A Top Buyer and Owner of Student Housing – Fred Pierce of Pierce Education Properties

Frederick Pierce, President and CEO of Pierce Education Properties

Fred Pierce, the President and CEO of Pierce Education Properties, from $11.2 million in 2014 to $59.8 million in 2017, a 435% increase, and to around $75 million in 2018.  

Pierce Education Properties owns and operates student housing properties.  

In this interview with Eversprint‘s Malcolm Lui, Fred shares how he and his team accelerated their high value sales by:  

  • Having access to institutional capital from pension funds, insurance companies and private equity firms.      
  • Receiving deal flow due to their reputation as a top 10 buyer of student housing properties.    
  • Hiring people throughout the company who excel at their jobs, as it drives investment performance and access to capital.  

Computer generated transcript - Pierce Education Properties Interview (transcribed by Sonix)

Download the "Computer generated transcript - Pierce Education Properties Interview" audio file directly from here. It was automatically transcribed by Sonix.ai below:

Malcolm Lui: Welcome to the High Value Sales Show of Eversprint.com. I'm Malcolm Lui, the Managing Member of Eversprint, and today we're speaking with Fred Pierce, the President and CEO of Pierce Education Properties, a company that owns and operates student housing properties. Welcome to the show Fred.

Fred Pierce: Thank you Malcolm. Thanks for having me.

Malcolm Lui: Fred, you grew your company's revenue from $11.2 million in 2014 to $59.8 million in 2017, a 435% increase, and in 2018 you hit around $75 million. Before we talk about how you grew your company so fast, can you briefly share what your company does beyond my quick intro, and how your company differs from the competition?

Fred Pierce: Yeah. So our company is the 12th largest owner of student apartments in America and we buy own and operate purpose built student apartments at major public universities around America. Today we own twenty three properties at 17 university excuse me 220. We'll probably get twenty three universities in 17 states totaling sixteen thousand beds.

Malcolm Lui: Minus a big number. And are there competitors who do what you do and how do you different from them. It's a

Fred Pierce: Yeah. You know ours ours is a niche industry of commercial real estate and there are the top twenty five owners in our space. Again we're number twelve the top twenty five control and own nearly three quarters of the inventory nationwide. So yes we have that family of competitors. We tend to differentiate ourselves by the fact that we are the value proposition in our space. So we have class a highly amount of ties to student apartments at large universities but at very affordable rents. And so it's our quality of assets and our rent structure that tend to set our company apart.

Malcolm Lui: And I also saw on your website that you focus on schools that are Division 1. Is that right.

Fred Pierce: That's right. It's so there are public universities with 15000 students or more that played Division 1 football

Malcolm Lui: I thought that to be an interesting defining characteristic Why is that why Division 1 Why not division 2

Fred Pierce: You know. So I get I get asked that question all the time and most people think it's because I'm a football fan which I am you know I enjoy football at the college as well as the professional level. But the truth of the matter is if you step back and you think about the universities in America that are the most well known and they tend to be the state universities that are public that play Division 1 football you know Florida and Florida State Georgia and Georgia Tech South Carolina Ohio State Purdue who Michigan Michigan State the list goes on. You know those schools. That's good because that means they have tremendously high demand for admissions. And when there's high demand for admissions there's high enrollment and high enrollment means lots of student residents available to occupy our apartments

Malcolm Lui: Right. Got it. But I imagine there must be a number of smaller schools as well that might be attractive for you two to invest in in the residential properties there. Where do you think

Fred Pierce: Yeah. Well generally no we don't go to smaller universities because imagine this the average property that we have is seven hundred bedrooms and has seven hundred residents at the property. Now think if you're at an eight thousand student university and somebody adds another 700 bed property to the marketplace. Well I property's got to capture between 8 and 9 percent of the entire student body. If there's only eight thousand students to try to procure your business from so when the universities are too small there's just not the depth of opportunity that makes sense for the size investments that we make we need to be a bigger more diversified universities.

Malcolm Lui: Right. So you're really talking about pretty large structures or set up buildings away for 700 beds. Is that your minimum size. Seven hundred

Fred Pierce: It's not our minimum. We typically buy pretty between 400 and 1000 beds but our average is about 700 beds and we have good economies of scale at that size.

Malcolm Lui: Right. Well even a 400 bed. That's nuts. Easily a five to 10 story building right.

Fred Pierce: Well no they're not typically high rise they're typically garden style so ours are usually three and four storey buildings spread out on larger tracts of land. We we do have one mid rise building that's in midtown Atlanta at Georgia Tech but most of ours are our garden style apartments and that allows us to have lots of amenities like resorts swimming pools and sand volleyball courts and basketball courts and and large fitness centers et cetera that make it really popular to live with us.

