With nearly 20,000 beds under ownership, Vesper Holdings has grown at the direction of co-founders and co-CEOs Isaac Sitt and Elliot Tamir. The company was a pioneer in the value-add space, acquiring student housing properties and renovating them into showplace properties. In 2016, the company launched a management subsidiary, Campus Life & Style, that modeled its behavior after the management of top tier resort hotels. Campus Life & Style has grown to be one of the Top 15 student housing managers, with over 26,000 beds under operation.
SHB recently spoke with Sitt and Tamir to find out their thoughts on the industry, and to see what Vesper is planning next.
SHB: Where do you see the student housing sector right now?
Sitt: We are very bullish on the space. The risk-adjusted returns that student housing can offer today, relative to any other asset class, are compelling. We always knew that student housing was recession resistant. Now we’ve found out that it is pandemic resistant as well. We saw a slight downtick in our occupancy this past year, but not by much. As a company, we had 2.5 percent rent growth in fall 2020. Our occupancy was off less than 3 percent. We also expect to see a nice bump in enrollment at the Tier 1 schools that we focus on in fall 2021 and fall 2022 as normal life resumes. We will see that bump from freshmen who took a gap year in 2020-2021 and the international students who couldn’t come into the country during the pandemic; we think most of them will be back by fall 2022.
Tamir: The industry is slightly behind on pre-leasing right now but I strongly believe that the core fundamentals of the student housing space are not only fully intact, but they’ve never been better and we actually have COVID to thank for it. The space proved its resiliency through the recession of 2008 and has outperformed almost all other asset classes through a worldwide pandemic. In addition, the myth that online learning would take over the on-campus experience has been officially debunked for good. In-person learning will resume this fall, we are beginning to see universities announce their plans and are excited to see our leasing activity begin to tick up. We may have to give up some rent growth this fall to get to where we need to be with occupancy. I am also predicting a banner year for fall 2022 with strong rent growth and occupancy.
SHB: You’re confident that things will be back to ‘normal’ in fall 2021?
Tamir: In short, yes. With vaccinations on the rise and cases continuing to fall, confidence
is building, and people are itching to get back to normal life. COVID is not just going to disappear overnight. It will take some time to adjust to a full sense of normalcy. That said, in terms of student housing, I think there will be a huge surge of leasing activity this spring and summer and I’m confident that we will lease up and that campus life will resume to some level of normalcy.
SHB: How do you view the investment market at present?
Sitt: Cap rates are definitely very low. We have seen the spread widen between student housing and conventional multifamily, more than what has been reported by the major industry sources. We are finding that when you compare Class A product in conventional versus student housing — on a true apples-to-apples basis — we see a 75-basis point spread in cap rates. The spread prior to the pandemic was down to about 25 percent. This makes student housing a more compelling investment than it has been in years. That is primarily driven by the fact that debt terms in the student space are not nearly as good as those in the conventional space. We think that is temporary. That should correct itself within the next 36 months. This temporary dislocation in the availability of exceptional debt terms is creating a buying opportunity, if you are willing to underwrite that you will be able to get the same debt terms as you were pre-pandemic over the next 24 to 36 months. That means this is a great market to buy in. We’re willing to do that.
SHB: Is the industry at a point where there is too much competition for acquisitions? Are companies at the point where pricing is too high, and they are going to take- a step back? Or do you just have to work harder to find deals?
Sitt: I don’t see that at all. Some capital was scared out of the space by COVID that hasn’t come back. It has been replaced by a number of new groups — mostly international, but some domestic. There is still a healthy level of competition for deals. We think that opportunity abounds. There are still only a handful of quality national operators in this business. If you are one of them, as we are with our wholly owned subsidiary Campus Life & Style, then you are positioned extremely well to find those opportunities in the market. There just aren’t that many quality vertically integrated operating partners for these institutional owners to partner with. That creates opportunity for us whether we are buying a deal with our own capital or partnering with an institution.
SHB: Would Vesper consider partnering with an international institutional investor?
Sitt: Yes. We’ve been speaking to a number of groups. We have a deal under contract with a large domestic institutional investor. We have also been speaking to a number of international institutional investors as well. We have done a lot of business buying properties for our own account. We have built a $1.5 billion portfolio; 80 percent of that was bought with our own capital. We are probably the only company close to that size who hasn’t taken outside institutional equity to build its portfolio. Now, with the talent we’ve brought in at Campus Life & Style, we are able to scale our model and are open to JV partnerships on the acquisition side to take it to the next level.
SHB: Have you disposed of any assets recently, or are you open to that?
