Fortunately, with the help of Fannie Mae and a couple of stock offerings, EDR was able to do more than just survive. The REIT is thriving—analysts have “buy” ratings out for it; housing-depleted colleges are making calls to Memphis; and other developers are reaching out in an effort to seek partnerships.
“You go from a situation where you’re worried about their liquidity to one where they now have a lot of capacity,” says Paula Poskon, a senior research analyst with Robert W. Baird & Co., a Milwaukee-based wealth management, capital markets, asset management, and private equity firm. “That’s a very different EDR.”
How did the turnaround happen? With a lot of work and some drastic changes. Over a 24-month period, EDR saw two management regimes, a portfolio cleansing, an operations shake-up, and some help from Fannie. Today, the company has re-established itself as a model in the student housing sector.
“A year and a half later, they made a lot of improvements,” says Haendel St. Juste, senior analyst covering the REIT industry at Keefe Bruyette & Woods. “All of those problems have essentially been reversed. There are only two public companies currently equipped to build and deliver new student housing supply, and EDR is one of them.”
Here’s an inside look at how EDR changed its course—and the role new CEO Randy Churchey played in saving a sinking ship.
A Rough Start
Paul Bower had been with EDR and its predecessor, Allen & O’Hara (which now specializes in procurement services of furniture, fixtures, and equipment and operation supplies), since 1969. Becoming CEO in 1998, Bower ran the company as a private firm that was also heavily involved in the hotel industry.
To go public in 2005, EDR needed critical mass, so it began splicing together student housing portfolios from Dallas-based JPI, adding properties from Atlanta-based Place Properties soon after its IPO in early 2006. “We came out of the gate in 2005 all energized, and then we didn’t meet expectations,” says Randall Brown, EDR’s CFO since 1999. “Our stock price started to decline.”
In its first 10 earnings releases, EDR was forced to cut guidance six times, according to Poskon. Like many aggressive, entrepreneurial firms, the transition to the public domain was difficult. “We have learned the pain of overpromising and underperforming,” says chief investment officer Thomas Trubiana. “When you’re an entrepreneurial company, you’re always pushing. You still want to be aggressive and push, but you don’t tell people you’ll reach the stars.”
Some of the guidance problems came from incorporating new portfolios with which EDR had little operational experience (and thus had difficultly projecting). Other issues rose from the fact that the portfolios, specifically those acquired from Place, simply weren’t that great. “They overpaid [for Place],” McCulloch says. “It was a lower-quality portfolio that they simply paid too much for. For a company as small as they were, Place was a capital allocation decision that destroyed a material amount of value, and the market beat them up for it. Once you get beat up and put in the penalty box with investors, it’s hard to get out.”
The less-than-stellar IPO and returns set the stage for potential calamity in 2008, when the credit markets froze. Both JPI and Place had refinanced their portfolios before selling to EDR in 2005, and the debt on those properties would mature in 2009. “The financing market was turned on its head,” Brown says. “It was a very difficult time for most real estate companies and certainly for us, since we had nearly 70 percent of total outstanding debt coming due in 2009. The concern was: Would EDR be able to refinance and go forward?”
Righting the Balance Sheet
Despite being taken into conservatorship, Fannie Mae was still able to lend—and EDR took full advantage of that ongoing liquidity in an otherwise deserted landscape. After having recapitalization talks with a number of entities (including life insurance companies and banks), EDR secured a $350 million Fannie Mae facility to assist in the refinancing of its portfolios in December 2008.
In July 2009, EDR followed that move with a $120 million equity offering. “We used a portion of that to continue to pay off debt,” Brown says. “That helped alleviate the fears the market had.”
Having raised equity in 2009 and addressed its maturity issues, suddenly EDR faced no impairments to growing the company. Which is why, when Bower announced that he was retiring in mid-2009 after 40 years with the company, analysts commented that Bower never really felt comfortable in the public spotlight. Churchey, a former board member and battle-tested public company executive who had most recently been CEO of Great Wolf Resorts, decided to throw his hat in the ring. Part of the reason he was interested was because he liked where EDR was positioned to capture the explosive growth predicted for the student sector.
But there was still work to be done on the balance sheet. So in January 2011, EDR made its second equity offering, of $90 million. In the past two years, it has sold 12 properties for approximately $127 million. That’s given the company a lot of dry powder. At the time of the economic meltdown, EDR’s leverage levels were in the high–50 percent to 60 percent range. Now, after the balance sheet maneuvering, it’s down to the mid–40 percents. “Having the balance sheet we have right now puts us at a strong competitive advantage,” Brown says.
In the student sector, that advantage helps EDR in several ways. For one, it makes the REIT more attractive to construction debt. As is the case in the conventional apartment market, companies with cash are often in a position to partner with those that aren’t. In EDR’s case, that meant opportunities such as being able to provide 90 percent of the equity for a project that Columbus, Ohio–based Edwards Cos., a private student housing developer, wanted to build adjacent to the University of Alabama campus in Tuscaloosa.
“They had a great piece of land tied up,” Churchey says. “For a variety of reasons, the overall financing was not what they hoped for. So they came to us.”
But the greater advantage in the student sector may be with the colleges and universities themselves. In an era of shrinking state budgets and ballooning enrollment numbers, institutions of higher learning are feeling squeezed to provide adequate housing. That has made them much more likely to consider arrangements where a company such as EDR comes on campus, builds a project that it will own (and finance off of its balance sheet), and simply pays the university on a ground lease.