Malcolm Lui: Ok. So that's not just gonna be a building full of beds and closets and nothing more

Fred Pierce: Oh no it's a it's a lifestyle an absolute lifestyle with plenty to do

Malcolm Lui: Right. Okay. Now you grew a business quite rapidly eleven point two million in 2014 to around seventy five million four years later in 2018. What were the three biggest drivers of your growth over those four years

Fred Pierce: Yeah. The biggest drivers of our growth were a access to institutional capital so we've got very large institutional investors namely a pension fund a life insurance company and a private equity firm that made capital available to us so that we could take advantage of the opportunities that were available and then the flip side is we've been a top 10 buyer of student apartments in America over the last decade. So we're very well known in the space and that presents plenty of opportunities. So it was both the capital to take advantage of the opportunities and a reputation as as a strong buyer in the marketplace that brought those opportunities to us. And then the third leg to the school was human resources and we've got a phenomenal team here at Pierce education properties that do a stand up job of identifying opportunities negotiating them well and helping us to close new acquisitions

Malcolm Lui: Now instead of each our side I saw in an in your profile that as a way they get they get about three hundred ninety employees or so is that about right

Fred Pierce: So we're now up to four hundred and thirty employees.

Malcolm Lui: Ok. So these employees are some at the head office. But I think most of them are at your properties. Your imagine they're involved with running and maintaining the properties

Fred Pierce: That's right. So we own and are a fully integrated management company. So we've got about 30 employees at the corporate level and then 400 regional and local property employees that are spread around are twenty three universities.

Malcolm Lui: Right. Okay. In the 400 folks are pretty much involved with with maintaining and running the properties and the 38 your at your headquarters are the ones who are looking at potential acquisitions Of the properties that are right

Fred Pierce: Yeah. Yeah so. So at corporate we have you know our acquisitions group our marketing group our asset management group and finance and accounting. So that's all at the corporate level. And then each of the properties have their own teams and they range from 10 to 15 people where there's an executive director and a director of leasing and marketing and a head of financial services and then a maintenance crew and a group a whole number of community assistance which are student workers that work in our property and also attend the local university.

Malcolm Lui: Right. All right. Got it. So the three drivers of your growth then access to institutional capital. Number one. Number two being that you have been a top 10 buyer a residential property yet a deal flow deals coming to you as opposed to chasing the now. The third one is human resources having the right people in the right places to deliver on the product.

Fred Pierce: You hit the nail right on the head. That's exactly it.

Malcolm Lui: All right. Maybe we can dive another deeper in each one of them. So you mentioned access to institutional capital. You mentioned a pension fund a life insurance company a PE firm. Are you saying that you only have three institutional investors right now and that's all you need or you're kind of probably grouping them together

Fred Pierce: Yeah I'm probably grouping them together although in the case of those there's there is one of each that we are we're presently working with and that gives us capital across the risk return spectrum to match up with our opportunities and they're very deep sources of capital. So that certainly is sufficient for our immediate term acquisition needs. That being said we're constantly being approached by new capital sources including offshore capital which has become more and more popular and more and more interested in student housing. So there are opportunities for new investor relations going forward with institutional type investment firms and we're we're constantly in conversation with those. But we're also incredibly happy with the investors that we have and vice versa and they allow us to succeed with the magnitude of resources they're providing right now.

Malcolm Lui: Right now it sounds like you don't have a shortage of capital. It sounds like you have people coming to you as well who want to invest with you is I write

Fred Pierce: Well that is right. Student Housing has become a darling of the real estate investment world as some of the other niche sectors of senior housing health care real estate medical office self storage and the like. But certainly student housing near the top of that niche list and and you know there's only you know our top twenty five are the all the players in the industry. Many of those have dedicated capital already. And so if somebody wants to know who's who. All they have to do is pick up student housing business magazine look at the top twenty five. We are there. So those that want to invest in the space were easy to find. And there's not very many of us. So yes more capital comes looking for us as opposed to us going looking for capital.

Malcolm Lui: Right. And are you finding that the capital that's coming to you wanting to invest with you. Do you find it terms that they are looking for are reasonable or are you already finding that they're not all that attractive.

Fred Pierce: No I would I would say there they're very reasonable and attractive and you know the reality is that there's trillions of dollars of investor capital out in the world universe that are that are looking to be deployed in commercial real estate you know in general obviously a subset of that are for targeting student housing. But with the depth and breadth of capital that there is if that capital is not competitive it simply is not going to get deployed. And so you know where we have our finger on the pulse of what our fair market terms. But what what I'll say is that while we expect reasonable business terms on our cost of capital every bit is important frankly. More important is the chemistry between us and our capital partner. And how well aligned our vision is for a business strategy for investments. And the people we work with because at the end of the day that's what they are their partners and they're not just capital. They're way more. And in any partnership you've got to have good partners

Malcolm Lui: Right now. What did they bring to the table as a partnership besides capital.

Fred Pierce: Well they bring credibility as well. So you know we have credibility on our industry. And then you know how well-known and the reputation of our capital partners adds tremendous credibility into into the equation. And so what's the second thing after the capital is it is the credibility and if they're the right partner the ease in doing business with them and the swiftness of how quickly they can make decisions and do business are important attributes

Malcolm Lui: So they don't need simply investing in a general fund and then you invest that capital as you see fit. Sounds like they're also working with you and then taking part in the decision process of each individual property you're looking to acquire and operate at. Is that how it works

Fred Pierce: Yeah that is that is true. So so we do not have what the industry calls it commingled fund with delegated discretion to for us to expend that capital. But we we generally have investment guidelines and what they might call discretion in a box. So our investors and US have an alignment of interest on the business plan and the criteria of investments and we make investments that fall within that criteria. They do actually approve the individual investments but the expectation is that if the investment falls within the box that that investment approval will be forthcoming very quickly.

