Why Invest in Purpose Built Student Accommodations?

Hosted by Bob Simpson, today we shift the focus to answering the question "Why Invest in Purpose Built Student Accommodations?".

Learn from our host Bob Simpson and our expert guest, Aly Damji, Managing Partner at Forum Asset Management.

Today's questions of interest:

0:00 - Intro
1:32 - Aly, tell us about you and what brought you to Forum?
4:11 - Please talk about your firm, Forum Asset Management.
6:49 - What are the trends that you're seeing in student accommodation in Canada today? 
9:40 - Tell us why you're excited about this new asset class?
12:58 - Why is student housing an attractive investment option for potential investors?
15:43 - How does student housing compare to other asset classes out there?
17:07 - If you look at your portfolio, how does your financing line up?
19:50 - How does your portfolio compare in the private and public REIT space?
23:25 - Could talk about the QUAD at York University, an RFP you won back in 2010?
25:44 -  How does your firm look at ESG and social responsibility when looking to run a build? 
27:54 - Talk about how this fund, Purpose Built Student Accommodations align with investor intrigue?

If you enjoyed this episode, please subscribe and visit our website at https://www.privatedebtandequity.ca/ for any questions or to learn more!

Transcript

0:14

Greetings listeners. I'm Bob Simpson, your host, and welcome to another educational episode of My private network today, our focus is on the concept purpose built student accommodation. Let's just jump right in today. My guest today Aly Damji is managing partner real estate for forum asset management. And he joins us today from Toronto. You're in Toronto today, right, Ali? You've been, uh, you've been moving around a fair bit over the last little while. You got it. I am in Toronto. Forums is an alternative asset manager, investor, and developer with a focus on real estate, private equity, and infrastructure operating across North America. Now, Ali, based on your profile, I see that you've been involved in A lot of things, uh, principal investments valued at up to 4 billion. That's probably higher than, uh, than that today. You've arranged debt financing for more than 500 million and you've secured over 300 leases resulting in net operating income of over 40 million bucks. So you've been busy. So, you know, I, I'm a guy, I like numbers. We could go and just talk numbers all day, but you know, I know for the sake of our audience, uh, most people aren't wired that way. So let's just give a little bit of flavor. Talk about Aly Damji and what drives you. What brought you to forum? Absolutely, Bob. So I, I bring a pretty unique background in that, you know, I think a lot of, Real estate professionals, you know, don't have a sole focus and a drive to wanting to be real estate professionals since they were kids. My mom has told me that, you know, when I was 4 or 5 years old, when kids in my class were. Looking to be, you know, NHL hockey players or police officers or firefighters. I've always wanted to be a real estate developer. So that's really driven me, uh, throughout my life is to, you know, be in real estate development and investment. And, you know, just the concept of building and owning assets that, uh, people. Live in, work in, shop in just resonates with me greatly. So that really drives everything I do and, and, uh, have been doing, you know, in terms of my career background, you know, it spans across all major asset classes. So I've been involved in all the major food groups. I've, you know, cut my teeth in hotels. When I started my career, I've been involved in Office, uh, during office, heyday, street front, retail, large format, retail, multifamily, you know, student housing, industrial, and now even, uh, self storage. And in addition to asset class focus, I've had the ability to work with, uh, Diverse group of investors prior to joining forum. I worked for a, for a private family and helped grow their real estate holdings. And I did that for eight years, really acted as a fiduciary for that family. And then today we manage capital for a diverse group of investors, both big and small, including, you know, large scale institutions. And so, you know, the perspective I bring to the table is not only just being an owner and investor. But also a manager of, uh, others' capital. Yeah. So the, uh, the first property you bought when you were six years old, do you still hold it or you just flipped it when you were eight?. Well, funny you mentioned that. I, I flipped my first property, uh, in my, uh, very early twenties, uh, and have done a number, uh, of them. So even in my personal life, uh, you know, real estate is a constant thing I am always thinking about.. Yeah, yeah, no, that's, that's, that's fun. So that's, uh, that's you talk about forum for a bit. Um, talk about the work that your firm is doing for investors. Absolutely. So we've been around for over 28 years and over the course of that time, we've been primarily balance sheet investors. Investors three years ago, we decided to embark on a journey to become a boutique mid market asset manager focused on alternatives. We are driven by not only, you know, returns a core focus of our