Why Student Housing Is Becoming a Winning Real Estate Investment | Kyle Torpey

Kyle Torpey (00:00)
What I would say just on student housing that makes it interesting is if I step back, I am seeing both new entrants and a return of some of the biggest investors of the world, you know, foreign pensions, sovereign wealth funds, big capital allocators who, you know, the last five, six years have been difficult. When you come out of COVID, the interest rate cycle, they’ve been rethinking and reshaping what they want their portfolios to look like. We believe, and it seems that, you know, what we’re hearing is that student housing is probably in one of the winning categories as they look at the residential or living spectrum—

Dylan Silver (02:03)
Hey folks, welcome back to the show. Today we’re joined by Kyle Torpey, partner and Chief Investment Officer at Subtext, overseeing investment strategy, portfolio construction, capital formation, and performance across the company’s national real estate platform. Kyle, thanks for taking the time here today.

Kyle Torpey (02:19)
Thanks, Dylan, and glad to be on.

Dylan Silver (02:20)
Student housing is a niche that many operators want to get in, but it is competitive. And as the focus of Subtext, this is a space that you’re around constantly. What are the biggest bottlenecks that you see facing operators in the space?

Kyle Torpey (02:37)
I would probably say two— two categories. O— one, just getting access to the opportunities themselves. And then the other would be the operational side of it. So, you know, at Subtext, we think about, you know, of the universe of… I think there’s something like 4,000 higher education, you know, in colleges in the United States, we— we think about a hundred of them approximately are truly institutionally investable. And of those, we’re focused on the top 50. I— I don’t think we’re alone in that. A lot of our competitors are probably focused on a similar set. People call that the Power Four conferences.

So when you narrow down the key markets where you’d like to be, you know, building or buying student housing, number one, it’s a smaller set. Two, you know, these are defined perimeters around the campuses. And so getting proximity… and ideally, you’re very close to the market, to the campus itself. We pride ourselves on being, you know, about an average of 0.1 miles to the campus, so we’re right on the edge of it. Just means there’s fewer opportunities to buy or build. The assemblage process takes a very long time to find land sites, acquire them, and then build. So, for one, there’s a natural barrier to entry— it’s— it’s a little hard to access those. And while there are a number of owner-operators in the space, I would say it’s getting more competitive from that standpoint.

The other nuance that’s important to think about that’s specific to student housing is just the— the cycle of these. So when you’re building, you’ve got to adhere to development timelines where you are delivering at the right time of the year and not mid-year during an academic year. You want to be delivering during the summer so that your students can be leasing, you know, in the year ahead of that and be there on campus for the start of school. So it’s a really tight leasing cycle. The development cycle is also tight in that way, and so it takes some real expertise to hit those timelines.

Dylan Silver (04:19)
Now, managing these properties is of course more complicated, right? Because there’s more turnover, it’s also a younger resident, right? And then on top of that, you also have to deal with— or not deal with, but you have to have a brand. Because I’ve seen this, you know, there’s students who want to live in a specific housing because it has a reputation as being a great place to live, and so you have to maintain or establish that brand, right?

Kyle Torpey (04:46)
That’s right. And— and I won’t overplug Subtext too much here, but that— that’s a big part of our business. We think about, you know, building from the resident up and a focus on our residents, you know, meeting demand where— where it is. What— what is it that they’re looking for? We— we have a few different brands. Our flagship brand is called VERVE, and we pride ourselves in adapting that brand to what students are seeking. It’s sort of, you know, a combination of amenities, mindfulness— things that students are looking for in body and mind while on campus. And they talk. I would say, you know, compared to the era when I was going to college, you know, students are fanning out even more regionally. They’re going, you know, further out of state, and they’re communicating with each other.

And we often hear stories of someone stays in a VERVE in one of our universities, and they’re communicating with a next year’s high school graduating class who are going to schools in a totally different part of the country, and say, “They have a VERVE there, you— you should— you should look at that.” And so that brand importance matters a lot. And— and yes, this is a pretty, you know, particular subset of, you know, the demographic age of, you know, rentership, and we’re talking about college students, but their families are involved. And so this is also, you know, a point that we— we focus on, is where are they coming from? We’ve found that there’s high degrees of affluence attending these schools and seeking out newly built, quality products at these schools.

And that’s a big part of the process is— is, you know, choosing in both directions: we’re looking for the right residents, and they’re looking for the right product. But we also have to hire people that are very deeply ingrained in the local market, know the university, know that student base, what they’re seeking to manage that annual leasing cycle, which is fast. And yes, there’s typically, you know, full turnover, but high retention rates— it’s— it’s not uncommon that we have many students staying for a second year or third year in our properties.