Malcolm Lui: Right. Exactly. OK. Got it. Now the way your capital is provided is it does it just simply get just a loan on the property or did it have an equity stake as well. Or maybe a hybrid in between.

Fred Pierce: Yes well. So the capital I described as all equity capital. And then we have you know we do leverage our transactions and and based upon the risk profile of the property and the risk profile of our capital partner you know we our debt is usually somewhere between 50 and 65 percent of the total acquisition costs. So equity would be the reciprocal of that. So somewhere between 35 and 50 percent of the acquisition costs would be equity. And we have standard lenders are our biggest lenders are key bank on the banking side Regions Bank as well. And and Fannie Mae is also our single largest lender

Malcolm Lui: So why not find capital. That's debt oriented. Imagine you try to find some funding that might be less expensive than borrowing from a bank. For example

Fred Pierce: Well there's a risk return trade off so we certainly could leverage the properties a higher full leverage in our business to get standard terms you know would be 70 to 75 percent maybe in some instances 80 percent of purchase price you can finance with debt but with higher debt comes higher risk and a higher mortgage payments and our capital partners find it and we find that there's a sweet spot and that the level of risk we take measured by leverage is is at a lower level. And frankly there's plenty of equity capital that wants to get deployed and deploying it on the right risk adjusted formula and applying the right leverage we've learned over time is the most prudent and the smartest way to go. If you take on too much leverage and if something doesn't go exactly as planned there can be lots of headwinds in front of you. We like tailwinds a lot better than headwinds so lower leverage helps in the stability of the investment returns for our investors

Malcolm Lui: Right. Well what I meant was right now you're borrowing 50 to sixty five percent of a property's value from banks and Fannie Mae and reaching bank. Why not find capital investors who are willing to loan that to you at potentially a more attractive rate than what the banks and Fannie Mae might give you

Fred Pierce: Well frankly the the lending community is is incredibly competitive and and in fact you know there are out there there are conduit loans and there are debt funds and and they are lenders you know in this space as well. But frankly the banks we work with are our cost competitive. So. So we are accessing the lowest cost of capital on the debt side. And part of that cost of capital does change that the interest rate gets a little higher. If you go above certain leverage points. So we're also at nice sweet spots where where we get kind of the highest leverage at the lowest price. So if we're under a four Fifty five percent or under you know we get the absolute best debt terms. But what we get from our lenders is incredibly competitive and you know if the debt funds were materially cheaper then we would access those but but they're not. And we also very much appreciate the long term relationships. We've probably done almost half a billion dollars in loans with Keybanc in over the last five five or six years and they've been a tremendous relationship. So we've value just like with equity partners. We don't look at debt as a commodity. We look at debt wanting to be competitively priced but we also look at our lenders as our business partners providing important financial reach sources so the people at our lenders are as important you know as necessarily the absolute terms of their debt financing.

Malcolm Lui: Right. And I imagine is also a plus having a diverse group of investors whether they be equity or debt investors right

Fred Pierce: Well I think in anything in life if you have all your eggs in one basket it may go great for a while. But you know what happens if there's a hiccup and you know people can leave organizations and someone new can come in and yeah we've found that you know having a small array but more than one you know both equity investor and lender service well although I will say know on the lending side that you know we've done the super majority of our of our business through KeyBanc and that has served as well but we do have others available to us because let's face it. You know not every hour our lender doesn't want to do every kind of loan we might want to access and the same with equity investors they may not want to all buy the exact same profile property. So yes it's also nice to have diverse applications so you can pursue diverse opportunities.

Malcolm Lui: Right. So outside of Fannie Mae the other two you mentioned Key Bank Regent bank. Those aren't household names right. Why isn't J.P. Morgan Chase in the mix here. Why isn't Citi Group in the mix here

Fred Pierce: It probably has to do with loan size you know as well as who's been actively pursuing you know lending in the student housing universe so big Wall Street investment banks you know are not necessarily going after sort of middle market transactions of loans of the size that we're taking down. They may be looking for much larger loans by way of example if we're seeking you know a loan of 10 to 30 million dollars maybe the money center banks you talked about you know are interested in one hundred million dollar loans and bigger so you know there is there's a role for four different size organizations and you know we've aligned ourselves with with banks that can meet our lending needs and where they're you know their primary sweet spot of of the average loan balance they want to carry on an individual property basis aligns with the size of properties that we buy

Malcolm Lui: Right. That makes sense for your second driver. You mentioned how you the top 10 buyer of residential property and lots of deals are coming your way. Also before you said your number twelve you give me another ranking number your 12th largest owner of soon housing. So when you say you're a top 10 buyer or one what metric is that

Fred Pierce: Would be an aggregate purchases over the last over the period in question. So I'm talking about acquisitions you know since since two thousand and thirteen you know we've we've closed over eight hundred million dollars worth of acquisitions in that timeframe. And in our space that makes us amongst the top 10 in the nation.

Malcolm Lui: Ok. And eight hundred acquisitions how many properties would that be.

Fred Pierce: During that timeframe we've we've purchased twenty three properties representing about 16000 beds.

