Student Housing Business

MAY-JUN 2018

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

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Page 33 of 88

THE SHB INTERVIE W May/June 2018 33 surprised people. But the biggest challenge between public and pri- vate is that if you are public, if you lose 100 basis points in occupancy, you might as well have empty buildings. In the private land, it's 100 basis points, what does it mat- ter? The judge, jury and execution- er is instantaneous in the public land, whereas in the private land, people see the business for what it is and 100 basis points doesn't change their internal rate of return (IRR) calculation in a meaningful way over the long term. SHB: We have two REITs in stu- dent housing, which is a very small universe. What types of pri- vate operators do you watch and how open are they to being cov- ered by you? Goldfarb: There are some large developers that have been very gracious with their time. And there are also large platforms, or platforms that were small years ago and are bigger today. Almost all of the private guys have been very giving of their time, and also very honest with their assess- ments. In general, it's a very col- legial group. When you cover the malls, the retail REITs are incred- ibly competitive. By contrast, the apartment guys tend to be pretty collegial, and certainly when you look in student housing it follows that. If I had to group the REIT industries, the malls definitely have a pretty competitive relation- ship. CBD office is also equally competitive among the REITs, but there is always another office ten- ant whereas the 'it' retailer may only take one or two locations in a market. When you go to indus- trial, it tends to be somewhere in the middle, and shopping centers tend to be somewhere in the mid- dle. But apartments and student housing are definitely on the col- legial side. My sense is that first off you have a lot more transactions. Second, and this is really impor- tant for student housing, is the industry as a whole realizes that the better they project an image overall, the better it helps their overall sector because they're try- ing to prove it. If you want to attract more capital into student housing, you want to show that the industry is maturing, is grow- ing, and is pretty much telling a consistent story. Axiometrics has been a big help in providing clarity on pre-leasing trends, so you don't have people panicking. When you have conferences the way you do and the fact that everyone has grown up in the industry together and knows everyone, it does help that overall bond that exists. It doesn't change the fact that when you talk to someone for more than a few minutes you find out that deep inside, each team wants to beat the other, but at least out in the open they're pretty good about being friends and I think that's an important element. SHB: Let's go back to something you touched on earlier, the 100 basis point drop in pre-leasing on the private side — that's not the end of the world. For the two pub- lic companies, it's judge, jury and executioner. Is that fair? Is it fair that their stocks get hurt when it really might just be a reflection of what's going on in the industry, or is that just the price of being public? Goldfarb: You can say, is life fair? One or two years ago the mar- ket was selling off big and it was an incredibly down, red day. ACC came out with an overnight equi- ty raise, they upsized it, and the stock outperformed the next day. They raised about $700 million. It was the only green name on a sea of red. When you take a look at how accessible and easy it is to raise capital in the public market, the opposite is the public mar- kets react extremely quickly in a negative way. If you're a private company and went to raise $700 million, the chances of you being able to do it overnight is unheard of. But because of that, there is a responsibility that you have to deliver what the street wants. You've got to give the people what they want, and if you as a public company are not delivering that, then you're going to get knocked. And the public markets care incredibly about occupancy, prob- ably more so than net operating income (NOI). If you gave the pub- lic market a choice between main- taining occupancy or growing NOI, chances are they would tilt toward occupancy. And I think it's simply because people see that as a headline number. Even though, as we all know, occupancy and rates are a tradeoff to maximize NOI, people see it more as occu- pancy versus NOI even though one is necessary to drive the other. As a public company you have to know that and you have to operate your portfolio on that basis to the best that you can. Clearly there are industries that have bigger, chunk- ier leases where it's more difficult to do that, but certainly in student housing when you're leasing by the bed, the granularity of your leasing platform means that you can operate at a pretty high level, and you almost need to make sure that your whole team understands that occupancy is something that needs to be maximized in a public format. While last year's pre-leas- ing wasn't the end of the world and it certainly wasn't going to be detrimental, the public markets reacted very quickly. SHB: At InterFace Student Housing, we heard from the two REITs that they feel that their stock prices are a lot lower than they should be. Why is that and what would it take to change that? Is that fair or is it again, life's not fair and that's the way things are? Goldfarb: Companies have to address specific issues. In two of the past four years, the guidance that EdR has come out with for the upcoming year been lower than street expectations. Right or wrong, that's something that needs to be remedied. Usually the street doesn't say they got it wrong. The market takes it out on the stock price. So that's some- thing that needs to be addressed, and I think the company is work- ing to try to make sure that expec- tations are more aligned with how actual results are going to be. For ACC, they reported weaker pre- leasing last year, as others in the industry did, but people hold them up to a very high standard, and therefore as a consequence, it's taken out on them a lot more. People want to see them actual- ly deliver this year on their pre- leasing. But as I said from the get

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