6.3% going-in on a 220 bed at a flagship. Where's the catch?

$180 a bed for a furnished turn made me laugh out loud. My non-student units cost more than that and nobody's putting a hole in the drywall with a futon.

Question from the cheap seats, does the parental guarantee actually show up in that 3.1% bad debt number or is bad debt low because of the guarantee? If it's the second, I'd want to know what their actual collection process on a guarantee looks like before I trusted the 3.1.

@wren that's the question I'd ask too. Guarantees are only worth what the enforcement effort is worth, and enforcement costs money that doesn't show up on the bad debt line, it shows up in G&A or in legal.

@ember, separately, 95.5% economic occupancy on a by-the-bed property is a claim about the lease-up week in August, not about the year. Ask for the pre-lease velocity curve, week by week, for the last three seasons. If they're at 60% pre-leased in April and finish at 95, fine. If they're at 88% in April and finish at 95, they're discounting hard in July and that shows up as concessions, which may or may not be in that 3.1%.

The thing I'd want, and nobody's said it, is the university's own housing plan in writing. 22% on-campus coverage at a flagship with growing enrollment is exactly the setup where a school decides to build 1,200 beds and finance them with a public-private deal. That happens on a 3 to 5 year timeline, which is your hold. Their facilities master plan is usually a public document.

@arbor that's a good one. I'd add: check whether any private developer has site control near campus. City planning agendas will tell you. New supply is the fastest way a 95.5% becomes an 88%.

I'm reading this twice and I still don't follow the exit cap piece. If they buy at 6.3 and sell at 5.75, does that mean they think the property gets more valuable per dollar of income? Why would that happen in a sector with an enrollment problem?

@juniper yes, that's what it means. A lower cap on the same NOI is a higher price. Sponsors model cap compression when they think either interest rates fall or buyers get more comfortable with the asset class.

The argument for it here is that student housing has become a mature, liquid subsector with real institutional buyers, so the pool of people who'll pay for it is deeper than it was ten years ago. That's a legitimate point. The argument against it is that the enrollment cliff is now well understood and priced by those same institutional buyers, so any compression from acceptance already happened.

@ember, run it flat. Exit at 6.3, same cap you're paying. If the deal only works with compression, you're being paid to take demographic risk with no cushion. That's the test I use on every deck.

I'll ask the embarrassing one. What is actually in "make ready" in a student deal? Is it the same list as a normal apartment turn plus furniture, or is it a different list entirely?

@compass in furnished by-the-bed product it's paint, carpet or LVP repair, full clean, mattress and furniture inspection and replacement, key and fob rekeying per bed, and appliance check. The furniture piece is what makes it different. Mattresses on a rough replacement cycle, desk chairs faster than that, sofas in the common area faster still. Some operators budget furniture replacement as a separate capital line rather than in make ready, which would partly explain @ember's $180.

@ember, ask specifically: is there a furniture and fixture reserve below the NOI line? If yes, the $180 is less crazy. If no, it's a hole.

Mostly lost on the operating side but I want to understand the guarantee as a document. Is it a personal guarantee on a residential lease, and does the parent sign the same lease or a separate instrument?

@vellum it's usually a separate guaranty instrument attached to the lease, signed by the guarantor, sometimes with its own credit check. Whether it's enforceable, what notice you have to give before you can go after the guarantor, and what your remedies are all depend on state law and on the language of that specific document. That's lawyer territory in whatever state the property sits.

@ember, to your actual question. The make-ready number is the tell, and not for the reason you think.

$180 a bed times 220 is $39,600. A realistic furnished turn on this product, from what I've seen in operating statements, runs somewhere between $400 and $700 a bed depending on how hard the year was and whether furniture replacement is inside or outside that number. Take the middle, $550. That's $121,000 against their $39,600. You're short about $81,400.

$81,400 off $1.56m NOI is $1.48m. At their 5.75 exit that's a $1.4m value difference. At the 6.3 you're paying it's $1.29m. On a $24.7m purchase you've eaten five percent of the equity before anyone's argued about the cap rate.

But the reason it matters more than the number is what it tells you about the rest of the model. If they left out most of a turn cost on a product where the entire building turns in one week every August, either they don't operate this asset type or they're building the deck for someone who won't check. Both of those change how you read the other lines. Go back through the opex with the assumption that every line is optimistic by a similar margin and see if 40.5% is still 40.5%.

On the exit cap, @canton is right that you run it flat. But if you fix the turn cost and run the cap flat and the deal still clears your hurdle, that's a real deal. Fix one and not the other and you've learned nothing.

One more thing to pull: their actual historical make ready per bed at other properties they own. Not their budget. Their actual. If they won't give it to you, that's your answer on the question you were going to ask next anyway.

@fathom's $550 midpoint is roughly what I'd use too, though I'd flag that the range is wide and depends heavily on whether the property is cottage-style with private baths or interior corridor with shared. Four private bathrooms per unit is four bathrooms to turn.

@ember, the other number I'd stress is that 3.1% combined loss to lease and bad debt. Combining those two in one line is a choice. Loss to lease is a pricing decision, bad debt is a collection outcome, and putting them together lets a bad number in one hide behind a good number in the other. Ask for them split. If they won't split them they've already told you which one is ugly.

Reading this whole thread as someone getting licensed and just noting how much of it is asking for data the sponsor already has and hasn't sent. That seems to be most of the job.

