Strategic Student & Senior Housing Rides Demographic Waves
August 13, 2019 | James Sprow | Blue Vault
There are three trends and related strategies that combine to make a nontraded REIT program that invests in two distinct asset types both logical and compelling:
- U.S. demographic trends that will increase university student enrollments and demand for student housing along with the aging Baby Boomer generation that will increase demand for senior housing.
- Investing within sectors that are characterized by fragmented ownership and will benefit from consolidation and professional management.
- College enrollments and seniors retiring are both recession-resistant, even negatively correlated with the economy’s ups and downs.
SmartStop Asset Management has successfully used demographic trends and consolidation of assets in sectors with fragmented ownership to create wealth for investors in their self storage REITs. Strategic Storage Trust gave its early investors a capital gain of 37.5% when it merged with Extra Space in 2015 for $13.75 in cash per share. Most recently, Strategic Storage Growth Trust had a cash exit price of $12.00 per share for its investors when it merged with Strategic Storage Trust II, a 20% capital gain on the $10.00 common share offering price. The majority of self storage properties are still owned and managed by “mom and pop” investors, making the sector ideal for consolidation and professional management that can increase rates and occupancies while reducing overhead. That’s what SmartStop has accomplished with their nontraded REIT programs to date.
Now, in a program that, on the surface, appears to depart from the successful self storage strategy, we see the same vision at work. Strategic Student & Senior Housing Trust, Inc. (“SSSHT”), in a public offering that was declared effective in May 2018, as the name implies, is investing in two distinct asset classes that share the three characteristics cited above. They are student housing properties within easy walking distance to major universities and senior housing properties that offer a continuum of senior living choices from active-adult age-restricted housing, to independent living, to assisted living to memory care. Each asset type is seeing increasing demand due to demographic trends, each is in a relatively fragmented-ownership sector, and each tends to have a low correlation with broader economic trends.
Blue Vault looks at the logic of the nontraded REIT’s strategy and what the company sees in the markets for the two distinct asset types. First, both sectors are still relatively small compared to other multi-housing types. Of the $160 billion in annual multi-housing investment sales, student housing comprised around $8 billion and senior housing just $12 billion, together between 5 and 7% of total investment sales. But, as global markets have been slowing down, there has been more interest in these sectors among major U.S. and global asset managers.
On the student housing side, SmartStop sees the “Gen Z” students who are very academically focused and attracted to properties that offer the amenities that last century’s dorms don’t always provide. SSHT’s strategy is to purchase student housing properties close to major universities, with the upgrades that Gen Z students look for like modern kitchens, ubiquitous WIFI, study areas to collaborate with friends and fellow students, and one bathroom per bed. Currently, the REIT has a 198-unit, 592-bed property near the University of Arkansas and a 125-unit, 434-bed property near Florida State University. The REIT targets properties located in or near cities and schools with 15,000 to 40,000 students or greater, classified as “Tier 1” schools by U.S. News & World Report, with Division I (FBS) football programs. The REIT also has a small investment in Power 5 Conference Student Housing which owns two properties in Ann Arbor, Michigan and Columbia, South Carolina.
In their senior housing investment strategy, they focus on acquiring, repositioning and/or expanding existing senior housing properties that have an emphasis on private pay sources of revenue. These properties are considered more stable and predictable than those relying on government reimbursements. It’s important to point out that SSSHT is not a healthcare REIT and the private pay revenue stream reduces the risk of changes in government policies. The REIT currently owns four senior housing properties with a combined total of 581 units, located in Utah (3) and Oregon (1). The most recent acquisition, the Courtyard at Mt. Tabor in Portland, contains 201 independent living units, 73 assisted living units, and 12 memory care units, and the REIT is developing additional memory care units.
The REIT works with “best in class” third-party management companies to run the day-to-day operations at both types of properties. The student housing properties are managed by Asset Campus Housing, a leading third-party student housing manager, with annual contracts that can automatically renew. The senior housing properties are also managed by third-party senior living operators, with three to five-year management agreements, and performance-based incentives.
SmartStop Asset Management CEO H. Michael Schwartz summed up the Company’s overall strategy that typifies their nontraded REIT products in a recent press release. “Demand for alternative investments that are non-correlated to traded equities continues to grow as wealth advisors and individual investors increasingly recognize the inherent benefits of portfolio diversification. We are committed to providing our advisor partners and their clients with investment programs that can provide income and potential appreciation while avoiding the volatility inherent in traded securities. Additionally, our focus on defensive and recession-resistant real estate asset classes provides advisors and investors with additional hedging and diversification options that many find appealing.”
Strategic Student & Senior Housing Trust’s current public offering for up to $1 billion in shares of common stock has three share classes, Class A ($10.40), Class W ($9.40) and Class T ($10.00). The REIT raised $93 million in a private offering that terminated in March 2018. Through June 30, 2019, the REIT has raised about $4.7 million in its public offering.
Sources: SmartStop Asset Management, SEC, Blue Vault