company. We have a tagline is To deliver extraordinary outcomes, and that's not only for our investors or for our team, but also in the communities that we invest in. So impact is a big focus of ours, and we measure this. We positively impacted close to 11, 000 lives, and that's not by building. Real estate and saying, Oh, you know, people have moved into our buildings. That's through philanthropy and charitable donations, which we, uh, you know, really focus on, you know, since embarking on our journey to become an asset manager, we've grown a development business that now totals over about a billion and a half dollars in completed value that includes purpose built student accommodation. We've launched two real estate funds. We're about to launch a third fund and our focus is really providing options to investors along the risk spectrum. So our flagship fund, which is focused on rental housing and impact. Is, you know, kind of core plus returns, eight to 12 percent returns. Um, we have recently launched a self storage business and a self storage fund through the acquisition of a, of a self storage manager, and that will be in the 12 to 15 percent net range. And then we also have a development vehicle where we bring in limited partners to help fund our developments alongside our sponsor equity. And that is, you know, kind of 18, uh, plus net returns. And the idea is. You know, ideally together with our private equity business and infrastructure business, be a one stop shop for allocators as they look to invest in alternative assets. Yeah. So if anybody is listening to this and you have interest in any of the things that Aly's talked about, just give us a call and we can walk you through what your options are and how you can get involved in that. Oh, Aly trends are always important. Right? Anybody who does investing, if they do it without having an eye on demographics and eye on trends, eye on things like that, you know, they're kind of wasting their time. They don't really see the big picture. Uh, when you look at trends, cause you've been around and you played this since you were six years old, what are the trends that you're seeing in student accommodation in Canada today? It's a very topical issue, Bob, with all the headlines around, uh, you know, students, particularly international students, what I would say is, you know, we're, we're driven in Canada by a number of things, including our demographic issue. We have, you know, one of the lowest fertility rates in the world. A couple of that with. Some really good things about Canada, which is our stable government, our world class education institution, climate resiliency, and you have a number of people here who want to study in Canada as a gateway and entrance into permanent residency. Now, the problem with that is. As we all know, Canada has a pretty big housing issue right now, you know, the lack of supply, you know, affecting everyone across the country is pretty huge. We have the lowest vacancy rate ever. You know, I think it was clocked at around 1. 5 percent across the country recently by CMHC, which is the, you know, federal government's housing agency and CMHC has said As of last year, the number is actually higher now that we need three and a half million homes to restore affordability. Um, so what we're seeing is that you've got this convergence of more people wanting to come into the country, particularly students, so they can gain, you know, fast track entry as a permanent residence upon completing their studies, and you have nowhere to house them. And so what we are seeing is, you know, strong rent growth, uh, you know, in, in student housing and couple that with, you know, the fact that student housing I would say is, you know, a fairly, uh, nascent asset class in Canada markets such as the UK, U. S. and Europe. It's a very sophisticated asset class and has a lot of institutional capital behind it. Canada, we're, you know, at the early stages of student housing accommodation, and that should create, you know, tremendous value opportunities over time, you know, kind of finishing off on the trends and student housing, you know, we have a 500, 000. Bed shortfall of student housing in Canada that's published by, you know, one of the leaders in student housing research. And unfortunately we only have 165, 000 total student housing beds today and only 15, 000 beds in a pipeline for development. So, you know, we see the trend of strong demand, low supply, which, you know, in turn results in higher rental rates continuing on for quite some time. Yeah. It's also a good idea to be a leader when there is a new asset class, uh, to be out there early. That's where opportunities generally, uh, arise. Is that what you find as well? Is that why you're excited about this asset class? Very much so. I would say, you know, there, there's a, there's a few things that make this asset class very interesting to us. You know, some of the characteristics I previously mentioned, we think it just drives a lot of alpha. So, you know, on the other end of the housing spectrum, you take, for example, a number of established public or private REITs out there that are focused on multifamily, they're capped in their ability to achieve rent growth due to