Inside the American Campus Communities and Kayne Anderson Sale

by Katie Sloan

Austin, Texas The acquisition is characteristic of ACC’s quest for top assets, and plenty of them.

The 475-bed West 27th Place near the University of Southern California was part of the acquisition.Austin, Texas — American Campus Communities’ acquisition of 19 of Kayne Anderson Capital Advisors’ student housing investment properties may not yet compare to the caliber of consolidation seen in other commercial real estate spheres like multifamily or self-storage, but the transaction furthers ACC’s goal to be a consolidator in the still fragmented student housing market. In a follow up to last week’s transaction — which is the largest to date in 2012 in the student housing sector — SHB interviewed ACC’s CEO, Bill Bayless, and Al Rabil, managing partner of Kayne Anderson Real Estate Advisors to get inside the deal.

With the deal, ACC will acquire properties across the country that are an average of 3.7 years old, with 75 percent of the properties located less than one-third of a mile from major university campuses in high barrier-to-entry markets. The $862.8 million purchase consists of the assumption of approximately $396.2 million of outstanding mortgage debt and $466.6 million in cash. ACC is planning $12.3 million in amenity upgrades, capital improvements and ACC’s branded “curb appeal” to drive occupancy, which CEO Bill Bayless says is the company’s initial focus for these new assets.

Currently, the Kayne portfolio is 92.3 percent occupied, while ACC’s same-store portfolio is at 97.4 percent. All of the 19 properties, which are currently managed by six different third-party student housing management companies, will be owned and operated by ACC.

“One of the unique opportunities in the Kayne Anderson acquisition is that we can bring American Campus’ premier proprietary student housing operating platform to bring significant efficiency and effectiveness under one centralized management structure,” Bayless says. “We expect the portfolio to immediately benefit from the sophistication of our operating platform.”

Sophistication is a word both the buyer and seller would use to define this deal. Kayne Anderson has been cautious but confident in its investment approach in college communities, asserting that while well-disciplined capital should be aggressive, investors shouldn’t rest on the idea that lower-cost college education at Tier 1 state schools — as compared to competing private institutions — and rising enrollment naturally leads to the idea that student housing investment is an easy ride during down cycles.

“Student housing has historically been recession-resistant, and I think it will continue to be so, but that shouldn’t be an accepted sound bite,” says Al Rabil, managing partner at Kayne Anderson. “I think that if we had an extended economic malaise, it would impact people’s ability to pay for 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.”

American Campus is equally assertive and selective about where the REIT’s low-cost capital is deployed and how its acquisitions and developments will affect shareholders. ACC researches markets yearly, including which programs universities are seeking to grow and to cut as well as the type of student college administrators are aiming to court to keep enrollment and tuition dollars flowing at the level institutions need to survive and compete.

“One key part of ACC’s growth story is that we have never been a growth-for-growth’s-sake company,” Bayless says. “We are always focused on the qualitative nature of our growth.”

ACC’s IPO was in 2004. Large acquisitions since then include the Royal Properties portfolio in 2006 (13 properties, 5,710 beds, $244.3 million), the entire student portfolio of GMH Communities Trust in 2008 for $1.4 billion, and the Campus Acquisitions buy of 15 properties for $627 million earlier this year. With the Kayne Anderson announcement last week, ACC is on track to meet its goals of piercing the fragmented sphere of purpose-built student housing. Approximately 4.5 percent of the 5.6 million off-campus beds are controlled by the top 10 owners in student housing, Rabil says.

“Since we went public in 2004, being the consolidator of the industry has been an objective for us,” Bayless says. “There’s no one out there who has the dominating market share of the overall sector.”

As ACC’s public competitors, EdR and Campus Crest Communities, continue to gain strength, Rabil says it wouldn’t be surprising to see increased, and possibly new, activity in the public space, and Bayless spoke at the recent NMHC Student Housing Conference about lessons learned as his company went public.

“A lot of the student housing companies initially had some difficulty in the public sector,” Bayless says. “We certainly welcome newcomers to the space, but if you’re coming in and considering the public market, you really have to understand the level of scrutiny and sophistication you have to have in your operating platform to be successful.”

Part of that success is the ability to first acquire a “core” asset at a good price, and then to operate and invest in it with a calibrated goal of driving net operating income.

“One of the things we love about the Kayne Anderson assets is that they are relatively new,” Bayless says. “Whenever we buy assets that were not American Campus designed and developed, we always see opportunities to improve the curb appeal and sometimes the space planning of common areas.”

With two large buys accumulated in a short period of time, Bayless says ACC will continue to balance its mix among development and acquisitions. In its recent earnings call, ACC updated the market that it has added 67 new Class A assets to its portfolio, 45 through acquisitions and 22 through development. This fall, ACC put 11 new development properties into service, six of which were on-campus communities financed under its ACE program, including a high-rise development on the campus of Portland State University.

“Portland State is one of the more exciting projects we opened this fall,” Bayless says. “It may be the coolest urbanThe high-density University Pointe at Portland State University opened this fall. ACC says it will remain active in on-campus development as well as off-campus development. infill, high-density residential student housing in the nation. We’re very active in the on-campus development world.”

Kayne Anderson identified ACC as the buyer it wanted to go with at the end of June. When the firm launched its Fund I in 2007, it had an exit strategy of selling a high-quality portfolio to a consolidator looking for scale, with low-cost capital.

“Since our IPO, we have outperformed the Morgan Stanley multifamily REIT index, all of our student housing peers, the Nasdaq and the S & P,” Bayless says. “We’re very proud to be the success story in the sector.”

— Lynn Peisner

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