Student Housing In Canada: In Search of a Market Leader

December 5, 2018

Can CHC Student Housing rise from the ashes to become one of Canada’s premier student housing owners?

Founded in 2012 by Craig Smith, CHC Student Housing is one of Canada’s early purpose-built student housing firms. Through two investment vehicles, CHC acquisitions included stakes in eight, high-quality student housing assets in major university markets throughout Ontario. In November 2013, CHC became the first student housing public company listed on the TSXV.

Unfortunately, sometimes being ahead of the curve has its consequences. In 2014 and 2016, two separate public offerings to raise additional capital failed, which threw CHC into a period of turmoil. In early 2018, Simon Nyilassy of Marigold and Associates was hired by CHC to stabilize the company and evaluate future options. To date, CHC has been able to refinance debt obligations and dispose of smaller assets, which has helped to stabilize the portfolio’s cash flow.

Nyilassy, who now serves as CHC’s President & CEO, attributes the company’s growing pains to a persistent view that student housing in Canada remains an emerging real estate sector.

Today, CHC is beginning to explore new opportunities which may include raising additional capital and/or teaming with a strategic partner who shares the company’s vision of becoming Canada’s preeminent purpose-built student housing owner and developer.

To further explore CHC’s experience and goals moving forward, Simon Nyilassy agreed to answer the following questions:

SL: What’s behind CHC’s desire to build a student housing platform?

SN: Canada lacks a market leader in purpose-built student housing. This is in stark contrast to other international markets such as the United States and United Kingdom, where an explosion of development has taken place over the past few years. Our board member Craig Smith saw the potential of this nascent sector in Canada. He laid the groundwork to capitalize on it through the creation of two investment vehicles, which have invested in high-quality assets in Southern Ontario.

SL: Can you provide a brief history of CHC’s ups and downs? ​

SN: CHC got off to a strong start in the early part of this decade. Of the two entities mentioned, CHC LP, a private limited partnership, was formed in April 2012 and acquired a 50% interest in four high-quality purpose-built student housing assets in three markets in Southern Ontario. Subsequently, CHC Student Housing Corp, the other entity, was incorporated In April 2013, and by early October, it had acquired four assets in major university markets. On November 23, 2013, CHC became the first public company in the student housing sector by listing their shares on the TSXV.

To further its expansion strategy, CHC filed a follow-on Public Offering in 2014 to raise $92.5 million for the purchase of several properties in Southern Ontario and Quebec. These properties included the 50% ownership of the CHC LP assets. However, this transaction proved to be too ambitious for the Canadian capital markets at that time and the offering was pulled when the underwriters failed to raise sufficient funds to complete the acquisitions.

In spite of these initial setbacks, CHC and others continued to have confidence in the sector. In 2016, Dundee Special Purpose Acquisition Vehicle created a new public company, called Canadian Student Living, to buy the assets of CHC LP, CHC Student Housing Corp and various other assets. They filed an Initial Public Offering to raise $112.3 million to fund this purchase. When Dundee was unable to convince the principals and investors to convert their ownership stake into shares of Canadian Student Living, the transaction fell through after a year.

SL: Where does CHC stand today?

SN: In early 2018, CHC hired Marigold and Associates to implement a strategy to stabilize the company and evaluate future options. To date, Marigold has helped CHC to refinance all of its debt obligations and complete a disposition of a smaller property. These moves have allowed the company to stabilize cash flows and provide a base from which to implement future options for CHC Student Housing Corp.

SL: Are rumors true that you’re planning an upcoming roadshow to raise funds for CHC?

SN: Raising additional capital and/or finding new partners are definitely options. The exact nature and timing of any capital raise will be subject to many factors and any details will need to be announced in the appropriate manner for a public company.

SL: Is the timing right now?

SN: CHC owns high-quality assets and also enjoys a strong operating team. Also, the interest in the sector appears to have intensified in the last few months

SL: Who is your ideal partner to grow CHC? 

SN: To fully capitalize on the potential for the sector requires a well-capitalized investor who shares our vision for the opportunity to create the market leader in Canadian purpose-built student housing and who has the longer-term time horizon necessary to achieve that goal.

