Student Housing Business

MAY-JUN 2018

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

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THE SHB INTERVIE W May/June 2018 34 go, if you have an industry that's only a percent and a half weight- ing at most, it becomes difficult because you have to try to win the attention of portfolio managers to get them to see you as an indi- vidual stock and that it's worth it to them, and will help them out- perform their portfolio. Each com- pany — ACC and EdR — have to give tangible, improving reasons why each company will help a portfolio manager outperform. The old adage 'past performance is not indicative of future' defi- nitely applies here because EdR had some incredible growth early on several years ago, but you can't sell old growth; you have to tell people that going forward, here's how we're going to outperform our peers. ACC is the same way — it may have had some weak pre-leasing last year, but they need to put forth how they are going to fund their operations and devel- opment programs. The companies have to lay that story out and then accept that it's going to take a few quarters before people start saying 'hey, these guys are delivering.' There are all these questions, and portfolio managers are looking for stocks that no one is going to ques- tion. Right now, no one is going to beat you up for owning industrial because everyone loves industrial, everyone loves Amazon. But if you go student housing, it's niche, and it's had some recent stumbles. SHB: What is your feeling about the foreign capital that is entering the space? Do you view that as a positive? Any thoughts on how they are going to view their invest- ments three to four years from now? Goldfarb: Foreign capital is funny, because every year, it's one entity. It's the Canadians, then it's the Koreans, then it's the Israelis, etc. It just rotates around the world. Basically all the countries go up to the deli counter, they all take a number, and once their num- ber is called and once they get their deli order, then they leave. Then the next country steps up and puts in their deli order. No one says that the deli counter is closing because the Canadians or Chinese have stepped away. It's the same way here. The U.S. is blessed with a large, investable universe. It's blessed with a lot of different property types that have become institutionalized. These foreign entities, their kids go to school here, they know the uni- versities. So they are well versed in the American higher education system, and therefore it's an easy sell. That is something that will continue to attract folks. At the college I went to, the dorm was falling apart. I can't believe the fire marshal allowed it, but that's what we lived in our senior year. Today, if you tour kids through dorms that were built in the 1920s or 1960s, it's not a rite of passage, it's just a negative for the school. Some of today's students don't understand that dorms did not always have air conditioning. You used to have a TV — if you were lucky — that had bunny ears to get reception. It's not even some- thing that's cute or funny, it's just not even understood. Therefore, the need to modernize student housing, whether it's on-campus or off-campus, is only growing. The institutions, especially if the decisions are made by people that have had people go through col- lege, they understand this first hand. The foreign investors, a lot of them are familiar with the U.S. system either directly through their own children or through oth- ers, and therefore the investment case is pretty easy to understand. SHB: How do you compare the student housing sector to other sectors, like seniors housing, or to conventional multifamily? What do you look at and how do you compare it sector against sector? Goldfarb: A lot of people will compare it to apartments because usually what the public portfolio managers do is say, 'how much do I want in retail, how much do I want in office, how much do I want in industrial, how much do I want in residential?' And the tough thing for residential is, people are never not going to own apartments. It's a big sector, people are going to own it. But if you say, what else do I want with my apartments? Do I want mobile homes, do I want student housing, do I want single-family rentals? And again, people think about their own experiences, and also the issues and challenges of each of those sectors. One, which area has given public investors less concern recently? Two, which do I think has the characteristics that will deliver what I'm going after? People are making those comparisons, so if you just look at student housing in isolation, it becomes difficult and I think that's one of the challenges. When peo- ple think about where the REITs are trading in the public market, it's not just the REIT performance and the interest rate environment and where fund flows are. When the portfolio managers are mak- ing the decisions about where to allocate their money, it's not just deciding whether or not they want residential, it's deciding where they want to be within residen- tial. That's something that isn't just readily available and it's not easily discussed at the power panel because it's more nuanced. But that's an important element and also a factor in the stocks; 100 basis points of occupancy matters because people are trying to fight for an extra 25 basis points about performance. You lose occupancy, even if it's minor, the market hits you hard because the market says, 'hey, that's not going to help me outperform.' Now it's on the com- panies to say, we may be down on occupancy, but actually our over- all NOI grew, which grew earn- ings, and you just have to keep hammering that message. SHB: What are your investors ask- ing you? What do they ask about the sector? What kind of metrics do they want to see, what are they asking you to report? Goldfarb: One is just the overall tone of the sector. I think everyone is comfortable with where valua- tions are. There is interest in what EdR is going to do, if it will follow ACC's path and start selling some of its stakes and lower cap assets. People want to see the sector rebound. People understand that it got overly hit, but the sector has to give them a reason as to why it's safe to come back in the water. SHB: Both ACC and EdR have been more development focused than investment focused in the last two years, and they are also focus- ing a lot of energy on on-campus public-private partnerships. Do you agree with those approaches and that those are the right areas for them to concentrate on? Goldfarb: People are discovering that on-campus only fits a certain customer base. What we believe, and I think others are coming around to it, is that on-campus is good, but it's good in limited quantity. It does help a portfolio on the downside because if a mar- ket is experiencing pain, presum- ably the on-campus will perform better. But if the market is expe- riencing growth, it's not going to experience the same upside. So you probably want a base of it, but it probably shouldn't be too much. EdR has more exposure than ACC. But I definitely would not advo- cate having more of it for either. For example, at the University of Kentucky this year, EdR had a higher attrition rate, which is a drag on their portfolio because more students left UK for what- ever reason. If you're renting off- campus, whether the kid leaves or not, they're on the hook for the lease. When you're on campus, it's a 'get out of rent free' card. You also have the added challenges of " The dorm I lived in was falling apart. Today, if you tour kids through dorms that were built in the 1920s or 1960s, it's not a rite of passage, it's just a negative for the school. — Alexander Goldfarb, Sandler O'Neill + Partners

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