When the University of Kentucky decided to revitalize its student housing last year, it had a number of viable contenders to perform the task. Ultimately, the school chose Memphis-based REIT Education Realty Trust (EdR) to redevelop its housing in two phases and hold the properties under a 50-year ground lease.
In Phase I, EdR will develop, construct, and eventually own a 601-bed, $25.8 million freshman honors housing community under a long-term ground-lease with the university. The university and EdR are talking about a Phase II, which is anticipated to include the systematic demolition of nearly all of the university’s current 6,000 on-campus beds and an expansion to 9,000 new residence-hall beds in the next five-to-seven years.
It’s a big task and, ultimately, the school wanted someone that not only had a balance sheet, but also the transparency to handle the job. “We agreed that being public definitely helped because we had to have someone who was transparent,” says Angie Martin, vice president of financial operations and the treasurer at UK.
The Advantages of Transparency
Kentucky’s attitude toward public companies didn’t surprise Andrew J. McCulloch, a managing director for Green Street Advisors. “Being public means much more financial transparency than their private market counterparts,” he says. “Universities find comfort in the fact that they can use public SEC filings to continuously monitor ACC’s and EdR’s [EdR and Austin-based American Campus Communities are the two major student housing REITs] financial health. Additionally, access to public equity gives ACC and EDR a distinct cost of capital advantage and access to liquidity at all points of the cycle.”
If the privatization at the University of Kentucky works (it’s considered the first complete privatization of housing stock at any big school across the country), many people in the student housing business expect other schools to follow. If that happens EdR and ACC could be fielding a lot of calls.
“There isn’t meaningful competition in terms of scale, financial wherewithal, and financial transparency that is so important to a university board,” says Paula Poskon, a senior research analyst with Robert W. Baird & Co. “It will be very hard for private companies to compete for the outsourcing of an entire university’s housing.”
More IPOs to Come?
Despite the appeal of the public markets for student operators, so far there haven’t been many IPOs. Charlotte-based Campus Crest Communities went public last year after overcoming some initial hurdles. Getting through the gate isn’t easy.
“Potential IPO [Initial Public Offering] candidates need scale, an operating track record, experienced management team, a sound corporate governance structure, strong balance sheet, and a unique story,” McCulloch says. “Otherwise, IPO pricing would likely come in below NAV [net asset value].”
Right now, McCulloch says he can’t pinpoint any other student IPOs. Either can Poskon. “There are companies that would probably like to, because of the opportunity,” she says. “The problem is nobody wants to be the seller. Three or four guys need to get together, merge, roll it up, have a private equity partner, and go public with scale. But nobody wants to step aside. That’s part of the problem.”
One company with the footprint and reputation to consider an IPO is Philadelphia-based Campus Apartments. CEO David Adelman begrudgingly acknowledges the possibility. “It’s safe to assume that at some point in time, it would make sense to be public, but we’re in no rush,” Adelman says.
Of course, if a couple more University of Kentucky-type projects come through the pipeline, it may speed up Adelman’s timeline.