Dylan Silver (07:21)
Now, one of the— the things that can be challenging in some of these markets, depending on where you’re at, right? In— in New York, where— where you’re based out of and where I’m close to— I’m— I’m in North New Jersey today— it’s gonna be different than in Austin, Texas, right? But sometimes you— you have to be aware of the market demand, right? And in— in markets like in Austin, Texas, we’ve seen a surplus, which is unusual here in the last several years. How do you approach markets like in Austin, Texas? Do you steer clear of those markets, or do you just have to price it correctly when acquiring these properties?

Kyle Torpey (07:55)
Well, look, I mean, supply is an issue in any sector that is experiencing positive growth or sector, but the markets within that sector where you’re seeing positive enrollment growth and good fundamentals. And we’re— we’re typically, you know, our data-driven approach is looking several years out. We’re looking at the last few years as well, but where are we seeing students coming from? You know, how are we understanding the enrollment trends at the university? Are they growing that base? Are they growing it, you know, in person versus online? And so, yeah, we’re not alone. Other companies are also looking at those trends, and there are times where there’s, you know, additional supply in these markets, so we have to assume that there’s a risk around that. Of course, we’re looking at healthy absorption trends and we’re setting pricing that allows us to absorb some of that risk and get us to an appropriate yield on cost where we have profitable developments, both for ourselves and for our limited partners.

And so, yes, we— we— we need to be mindful of— of those things. The— all the other point I think you made and/or question you raised is, you know, the product did— does differentiate a little bit. We might have a similarity in our brand, but in certain schools and certain markets, the look and feel of an asset just needs to be different to meet, you know, the— the demographics there. You know, are they looking for surface parking? You know, are they looking for covered parking? Is there a high out-of-state enrollment trend where people are looking for certain amenities and scale, or are you— do you need more of a boutique product where you have fewer than 500 beds in— in assets? So it’s evolving, and I think, you know, the two elements of that are bringing a macro, data-driven approach from the top down and seeing where those trend lines are, and then having on-the-ground teams, both in the operation and leasing of it, that are telling us real time what’s happening, and teams that are sourcing out these opportunities for both development and acquisition.

Dylan Silver (09:42)
Now, in the multifamily space, which again we were talking in the green room, it’s different, right? But hold times can range anywhere from three to five years to I’ve seen recently people extending beyond that. Is it comparable in the student housing space, or— or is it really dependent on the deal?

Kyle Torpey (09:58)
It probably depends on the nature of the transaction. But yeah, I— I think we think about hold periods typically as five years. I think most institutions when they’re putting capital into, you know, these types, and particularly residential assets, are gonna underwrite generally on a five-year hold. But we have some capital that thinks, you know, ten-year. We have Opportunity Zone investments that are, you know, mandatorily ten years. I— I would say the reasons why it might differ could be around the business plan— that— that’s probably more true in the acquisition space. So if we’re acquiring an asset with a value-add business plan, it might be that we’re able to achieve the amenity upgrades or any of the other value-add work that we’re doing within three years. And then from an IRR perspective— and we’re always driven by return, you know, but particularly on behalf of our investors— from an IRR perspective, it may not make sense to hold it for another two or three years. If there’s a, you know, open market window to monetize, we would— we would do it on a shorter term.

What I would say just on student housing that makes it interesting is if I step back, I am seeing both new entrants and a return of some of the biggest investors of the world, you know, foreign pensions, sovereign wealth funds, big capital allocators who, you know, the last five, six years have been difficult. When you come out of COVID, the interest rate cycle, they’ve been rethinking and reshaping what they want their portfolios to look like. We believe, and it seems that, you know, what we’re hearing is that student housing is probably in one of the winning categories as they look at the residential or living— that is an area of interest.

And particularly on the— the long-term side, if you— if you think about the markets we’re in, and I mentioned kind of the top 50, you know, we generally are focused on the Power Four conferences. The average age of those schools is something like 170 years, so there’s a real permanence to these markets and the long-term trends. And if you’re careful and you study the demographics of the next 10 to 15 years, you know, at least those 50, and possibly more than that, seem to be net winners with enrollment growth and draw of students from around the country. And the— those capital partners that are returning to the market or just entering it now, focused on student, are seeing the same trend lines and are— and are focused on— on a lot of these universities.

Dylan Silver (12:42)
Now without giving away all of the gold here, but maybe a nugget for our audience, what does the— the capital stack look like in these deals, or, you know, is it different every deal?

