Why Unique Assets Matter For Investors (And Potential Acquirers)
My morning routine is fairly predictable.
Shower. Coffee. Stock quotes.
Between my two premium advisories, I have to keep tabs on between 60 and 70 securities at any one time. So after clocking in (even before tackling the economic news du jour), I usually take just a few minutes to see what’s moving — and why.
On April 19, my screen was flashing with a pretty big win from American Campus Communities (NYSE: ACC). The stock was trading near $65, after closing at $57 and change the day before. It shot up around 14% at the opening bell that morning, a highly unusual move for this quiet property owner. And the trading volume was quite heavy, about 15 times greater than usual.
Clearly, something was up.
You can probably guess. Overnight, the company had received a takeover offer from Blackstone Property Partners (NYSE: BPY). The $13 billion price tag worked out to an all-cash bid of $65.47 per share, a generous premium of about 30% over where the stock was trading in mid-February when speculation of a potential buyout first surfaced.
I first recommended ACC to my High-Yield Investing readers nearly two years ago for its undervalued assets, ambitious development pipeline, steady cash flows, and healthy 5%+ yield. A potential buyout honestly wasn’t even a consideration. But it’s easy to see why the company caught the attention of a serial acquirer like Blackstone.
First-year student enrollment at major public universities has just reached the highest levels in 30 years. There will be a lot of incoming freshmen on campus next fall. But the construction of new student dorms and residential housing facilities stalled during the pandemic and continues to lag, falling to the lowest levels in over a decade.
That supply/demand imbalance can drive rental rates in only one direction: upward. As the parent of a college freshman, I can attest that room and board prices have skyrocketed. That puts American Campus Communities in the sweet spot.
As the nation’s largest developer, it owns 166 student housing properties located near major schools like Florida State and the University of Texas. Having fully recovered from the lockdowns, occupancy rates are back above 96% and rental rates continue to climb. Management was projecting healthy mid-teens operating cash flow growth in 2022.
Until Blackstone pounced.
I’ll happily collect my $65 per share, but hate to see ACC disappear from my portfolio.
I felt the same way about CoreSite just a few months earlier. I initially recommended the stock back in 2019 as a backdoor way to profit from the explosive growth of mobile data traffic. The company owned two dozen state-of-the-art data centers housing 1,400 corporate tenants, from wireless providers like Verizon to cloud services behemoths such as Amazon.
While typical warehouse space rents for $5 per square foot annually and retailers might pay $25 per square foot, data center space often leases at $200 per square foot or more. With a growing roster of tenants, CoreSite had raised its quarterly dividends by 877% since its inception a decade ago.
It was a fantastic business. But not surprisingly, a larger player spotted the same desirable attributes and decided these data centers would be a good strategic fit. That’s when American Tower (NYSE: AMT) came forward with a bold cash offer for $10.1 billion, or $170 per share.
Institutional Investors Want Unique Assets
It’s a bit ironic that my High-Yield Investing service — which was created to profit from dividends, not M&A activity — has seen more than its share of these transactions over the years. But I wouldn’t call them accidental, considering the core qualities that help anchor an income portfolio often attract corporate and private equity buyers as well.
You could point to competitive advantages, superior returns on invested capital, and other admirable traits that are applicable across any asset class. But let’s zero in more specifically on one characteristic that often lures in suitors: unique assets.
With every takeover, the seller always possesses something the buyer wants or needs. Sure, you can always build a better gadget. Or upgrade to more efficient manufacturing equipment. Or even create an entire new overseas division from scratch. But in many cases, it’s quicker and less expensive to partner up with someone who has already done the work.
But I’m talking about rare assets that would be difficult (or even impossible) to replicate at any price. They can take many forms. Imagine the difficulty in building a new railroad from coast-to-coast and obtaining all the necessary right-of-way easements. Or opening a new casino resort in a state that legally allows just a small handful of operating permits.
One of those licenses would make for a fairly negotiable instrument.
It’s hard to get more unique than a patent. By law, they can’t be encroached upon, at least for a period of time. Shielded from competition, these products and processes can become a cash cow. The owners can choose to milk them by granting licensing or royalty rights to certain users, which can generate tens or even hundreds of millions in revenues (just ask Qualcomm, which has over 140,000 patents).
But the only way to take complete control is via outright acquisition. Case in point, Google paid $12.5 billion for Motorola Mobility strictly for the keys to its rich patent file. Biopharma companies routinely dish out even more for novel treatments and breakthroughs.
Then there are unique brands. The corporate parent of Burger King and Popeye’s shelled out $1 billion for Firehouse Subs and all it got was a name – 97% of the chain’s 1,200 outlets are owned and operated by third-party franchisees.
So let’s circle back to American Campus and Coresite. Location obviously played a major role in their respective buyout offers. It’s at the very heart of the real estate investing creed. But there’s more to it than that. Both companies were also early pioneers in brand new institutional asset classes.
These investment niches just didn’t exist until fairly recently. And with hedge funds, endowments, and pensions always scoping for new places to park their ample cash and earn strong risk-adjusted returns, data centers and college housing stood out as attractive options.
This is one of the reasons why I’ve told my Takeover Trader readers not to ignore areas of the market that are known for yields rather than capital appreciation. Believe it or not, by ignoring these corners of the market, you’ll often find out you’re missing on a considerable bit of upside, too.
And it’s also why I recently told my premium readers about another opportunity in a “niche” asset class. But this time around, we’re targeting one of the oldest (if not the oldest) real estate asset around…