“One of the reasons you use a private developer is because it can be their capital that can fund the work,” says Louis G. Marcoccia, EVP and CFO at Syracuse University. Being transparent and public helps EDR sell itself to colleges. A good track record helps too. “They’ve been good to deal with,” Marcoccia adds. “We’ve had absolutely no problems with them. That’s why we’re doing a second project with them.”
In the midst of this stabilization, when Churchey arrived in January 2010, he knew that things needed to change for EDR to avoid falling into critical danger again. “You always like to say that you come in with an open mind, but everyone has preconceived notions of what needs to change,” Churchey says.
After Churchey arrived, two key senior executives left. “Within the first few months, he cleaned house,” Poskon says. “He also added a board member. All of this was overdue.”
The biggest changes came in operations, where Churchey put a “senior” in front of Christine Richards’ vice president of operations title and turned the property operations reigns over to her. He followed that promotion by changing out a number of his regional managers—in all, 30 percent of EDR’s operations team is new in the past year and a half. Churchey had selected a change-maker in Richards, who had a number of priorities starting out, with her main priority being the company’s technology—its revenue management systems, websites, and marketing infrastructure.
Poskon recalls visiting an EDR property in Phoenix around Halloween of 2009. When she went on the property’s website for information, she saw advertisements offering Easter promotions. Under Richards, months-past Easter promotions are a thing of the past. One of the first things Richards did was revamp the websites. “You can now schedule a tour online,” she says. “We can log in to Twitter and provide updates. That then feeds to Facebook and [the property’s] website. The content is constantly changing, which is what’s important to our students.”
Richards also standardized EDR’s brochures and signage, making templates that can be customized by property. The company is also aiming to have WiFi available at 100 percent of its properties this month.
On the revenue management side, up until last year, EDR relied on a simple, archaic Excel spreadsheet to let it know what floor plans were leasing, along with their velocity and price. The company had developed a reputation for chasing occupancy at almost any cost, minimizing its ability to push rents. Pricing changes weren’t made with any regularity. To fix that problem, Richards helped build EDR’s PILOT (Property Impact on Leasing and Occupancy Targets) program, which tracks sales by floor plan and lets her know how quickly each type is selling. Now, EDR has moved beyond Excel and makes weekly rate adjustments. “We look at velocity to see what’s moving,” Richards says. “We’re not leaving money on the table. We can alter something immediately if we outpriced ourselves. We can react a lot quicker.”
The boss is impressed. “The data that we now get to manage the business is greater than we have had before,” Churchey says. “We also stripped out a lot of extraneous stuff they were doing.”
For instance, regional and property managers used to be in charge of things such as reviewing bids to put a new fence on the property. Churchey decided that was something his construction group could handle. “That’s not what they need to do,” he says. “They need to please our customers, generate NOI, and focus on pre-leasing. Everything else is extraneous.”
Pruning the Portfolio
Richards wasn’t the only exec Churchey felt was underutilized. He also had student housing veteran and former Austin, Texas–based American Campus Communities CEO Thomas Trubiana on his board. Under Churchey’s leadership, chief investment officer Trubiana and his team have jettisoned the troubled Place buy. “[That deal] was a black cloud hanging over them,” McCulloch says. “He got rid of most of those assets, did it in a quick fashion, and at a reasonable price.”
Right now, only one of the three properties acquired from Place remains. Unfortunately, the sell-off didn’t create the optimism Churchey was hoping for. As EDR sold assets, it focused on replenishing its portfolio with properties closer to campus. “I think we now realize the importance of proximity to campus more so than the company did in the past,” Trubiana says. “Our emphasis on situations with high barriers to entry has taken on much greater importance as we evaluate acquisition opportunities.” In fact, EDR is aggressively adding assets closer to campus. Since the beginning of 2010, it has announced $240 million worth of development; since October 2010, it has made $80 million in acquisitions. The firm reinvested proceeds from the Place sales in three assets at the University of Virginia and a fourth at the University of California, Berkeley. In three of the four deals, it bought properties that weren’t marketed. The fact that it has gone to these highly ranked schools isn’t a coincidence. “We want to be adjacent to robust universities,” Churchey says. “In my view, robust means a reasonable-size enrollment, a decent-sized backlog, and equal to or above average tuition growth.”
With an almost entirely unused $95 million credit facility and the ability to find cash through preferred or common stock offerings or via the credit markets or even the cash on its balance sheet, EDR has a lot of ways to fuel continued expansion. Through 2011, EDR plans to start $90 million in development, with $155 million planned in 2012, and another $90 million in 2013. Some might argue that it’s getting a little too aggressive in development, but Churchey says that, unless a special situation arises (such as a school like Harvard asking EDR for 1,000 beds on campus), no one year’s deliveries will exceed the company’s total enterprise value.
There may even be bigger opportunities down the road. In an industry as fragmented as student housing, Brown expects there to be consolidation of smaller companies in the next couple of years. “To the extent that there’s an opportunity to participate in this consolidation, I think our investors would expect us to be on the lookout for that,” he says.
But given the changes Churchey has implemented, Wall Street is happy. In its most recent pre-leasing season, EDR’s occupancy levels, which were never a problem, are flat, but it’s forecasting a 4 percent increase in net rental rates for the upcoming leasing term, beginning in fall 2011. Churchey expects student housing demand to continue increasing 1.1 percent annually through 2017. With its operations fixed, portfolio pruned, and development engine fueled up, Churchey believes EDR is poised to capture this demand.
“We’ve done the heavy lifting,” Churchey says. “What we need to do now is tweak the business as we go along.”