Sitt: Yes, we do selectively sell our properties. We sold an asset in December 2020 because we received an unsolicited offer to buy it. We had owned it for seven years. That allowed us to realize a massive profit. We are definitely long-term investors relative to a lot of companies in this space. However, we are always open to selling when an offer is so compelling, as the one we received in December was, or if we want to exit a particular university market. The other reason would be, of course, if we feel we have extracted as much value as we can from the property.
SHB: Are you concerned about interest rates or any other issue that could be a factor in future acquisitions?
Sitt: I’m not convinced there will be a dramatic rise in interest rates, and if there is, it will not be lasting. The experts have been saying for years that rates would rise, but they have not risen for any prolonged period of time. That being said, it is possible and should there be a rise in interest rates, we are extremely well positioned. The vast majority of our portfolio has fixed-rate, long-term debt placed on it. A rise in rates would make our debt accretive to the assets we own, rather than a hindrance to sales. If you have an inflationary environment where you are resetting your rents every year and you combine that with long-term fixed-rate debt, that is a recipe for success. The student housing industry is well positioned for a rising interest rate environment because we reset our rents every year. It is not retail where they are signing a 10-year lease with no escalation.
SHB: We have heard that there are some portfolio deals out there in play right now. Looking at the big picture, do you think these deals will transact?
Sitt: There are a number of large deals out there. We are among the bidders on some of them. I think we will see one more large portfolio transaction in the first half of 2021. Most of the volume is going to happen in the fourth quarter, more so than in the past. That’s always been a heavy time for acquisitions, but this year more than ever. Most owners had slightly lower occupancies for the 2020-2021 academic year due to COVID. The prevailing view is that fall 2021 enrollment is going to rebound strongly, and with it occupancy should rise back at or near pre-pandemic levels. Most sellers will want to complete their lease-up and have the students occupy the units before selling at the full value of the property. They don’t want to have to give a discount based on current occupancy in 2020-2021. There is definitely a backlog of deal volume from the pandemic, when deals just weren’t happening. That backlog should clear up by the end of 2021. I think Q4 of 2021 could be record setting.
SHB: Given that the investment market is so crowded at present, has Vesper considered changing directions and becoming a developer?
Tamir: Isaac and I have recently pondered whether the timing to enter ground up is right and at this point we are just not there yet. Companies like Landmark, Aspen Heights, Core Spaces and Capstone have all done a tremendous job and I know that if we ventured in, we would produce an incredible product. It’s to be continued…
SHB: A few years ago, you launched your management arm, Campus Life & Style. Take us back to that decision, then tell us where CLS is today.
Tamir: When we first entered the space in 2009, cap rates were higher than most other asset classes and we quickly realized why: student housing is a management intensive business. It’s a sister only to hospitality, where you must have a strong operating partner; it is not just a real estate play. When we entered, we knew that launching a management company out of the gate would have been suicide. Like many who enter student housing, we went with a third-party manager. We learned early on that going third-party wasn’t for us as we are long-term players and want to build a family business. We needed to gain as much hands-on experience as we could before going vertical and so the decision to create CLS was made internally in 2014. We spent about two years in an incubator building our team and our platform, and then we launched CLS in January 2016 with over 15 properties and more than 10,000 beds. We were very fortunate in that we did not lose a single site-level team member through the transfer. Today, CLS is one of the largest student housing management companies in the U.S. with over 26,000 beds under management. We recently launched a third-party management division and within a few months were awarded 10 deals. Our commitment to excellence is unsurpassed, and it flows from our top executives all the way to our site team members. I am extremely proud of our management platform and what we have accomplished thus far.
SHB: You had a vision for CLS as being a lifestyle brand. Have you seen that come to fruition?
Tamir: Yes, I think it has. I am a pretty detail oriented person and had a very specific vision for the company. The key to CLS’s success is the incredible synergy among all executives in terms of how the company is to be operated. My vision for CLS was to create an ultra-high-end boutique hotel aesthetic unique to each asset, combine it with a level of first-class customer service only seen at the finest hotels of the world through our exclusive partnership with Forbes Travel Guide, and retain a price point that still caters to the masses. Think of it as Ian Schrager meets the Peninsula at a value; I call it ‘Art Meets Excellence.’ I think we have executed flawlessly on this vision we have elevated the industry standard to new heights and built a fine brand. I get a high observing students and their parents tour our amenity spaces. Just the other day I witnessed a parent ask if they could move in.
SHB: There has been a lot of activity in the management space in the past two years, from new firms to a lot of executive movement. What is your take on that?