Philadelphia’s Contribution to the Student Housing Industry

October 30, 2018

I am one of the fortunate ones who gets to observe the genesis of the student housing industry in Canada. I continue to meet new contacts all of which have the same conviction regarding Canadian student housing’s potential. I particularly enjoy meeting those who have experiences with or are educated about the U.S. student housing market and its players.

I recently spoke with a developer about his newly constructed, purpose-built student asset in Ottawa. – Beautiful asset by the way, 100% occupied with a waiting list in its first year of existence, which supports the hypothesis that Canadian students desire similar housing options that are available in the States and Europe.

As with most “getting to know you” conversations, both of us discussed our back grounds in the student business. Inevitably these conversations include “Do you know X? / Do you know Y?” It struck me that a common response of mine is always: “Yes I know him. We use to work together”.

As with with many of today’s student housing professionals, I am an alumni of GMH Capital Partners.  I spent most of the 2000’s at 10 Campus Boulevard, Newtown Square, Pennsylvania, the corporate headquarters of GMH. During that time, GMH Communities Trust was the largest owner of student housing in the nation with more than 60,000 beds. In early 2008, the GMH portfolio was sold to ACC for $1.4 billion dollars.

Since 2008, a core group of the GMH team remained. GMH is once again growing a portfolio which currently totals 3,595 beds in seven states. GMH has an additional pipeline of approximately 2,131 beds.*

Others have relocated within the Philadelphia MSA and continue in the student housing business. When people think of where America’s premier student housing firms are based, they most likely think of Chicago or Austin, but the Philadelphia metro is home to a number of prominent student housing developers, owners and brokers all of which are manned with GMH alumni:

University Student Living (Marlton, NJ) – a company of The Michaels Organization, University Student Living was ranked #22 of the top 25 student housing owners in 2017 with 11 assets totaling 6,580 beds. University Student Living has a reported pipeline of eight properties totaling 7,748 beds.*

Balfour Beatty (Malvern, PA) – Divisions include Balfour Beatty Communities, Balfour Beatty Campus Solutions and Balfour Beatty Investments. Balfour Beatty ranked #14 of The Most Active Developers in Student Housing 2018 with six projects in the pipeline totaling 6,000 beds.*

Campus Apartments (Philadelphia, PA)– Currently celebrating their 60th year, Campus Apartments was ranked #7 of the top 25 student housing owners in 2017 with 33 assets totaling 17,048 beds. Campus Apartments has a reported 2018 development pipeline of an additional five properties totaling 2,039 beds.*

TSB Realty (Paoli, PA) is a full service, national investment sales firm specializing in the valuation and disposition of student housing communities. Founded by TSB Capital Advisors’ Timothy Bradley and GMH alumni Austin Repetto in 2014, TSB has closed over $2 billion in student housing sales totaling more than 22,000 beds since its inception. TSB currently has 10 properties on the market totaling more than 4,000 beds.

*Source: Student Housing Business’ “The Goldbook of Student Housing 2018”.

A few alumni ventured even further and are now located in the above mentioned student housing meccas of Chicago and Austin, holding senior positions at some of the nation’s most well know student housing firms.

When I think of the GMH alumni network I am reminded of the “coaching tree” concept in the NFL.  The most well know coaching tree is that of Bill Walsh who’s disciples went on to be great or even legendary coaches in their own right. Gary Holloway is considered a student housing pioneer so it is no surprise that those who worked for him in the early days have gone on to become today’s decision makers who are tasked with overseeing the evolution and growth of the U.S. student housing industry. I am proud of the accomplishments of my former colleagues and happy that I still call them friends.

Click link below to see the GMH coaching tree.

GMH Coaching Tree

Student Housing in Canada: Is there room for U.S. investors?

July 9, 2018

As an investment sales underwriter, I have a crystal ball that enables me to make the following predictions:

  1. While it will never be on the same level of the U.S. industry due to the market’s smaller size, the student housing industry in Canada will continue to evolve and grow. Purpose-built housing will become more attractive to residents, investor/developers, and Canadian institutions. P3 arrangements will gain traction and offer a logical option for Canadian universities looking to add to or upgrade their on-campus living facilities.
  2. The dominant players will be the ones able to convince the Canadian institutions that student housing is a stable, stand-alone, property type worthy of investment. Due to the many cultural differences discussed in part twoof this series, as well as some financial- and market-specific considerations outlined below, the major players will be Canadian or Canadian/U.S. joint ventures.

