Student Housing Business

JAN-FEB 2018

Student Housing Business is the voice of the student housing industry.

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COMPANY PROFILE StudentHousingBusiness.com January/February 2018 81 Phillips, with one of the key principals in the Oxford project, Dave Cocagne, CEO of Chicago- based Vermilion Development, formed a new entity, VerTex Student Housing, in joint venture with Harrison Street Real Estate Capital to acquire student housing properties. While Roger Phillips focused on finance and acquisitions, Sandy Phillips was busy focusing on the turnarounds of the properties. "Through watching some of Sandy's work and some of the success we had working together, we knew operations was our real strength," says Roger Phillips. "Our belief was that we could take distressed properties and improve them through prudent capital expenditures or more efficient operations. We really thought, 'what is good today, can be better tomorrow.' We were fortunate that our timing in the cycle was good; coming off the recession, we were able to make some strong buys of distressed assets at a comfortable, risk adjusted basis." From 2013 to 2015, the VerTex joint venture acquired four value add properties, turning them around over a several-year period. In 2017, the venture began selling the assets to realize its return. Turnarounds for TEXLA have run the gamut. The company per- formed several full interior ren- ovations of communities it has acquired. These included new paint, flooring, kitchen cabinets and countertops, bathroom reno- vations and other improvements. The company did a few full reno- vations on its clubhouses as well, though it generally avoided any architectural changes on the units themselves. "We are usually not moving walls or combining units," says Roger Phillips. "We are usual- ly trying to stick with cosmetic changes." The VerTex joint venture pur- chased its latest property, the 792- bed Element near Sacramento State University in California, in December 2015. The project was built in 2004 and had not received many upgrades since. Over its 18 months of ownership, VerTex turned the project around with improvements to the interiors of the units. The project was sold in September 2017, much earlier than originally forecasted, as the business plan had been met and surpassed. "The internal rate of return for the properties sold over the last year far exceeded the upper teens originally forecasted and under- written on business plans," says Roger Phillips. He adds, "We have well out- paced our commitment to our investors." The VerTex venture with Harrison Street has been success- ful for both parties. With the sale of four properties in 2017, TEXLA is seeking to place a lot of capital in value-add projects in the stu- dent housing sector in 2018 and beyond. "We are, without a doubt, Harrison Street's smallest partner on the student housing front," says Roger Phillips. "From the acquisitions side of the business, though, we have both enjoyed a lot success with our acquisitions." The industry has changed tre- mendously since TEXLA began acquiring properties. For one, because real estate is healthier, the number of available distressed properties is smaller than it used to be. For another, the increased amount of equity capital in the space has increased the competi- tion that TEXLA sees when it goes to acquire properties. Because it is small, TEXLA has no geographic boundaries. It has owned proper- ties from Georgia to New York to California. "We have to work twice as hard to get one-third of what we might have had a few years ago," says Roger Phillips. "If we are going to scale up, there is going to be little sleep in the near future to get to the volume that we want to achieve." Since launching, TEXLA has been careful to watch how large it grew. The company never wanted to be large enough that it couldn't turn on a dime. It has kept its executive staff small, choosing to focus on the properties. "We have principals that are in the day-to-day operations of the properties," says Roger Phillips. "We are not delegating issues three levels down and expecting someone else to execute. That is one of the strengths that have car- ried us this far." Roger Phillips says that each one of the company's senior officers gets involved in turn every year. As it seeks new acquisitions, the company still owns one asset, University Trails, in College Station, Texas, and manages sev- eral student housing properties third-party for owners. The com- pany manages Campus Square, a former school that was converted to student housing in Binghamton, New York, near SUNY- Binghamton. That building was in bankruptcy for several years before TEXLA took over manage- ment for the lender in 2011. At the time TEXLA took it over in April, of 130 beds, only 12 were rented. TEXLA turned the project around by making simple changes at first — including adding heat to the building's common areas — and later adding other amenities like air conditioning in the common areas. By fall 2011, the company had changed the brand and iden- tity of the center, and it was over 90 percent leased. Today, the proj- ect is still performing strongly and has generated a lot of income for the owner, says Roger Phillips. TEXLA is growing its third-par- ty management business as well, making some key hires in that area to compliment the oversight of not only its owned assets but also those of other owners, performing property turnarounds and third- party management. "We are doubling down on hir- ing at a time when we have the least amount of assets under man- agement," says Roger Phillips. "We want to be prepared so that we can onboard properties as quickly as possible with no learn- ing curve. We feel like it is just a matter of time before we begin to acquire more properties, and when we do, we will be ready." SHB TEXLA's first turnaround was a 492-bed property in Oxford, Mississippi, near Ole Miss. The property was turned around and held for a little over seven years until being sold in fall 2017.

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