rent control and turnover. You know, the average turnover, I'll give you an example in the greater Toronto area, has historically been like, low double digit, call it, you know, 10 to 15%, and, uh, just, you know, for for the listeners, turnover refers to the percentage of units. That vacate annually because of the rent growth in this country because of the supply demand dynamics that I mentioned, this number has gone into the low single digits and so the ability to capture rent growth has become very challenging for most of the owners out there who have, you know, old stock cap rate. As an example, the largest publicly traded multifamily REIT out there, their average portfolio age is 40 years. And so, you know, those buildings are primarily rent control versus newer buildings in Ontario, as an example, that are built, you know, after November, 2018, you can effectively mark to market every year and charge whatever, you know, the market will bear. Student housing, we don't have that issue because students have natural turnover. Okay. They're, you know, typically moving annually between units, what I would say, and what we've seen is that if a student comes in from a first year dorm, second year, they're usually living in a shared unit to three, four bedrooms, even, but then as they get older and mature, you know, going to fourth year or even graduate, uh, years, they're moving to more private style units every time they move that allows you to capture rent growth, uh, even in a rent control building and at a minimum at a maximum, every four to five years, these tenants are moving out. Historically in our portfolio, we've seen about 50 to 60 percent turnover, which is a huge difference compared to a traditional multifamily building. So that's really attractive. Because you're getting the mark to market on rents, you're capturing inflation, and those are some of the characteristics that, you know, purposeful student accommodation offers compared to other forms of housing and even other forms of real estate. Private Debt and Equity, our website, uh, on which this podcast is listed. There's articles in the news recently about student housing, student accommodation, and that's where our, our newsletter got lit up. People coming in and saying, you know, Hey, I'm interested in student housing. There are a couple like student housing, music royalties, a few things that are off the charts for most people that kind of catch their, catch their interest. So. You know, for those people who come from that direction, you know, they're thinking about investing in returns and, uh, returns are not just about how much you make, but what kind of safety you have, uh, in that asset class. So talk a bit about, uh, you know, why. Student housing would be attractive investment option for potential investors. Absolutely. So, you know, like everything, Bob, the devil is in the details. And obviously recently we've heard about a potential or actually an acted cap by the federal government. on international student visas. Now what we've learned, because, you know, the moment that information came out, we had our team do a deep dive on, you know, where we believe this is going to be targeted. And in fact, more recently, there's been articles, you know, explaining that a lot of the surge in international students has really come from private unregulated colleges and even public colleges, some colleges in Ontario have seen, you know, a 300. percent increase in the past three years in the amount of international students they've brought in. Our focus in student housing is to focus in the best in class university markets. We think these are stable markets, and much like investing in primary markets in real estate, you know, which provides more liquidity, we feel the same way about student housing. You know, top university markets. And so, you know, that's one differentiation that I would bring to the table. Not all student housing is the same. And that even exists for the type of units that one, one can acquire. So historically we've seen, uh, competitors in this space own and develop products that have multiple beds. So, you know, five, six or seven bedrooms. Our focus is on four bedrooms or less. We just see more demand for that product, particularly coming out of COVID, but notably CMHC who provides government insured loans in the housing industry. They only insure loans on student housing. Uh, that's off campus that has four bedrooms or less. So that's an important distinction because that creates more liquidity and values assets, you know, on a much lower cap rate because the difference between a CMHC loan today versus a conventional loan is about 150 to 250 basis points. You can take current CMHC loan in the 4 percent range. And high 3 percent range versus, you know, a traditional, conventional mortgage, which would be in the 6 percent range today. And so that's another important distinction and one area we focus on, and it's characteristics like those you really want to make sure you're aligning yourself with, uh, you know, a group who understands all those important distinctions because it can really impact your returns over time. Yeah, so if you compare student housing as an asset class to other asset classes