Malcolm Lui: Ok all right now just that I have an idea of the scale how many beds up are out there in total

Fred Pierce: The universe of purpose built student housing is is probably about 750 thousand beds nationwide. And that includes that's what's called the axial one seventy five or the one hundred seventy five largest universities in America. And we don't buy in all those markets. We have about one hundred eight target markets so we're about two thirds of those. But that's the that's the universe. It's about three quarters of a million beds nationwide. A purpose built student housing

Malcolm Lui: Right. And then you said at the very beginning of our call you have 16000 beds currently under management

Fred Pierce: That's correct. That's correct.

Malcolm Lui: Ok so it sounds like it's a big opportunity for you still to acquire more properties.

Fred Pierce: Well no doubt that there are tremendous opportunities the biggest company in our space is AC DC they're a publicly traded student apartment rate and they have over one hundred thousand beds. So you know we can we can look out there on the horizon and know that if we're at twenty three universities. But our target is one hundred and eight. And if we're at sixteen thousand beds and the biggest company in our industry is at one hundred thousand you could I could easily see our company you know over the next decade quadrupling in size without without breaking a sweat.

Malcolm Lui: Right now before though you also mentioned how that among the top twenty five buyers of residential property down like 80 percent of them that's out there right now right. 80 percent of the beds. So is I mean to you be targeting the 20 percent that's not being owned by those guys or would you be buying from the other stakeholders as well.

Fred Pierce: Books so it would be we'd be we'd be buying from existing owners because many of them are in investments for a finite period of time it's their business strategy to by way of example being an investment for three to five years. So. So there's a recycling of assets for sure there is part of the inventory. That is the 20 percent that's not owned. That would be the second category. And the third is that the market delivers new supplies and new construction. And next year a little bit more than 40000 new beds will hit the market. And those new beds once they hit the market most are by what are called merchant builders whose business strategy is to build it and then sell it. And so most of that inventory that's built each year ultimately gets sold you know within within one to three years after it's completed. So that's the other sources of new supply.

Malcolm Lui: Right now there's other a good number of other players who know what they're doing right. The other the other 20 for outside of you. So how do you find a price that works. I mean these guys know what they're doing as well. Right. So you know for sure that I can I want to sell something to cheap right at the same time you don't want to pay too much. So how do you guys figure out a transaction price that makes sense for both of you in the both you guys are savvy investors

Fred Pierce: Well there's there's a national marketplace in student housing and there are national brokers and it's very unique compared to other sectors of commercial real estate where in apartments by way of example you have a whole host of brokers with all the major brokerage firms competing against themselves in every major market in the country in student housing. Each of the major national brokerage offices all have one national house student housing group. They they they often work with their local brokers but the majority of the student apartment investment sales are marketed through the National Investor sales groups of those firms. So so having relationships there is is an important element of building a pipeline. The second is is that you know our industry has been doing you know eight to 10 billion dollars a year in volume. And the competitors in our business you know have an appetite. You know ours has been historically one to two hundred million a year. And and so frankly with the volume of sales that there are and in the universe of top buyers that that it usually provides you know lots of opportunities that you know one time pursuing a couple three opportunities. I may need to finish closing those before I can jump on trying to pursue the next opportunity. So you know not everybody is is able to pursue every opportunity. And also you know people like to have different investment appetites. Some people like different locations different product types and what have you. So you know there really is enough to go around for those of us who have an appetite to fill our investment pipeline.

Malcolm Lui: Right. I guess the key to that it really is is the new construction is still occurring right. So the supply isn't really finite it's still growing.

Fred Pierce: Well it is still growing but also the ownership of the industry is consolidating tremendously. So you know to make the top twenty five today as compared to you know eight years ago when they started that survey you have to you have to own double the number of beds you know and by way of example you know we 10 years ago the first year of that survey we were in the top 25. And and our portfolio was three thousand five hundred beds and we were in the top twenty five and you know now fast forward to today with 16000 beds and we're up at number 12. You know 16000 beds 10 years ago would have probably been number three. So the big companies are getting bigger. And and to some extent you know the people at the bottom of the top 25 maybe out of the top 25. And and you know the the bigger the bigger are getting bigger is what I'm saying

Malcolm Lui: Right. Yeah I definitely can see that now for a driving number three. You talked about people being the key component of your growth. So which people in particular are you shrinking the people at your head office that are finding the buildings and the and the and the properties to acquire. Are you talking about that people at the properties that are running and managing it more you bring to both

Fred Pierce: You know I'm referring to both and and the reason is this. That that yes it's the people in the corporate office who are on the cutting edge of identifying acquisition opportunities submitting offers negotiating those offered to cities. And what have you but. But if we didn't have a very very strong investment performance track records then we wouldn't have capital available to us and we wouldn't be able to continue to pursue and and succeed and opportunities. And the way we have successful properties is to have successful teams on those properties. That is the most important thing in our structure is the operating team at a given property is the most important factor in the success of that individual property. So. So it's every bit a team effort. We need a great team in the in the ground to be able to perform year in and year out optimal financially and operationally. And then we need a really strong team in the corporate office so that we can continue to successfully compete in the competitive world of acquisitions

Malcolm Lui: Now many of my guests on my show disgusted. How challenging is the find the right people those that have the technical skills those that are a good fit for the culture and those that are willing to do the work and at the compensation levels that's appropriate. How are you. How are harsh things for you in regards to onboarding finding the right people your team