Kyle Torpey (12:52)
It— it has evolved. I would say the industry has definitely… look, sourcing capital is not easy today. I think we all witnessed the 2022 interest rate cycle, thought 2023 was gonna come roaring back, then ’24. The truth is, you know, capital is stuck in— in— in various forms and portfolios in different sectors, and getting that released and kind of that velocity back into the market is a challenge. So in a world where it’s a little harder to source capital, we’ve seen, you know, the student housing industry evolve to pick up more pref and find ways to make deals pencil. That can work in certain markets— you’ve got to have a high degree of confidence in the growth there.

I would say we’re— we’re a little bit more, you know, straightforward. Our cap stacks have not really changed. We’re— we’re typically common equity of about 35 to 40% and senior debt, which is readily available— that has been a, you know, one of the— the bright spots in student housing— but senior debt in the 60 to 65% loan-to-cost or loan-to-value range. And, you know, going beyond that, there’s certainly a market and an opportunity to put pref on deals, but it’s not something we do, but we are seeing that today in student housing in some of the— the competitive—

Dylan Silver (14:03)
Pivoting here. New construction seems to be challenging across the country. I’ve heard people say new construction doesn’t pencil, so there may be some validity there. What— what’s your outlook on new construction as it relates to the student housing space?

Kyle Torpey (14:17)
It does work in the right markets and obviously with the right cost basis. So, you know, the whole process starts very early, you know, in— in pre-development. You could be a year, 18 months or more of sourcing the land and working with 10-plus buyers to assemble the right site, and so that basis matters because that’s one of the cost factors that go into it. Construction costs in all industries have risen, and that— that is, you know, true— that’s been hard. But luckily, we’re seeing in student housing some healthy rent growth, and there’s a lot of markets that have had double-digit rent growth over the last couple of years. I don’t think that’s in any sector sustainable for too many years, but something that’s healthy is certainly there. Where you’ve seen construction not pencil in other sectors is where there’s been, you know, real oversupply in the— in a way that mutes rent growth to less than 2% or flat, and that— that is challenging. How can you underwrite something on that basis?

We— we take an approach that even if there is a trend line of rent growth in a market, we need to ensure that we’re getting to a yield on cost on an untrended basis, just based on the rents that we see today, that is viable relative to the exit yield or the exit cap rate that we’re seeing in the market today. Student happens to be one that works, but again, I don’t think everyone can jump in and do that. Getting access to these sites, you know, it is not easy— there’s— there’s a secret sauce in that as well.

And then you got to think about, you know, the barriers to entry. I would say when we saw it happen in multifamily in the Southeast, many of these markets, you could build almost anywhere, land was available, lots of developers came in. When you think about student housing and the concentric circles around the school, if you’re really trying to be truly proximate and adjacent to campus, there’s only so many sites available. And so we do have a little bit of cushion from that supply risk for the most competitive sites, and that helps, you know, maintain some of the— the rent growth out.

Dylan Silver (16:51)
Now, when you’re looking at the space as a whole and other people coming into the space, what do you think about operators who are vertically integrating their property management versus those who are not? Is it like a must-have that you manage these properties yourselves if you’re gonna be in a student housing space?

Kyle Torpey (17:08)
It’s a great question. I think you’ve got to have real control over it if it’s not vertically integrated. So you must be, you know, training your staff or— or have some degree of training over your brand and the product to make sure it’s— it’s done right. But look, I think— I think a lot of groups are heading in that direction. It’s not easy. You know, bringing fully in-house property management where you’ve got, you know, disparate assets in different parts of the country, you know, means it’s a little harder to concentrate teams. You may not have, you know, five properties in one market where it makes sense to have everyone there in-house— it’s often that you have one or two at a given time in— in— in different university markets.

And so it’s a great debate. I do think having the control over it is important. You know, property management serves the other elements of a business, and so they’re all interrelated at Subtext. You know, we have, you know, the pre-development and then design and construction, we’ve got acquisitions, asset management as we’re raising our first vehicles, and— and property management is an essential piece to tie into and— and frankly support all of the other functions of the business. So I think most groups are heading that direction. The truth is it is not easy to do on a profitable basis, if at all, but it’s a critical component if you want to have expertise. And frankly, as I kind of mentioned earlier, that boots-on-the-ground knowledge of real-time trends in leasing, you know, week to week and— and student preferences as well, it’s important to have that skill set.

Dylan Silver (18:39)
It— it seems that, you know, if— even if it’s not a hugely profitable business line, having a property management in-house… delegating it to a group that isn’t experienced in student housing could be a real source of— of potential pain and distress in the future because, you know, they need to have that brand identity and have that reputation. So where students want to continue living there, you know, they’re not going to be looking for other spots, and so that future students are— are basically incentivized to follow in the footsteps of other folks who they heard had a great experience, you know, at the VERVE, for instance.

