Student Housing Business

NOV-DEC 2017

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

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THE SHB INTERVIE W November/December 2017 42 sales that you've had. The percep- tion is probably more that you are a net seller. Can you address your activity in the market? Rabil: Among our funds, Fund III, which is a 2013 vintage, was 23 percent student housing. That was a $750 million fund — 23 percent equates to about $175 million in equity and represents about $500 million in student housing invest- ments. That is about $250 million worth of investments per annum. Fund IV, which was just over $1 billion, had 15 percent allocated to student housing. That was again about $150 million in equity and about $500 million of total invest- ment. We have a number of devel- opments in process; one of those is in Fund V. We are in the pro- cess of raising Fund V and expect, from an absolute dollar perspec- tive, that the investment level will be consistent with what we saw in Fund III and Fund IV. That is on the opportunistic side. We have added the open-ended core fund side. We also have a debt platform. Part of that platform is going to be lending to student housing. We remain very active in the sector. We do expect to see more opportunities in the sector at some point in time when we have a downturn. We're big believers in the sector. SHB: Is there anything that rais- es an eyebrow about the student space today? Rabil: You have seen a lot of new entrants who don't have a com- plete grasp or understanding of the nuances of student housing. Not all of those are going to be winners. We, among others, will likely be well positioned to pick up some of those pieces. I'm not talking about a crash or massive correction, but there are some spe- cific asset level buys that have occurred that may not work out so well for the investors. Zogby: Just in the past 18 months you have seen somewhat of a pull-back from some of these buy- ers. They have realized that you can't project a 5 percent growth year-over-year and buy properties based on year three net operating incomes. They have made some silly assumptions. Over the next 12 to 18 months you will see that continued realization from some of these investors who did not underwrite their buys responsibly. SHB: What has been your reac- tion to the influx of capital to stu- dent housing? Has the volume surprised you? Student housing presents some challenges if you have a lot of money to invest in a quick period of time. . . . Rabil: We have welcomed the inflow of capital. Neither the dol- lar volumes nor the number of players have surprised us. If there was anything that surprised us it was the rapidity with which it happened. Rather than being an incremental process, in early 2013 it became a very crowded pool. That wasn't just because of student housing being a hot sec- tor, it was a number of factors. It was post 2008-2009 recession and many investors were just breath- ing a sigh of relief. That led to a lot of dollars in real assets, some of which came to student housing. The sector, as a whole, continues to be very well positioned and enjoys some very strong dynam- ics. The reality of investing is that the most important factor in your return is your cost basis. That is more important than anything else. It is highly unlikely that we are in a compressing cap rate environment from this point for- ward. When Craig says that we need to underwrite responsibly, he has a point. A lot of invest- ments can look good in retrospect when you have a compressing cap rate environment. The reasons for that are obvious. A few years ago, you could make some mistakes on net operating income, etcet- era, but at the end of the day you underwrote to a 6 percent exit cap rate and achieved a 5.25 percent cap rate. You may not have gotten there the way that you expected to get there, but you got there. From this point forward, you are not going to see that. If you are underwriting to a 5.5 percent exit cap rate, it is highly unlikely that you are going to do a lot bet- ter than that, so your calculations going into the deal better be right on your revenues and expenses. We are entering a new point in time where there won't be much cushion for error in assets. That goes for acquisitions and new developments. Zogby: We are lucky to have a lot of experienced developers who know what they are doing. You do have a few new entrants on the development side, but the vast majority delivering institu- tional quality product are very experienced and understand how they have to build and deliver projects. These are companies like American Campus Communities, EdR, Landmark Properties, Capstone and Core Spaces. They truly understand the business and hopefully they are cautious as they continue to move forward. LIVESQ.COM | STUDENTQUARTERS@LIVESQ.COM YOUR FRONT DOOR TO CAMPUS

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