Fred Pierce: You know finding really good people and retaining really good people. Is is a constant challenge and we've found that the best way to do it is to to Hiram young Hiram right out of school give them career growth opportunities and training and promote from within. And when you're growing at the pace that we're growing that creates tremendous career upside for people who graduate and and are going to have opportunities to grow just by virtue of your growth that creates new jobs and new opportunities. So the trick is to find the good ones train them well and then compensate them you know at a best in class level and retain them and promote them and that's that's what our success model has been. It has been to promote from within and to recruit good out of out of college because it's very very competitive. If you need to be hiring at middle management and upper management levels it's incredibly competitive. Out in the universe and it's difficult to replace the people

Malcolm Lui: Right. How is your retention rate that the people are. Do you have numbers that you know internally and you know some industry averages that you could say yeah we're doing much better than industry. I mean are those figures available for

Fred Pierce: You know I don't have the figures off the top of my head but the my senior management team have all been together with us for five to 10 years. And and that's great continuity amongst our senior management. And what I will say is that at the property level there is more turnover and a lot of that is is attributable to the fact that the property management business is not the highest paying business you know out there. And so we're working on a plan to increase the compensation the salaries at our people at the property level so that that can be you know increasingly more attractive. But when you when you. Have average level salaries then as an industry then you know compared to others then you do face turnover and work. We're looking to we're looking to improve our our retention rates every every year.

Malcolm Lui: Right now have you find it hard to find people to to right out of college. You say Yeah. I'm going to I'm going to join this company and go and do commercial real estate for soon housing. Is that an easy sell

Fred Pierce: You know generally speaking we are finding that there are great students at at several universities that are studying real estate that want to be in commercial real estate that are studying property management. So we are finding good people but the way we find most of our people out of college is that they work for us while they're in college. So we have this community assistance program where each property has between five and 10 students at any given time. Working on our property on a part time basis and living in our community. And they learn during that time in school if they like this industry and we learn if we think they've got a bright future for us. And those are the people we try to convert into full time employees and we've got a very strong track record of doing that across our portfolio where much of our middle management today you know we're at one point in time a community assistant for us working for us while they're in college.

Malcolm Lui: Are you. They have programs in place systems in place to actively recruit the ideal students those who are perhaps studying real estate and can get them into staying at your property and being a community manager

Fred Pierce: You know we do we do add a couple of universities. But like I just mentioned the majority of our of our recruitment at the entry level comes from people who are already working for us as students. There are a couple of them diversity. One is Ball State University in Indiana and the other one is San Diego State University here in San Diego that both have great programs in these areas and where we are actively involved in in recruiting on a on a regular basis

Malcolm Lui: Right. OK fantastic for 2019. Let's talk a little bit about your plans here. I mean you've had a great year and she doesn't 18 19. If we were to talk again one year from today and you're looking back over the past one year what has what has to have happened in your business for you. If you're happy with your company's progress in particular what problems do you have today that need to be eliminated. What opportunities do you see today that need to be captured and what strengths do you have that you'd like to further maximize.

Fred Pierce: Yeah. You know what I'd say is we need to discontinue the success that we've had and that success will be fueled by keeping our employees happy and satisfied and working hard for the betterment of our employees and for our company. So so enhancing ever ever increasingly enhancing the corporate culture that makes this a super desirable place to work. So we're focusing on that. We're introducing new employee events all the time here. Recently we just got season tickets to the San Diego Padres and you know we're making those available to all the employees in the corporate office can all get to go to a game. And so we're trying to enhance our relations with our employees. Half the employees will make for a happy company. And secondly we need to just continue our pattern of acquisitions and you know a good growth trajectory for us is one to two hundred million a year. We see 2019 as a year within that range. At the same point in time we are we're careful and we're strategic about what we buy and and we're not just going to buy for the sake of buying or grow for the sake of growing. You know we need to grow right. We need to manage that growth and we need to select you know superior assets but we believe that it will be a successful year if we if we acquire between 100 and 200 million and it's our expectation to do so and we don't really I don't really see any bumps in the road. I see even with a recession on the horizon that that's going to drive more capital to student housing not less capital. More kids go to school in a recession than they do when you're in a growing economy. And that should bode well for interest in performance by student apartments. This year as well so we think this is gonna be another good year 2019 for Pierce education properties.

Malcolm Lui: All right. So we're having it right now I teamed up with another client somebody to have a similar business to you. They too are looking to acquire businesses but they find it's very competitive out there. There are a lot of other buyers for the same businesses out there. In your particular case do you find it advantageous to find a property owner of a suitably large enough student housing and getting get into them early to begin having discussions about selling their properties or in your predict journey she doesn't quite work that way.

Fred Pierce: Well yeah I wouldn't say it necessarily works that way in. In our case that there is no such a large volume of investment sales opportunities that are brought to the market that there are plenty each year that are going to market with reasonable price expectations that we're going to find you know investments that meet our criteria. So. So you know what we do is we we sort of rank opportunities internally based on how realistic we think the sellers are in their valuation expectations. And we only work on properties where we think the value expectation is aligned with what we think that they're worth that they're in the same order magnitude because we won't work on something of someone's expectations is is unrealistic we think it's a it's a waste of time and even sometimes when opportunities come out that look like they're going to be available in the range that seems executable that seems like what you'd want to pay in the end. Sometimes they don't always trade maybe buyers didn't you know fairly or honestly disclose what their valuation expectations were and they didn't end up wanting to sell at the price the market would bear.