that are out there, how do they compare? Well, I would, I would go back, Bob, to what I mentioned earlier. The ability to mark to market rents is really different in student housing compared to, say, for example, Office or industrial where you enter into long term leases, I would say the only asset classes that, you know, turnover more than student housing are hotels and, you know, self storage, self storage are on monthly leases, hotels come with a lot of economic and cyclical risk. In them, student housing, we think are bolstered by the sound fundamentals of the housing market, but have that benefit capturing frequent mark to market and rents. Yeah. So one of the things that is affected many of the asset classes is financing. You know, there are some, the, the, uh, multifamily groups who are in there trying to come in, upgrade it, bump the rents, flip it in three or four years. You know, they've kind of been in short term floating rate investments and that's really squeezed their profitability. You're not in the buy and flip business. So you can, you can better take a longer term view towards financing. What have you done? If you look at your portfolio, how does your financing line up? Bob, so because we're developers and long term owners, we have created really prudent strategy in our development projects, which development projects are on similar, you know, a floating rate short term debt. What we've done are things such as enter into rate caps or hedges during our construction term to minimize any interest rate fluctuation. Cause what you probably heard out there and the readers have heard out there is over the past two to three years as prime rate has increased, a lot of developers have run into trouble because all of a sudden, you know, their loans are priced much higher than their interest reserves, which the banks would have provided them when they entered into construction loans would have, you know, allowed for. And so that creates equity shortfalls. We take that risk away by paying slight premiums for caps and hedges. During our construction duration. And that's a feature in our, all of our development projects and investors can take comfort. They ever invested in our development projects, that risk is mitigated. In our long term assets, we benefit from what I mentioned earlier, CMHC insured fixed rate debt in our open ended fund, our flagship fund, which is focused on rental housing, our weighted average term to maturity is seven years. And we have a fixed rate. Uh, in the, in the 3 percent range, so very attractive. And, you know, I think that provides a lot of certainty for investors that, you know, returns won't fluctuate, uh, because of that weighted average term to maturity again, because we focus on student housing that has four or less bedrooms as well as traditional multifamily. We can benefit from that low cost CMHC insured mortgage product that is the lowest cost financing out there in the real estate industry. Yeah, one of the things that I had fights with my kids about was, you know, they have some. Pretty big mortgages and when rates were down near zero, I said, lock it in, lock it in. And they said, no, no, but you got to pay too much to lock it in. Right now they're finding out how much they have to pay to not lock it in. Uh, back last summer, I, I attended a tour that. To the, your firm did at York university. Yeah. And I just have to make a comment that, you know, you're, you're talking best in class, but I haven't seen in your portfolio that you have, uh, student residences yet at Western, uh, which would be best of class, right? You have York, that sort of thing is that, uh, but that's where you went, right? You're a York, you're a York grad. I saw in your bio. I am. Yes. Yeah. But I did a tour of that, uh, of the quad at York university. It's spectacular. What I see is that the average property is about four years old. Pretty new, huh? Yeah. You know, our portfolio, you know, really compares favorably to some of our competitors, both in the private REIT space and public REITs, you know, public REITs, we, we did some research and found that the average age of the public is is about 40 years. In the, in the multifamily focused REITs compared to ours at four years of age, even on the private REIT space, the average age is, you know, much higher than ours, 10 to 20 years, depending on the REIT and what that just means is that these owners and operators need to, you know, reserve more capital for capital expenditures and repairs and maintenance, and that's a distinction that we have a huge competitive advantage over because of our new age assets. Many of which are built from our development pipeline. Uh, you know, we're, we don't have to reserve as much income and it can flow to the bottom line to investors and pay, you know, higher distributions. Uh, so that's a, that's a key distinction, you know, going back to our development business. I think that's a unique offering we bring to the table compared to the public and private REITs. As I mentioned earlier, you know, we are developers, we have a billion and a half dollar pipeline of various housing, uh, developments and our open ended flagship fund has a right, a first opportunity to acquire all those