Student Housing Business

MAR-APR 2018

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

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Page 35 of 128

THE SHB INTERVIE W March/April 2018 35 In addition to the foreign interest, there are a few new name-brand domestic firms who have joined the sector, including Heitman, Goldman Sachs, PIMCO, RREEF, Principal and TH Real Estate. At the same time, industry veter- ans continue to adapt/reinvent themselves as the space evolves. Harrison Street maintains a vari- ety of capital buckets to actively acquire student housing proper- ties, including an open-end core fund, opportunistic funds and separate client accounts. As of this year, Kayne Anderson has also launched a core fund for acquisi- tions which will include student housing properties, and there are many new investors looking to make their first splash in the space in 2018 and 2019. New off-cam- pus development has stabilized at around 40,000 to 45,000 beds per year, but there are fewer develop- ers building the majority of those beds. Land and construction costs have continued to rise, which obviously makes it more difficult for deals to pencil and competi- tion for the best sites is fierce. Add the more selective construction lending environment and you can see why these new development deals are so valuable once they come to market. The liquidity for well leased assets in pedestrian locations was evident in late 2017 when TSB Realty helped facilitate the largest single asset sale in stu- dent housing — a bidding process in which we saw more than 10 offers over $200 million, without the public REITs offering on the transaction. Several years ago the only offers on that deal would have likely come from the two public REITs and a few private equity funds. Sophisticated capi- tal sources are helping our busi- ness become more institutional as evidenced by large portfolio acquisitions, such as Scion/GIC/ CPPIB's deployment of $4 bil- lion over the past two years, and two deals TSB consulted on in Mapletree's $1.6 billion in acquisi- tions from Kayne Anderson, and ACC's recapitalization of the Core Spaces portfolio for $591 million in 2017. So not only are larger one- off transactions more competitive on sales or recaps, but we also have more buyers capable of com- peting on billion-dollar portfolios. SHB: With the flow of foreign and institutional capital increasing to the sector, is it easier for the established players in the student housing market to find traditional lending capital? Or is it more dif- ficult for them to align themselves with a good capital partner? Bradley: It comes down to spon- sorship. Over the past 18 months, the banks have really pulled back from transactional lending and are pushing for ancillary servic- es, including operating accounts, permanent financing with the agencies, deposits, wealth man- agement, etc. We are seeing a resurgence of relationship bank- ing as a prerequisite to borrow- ing construction dollars. In other words, most new lending rela- tionships will require other lines of business in exchange for access to their balance sheet. In student housing, banks like Wells Fargo, Capital One, JP Morgan, BMO, PNC Bank and others have a list of student housing developers to whom they want to lend. If you want to borrow from a bank, it is more accessible if you have the expertise, track record, balance sheet and other business lines to offer. Construction financing is available, albeit at a higher cost than before. From 2013 to 2016 we were frequently seeing 75 percent loan-to-cost (LTC), while today we often see lenders max out at 65 percent leverage with higher origination fees and more syndi- cation risk. The first quarter of 2018 has been refreshing — con- struction lending is getting more competitive and less restrictive as construction loans are being paid off. Debt funds are also begin- ning to lend dollars to bridge and perm deals that may not qualify for an agency financing takeout, which has in turn freed up the banks to lend more construction dollars. We have also seen banks become more aggressive for term business on stabilized proper- ties. TSB Capital Advisors is in the market right now with a $300 million portfolio refinance and we had four banks get very competi- tive on non-recourse term debt with spreads in the 155 to 165 basis point range over LIBOR, on full term interest-only financ- ing at 60 to 65 percent loan to value. In other words, banks will selectively compete with the agencies on perm business which brings healthy competition and increased liquidity for construc- tion loan take-outs. SHB: From your own lens, is the environment today good for you as an intermediary, or is it more difficult than in the past? Bradley: We love it. This is the type of environment where we can provide the most value to our clients. There is more opportunity for our clients when there are more capital sources. While the core acquisition capital — what most of the new institutional investors target — is out there, some of these groups are new to the sector and need to be educated on the fun- damentals of the industry. We like being ambassadors for new inves- tors in the space and helping them find good partners, and we like helping our developer and buyer clients find good, strong capital partners. And yes, while construc- tion financing has been tough over the past 18 months, we've been able to bring more value to both sides of the table through our par- ticipation. We took the syndication risk off some of our lenders to help negotiate better terms for our cli- ents. We've had to get our hands dirtier on construction financing recently, but that is what we are here for. On the permanent side, • Development • Construction • Acquisition • Joint Ventures Life starts here, steps from campus # TAG TIM BRADLEY Principal of TSB Realty and founder of TSB Capital Advisors

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