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AMERICAS NEWS: ‘A’ for complexity

Purchasing 29 properties in three different portfolios across the US from multiple sellers may seem like a complex deal, but for the Canada Pension Plan Investment Board’s Hilary Spann it is par for the course in investing in niche real estate sectors in the country.

Last month, CPPIB and its joint venture partners, Singaporean sovereign wealth fund GIC Private Limited and The Scion Group, a Chicago-based private owner and operator of student housing, expanded their US student housing platform, Scion Student Communities, with the purchase of three student housing portfolios for $1.6 billion.

In SSC’s initial investment in January 2016, the JV purchased a student housing company with almost 13,000 beds for $1.4 billion. The latest deal, which brought SSC’s total bed count to 32,000 across 48 communities, comprised a $385 million purchase of six Class A properties in the southern US; a $640 million acquisition of 11 Class A properties across the US; and $550 million in recapitalizations of 12 legacy Scion-owned assets, also nationally. CPPIB and GIC each own a 45 percent interest in the portfolios and Scion the remainder.

Spann, CPPIB’s head of US real estate, told PERE the off-market transaction, which came together over several months, was no more complicated than a typical deal. SSC executed the same type of due diligence and underwriting the JV would do for a transaction of any size. The partners also benefitted from Scion’s experience with the 12 assets the group recapitalized.

“You just start at the beginning and work your way through the complexity,” Spann said. “There’s always a specific challenge with every acquisition – $10 million deals have their own complexity as much as $1 billion portfolio acquisitions. It’s very important in general that you have the processes and procedures in place to cover all of the potential risks that exist in a transaction. I think applying the same discipline to every acquisition is the hallmark of a good investment shop.”

For such large multi-portfolio transactions, she highlighted the importance of alignment within a JV to ensure all partners have the same goal, a salient point for any transaction that is even more critical for portfolio acquisitions. SSC’s initial investment was similarly complex, with the purchase of almost 13,000 beds across 18 properties for $1.4 billion in January 2016.

“When we established this JV, we set out parameters for what we thought would be attractive in this space,” Spann said. “We’ve been careful to stick to our knitting in terms of acquisitions. Focusing on quality, distance to campus, things like enrollment and acceptance rates help us filter compelling opportunities out of the larger pool of potential acquisitions.”

Spann said the partners considered each seller independently, as if the deal was three separate purchases. Chicago-based Harrison Street Real Estate Capital was one of those sellers, transferring nine assets to the JV for $465 million. Those assets ultimately became part of the 11-property, $640 million portfolio.

Harrison Street co-founder Christopher Merrill said his side of the deal was also complex: the nine properties the firm sold were located at eight universities, owned by four different funds and managed by multiple operating partners. In a space with growing institutional interest, both from domestic and foreign investors, he said Harrison Street’s ability to aggregate assets in the niche property type at scale allows the firm to sell the properties at a premium.

“Our diligence, during any sale exercise, is focused on working with firms that have experience in executing in the space,” he said. “Many firms don’t have the discretionary capital or the history of buying these types of assets or portfolios. The group we chose with this sale is very sophisticated and knowledgeable about this the asset class and has proven the ability to close larger portfolio transactions.”