Writing these blogs has allowed me to meet many wonderful people in the student housing business on both sides of the border and to reconnect with a lot of old friends in the U.S. industry. In talking to my American contacts, my question was simple: Would you look to build to buy or build in Canada? To my delight, there were several yeses and a few maybes. Though I’m not a tax accountant and don’t know the ramifications of a U.S. company owning real estate or operating a company in Canada, here are some of my observations:

Poor Grades for Demand Tracking
A challenge presented by Canada’s student industry is its young age. According to one owner/developer, there’s a lack of solid supply and demand statistics. Off-campus living is fragmented with students residing in single-family homes and low to mid-rise apartments (high-rise urban markets). As discussed in my second blog, Canada also has a large population of second-generation immigrant students who choose to live at home. When the developer I interviewed decided to build his complexes, he had to “believe” that the demand was there — and fortunately it was. I can see this being a little nerve wracking for any U.S. developer in Canada, although as another U.S. expert pointed out, the situation was much the same in the U.S. in the mid- 90s.

Though a recent article in the Financial Post claims there’s a demand for 416,000 student beds in Canada, this figure was met with some skepticism by the people I talked to.

Urban Locations: Toronto vs. Philadelphia
Canadian universities tend to be located in dense urban areas where land costs are extremely expensive, making new student housing development unfeasible.

Take Toronto versus my home town of Philadelphia as a case in point. Both cities are home to a large student populations. The University of Toronto has an enrollment of 88,766. The University of Pennsylvania and Drexel University have a combined total of 50,401 students in Philadelphia’s University City neighborhood and Temple University has an enrollment of 39,581 in North Philadelphia.

Competition for development sites in Toronto is fierce pushing the prices of high-rise condominium land over $250 per square foot of buildable area. The most recent apartment rental development site close to the University of Toronto sold for $189-per-buildable square foot. High density residential land values in the premier locations of Philadelphia on the other hand range from $45 to $55 per buildable square foot.

Lack of Liquidity
The Canadian student housing industry is in its infancy. Campus Living Centres, Campus Suites, CHC Student Housing, Knightstone Capital Management, and Varsity Properties, along with a few others are industry pioneers. Multiple contributors to this blog commented that there is no student deal flow in Canada. One source asked me “During your research, how many student deals have you heard closed?” My answer was two. According to Real Capital Analytics, three buildings classified as “student housing greater than 200 units” have sold in all of Canada since January 2017! I note that RCA may not have the superior coverage in Canada as it does in the States.

Gary Holloway, stated in Part One that a tipping point for the U.S. industry came in the late 1990s when it was finally proved that there were buyers for student housing. Once the institutions became involved with purchases, student housing was seen as its own product class and the industry took off. This must happen in Canada — institutions are key.

Debt Financing
Every American multi-family or student housing owner/developer looking to expand in Canada should know about the Canadian Mortgage and Housing Corporation (CMHC). As per the document linked below: “CMHC mortgage loan insurance provides access to preferred rates that can lower borrowing costs for the construction, purchase and refinancing of multi-unit properties and facilitates renewals throughout the life of the mortgage. In addition to mortgage loan insurance, CMHC offers a variety of services and products to support the development of rental properties, from planning, through construction, and beyond.”

CMHC insurance is based on its own value underwriting, which tends to utilize going-in capitalization rates 0.25% – 0.75% bps above-market cap rates. The benefits, however, include LTVs of up to 85%, amortization periods of up to 40 years, and below-market interest rates currently estimated at 3.20% to 3.25%. Insurance premiums and recourse provisions do apply. A link to CMHC’s reference guide can be found here.

CMHC historically only applied to traditional multi-family and would not include student assets unless the property had an agreement with the university it served or was located basically on the school’s doorsteps.

Recently, CMHC broadened its criteria to allow for student housing assets in close proximity to a university or directly on public transit leading to the school, and which have no more than four bedrooms within a unit. One of my sources questioned this new openness citing a recent experience in London, Ontario, home to the University of Western Ontario. While looking to refinance, this individual’s property was turned down for CMHC insurance because the deal was labeled a student housing asset. So clearly, there are still no guarantees!