Fred Pierce: Well in those situations we find all the time that that those opportunities eventually come back to us at a high percentage. And we call those rebounds and it's like somebody who shot the ball at the basket and it didn't make it. And if you're sitting there near the rim you've got a better chance to get the rebound and so we're hanging around those transactions and watching to see what happens if they don't transact and a lot of times those will come back to us on an off market basis where they'll now come to realistic price expectations and they'll say you were looking at this for. How about if we make it available to you now at this price. How do you like to buy it. And then we're not competing against a larger array of buyers because at that time they're ready to make a transaction. They've come to realistic price expectations and now they just want a buyer who will perform and that's our reputation is as the top performing buyer in the industry. So that plays well to our succeeding on a business plan of acquisitions

Malcolm Lui: Right. So when you said before though approach you off market I mean there's an approach you directly as a as opposed to going through the marketplace that you talked about earlier

Fred Pierce: Yeah. And although I'm going to use the word off markets very broadly that that's what I'm differentiating between a fully marketed process where you know the opportunity is blasted to the entire industry you know hundreds and hundreds and hundreds of would be buyers see it you know all kinds of tours happen to go to go view the property versus maybe once because that can really you know that can really inhibit the property's performance. If your people aren't managing your property and they're instead spending all their time giving would be buyers tours of the property ads. And so that takes its toll on a property and often doesn't trade through that process. Oftentimes the owners say hey just go talk to the two people who made the made some of the better offers and let's see if one of them will buy it now. It may still be through the original listing broke. So it technically you know is I suppose you could say marketed but it's just this time around it didn't go through a full marketing. Sometimes people call that a pocket listing where they just say hey I think the most likely buyers are these four groups in any of it. So why go through six months of a hassle and disrupting your property personnel. Let's just talk to the people who are the most likely buyers see if you can make a deal for what the property's worth and then that's what I call off market is when it's coming to you directly on either a sole source or a very limited competition basis. And I'd say we've transacted almost half of our volume in the last 10 years on on one of those bases.

Malcolm Lui: Right. Yeah. Makes sense to be selective now in terms of the kinds of properties you buy. Are you looking to buy properties that are good to go just buy. Take it over and it runs smoothly or you're looking for a fixer uppers

Fred Pierce: Well yeah. And the world calls the one the first one core and they call the second one value add and and we're we're looking to buy both. So we've got investors who want to collect the income that a stabilized fully occupied property produces and to enjoy the benefits of growing net income over time. And we pursue those opportunities but they they deliver on one size return right it's a smaller return for what's a lower risk investment. And then we pursue value add opportunities you know and the word fixer upper probably you'd look at our properties and you wouldn't call it a fixer upper because you'd look at it and it's a 10 year old class a purpose built student apartment building that looks great. But guess what. Maybe they want it. We want to trade out carpets on the interior and put in faux wood floors and we want to upgrade to granite countertops and put in new cabinets. And so we do interior unit renovations and that allows us to raise the rent and that that produces a value add return a higher return to core and there's lots of those opportunities. And so we're pursuing both core and value add and opportunities are plentiful in both in both areas

Malcolm Lui: D tend to invest alongside where you already are. Because then you had the advantage of already having people in place you already know contractors who are out there to do the renovation. Or are you willing to open up a new market right away and just start finding the right people to get the job done.

Fred Pierce: Yes. So the answer is both and historically we've gone to new markets. So right now our portfolio has 24 properties at twenty three universities. So obviously we only have two investments right now in one market that's in Athens Georgia at the University of Georgia. But with that investment at Georgia we now are interested in doubling down or tripling down and increasing our footprint in the markets that we like that we know. And so we're actively looking to make additional investments in our favorite market. And we're also wanting to continue to diversify our portfolio by entering new markets you know because I've mentioned there's over 100 that we would ultimately be interested in acquiring at. And we're in a twenty three of those right now. So there's room for growth in both doubling down in existing markets as well as continuing to pursue markets that we've not yet added.

Malcolm Lui: Right. I can imagine doubling down the existing markets would be attractive from a cost perspective right. In terms of having people on the ground relationships ready to go I imagine I would just boost your returns more so than entering into a brand new market

Fred Pierce: Well you know you might be surprised that that in our business you know the economies of scale and there are few but they wouldn't necessarily happen. You know when you've got go from one to two assets but maybe if you went from one to five assets you know you may have more economies of scale and then be able to have you know one position serving multiple properties as opposed to go from one asset to the second asset. I pretty much am doubling my team because I need the same team that the other asset I might have some some efficiencies and marketing I might be able to buy some contracts for services cheaper because I've got bigger volume so there is some incremental benefit to it as well as the benefit that you're intimately familiar with the marketplace. But it might not be quite as much as you might imagine in terms of efficiencies when you're when you're doubling debt.

