In a way, the seeds planted by American Campus Communities (ACC) in 1994 blossomed late last year.
The Austin, Texas–based REIT did its first of 61 on-campus deals at Langston University in Oklahoma 18 years ago, when the concept of privatized student housing was still in its infancy.
Now, in the wake of the University of Kentucky's deal to outsource its entire campus housing portfolio to Memphis, Tenn.– based REIT EdR, the privatization trend has matured, albeit in fits and starts.
Before Kentucky, there was Arizona State University (ASU) in Tempe. Since 2000, the school has developed approximately $700 million in new campus housing facilities, with approximately 9,500 beds under privatized structures with six providers. Meanwhile, ACC is building 5,000 beds in five different projects and is also performing maintenance for 7,972 beds.
“ASU is the poster child of student housing privatization,” says Bill Bayless, CEO of ACC. “Kentucky is beginning a program, but you wouldn't see a Kentucky without an ASU.”
Along the way, a who's who of universities, like Princeton and Johns Hopkins, has dabbled in privatized on-campus housing. The University of California–Irvine, alone, has 4,000 privatized beds.
Indeed, student housing has long since shed its tag as a small niche and is now the darling of Wall Street and private equity. And with more students coming through college gates every year, coupled with ever-growing financial pressures on schools, there's room for a lot more maturity.
The question is, who in the widely fragmented industry will be able to take advantage of this opportunity?
A Progression Over Time
In the late '90s, colleges and universities were keenly focused on limiting the risk that new housing projects had on their balance sheets and credit facilities. So they established “related” real estate foundations and other entities to eliminate or minimize that risk.
That's when the private sector stepped in. Birmingham, Ala.–based Capstone helped set up nonprofit, charitable 501(c)(3) foundations to own on-campus developments. The developer secured Moody's Investors Service to rate bonds to finance the deals, and it pioneered the use of nonrecourse debt to fund on-campus student projects. Before that, universities used only the general obligation or auxiliary debt of the institution to fund such projects.
“I think quite possibly our actions in the late 1990s started some movement toward greater university consideration of alternative means of development, management, and financing—but many have contributed variations and enhancements along the way, and more will continue to materialize in the years to come,” says Mike Mouron, CEO of Capstone.
Though Moody's and Standard & Poor's (S&P) have begun to scrutinize how much these 501(c)(3) entities really affect a university's credit capacity, the trend toward privatization as a way to update aging student housing stock continues. And that trend has particularly benefitted the big student housing players.
“You're seeing flagship institutions saying, ”˜We should be taking limited capital dollars and devoting them to our core academic mission,'” Bayless says. “You're seeing the outsourcing of the development of student housing.”
Despite that movement, no large school had decided to outsource everything until last winter.
“The University of Kentucky is the first major land grant institution that has said it's going to revitalize its campus and have a public company like EdR actually own and operate its housing,” says Tom Trubiana, chief investment officer of EdR.
The UK Proving Ground
For several years, the University of Kentucky had been watching the student housing industry and trying to decide how to deal with its aging housing portfolio. When Dr. Eli Capilouto became president in July 2011, he made housing a top priority. After the school's board of trustees asked him to focus on student facilities in October, things moved quickly.
“It became a race to see how quickly we could transform the campus for our undergraduate students,” says Angie Martin, vice president of financial operations and the treasurer at the University of Kentucky. “Going through this, it became evident that if we could make a privatized housing arrangement work, that might be our best option.”
Martin says privatized housing appealed to Kentucky because it was “the best arrangement” for its students, but there were other major drivers, as well. The Kentucky General Assembly has to authorize all projects and any debt the university wishes to issue, and it stipulates that all debt must be amortized over 20 years.
“That will hinder our rate structures, because we have to pay it off so quickly,” Martin says. “How do you make a 20-year payback fit inside a rate schedule for a student? It's very difficult to do that, especially with the magnitude of what we need to replace. We asked [ourselves] if we could get into a partnership arrangement [with a private student housing provider] where the return off their investment is structured over a longer period of time, therefore smoothing out the rate increases.”
After it determined that was possible, the university quickly came up with a way to preserve its credit capacity while adding sorely needed modern housing. In late 2011, it chose 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.
UK and EdR are also 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.
If it works, Trubiana expects other schools to follow the Kentucky model.
“I don't think this is a one-time situation,” he says. “It's very important because of this magnitude. It needs to be successful in the eyes of the University of Kentucky. I know there are a lot of schools, and even systems, that are looking to Kentucky to see how this all works.”