grow their careers with Cardinal Group.  When we look back at the Great Recession, we are proud at the way we took care of our people. The same this year; we fought any conversation on furloughs or pay cuts. We have a company of superstars already, and we are always pleased to have more join us.

SHB: On the portfolio side, how much does Cardinal manage versus own?

O’Brien: We own about 12,000 beds via our first fund that we put together in 2018. The PAC portfolio is a pretty significant addition to that. We see the opportunity in the times ahead to acquire more student housing. We have the capital to deploy, and in early 2021 we are going to raise a second fund to acquire more. On the management side, we have about 58,000 beds under third-party management; we have a total of approximately 70,000 overall under management. We want to continue to build both platforms. We originally thought we would have some magic ratio, but we would rather be opportunistic on the acquisition side and continue to deliver results for our management clients. 

SHB: Could you talk about your construction arm, and other parts of Cardinal Group that people may not know about?

O’Brien: The Cardinal culture really is a seed that helps grow new businesses — if they follow the same commitment to excellence and they focus on people and culture. Agency53, which is our advertising and marketing firm — who does not just serve Cardinal Group by the way — has done an incredible job introducing new marketing initiatives to the student housing space. They are doing the same in the market rate space now. Agency53 stems from Cardinal Group’s focus on innovation and technology. Cardinal Construction helps with renovation and value-add campaigns primarily. That is a big part of our real estate strategy. That strategy requires a strong construction management platform. We are entrepreneurs at heart; we believe in rolling out new products and services that our clients need. Both Cardinal Construction and Agency53 are examples of that. 

SHB: You became CEO about eight months ago. How has that gone?

O’Brien: The four founding partners have always put the team and the company first. After 10 years, we really were at a point where we were ready to enter a new chapter. We’re turning the page from a startup to a large company that wants to grow. That somewhat fit my skillset more. As COO, I was working day-in and day-out on growth strategies. I was a Marine Corps officer and I have an MBA; my partners felt that that background was best to take this business and scale it. Despite my operations focus in the past, I love the external relationship piece of leadership. I was humbled to take the CEO role. I have big shoes to fill with the growth that Del created. In my first 100 days as CEO I had to deal with a national conversation on race relations and a global pandemic. It has been an interesting time to take the role on, but it is an honor to lead the organization through this time. I also have an amazing leadership team here; this is by no means a one-man show. 

SHB: Where do you see the industry overall? 

O’Brien: Even before the virus hit, everyone was kind of recession-minded in the student housing industry. Certainly, prices of real estate had become frothy. This period isn’t going to have a traumatic impact on our space, but I think it will slow things so that they cool off a bit. The debt markets have to restabilize. There will be a lot of capital coming off the sidelines eventually. My hope is that our platform is positioned to be one of the few operating partners that capital wants to align with when they re-enter the space. This has been an interesting moment in time, though. Student housing has proven itself resilient again, even in some really strange situations. Even though national enrollment took a really big hit, student housing held its own. While we don’t have a crystal ball, we see progress on the vaccine as a positive indicator that COVID will get under control. We have positioned ourselves well to weather this year and set ourselves up for a strong move-in in fall 2021. The challenge for this year is really rates. That uncertainty has a big impact on our industry since we are always pre-leasing for the future. Like last year, we should be able to keep occupancy and collections strong, but we don’t think we will have a full recovery in fall 2021 on rate growth. Once the international students come back and universities are able to have all classes in-person again, things should return to normal. Following that, we have a huge cohort of high school seniors about to graduate, so there are sunny days ahead for student housing.

SHB: Would Cardinal Group ever look at getting into on-campus management?

O’Brien: We actually do some on-campus management through a partnership with Capstone Development Partners (CDP). We utilize their on-campus management team while providing a lot of the back-office support. We will grow our on-campus management through that partnership. CDP has done an incredible job. The partners, Bruce McKee and Jeff Jones, are well-known in the industry and they have a great leadership team. We view our role as backing their efforts and helping them scale their on-campus management. Looking ahead, if you look at state budget deficits and the challenges facing universities to make their budgets, this is going to be an opportunity for off-campus management companies to grow their on-campus skills. I think you are going to see more large-scale deals like the one EdR had with the University of Kentucky that’s now operated by Greystar since the merger.

SHB: How has your experience in the Marine Corps affected your career?

O’Brien: I view the Marine Corps as one of the most unbelievable business courses I ever took. It’s really a five-year course in leadership. At the heart of the Marine Corps is a servant leadership mentality; a lead-by-example mentality. I’ve always believed that the mission comes first; you have to be a servant leader and put others first. I try to set that example for other leaders as well. Leadership is not about the leader; it is about the people you lead. I look back at the lessons I learned in the Marines and try to apply them in my role as CEO.

This article was originally published in the November/December 2020 issue of Student Housing Business magazine.