Tamir: I am not at all surprised that owners are launching their own management firms. The first thing your capital partners will ask is who will be managing the asset and what level of experience does the management team have. Each owner has their own flavor in terms of how they see fit to operate and at some point, owners that are long-term players will want to take management in-house. I can tell you firsthand, launching a student housing management platform should not be taken lightly, and if not executed properly, could be catastrophic. We were fortunate to have two years to build our management company and assemble an extremely talented team prior to launch.
SHB: How has COVID impacted Vesper and CLS? What long-standing impacts do you see from COVID on the industry?
Tamir: In late March 2020, I called an emergency meeting of our top executives and asked that they model a worst-case scenario of collections and pre-leasing from April through July. We looked at every possible scenario, from suspending our investor distributions to mortgage deferments to layoffs. It was a rough meeting, but one that was necessary. Yet on April 6, which is the point in the month at which we collect most of our rents, I reluctantly reviewed our delinquency report and with amazement saw 96 percent of rents collected; off by only two points versus the previous year. First, I thanked the heavens, then called my team and commended them profusely on a job well done. While pre-leasing was slow in April, we noticed that online leasing had taken off and virtual tours were ramping up. The entire industry is extremely fortunate to not only have collected rents into the mid-90s, but to have also leased-up very well for fall 2020. It is truly miraculous, compared to other asset classes within the real estate industry. These numbers speak volumes to the resiliency of our space, and how badly students crave the on-campus experience. In terms of COVID’s impact on the future, the major value proposition that off-campus housing providers enjoy is bed-bath parity and I see this becoming even more paramount. From a marketing and leasing perspective, I think we learned that our leasing agents who worked from home were surprisingly much more efficient and focused 100 percent on leasing. They weren’t dealing with package deliveries and other distractions in the office. This was an eye opener for me and because of it we are going to take a hard look at the specific roles that each team member plays at our properties to ensure maximum efficiency. I believe we were only getting about 50 percent of a leasing agent’s time truly dedicated to marketing and leasing and that needs to change. Technology will also continue to play a major role in marketing and leasing, especially with respect to how we acquire our customer.
SHB: Owner-operators are a little bit behind on the pre-leasing numbers for fall 2021. Is it just taking longer this year with the delays in the start of the spring semester due to
COVID, or is there a bigger issue at hand?
Tamir: It is an anomaly, as is
COVID-19. Parents have been somewhat hesitant to sign leases early this year, for obvious reasons. The country continues to watch and wait to see what happens with bated breath. We are thankfully beginning to see signs of normalcy. Many universities have already announced their fall plans for full in-person classes, and I think most others will follow suit shortly. We are seeing the positive results of this with our same-store pre-lease deficit beginning to evaporate.
SHB: Are you changing any of your common areas or amenities because of COVID?
Tamir: No. Humans are, by nature, social creatures. That’s why I believe that the move to the suburbs will be short-lived. The urban environment will come back; it might take a few years, but it will be back. College students are hyper-social creatures. Honestly, they could care less about social distancing or COVID, for the most part. I see this as I tour our properties in the areas hardest hit by COVID. When we reposition our amenity spaces, we focus primarily on three areas within our clubhouses: study, fitness and socialization, and I do not see us pivoting. If anything, we may add a co-working component and more spaces for students to collaborate and study.
SHB: How did you both ride out the past year?
Sitt: During the first month of quarantine, I spent a lot of time with my wife and children together at our family home. Most of my family had mild cases of the virus in early March 2020. My four children are ages 17 to 24, so it is quite rare for all of us to be together for that long. My memories of that quality family time in quarantine are the high point for me, and I will treasure them forever. The low point for me was the tragic loss of my uncle from the virus.
Tamir: In late March 2020, my family left New York for our summer home in New Jersey. The adjustment to work-from-home was ok initially, but by the fall I had quarantine fatigue and I began to travel again to visit our properties. It was great to get out and see everyone. The highs for me were spending time with my family, but also watching how our healthcare system and essential workers came together; their bravery was inspiring. The lows were the loss of some of people I knew personally and going through COVID myself. We all want to forget the past year, but I think it has forced us to reflect, to put things into perspective and adjust our values. My heart will forever be heavy for the souls that were lost. My debt of gratitude will be eternal for the scientists who developed these vaccines so quickly, the courageous healthcare workers and others on the frontlines risking their lives everyday so we could safely live ours.
— Interview conducted by Randall Shearin and Richard Kelley
This article was originally published in the March/April 2021 issue of Student Housing Business magazine. To subscribe, please click here.