Special Thanks
It’s been a pleasure to write this blog series, and I hope you have found them informative – and entertaining. I would like to thank the following contributors to part three: Joseph D. Pasquarella (Newmark Knight Frank), Trip Lukens (Valbridge Property Advisors), David Fulop (Cushman & Wakefield), A.J. Keilty (Varsity Properties), Daniel Bragagnolo (First National Financial LP), Craig Smith (CHC Student Housing), Henry Morton (Campus Suites), Brian Thompson (CA Ventures), Jason Taylor (EdR), Mike Porritt (The Scion Group), Sandy Harrington (IC Funding) and Jason Schwartz (Blue Vista Capital Management).

Investment Insights: Creative Thinking Enhances Opportunity

June 18, 2018

In a land market as tight as Downtown Toronto’s, investors need expert partners with inside knowledge with the ability to see hidden opportunities

With unimproved land availability in Toronto virtually non-existent, developers have turned to purchasing improved sites, up-zoning the land, and redeveloping it. Some groups choose to create additional land value via the zoning process and then sell at a healthy premium to a third-party who will build the end product. With the recent phasing out of the Ontario Municipal Board (OMB), market participants are quoting a 40%-50% premium for zoned vs un-zoned land.

As an urban land specialist servicing clients in this challenging environment, you must have a deep knowledge of the market, understand your clients’ needs, and have that added ability to think outside of the box. Liam Sauro, Associate Vice President in our Capital Markets Toronto Central group, displayed all of these attributes in finalizing a recent deal – and it started with a hunch.

Liam was aware that the Wynn Group of Companies was in conversation with Timbercreek Asset Management to sell a portfolio of approximately 4,500 residential units and three million square feet (sf) of commercial space — a transaction estimated at over $1 billion.

In assessing the portfolio, Liam had a hunch that one of its assets was not being fully valued at market for development lands. The downtown site in question was 484 Spadina, home to the former Waverly Hotel. Zoning was in-place for a rental apartment totaling 15-storeys and 125,423 square feet to accommodate 309 (279 sf) bachelor units and 5,042 sf of first-floor retail space.

On behalf of a client, Adrian Rocca of Fitzrovia Capital, which specializes in high-end residential development (https://www.gta-homes.com/condo-developers/fitzrovia-capital/ ), Liam approached the Wynn family with the theory that the site may be undervalued as part of a larger portfolio. He believed value could be enhanced by broadening the building’s design from small bachelor units catering exclusively to university students to incorporating two- and three-bedroom units that would serve both students and young working professionals.

Together, Liam and Fitzrovia drafted a letter of intent and presented it to the Wynn Group. In the end, Fitzrovia and its partner AIMCO closed on 484 Spadina in March 2018 for $23.6 million dollars, which equates to $188.20 per buildable square foot. Fitzrovia is currently in the process of altering the building’s design in support of Liam’s idea.

With many players chasing very few quality deals, such creative thinking is key to maximizing value in the constrained Toronto development market. For further information about this deal or to inquire about downtown development opportunities, please contact Liam Sauro directly: liam.sauro@cushwake.com

Shawn P. Lubic, is Senior Financial Analyst, Capital Markets, Cushman & Wakefield.

Part Two – Student Housing: The Great Cultural Divide Between Canada and the U.S.

June 7, 2018

By Shawn P. Lubic, Senior Financial Analyst, Capital Markets, Cushman & Wakefield, Toronto

Canadians are Just Like Americans – Wrong!

What is it that American student housing owners and operators don’t understand about Canadian student housing?  To my surprise, a common refrain has surfaced: “Americans don’t understand our culture.”

Weighing Cultural Differences
In addition to Canadians spelling color, favorite, neighborhood, and center incorrectly, I’ve learned that there are lots of cultural differences between Canadians and Americans. In my two years living above the 49 parallel, I’ve observed the “niceness” we hear about is real, social justice is top of mind, and giving back to the community is big for individuals and corporations.