assets. That means the portfolio will, as some of our existing assets get older, they will be replenished with newer assets. And we think our average age will, you know, continue to be among the lead, uh, the best out of the competitive set. And it provides investors and our fund. Another advantage is that we don't need to compete in the open market to acquire new age assets. New assets are what institutions and some of the public REITs are coveting right now. A number of the public REITs are trying to recycle capital and sell all their old product and add new product to benefit from, you know, no rent control or higher turnover. And these assets get really bid up in the marketplace. Thanks. Having access to a development pipeline, uh, you know, ensures we can just grow organically, uh, through, you know, forums, own activities. Yeah, and I guess if there was an opportunity down the road where, let's say, your inflow of funds coming in slowed down, you could take one of your older buildings, just flip it out and build a new one, and that probably helps your portfolio. Is that, is that something you'd look at, or is that, are you pretty much buy and hold forever? Uh, no, we're prudent managers. We're always looking at portfolio construction and, you know, we're, we're definitely focused on long-term growth and value. And, and, you know, most definitely our portfolio will continue to grow over time. However, we're always looking at assets, uh, you know, that we think if they've been optimized or, you know, there are market changes that are coming and because we're, you know, have deep market knowledge, we can see these things, you know, well in advance. We'll look to recycle out of, uh, you know, some assets, uh, over time, uh, but that won't be a constant activity of our, of our fund, uh, our open ended fund because our goal is to grow it, uh, and grow income, uh, over time. Yeah. Talk a bit about, you know, while you're talking about age of a product there, the quad, just talk about it, where you are in that, you know, I was just totally impressed with the, the building, but. When I was there, I think you're just breaking ground on, on the next unit next door. Just talk about where that property sits. Absolutely. So the quad at York University, uh, stems back from an RFP that we won back in, uh, 2010. And it was, uh, the ability to build Private on campus student housing on the Keele campus of York University. Our first phase started construction in 2015 and was completed in 2017. That delivered about 800 beds. Then in 2020, we started construction on our phase two building, which ended up completing in 2022. That added another 700 beds for a total of 1500 beds. Both those assets are now owned by our Open-ended fund vehicle, and we consider them the preeminent student housing assets in the country, given the fact that they're located on campus. And now York University has a subway line, which Western doesn't have by the way. I must get that in there. Uh, right now we are, uh, embarking on the next phase of the quad, and we plan to start construction at the end of 2024 on phase 3, which will deliver another 800 beds. And shortly after that date, Project is constructed. We think in time for the September 2026 school year, if all things work out, we will then quickly move to quad phase four. And so in total, we think we'll have about 3000 beds once all four phases are done. And York University really needs a lot more housing. In our latest estimates, they require 12, 000 student housing beds. They have a pretty old stock of housing, uh, themselves that they will need to renew. And so, you know, the need and urgency to deliver more student housing on campus at York is great. Yeah. So touch on ESG, everybody's interested in the environment today and should be, you know, we've just had a winter in Toronto with no snow and temperatures. I think it's cold today, but it's going to be back up to 14 degrees or something in, uh, you know, the end of February, early March. How does your firm look at ESG and, and how socially responsible are you, are you, uh, taking things when you are building or running a building like this? But, you know, before we go into that, uh, as a, as an avid skier, this season has not been, uh, great. So, you know, El Nino has certainly, uh, you know, uh, rained all and washed out all the ski hills in Ontario. While this year, you know, largely the weather patterns were due to El Nino, we do know, and as you noted, Bob, We need to take climate change seriously. There's an issue globally. Uh, the world is getting warmer. Um, it's causing impacts around, uh, you know, around the globe. We have a really pragmatic approach to how we drive impact and ESG in our portfolio. Put simply, we think that being environmentally sustainable and socially responsible in our investment activities delivers alpha and higher returns. I'll give a good example. In our open ended fund, we embarked on a, on a strategy of making sure we install water saving meters, uh, throughout our portfolio assets and buildings that did not already have them. So that's a really emerging technology. Over the past 12 months, we've saved hundreds of thousands of dollars in utility costs through, you know, our water