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Earlier this month American Campus Communities Inc. closed on the largest acquisition in the student housing space – its $1.4 billion purchase of Newton Square, PA-based GMH Communities Trust’ student housing portfolio. It was a complex cash-and-stock deal involving several separate transactions including the sale of 4.5 million shares of www.globest.com/news/1138_1138/austin/170007-1.htmlACC’s common stock. With the portfolio now within ACC’s fold, the company has increased its market capitalization to $2.5 billion from $1.3 billion, moved into 39 new markets and more than doubled the size of its portfolio. It is a huge deal by any measure, says ACC CEO Bill Bayless. That it happened in the student housing space is all the more noteworthy, considering that just a few years ago it was viewed as an obscure niche in the commercial real estate industry. “It wasn’t that long ago when venture capital was the only source of funding. Compare that to what we accomplished in this deal.”

GlobeSt.com: What shifted student housing to mainstream status for lenders and developers?

Bayless: It was our IPO in 2004, which was quickly followed by two others. Wall Street got an introduction to the sector’s business case and began to understand why student housing would be a good mainstream investment. Until then, the sector had been burdened with double digit-weighted cost of capital.

GlobeSt.com: What is it today?

Bayless: As a public company we have been able to dramatically lower our cost of capital to single digits.

GlobeSt.com: How did the sector do during the debt and equity boom times of the past few years? More importantly, is it adjusting now that underwriting is much tighter for every asset class?

Bayless: I think over the last two to three years, from our perspective, the sector was overheated with a lot of equity players looking to get in. Also, a lot of multifamily lenders got excited about the sector as well. So yes, we have seen a tightening of underwriting standards and a sharper focus on credit quality like everyone else. Generally deals are at 75% LTV. But success in this area depends a lot on the operational track record of the sponsor and its defined mission. If you have both, you will find debt and equity is still plentiful.

GlobeSt.com: How are you positioned for the ongoing credit squeeze, especially after this acquisition?

Bayless: We have always been a prudent balance sheet manager. We still have only 45% leverage on our balance sheet, for instance, which has preserved our capacity to grow very well. We have a substantial development pipeline, as well as a program in which we invest equity to own on-campus student housing.

GlobeSt.com: Can you tell me more about that program?

Bayless: We pioneered this concept at Arizona State University and the first phase — $130 million – will be opening this August. All together it is a three-phase, $350 million, 5,000-bed project. We acquired the property in an 85-year ground lease from the university. We also get marketing assistance from the school. Students sign a one-year lease. We just announced another 2,000-bed program in Boise last month.

GlobeSt.com: How do you finance a structure like that?

Bayless: About 50% is project-based leverage and the remainder is in the form of our own equity. Phase one of Arizona State is under a construction loan, which we got at 150 over Libor, and that will drop to 125 once the project stabilizes.

GlobeSt.com: Back to your recent acquisition, how long will it take for it to be fully integrated into your operations?

Bayless: Given student’s housing lease cycle, it won’t have an impact on valuation until the 2009-2010 academic year.

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