Malcolm Lui: Right now in terms of just to recap what you share with me in terms of the biggest obstacles you face. I didn't hear too many of them other than maybe hiring people or their other big obstacles that you like to see over come over the next one year

Fred Pierce: No I actually think I think that being able to manage growth of a continued high volume level and and procure the human resources. That's that's the main obstacle that we've got and we're we're laser focused on on that where we've created an increasing number of internal educational programs training opportunities so that our people are able to to experience personal growth and development. And I really think that you know we've established ourself as such a major player in our sector and with plentiful capital and a national reputation then we just need to keep keep having a top caliber team and we'll be able to deliver that's really our only primary obstacle or constraint right now is continuing to get emerging good people

Malcolm Lui: Right. And then from a opportunity standpoint it sounds like the opportunities are different our conversation so far didn't sound like there's one particular opportunity you really want to attack. Sounds like there are several dimensions that sound equally attractive right. Buying from other investors who are at the end of their projected initial investment horizon buying from the 20 percent who aren't currently being owned by institutional investors. I mean is there a particular area that you find particularly ripe that you really want to jump into more than the others.

Fred Pierce: They're all they're all plentiful. I mean I guess if I was to say amongst anything that the value add we call acquisition rehab opportunities to buy properties that are of the vintage where they're ripe to renovate the unit interiors and achieve a rent increase associated with it. I think that we're going to see perhaps more of those than than the other opportunities but it may not be hugely different. There's there's opportunities in all three buckets.

Malcolm Lui: Right exactly. And in terms of the strengths you want to maximize further the strength that you shared with me one I think is that your reputation that you have is being a big buyer because having a lot of deals come through your way which I think is it's great to be able to cherry pick right the operatives out there. Are there other particular strengths that you want to leverage further over next year

Fred Pierce: Yeah. You know what. What it is is in and it's related to the need to have the best possible team we can have. So I think we're constantly looking internally and seeing what we can do to optimize our corporate culture to have it. It have the feel of you know a smaller family owned business kind of environment in a in a situation where we're increasingly a larger and larger company so. So we're doing a lot of internal surveys and a lot of internal reflection to to make sure we're taking the steps that we need to take for this to rank as one of the better places to work in our industry. So I don't think that's that's a goal for exclusively 20 19. I think that's going to be a a goal on a regular basis going forward. But I will say that we are taking extraordinary efforts in a variety of different ways to make sure that we've got the right corporate culture that will help grow

Malcolm Lui: Right. Got it. Now three last questions for you. If you were to have a billboard out on the freeway in San Diego somewhere or perhaps in any of your other markets where you are you're doing business right now. What would your billboard message be. You keep in mind that people generally only have six seconds to see and read a billboard and they drive by it. So what's your six second billboard message

Fred Pierce: Mean I'm going to give you 2 6 second billboard messages to our two audiences. And one would be you know Pierce education properties the place for your successful institutional investment and the and the other would be aimed at student residents. And it would be peers education properties the best value in student housing.

Malcolm Lui: Do you find that students will actively seek out your properties in particular

Fred Pierce: Absolutely. Absolutely. And and word of mouth is is by far the greatest driver of traffic to our properties. So what that means is that we need to treat our residents as customers and they need to have a great living experience. And part of a great living experience is feeling like you're getting a good value for the rent you're paying. And if we can create a good environment on our properties the students think they're getting value for for their rent and they enjoy being at the property and they like the amenities that they're going to refer their friends and bring their friends to the property. And and that's an incredibly important part of what we do.

Malcolm Lui: Right. There's one last question I have on my list here. I forgot to ask you. Well actually I have three more but there's another one I forgot to ask you. But let me yes circle back a little bit to your 2009 19 plans and your marketing and I took a look at your company's online presence. I didn't see any paper like advertising that you're running right now and your SVOD presence is a pretty light. So what's your thoughts on paper click and SCA when it comes to your business

Fred Pierce: Yeah. The reason is is because all of our marketing efforts in that regard are done under the brand of our individual properties. So we are we are such a household word and name in our in our investment marketplace in the student housing sector that frankly anybody who wants to know or is interested in investing in student housing knows who we are. And if you wanted to do an NCO you know you know just Google me and and see how universally that you know that I am out there in places that institutional investors look and they're not going and doing pay per click and that kind of thing. You know for where they're finding out about investments they're they're going to other sources and where they're from a corporate perspective. But on our property perspective it's all of the above and search engine optimization is is absolutely the second highest area of importance in marketing after resident referrals that I just mentioned. So we are investing heavily it would just be in the name of our individual properties. So if you went on our website and you looked at our individual properties and then you went in and checked out you know under that in those local markets you know what does our SVOD look like. And are we on the first page you know in Google or wherever you're doing your searches then you'd find that we would register register very highly. But at the corporate level you know we're not a retail brand that needs you know retail visibility we need tactical targeted visibility we go up go about that in a different way

Malcolm Lui: Right now are your individual property brands. They do in paper click advertising as well

Fred Pierce: They're doing all the kinds of things you do in FCO but yes including pay per click advertising where we see a good return on investment for that for that vehicle.

Malcolm Lui: Right. I could I could imagine among college students given how they're on the on the web so often that paper click ads on the various social media platforms that work really well for you guys.