Once you think you’ve figured things out, you then realize you only know about oneprovince; in my case, Ontario. Next to Russia, Canada is the second largest country by land mass, and its ten provinces and three territories are all unique in their own way. Quebec is even recognized as a distinct society in the constitution, and has its own French language and civil laws. Then there’s the Western and Atlantic provinces, which are whole other stories.

As one Canadian student housing veteran put it: “It’s hard to successfully manage properties in each of these provinces from Chicago or Texas.”

 It’s Not a Party Scene

Of course, closeness to campus is the most desired trait of a Canadian student housing asset, and students appreciate purpose-built amenities such as fitness centres, social /study rooms, and so on, but American staples like one-to-one bed-bath ratios and in-suite washers and dryers are not expected. Neither is a “party atmosphere”, which is a common feature of off-campus, purpose-built housing.

“Canada doesn’t need jiggly leasing agents,” said one source. While this sounds crass, I got what he meant. How many student residences have I toured that had beautiful staff at the front desk? Each complex is a pool party or BBQ waiting to happen. Websites are populated with gorgeous young people having the time of their lives. In Canada, the “party scene” as a selling feature is pretty much non-existent. Housing is more utilitarian in nature.

On-Campus Living is First Choice

Like many U.S. university students, I did my time in on-campus housing for one year and then high-tailed it off campus for the remaining three years (four actually – sorry Mom and Dad). Canadians, on the other hand, see living on campus as a big part of the post-secondary education experience. Universities, as a result, are continually looking to add beds on campus for both first- and subsequent-year students.

The Foreign Student Factor
Canadian universities have a high foreign-student ratio. According to a CBS News study, the number of foreign students at the University of Toronto increased from 10% of enrollment in 2007 to 20% in 2017. Foreign enrollment at the University of Ottawa has tripled in the past 10 years and represents about 23% of total enrollment at the University of British Columbia. Contributors to this blog series consistently commented that 50% of the students living in their facilities were either foreign or first-generation immigrants.

As a source commented:  “Canada is a young country with a large immigration population. A lot of students are first generation. This group is more cost conscious so they’ll live at home or rent housing based on cost. If they were to live away from home, they would prefer to live on campus or in university-controlled housing.”

Another person noted that 50% of the students living in his purpose-built housing were foreign. Unlike new immigrant students, foreign students must pay a hefty premium for being educated here and tend to be well financed. In fact, as my source said, these students desired a higher living standard that his complex provided. This, he saw, as an opportunity.

Close, But No Baguette

Nothing exemplifies the perils of not understanding a culture more than Campus Crest’s entry into Canada. McGill University students in Montreal are a prime example of a community after the “experience” and demand for on-campus and university-controlled housing is immense. Between 2003 and 2010, McGill purchased three hotel properties within blocks of the campus and converted each to student housing. These projects were highly successful.

In an attempt to replicate this success, Campus Crest purchased the Delta and Holiday Inn Midtown between mid-2013 and early 2014, and converted them into the Evo Centre-Ville and Evo Vieux-Montreal. Both properties were well located close to campus and renovated to a high quality. According to an article in RENX, at the beginning of the 2014-2015 school year, Campus Crest achieved a total occupancy level of 10.9%. In order to drive occupancy, management held “the world’s largest Toga party” in the winter, threw an “EvoHouse party” in April, and hosted a McGill varsity sports awards gala. As of May 2015, preleasing for the 2015-2016 school year was 14.6%. Campus Crest sold their interest in the Evo assets in the fall of 2015 (prior to their portfolio sale to Harrison Street).

Seven Years of College Down the Drain
Understanding the culture is key to owning and managing successful student housing properties in Canada. While high living standards are universal, cost-conscious first-generation Canadians, foreign students, and generally more conservative Canadians are not the ideal target audience for extras like planned parties. Students, being students, find other places to have fun.

The upcoming third part of my blog series will delve into the “numbers”. What are the ramifications of cross-border investing? Is there enough demand to warrant U.S. companies coming to Canada? Is it worth the headache?

I would like to thank the following contributors to this blog: Jason Taylor, EdR Collegiate Housing; Mike Porritt, Scion Group; Patrick Miksa, Knightstone Capital Management; Henry Morton, Campus Suites; and Craig Smith, CHC Student Housing.