JANUARY ISSUE: Campus Crest’s Renaissance

By Gail Kalinoski, Contributing Editor

As 2015 begins, Campus Crest Communities Inc. has several big items on its to-do list. Finding a new CEO, closing on a $230 million acquisition and selling off assets are on the agenda, all part of a repositioning strategy at the student housing REIT. Following disappointing third-quarter financial results, the Charlotte, N.C.-based REIT’s board of directors announced in early November that company co-founder & CEO Ted Rollins and CFO Donnie Bobbitt had departed. Richard Kahlbaugh, the lead independent director on the board, stepped in as executive chairman & interim CEO. Kahlbaugh, a longtime member of the Campus Crest board, is also chairman, president & CEO of Fortegra Financial Corp., a revenue development company specializing in insurance products and services. Scott Rochon, the firm’s chief accounting officer, took over as CFO.
Aaron Halfacre, Campus Crest’s executive vice president and chief investment officer, said Kahlbaugh is known in the industry “as a lean operator.”

“Rick told the board he is willing and able to stay as interim CEO through the course of the strategic repositioning if that’s what’s best for the company,” Halfacre told Commercial Property Executive.
Kalhbaugh and Halfacre said during a Nov. 4 investors’ call that the biggest news besides the change in management was the long-awaited completion of the Copper Beech portfolio acquisition. The deal dates back to February 2013, when Campus Crest agreed to buy a 48 percent stake in Copper Beech Townhome Communities for $230 million, including $106.7 million in assumed debt. That transaction covered 35 student housing communities and two that were under construction, and gave Campus Crest the option to buy the remaining 52 percent interest in the portfolio. However, Rollins announced in August that the parties had been unable to come to agreement.

After joining Campus Crest in July, Halfacre traveled to State College, Pa., to renew conversations with Copper Beech founder & CEO Jack McWhirter in what Halfacre called “a show of discipline to our shareholders.” Halfacre explained that a deal would not have worked by the original deadline because it would have been dilutive to shareholders. Moreover, he added, McWhirter had concerns about tax implications. Since then, the parties have hammered out a deal for Campus Crest to acquire the remaining stake in 32 Copper Beech properties for approximately $60.3 million in cash, about $140.6 million in assumed debt and the issuance of 12.4 million operating partnership units. The deal was expected to close in late December or early January.
The deal is critical to Campus Crest’s repositioning solely as a student housing operator because it doubled the size of the company’s portfolio. “It achieves the scale that I would argue we have to have,” Halfacre said. He acknowledged that Campus Crest, which has ownership interests in 86 student housing properties with more than 46,000 beds across North America, lacked “good management practices. We weren’t thoughtful of every dollar.”

Among the bad news in the third-quarter report was a net loss attributable to its shareholders of about $130 million, or $2.01 per share, compared to net income of $3.7 million, or five cents per share for the same period of 2013. Investors have responded to the ups and downs, as well: Over the past year, the stock price has ranged from a 52-week high of $9.76 to a low of $6 per share. The stock, which trades as CCG on the New York Stock Exchange, opened on Nov. 4 at $6.33 per share and closed at $7.26, a 15 percent increase, on the news that Rollins and Bobbitt were out and Campus Crest was stopping its construction activities.
The stock received another boost after Campus Crest released a list on Nov. 20 of nine land parcels available for disposition. The properties, in various stages of entitlement, included sites in Allendale and Mt. Pleasant, Mich.; Bellingham, Wash.; Boca Raton, Fla.; Sacramento, Calif.; and Tempe, Ariz. Bids were due on Dec. 3. Halfacre said he received numerous bids that were all “very competitive.” He added that some investors were looking to “do portfolio deals, taking six or all nine.”

Campus Crest also plans to put other parcels up for sale, including potential retail development locations. Some parcels contiguous to existing assets will be retained for possible expansion, but in a departure from past practice, Campus Crest will seek a third-party developer for any new projects. Halfacre cited multiple reasons for its exit from the development business.

“One, I don’t think we were executing it well. Two, as a REIT it is OK to have development activity. But when you run yourself as a developer and not as a REIT, you tend to get risk associated with you, and you don’t trade as well—and we saw that,” he told CPE.

Brad Thomas, editor of The Intelligent REIT Investor, agreed that was part of the REIT’s problems. “They had too much development risk. A development component with REITs is very difficult unless you have acumen for that. Thomas also cited the REIT’s decision to expand outside the U.S. In July 2013 and January 2014, Campus Crest formed joint ventures with Beaumont Partners SA to acquire two hotels in Montreal for about $120 million and develop them into high-end student housing as part of the evo brand. Campus Crest manages both properties, known as evo Centre-Ville and evo Vieux-Montreal.

Renovations were delayed, however, so that the properties were only 11 percent leased at the start of the current school year. “Why in the world did they go up to Canada to fill up dorms when there are plenty in the U.S.? That was a head-scratcher,” Thomas added. “They ended up delivering the product late, which is one of the worst things you can do.”

Halfacre, a former senior vice president at Cole Real Estate Investments who joined Campus Crest after the expansion into Montreal, told CPE the goal now is to exit Canada or at least significantly reduce the firm’s exposure. His frank assessment of the expansion: “If I was here, I would never have made the deal because it’s not a good investment.”

While the two evo assets in Montreal have underachieved, a third evo property is faring much better. In Philadelphia’s University City district, a joint venture of Harrison Street, Brandywine Realty Trust and Campus Crest recently completed evo at Cira Centre South, a $158.5 million, 850-bed tower. At 33 stories, the property is the nation’s tallest student housing facility. Brandywine and Campus Crest each own 30 percent and Harrison Street owns 40 percent. At the beginning of the school year, it was about 50 percent leased. Halfacre said the REIT expects long-term success for the Philadelphia property.

As part of its restructuring process, Campus Crest is working with Harrison Street, its longtime joint venture partner, to identify assets to sell, Halfacre said. Three of the four development projects slated for 2015 will be joint ventures with the Chicago-based real estate private equity firm. Some of those were included in the nine sites listed for sale in late November, he noted.

Of the 12 properties owned jointly by Campus Crest and Harrison Street, some will likely be sold to third parties. For others, Harrison Street will either acquire Campus Crest’s stake or vice versa. Reducing the REIT’s joint venture exposure is an important piece of restructuring because JVs provide too little balance-sheet transparency, Halfacre explained.

Another priority is cleaning up Campus Crest’s balance sheet through such steps as efficient rent collection and controlling expenses. The company had previously announced the elimination of 45 jobs, most of them development related. “We are focusing on becoming a leaner, more productive campus housing enterprise,” Kahlbaugh told analysts and investors on the Nov. 4 call.

While Kahlbaugh serves as interim CEO, a search for a permanent chief will kick into high gear this year as several new members join the board of directors to help vet candidates. In early December, Clinton Group Inc., which owns approximately 0.8 percent of the company’s outstanding shares, notified Campus Crest that it intended to nominate four people for the board; Campus Crest responded by noting it had hired Korn Ferry to conduct a search for qualified independent directors and would include the Clinton Group nominees.
Joseph De Perio, senior portfolio manager at Clinton Group, said in a statement that a newly constituted board may eventually decide that “the best way to maximize value to shareholders is to position the company for a sale.” Others following the company, including Thomas of Intelligent REIT Investor and Craig Kucera, an analyst with Wunderlich Securities, also raised the possibility.

When asked on Nov. 4 if they were considering a sale, however, Kahlbaugh and Halfacre said there were no current plans. “There is a real opportunity to operate this portfolio of assets in a very profitable and healthy way,” Halfacre said. “I can see personally and professionally there is upside here.”