Kyle Torpey (19:19)
Yeah, that’s true. And look, that— that’s true in other sectors. I mean, I’ve seen that in multifamily as well. Even if you’ve got a nationally recognized or regionally recognized property manager, you know, depending on the terms that you struck with them, you might have the most excellent team, you might not. So third-party management is always a risk if you are, you know, the landlord and you own the asset. You know, we— we approach it differently. And that’s why at Subtext, it’s really important, and we have a property management team. We really focus on training the staff. We have summits and we bring people together at HQ or on site. We all collectively go out as a team, including like everyone in the company, not just the development team or property management, when we open new products so that everyone’s there. I’m gonna be traveling the next few weeks as we deliver new assets. You know, that’s not to say that all of us are involved directly in the property management part of our business, but critically, it does matter that we think alike, we have, you know, certain values, and those are supporting the brand and what that brand is meant to represent to our residents, which is the— the ultimate focus of the company. So it— it’s a really important part of the business.

Dylan Silver (20:25)
I wanna touch again on this idea of capital stack, and specifically one of the— the challenges that I see investors face is setting expectations and investor communication, right? And oftentimes raising the capital is challenging, but then also being able to, you know, stay in— in communication and keep everyone up to date, those expectations seems to be just as— as critical. How have you managed that? What’s been your approach to investor communication and expectations over the years?

Kyle Torpey (20:53)
Yeah, so we— we have a— a large team at Subtext. You know, we’re— we’re 60 at— at corporate and then another roughly 25, you know, on site and property management. And a number of us are involved in that process, so it’s important. Our— our limited partners and our capital are a huge part of our business— it’s a fuel that— that helps the business run. And so it’s not surprising that, you know, we focus so much there that we have repeat partners. And I would say, you know, that translates into track record. If we’ve— if we’ve produced good results for our partners, even in through market uncertainty— and every year and every market has brought new challenges— a very high degree of touch and communication with those partners, you know, to meet their expectations is important.

And I think we have the benefit of great capital partners who understand there are certain things that are, you know, uncontrollable, unforeseen, macro events, and adjusting and managing to those and adapting is what they expect of us, and I think we— we deliver that. And ultimately, if we’re hitting the good results, we’ll have multiple repeat partners, which is one of the— the hallmarks of our business. We’ve been able to capitalize every deal we pursue, and I think that speaks to— to that high-touch, you know, importance. So equity capital is— is certainly key. We treat it, you know, with— with— with a high degree of care, and we’re there focused on, you know, delivering as— as fiduciaries good returns, but we’re also thinking about our business— we want them to come back for the next deal in our pipeline. So we’re always staying in touch not only on the existing investments, but what’s next in our business.

Dylan Silver (22:23)
We are coming up on time here, Kyle. Any new projects that you’re working on? And then also, anything you’d like to mention directly to our audience?

Kyle Torpey (22:30)
Yes, look, we are active and we have… so today we’re managing about a little over 10,000 beds across our portfolio. To put that in context, you know, in Subtext’s history, we’ve delivered over, you know, four point five billion of assets, including some investments we’ve made, you know, about 25,000 beds. So we have a pretty sizable managed portfolio today. We’ve got another six to seven thousand beds on the horizon in our pipeline. And so we’re out there looking at, you know, top markets in the Power Four conferences. We think of this as a very core pipeline that, you know, didn’t evolve in the l— in recent months— it’s been years of building up to this and with a dedicated team sourcing these opportunities. So we’re looking ahead.

And— and may— maybe just to touch on, you know, the— the importance of a concentration of a core portfolio in student housing. You know, if you look at the— you know, the evolution of this market, couple of interesting trends that are important to note. You know, out-of-state movement, you know, particularly from the Northeast and, you know, affluent zip codes to, you know, parts of these Power Four schools and these conferences was not a historical norm— that happens a lot today. We’re also seeing, even with the outlook of decreasing birth rates or— or, you know, that’s been a trend since 2008, but decreasing graduating classes over the next decade… what we are seeing is there has been an increase in childbirth and birth rates in the more affluent parts of the country and the upper income levels, and those typically are the ones that are sending their kids to college. And they’re being more selective— they’re saying, “We want that school experience.” And again, that— that tends to show up in the enrollment trends of these— of these Power Four schools. So within the— the world of student housing, a— a focus on concentrating in the Power Four conferences and a handful of other universities, typically the top 50 markets, is critical. And— and it not only is, you know, the running through some of the headwinds in the space, but actually there’s tailwinds behind that around positive enrollment growth, and I think that’s a key if you’re looking to invest in student housing.

Dylan Silver (24:31)
Kyle, thank you so much for your time today. Thanks for joining us.

Kyle Torpey (24:34)
All right, thanks a lot, Dylan. Appreciate it.