CA Ventures: Finding shock-resistant assets

This article is sponsored by CA Ventures

One of the asset classes CA Ventures has focused on over the past decade is student housing – not exactly a traditional asset class. What makes it attractive?

We are and continue to be a major investor in student housing because of several factors. First, purpose-built supply as a percentage of enrollment continues to be quite low; even before taking into account obsolescence, purpose-built student housing represents only 40-50 percent of enrollment at most universities.

Second, university enrollment continues to grow steadily as a degree is increasingly becoming a pre-requisite to be an effective candidate in today’s competitive job market, so demand continues to rise. And third, supply particularly in our target “pedestrian to campus” micro-locations is highly constrained due to lack of available land sites, restrictive zoning and increasing construction costs.

It is important to note that most of the largest research-oriented universities we focus on were founded through land grants made 150-200 years ago and built to accommodate fewer than 1,000 students. Take UC Berkeley for example: the core campus is on 178 acres and has seen enrollment grow from 31,800 students in 2005 to over 41,000 today, and the market only has about 9,000 purpose-built beds. Berkeley is a particularly supply constrained market but still reflective of the overall shortage of student housing at major universities.

Additionally, student living is highly uncorrelated to the broader economy. I would not say the asset class is recession proof, but it is certainly recession resistant. For example, in 2009, when job growth declined 5 percent, university enrollment increased 6.5 percent.
As we are likely to enter a period of significant economic stress, potentially even greater than that of the great financial crisis, we expect to see similar increases in applications and enrollment as an increasingly competitive job market will drive demand for education and skills. Among the top 100 universities in particular we expect to see significant increases in enrollment from both domestic and international students.

Another alternative asset class – at the other end of the age spectrum – is the senior living space. What opportunities does it hold?

Senior, like student housing, is a needs-based asset class. Regardless of the market cycle we know that the population of seniors will double from 20 million to 40 million in the next 20 years as the US ages.

We focus on non-governmental private pay senior living. While supply of this product is around 25,000 units a year, the private pay penetration rate of 7 percent suggests that 1.4 million units will be needed over the same period. At current run rate, only one third of this demand will be met. This macro demand picture drove us to set up Anthology, our vertically integrated senior living operator, seven years ago and we invested over $700 million in senior living in 2019 alone.

Additionally, similar to student living, the supply that exists in senior living is increasingly functionally obsolete. We estimate 70 percent of senior housing in the US is over 25 years old, so it’s not structurally set up to meet the rapidly evolving demands of operators to deliver care. For example we use tracking devices to monitor resident and care-giver movements within a facility and that requires a robust WiFi data interface; in many old buildings there is not sufficient bandwidth to stream data outside of the main common areas which will increasingly hamper the ability to deliver care efficiently. As the population ages, the need for modern, amenitized senior housing that leverages technology will become crucial.

Given these fundamentals in alternate real estate, do you have any concerns about too many investors jumping on board and oversaturating the market?

We are happy to see an increasing number of investors enter these asset classes. They continue to be largely under-penetrated relative to traditional real estate asset classes and we feel a greater amount of institutional capital will benefit the industry by bringing greater standardization and enhanced transparency so that investors, including ourselves, make better informed decisions.

The important thing to note about both student and senior housing is that they are fairly operationally intensive asset classes. In student living for example we have buildings that have 75 percent-plus turn in a given year and have to be fully leased by the fall of every academic year. It is the same for Anthology Senior Living – assisted living and memory care are regulated and licensed segments that require a significant oversight and infrastructure to deliver high quality care.

As a vertically integrated owner operator with over $5 billion operating and under development in student living and $2.5 billion in senior living we feel we have the resources and infrastructure to deliver for investors and have made significant investments in people, systems and technology to protect our investors’ capital.

What makes your approach attractive to investors?

Most real estate private equity investors function as allocators. What’s unique about us is that we are a vertically integrated investment manager: in addition to the investment management function, we also execute on all operational aspects of the business plan ourselves. In our experience, investors like that approach, because when you bring in third-parties you lose control over a large part of the value chain.

Because we control acquisitions, entitlement, leasing, operations and construction management functions we have the ability to create value in multiple areas of the real estate value chain, are less reliant on financial engineering and have much better transparency to rapidly address issues as they emerge.

We also believe strongly in specialization. All our investments are made through sector-specific platforms that have their own dedicated leaders and operational teams; even down to the accounting function. This is because we place a great deal of emphasis on asset class knowledge; we don’t have the same team members making investments in student and senior housing, industrial and residential – we have specialists with sector-specific knowledge rather than generalists. So we know firsthand which assets and markets are on-track, and which should be performing better.

How has the covid-19 pandemic impacted your outlook for these alternate asset classes?

Overall, the crisis has confirmed that it is right to be investing in these sectors with strong secular growth fundamentals. In the near term, we expect to see attractive risk-adjusted opportunities in our specific asset classes – but we don’t expect to see the level of distress we are seeing elsewhere, such as lodging or retail.

In the beginning, we were getting a lot of calls from investors, driven by concerns about what they were seeing in their broader portfolios. We are spending a lot of time on real time reporting and being in constant communication with investors. The level of stress has markedly decreased over the last few weeks as the operational data has come through, and stronger than expected performance is giving them some level of comfort.
Student housing has maintained surprisingly strong performance. We are 70 percent preleased for the next academic year, and we were at the same point last year. Rent collections have also been strong – we’ve collected 96 percent of the rent this April.

It is important to note that the consumption decision for student living is far less discretionary than most rental decisions. Parents have typically been saving for 10-15 years to plan for their children’s higher education needs.

We also tend to generally focus on the top quartile of income, and this demographic has been less impacted by covid-19 shutdowns, similar to what we saw in 2009. Going forward, we feel some of the choices we’ve made over the past few years make us particularly well positioned, such as focusing on pedestrian to campus sites, investing heavily in virtual leasing, higher bed-to-bath parity ratios and limiting double occupancy.

Senior living is a different matter. The susceptibility of the resident demographic made us move faster and in a much more conservative manner. As covid-19 escalated we banned non-essential visitors at all of our assets, and have broadly implemented new tenancy bans. Because the senior living industry is still highly fragmented with a lot of non-institutional operators, we expect this pandemic will drive higher expectations from residents and healthcare agencies regarding oversight and quality of care. We also expect that this crisis will change public perceptions about quality of care.