saving meters, as well as other initiatives that we put through our portfolio, such as building automation systems, which help Bring temperatures up and down occupancy sensors so that when you're walking through a building, you know, lights turn on as opposed to being kept on all the time when you're saving that amount of money that ultimately drives higher income and higher asset values. Our focus is not to create impact and ESG just to make ourselves feel better or for marketing purposes. It's truly pragmatic and returns driven. And we believe over time buildings that are more sustainable, uh, will have greater asset value. Yeah, I would agree with that. Yeah. It's sort of final point, Aly is, uh, the important of alignment with investors and having forum as the largest investor in the fund that we're discussing here today. Just talk about that for a sec. Yeah, we, we think alignment is so important. It really drives everything we do in all of our investment activities where we have outside third party investors. I'll give a really good example. So in our, in our open ended flagship fund, we are currently the largest investor and we plan to be over time with a minimum 50 million commitment at all times. Some of your listeners have probably heard about. Evaluations and disparity between what asset managers are holding asset values in their funds versus what's actually happening out there in the open market. And some of these managers, they're doing this because they're misaligned. If they drop their asset values, their fees will drop and their promote and their incentive fees will be reduced. For us, because we're a major investor in the fund, yes, we earn fees, but more important than the fees are the returns we generate from our investment holdings. And because of the alignment we have with other investors, we are always, you know, erring on the side of caution when we're looking at our asset values. A really good example is, This past year in 2023, we delivered about 11 percent net return for our Series F return share class. That was done because we were able to capture a lot of rent growth, but we also marked up cap rates by 30 basis points. Had we not, We would have had a return closer to 20%, which would have driven much higher promote and much higher fees. But as a prudent investor, we decided to ensure the portfolio represented the reality of what's going on out there. So it's a, it's an important point that you mentioned and one that should not go unnoticed as your listeners are looking to make investments in funds with managers. Yeah. It's always important to work with managers who are prudent and are working in the best long term interests of investors. And, you know, I think, uh, depending on when this particular episode gets released, uh, we've just done a, an episode on liquidity and why firms like yours are really looking for longer term investors. We're not looking for those who are trying to flip it and say, Oh, I think if they don't raise the cap rates, we might be able to pick up a few extra percent this year, and then we can get the heck out and move on. You're really looking for that longer term investor. Who's making a decision that they, this is a good asset class. They want to put it away, just let it grow. Is that a fair statement? Absolutely. Our open ended flagship fund is, you know, we look to as a permanent capital vehicle, and we're really looking for sticky investors who believe in the long term story of the Canadian rental housing sector because of the supply. Demand imbalances that we talked about because the fact that our government needs to continue to let in people, given our demographic issues and you know, the fact that you've got this tremendous imbalance that won't be resolved for many years. Yeah. So Ali, thanks for taking time to join us today and help investors better understand that there are some interesting ways to generate passive income in real estate. Bob, uh, really appreciate the time. Thank you for having me. And I hope this, uh, session has been informative to your listeners. People who invest in your fund. Don't get calls in the middle of the night that a toilet's plugged or anything, right? Is that, I was asked to ask. Absolutely not. Let's not do that. Right? No, absolutely. From a disclaimer point of view, for making any investments, it's crucial to consult a professional financial advisor to determine suitability. We have full disclaimers available on private debt and equity. ca. Also, don't forget to follow us on your preferred podcast platform. Subscribe to our YouTube channel to stay updated on new episodes. If you're eager to learn more about today's topic, click here. Look at the dedicated channels within private debt and equity. ca and you can learn and improve your education about investing in today's private debt and equity opportunities. So just in closing, I'm Bob Simpson. It's been a pleasure to guide you through this enlightening conversation, Aly. Thanks for. Thanks for coming out, spending the time. I know you're a busy guy, but please remember, knowledge empowers you to make informed decisions with your investments. Until we meet again, stay focused and disciplined on your financial journey. Thanks for listening.