Fred Pierce: They do in some. But I will tell you that you know working with you know an expert firm in social media and FCO that you know if we can embed the right search terms into our websites and in organically have our Web sites come up on the first page. When you when you put those key search words in in your market you know what the students looking for apartments in you know X Y Z and Columbia South Carolina and what other words they're putting into search and make sure when they put those in. We're coming up on the first page I made I likely don't need to have to pay per click to be able to get their attention and be front and center when they're doing their search. So we we will use paper click where it's cost effective maybe where we need a little bit of an extra boost but you know most important is is SEO and driving FCO because if I can get there organically that's the place to be.

Malcolm Lui: Yep. Do you find it getting students into your housing is is a challenge. You didn't mention that during our conversations it sounds like your guys are doing pretty well on that front.

Fred Pierce: No no no. The brands are known in their marketplaces you know our staff are terrific our community assistants get the word out on the campuses become street teams and they give away you know they give away a little Starbucks gift cards and you know in other incentives to come out to the property and check us out. And so now getting the word out to today's students you know in an electronic world is you know something that we have to be good at but we are good at it and it generates tremendous traffic and the students have gotten very sophisticated and know how to find and search for student apartments and we likewise have to read on the cutting edge of sophistication to make sure we're where they're looking and we know where they're going to.

Malcolm Lui: Right. Got it. So the the last two questions I have for you. Who are your ideal investors. And at the same time since you mentioned how students are looking for your brands as well who are your ideal students for your properties and what's the best way for them to contact you and your team and your properties.

Fred Pierce: Well thank you for that question. So you know our ideal institutional investor is is is probably an organization that has 40 billion dollars in assets under management or larger that has an interest and a desire to invest on a programmatic basis to want to not buy simply a single one off property but would have an objective that they want to be in the student housing space. They want a best in class operator and they wanted deploy and make a commitment for hundreds of millions of dollars so they can assure they can build a portfolio you know in the marketplace. That's where there's a perfect alignment between our ability to deliver investments of volume and the desires of large institutional investors that if they want to get into let's call it maybe a new area of investing that by getting into it it's meaningful to their portfolio and if they can't invest those kinds of volumes of money then it's generally not meaningful to their investment performance or their diversification. So that's where the alignment is when you do deploy a sizable amount you know that aligns with our strategy of wanting to be at division one football universe. Studies on on the student side you know of course we're interested in in all students. And but what we're first interested in is that our residents renewing so we want those living with us to live with us again next year.

Fred Pierce: Secondly we want our residents to have had such a satisfactory living experience that they're referring us to their other friends so they're doing our marketing for us. And then finally the one class that we typically do not pursue is freshmen most freshmen move on campus and live in the residence halls and we support that is a smart way to start their college career. So then our target more generally ends up being sophomores through seniors. And the reason is again freshmen tend to live on campus and we think that's a smart place for them to go. And while we would welcome graduate students most graduate students don't have anywhere near the resources that undergraduate students have. Usually parents are paying so that their undergraduate students education and will pay a fair price for housing. Graduate students are usually on a student loan and and are much more finicky and frankly much more frugal in terms of their housing allowance and housing expenditures. So while we have a couple of universities with strong graduate populations and we'd welcome graduate students it just tends to be that graduate students don't live in purpose built student housing to the propensity that undergraduate students do. So we love sophomores juniors and seniors

Malcolm Lui: So you said before that you don't target freshmen

Fred Pierce: That's that's generally right. Most universities almost all the all the universities that we're at offer freshman housing many of them mandate that the freshmen live on campus. And it's a good idea it's a good foothold for students. So there are a few places that we have some freshmen but those are usually candidly where there's a feeder community college and that their students that are from out of the areas that couldn't get into the main university that are going their first two years at the community college so they can transfer to the main big public university and then they need a place to live. And that's that the freshmen. We usually procure so yeah we usually don't otherwise have many freshmen in our properties. I would say also another important than good sector for us are international students. They add cultural diversity to our universities and to our properties and they usually have resources. So there they're good capacity to pay rent. So

Malcolm Lui: Right

Fred Pierce: International students are definitely a positive as well.

Malcolm Lui: Yeah they definitely do have a budget right. It's not cheap for international students to attend any school abroad. Do you have marketing

Fred Pierce: No that's

Malcolm Lui: Programs.

Fred Pierce: Right.

Malcolm Lui: Yeah marketing programs to do that these guys know about your brands at the universities that they are attending

Fred Pierce: Yeah we do. I mean we we generally speaking have a relationship with the international student office at every university that we're at and that has an international student office. And and then secondly we do have a vendor relationship with a Chinese company that gains access to Chinese students that are destined for the United States. And it ends up being a referral program where they they identify the Chinese students and then they send them to us. You know once they've learned what school that they are they're going to go to when they're going to our school a school where we're at. Then they they refer those students to us.

Malcolm Lui: Right. Cool. Very cool. Fred it's been it's been awesome having you on my show today. I've really enjoyed hearing how you grew your company so fast.

Fred Pierce: Well I appreciate the opportunity and thanks for all of your great questions.

Malcolm Lui: We've been speaking with Fred Pierce, the President and CEO of Pierce Education Properties, about his company's rapid growth. For interviews with other fast growing, high value sales companies, or to learn how we can accelerate your firm's high value sales through automation, visit Eversprint.com.

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