@halyard it is most of the job on the LP side. The deck is marketing. The data room is the deal.

@ember, one thing I'd add to your list. Ask what percentage of their beds renew year over year. Student housing renewal rates are structurally low because people graduate, but the spread between a property that renews 35% and one that renews 18% is enormous in turn cost and in leasing labor. That number is a better read on whether residents actually like living there than the occupancy is.

Turn week on student product is the single most operationally violent thing I've been near. I had a friend running 90 beds who hired 22 temp cleaners for five days and still didn't finish. Whatever the sponsor's make ready number is, ask how many days they budget between the last move-out and the first move-in. If it's under a week they're either very good or lying.

@quarry's point about the gap between move-out and move-in is the one I'd chase. In some markets leases are structured so the outgoing and incoming terms overlap by zero days, which means the property is paying for compressed labor at peak rates. Others build a 10 day gap in, which costs you 10 days of rent on 220 beds but buys sane operations. $1,040 a month over 10 days on 220 beds is about $76,000. Which choice they made is a real line in the model and it should be visible.

On the documents side, ask for the actual lease form and the actual guaranty form, not a summary. Things I'd look for: whether the guarantor's obligation survives an assignment or sublet, what the notice requirement is before you can pursue the guarantor, and whether there's a cap on the guarantor's liability. A capped guaranty at one month's rent is functionally decoration. Enforceability and notice requirements vary by state, so have counsel in that state read it.

@warrant a cap at one month would be a real find. Is that common?

@tally it shows up. Usually in markets where operators competed on ease of signing. Once one property drops the guarantee requirement or waters it down, the others follow within a season or two, because parents shop that.

@ember, that's actually a market-level thing worth checking. If your two older competitors within four blocks have dropped guarantees, your subject property's requirement becomes a leasing disadvantage and either occupancy or the guarantee goes. Call both of them as a prospective parent and ask.

Calling the comps as a prospective parent is the best idea in this thread and costs nothing.

Going back to the underwriting. @ember, your 6.3% going in is computed on NOI after their opex, and the whole thread has been picking at their opex. Rebuild it from the bottom.

Start with the tax bill. Purpose-built student housing gets reassessed on sale in a lot of jurisdictions and the reassessment can be brutal on a $24.7m trade. Whether it reassesses and on what schedule varies by state, sometimes by county, so pull the assessor's history on that parcel and on comparable trades. If their tax line is the seller's current tax and not a post-sale estimate, that's a bigger hole than the make ready.

Then insurance. Then management fee, which on student product runs above conventional multifamily because of the leasing intensity. Then a real turn number at @fathom's range. Then payroll, because these properties carry more leasing staff per bed than conventional and a lot of part-time student labor that shows up in the fall.

My guess is you end up somewhere north of 46% opex, which puts NOI closer to $1.41m and your going-in near 5.7%. That's a different deal and it may still be a fine one at a growing flagship. It's just not the deal in the deck.

@sextant's tax point is the one I'd chase first because it's checkable in an afternoon and it's the largest single line after payroll.

On the debt, 60% LTV on student product at a flagship should be financeable, but ask the sponsor what the actual quoted terms are and whether they have a signed term sheet or an indication. Those are different things and only one of them is real. Lenders also have their own view on the enrollment cliff and some are shortening terms on assets at weaker schools. Confirm whatever they tell you in writing with the lender directly if you can get that access.

Managing this product is a different business from conventional. Leasing season starts almost a year ahead, you're marketing to 19 year olds and billing their parents, and you carry a leasing team through a season where nothing happens for four months and then everything happens at once.

@ember, ask what the management fee is as a percentage and whether there are separate leasing fees, turn coordination fees, or marketing reimbursements paid to an affiliate of the sponsor. That's where fee load hides in student deals. A 3% management fee with $200k of affiliate leasing and marketing charges on top is a 10% fee wearing a costume.

@trellis that affiliate fee thing is new to me and slightly alarming. Is it disclosed anywhere standard or do you have to go looking?

@plumb it should be in the PPM and the operating agreement, usually in a section on affiliate transactions. It's often disclosed accurately and just written in a way that makes the total hard to add up. Add it up yourself. That's the whole job.

Running a small team on the service side, the thing I'd flag from @trellis's point is the four-month dead period. A leasing team that has nothing to do from November to February either gets cut, in which case you lose your institutional knowledge before pre-leasing season, or gets carried, in which case it's in payroll. Ask which.

What I'm taking from this thread as someone still learning how the capital side works: the deck said 6.3% and after 25 people looked at it the number is maybe 5.7% and the exit assumption might be wrong. Nobody found fraud. They just found optimism in every line, in the same direction.

@sable that's the pattern and it's why I keep over-analyzing.

@ember, one closing thought. Everything in this thread is about the property. The deal-level question is whether you believe that specific flagship holds enrollment through the cliff, because at a 38,000 student school with seven of eight years of growth, you're probably on the right side of the demographic split. Smaller and less selective schools take the damage. Flagships mostly hold.

So I'd separate the two decisions. Do you want exposure to student housing at a strong flagship? That's a defensible yes. Do you want this sponsor's version of it at their numbers? That's the one the thread just answered no to, or at least not at $24.7m. Those are different questions and you can say yes to the first while walking from the second.