This article was originally published in the July/August 2022 issue of Student Housing Business magazine.
Tim Smith, managing partner and co-founder of Horizon Realty Advisors, says his firm has a different take on off-campus student housing. The company entered the sector many years ago by acquiring a conventional multifamily property located near a university that appealed to students, faculty, staff and local residents. Entering the sector through a hybrid approach turned out to be a sweet spot for the firm. Today, the Seattle-based company has approximately 14,000 beds of student housing under ownership and relies heavily on its management and operations team to successfully run its assets across the country. SHB recently interviewed Smith to find out more about what the company has been up to and where he sees the student housing sector.
SHB: What has Horizon been up to for the past few years?
Smith: We are focused about 50 percent on student housing and 50 percent on conventional multifamily. There is some crossover in some of our markets with properties that are setup conventionally, but appeal to the student population. We call those hybrid properties as they can leverage the demand from both the student and conventional markets. Over the past few years we have really grown our organization. We have almost doubled our corporate staff by expanding nearly every department and positioned the company for future growth. We’re also finding opportunities to do things better. We have taken a lot of tasks in-house that we used to pay others to do. An emerging area for us is development. We have added an entire development team and currently have four projects under development. Three projects are under construction, totaling $180 million and a fourth project is in the planning stages. In addition, we have developed a platform called ‘Change Is On The Horizon’ which allows our employees who are of color to share their experiences and perspective with the rest of the company. That has been very powerful in helping to facilitate creating a safe place psychologically for our employees. It has also been very moving for me, personally, and has given me a perspective that I didn’t have before. We are fortunate to have so many talented people at this company.
SHB: How has your portfolio grown over the years? How has the company grown?
Smith: We are really an investment company on the back of a robust operating platform. I am one of the co-founders, along with Greg Beckel and Mike Strand. We came from the operations side of multifamily. We met in the late 1980s when we worked for what became Pinnacle Realty and founded Horizon in 2000. We started by acquiring conventional multifamily projects. One of our first acquisitions was a project near the University of Oregon, which we still own, called Chase Village. That was our entry into student housing — and that was around 2002 or 2003. We have grown up with the industry and have developed a real expertise in student housing. Student housing is 10 times more intensive than operating conventional multifamily. If you are a known quantity with a capability to operate, that will make you a compelling buyer among a less competitive group. On the conventional side, it is harder to distinguish yourself because there are so many well capitalized groups.
SHB: Where do you think the student housing space is overall today?
Smith: It is a great place to be right now. We have never experienced better fundamentals. Conventional is just as strong. We are at 96 percent pre-leased for fall 2022, portfolio-wide. We are looking at about 8 percent year-over-year rent growth on average, which is better than we have ever experienced. We’ve seen some markets have rent increases of 15 percent year-over-year. Historically, if we could get 3 percent, we thought that was good. I don’t think we are unique; I think most student housing owners are experiencing similar, excellent operations and preleasaing. Even still, the rent growth in the student space has been less dramatic than the conventional market, where we are seeing lease trade-outs in the 15 percent to 20 percent range. I think this is very positive for the student market in that there is likely more room for outsized rent growth. I do worry about the supply side of the equation. Some of our peers have gotten so good at what they do with delivering fantastic projects around the country. However there have been a few times when three or four name-brand developers have come to a market and overbuilt. I don’t know that they are being driven by the demand fundamentals of some of the markets; I think they are more driven by the fact that these are Tier 1 schools, great locations and they want to have the newest project. That project may be ok, but it might cause stress to a lot of other projects in the market.
SHB: Oversupply has happened in a number of markets, small and large.
Smith: We are seeing it happen in Pullman, Washington, home of Washington State University. Enrollment went down during the pandemic and is back to growing modestly now. There isn’t much happening in Pullman besides the university. There are a couple thousand new beds opening this fall, on top of a market that already feels oversupplied. It’s similar to what happened in College Station a few years ago. Unlike College Station, the prospect for Washington State to grow at the same pace as Texas A&M is not likely.
SHB: With fundamentals so strong, has it been hard to acquire? Is it difficult for you to maintain your growth?
Smith: We had a great 2021 regarding acquisitions. In 2022, we have been keeping an eye on things. We saw record valuations in the fourth quarter of 2021 and first quarter of 2022. When interest rates went up and with the talk of a potential recession, there has been a period of price discovery occurring. We have two deals that our acquisitions team has been awarded, and we are in the early stages of due diligence to complete those deals. Navigating the rise in interest rates has really been what’s held a lot of activity from the market.
SHB: How are you acquiring deals?
Smith: We have attracted most of our equity through an audience of accredited investors that we have syndicated our acquisitions with. We have tremendous capabilities there. In the fourth quarter of 2021, we refinanced in excess of $300 million of debt on a number of our assets that had loans nearing maturity. As part of that, we returned a bunch of capital by tapping into the increased equity available from increased valuations. We are ready and able to buy. The investors who participate with us would like to see us acquire more. We are nearing the completion of allocating what we call HRA Opportunity Fund III. If we complete the two acquisitions we have in the works that will complete that fund, and we will raise Fund IV. In addition, we have an emerging channel where we are partnering with limited partnership equity sources. I don’t feel like we have much in the way of limitations in capitalizing an acquisition or development at this point.
SHB: Let’s talk about your internal growth. How has that been accomplished?
Smith: Part of that growth was preparing to grow, and part of that was identifying areas where we were paying third parties to handle certain tasks and realizing we could do that better in-house. That has resulted in the creation of a few new departments, and other departments growing. Debt recovery is an example of a department we now have where we used to utilize a third-party. In addition, we have added to just about every department in our organization, from our regional management team to capital improvements. We have recently added to our development division, and have added a sustainability manager, who is helping us make our portfolio more sustainable. Our developments that we are doing will be some of the greenest in the industry.
SHB: What do you think sets Horizon apart from other student housing owners?
Smith: Our people set us apart. While that is easy for anyone to say, it is true in our case. We just completed our management excellence retreat, which we hold every year. We work on our teambuilding, culture and training. It is all centered around our ‘Pledge of Excellence.’ It provides a framework for us to be great, around the country. We are based in Seattle, which isn’t a very central location. We used to concentrate in the Pacific Northwest, but we expanded years ago to markets like Florida, Texas and North Carolina. Our issue then was bringing our culture in this very intensive business to those employees. It was a big challenge. Our ‘Pledge of Excellence’ is a set of values that we hold core and helps us spread that to our regional employees. And they really do buy into it. It speaks to customer service, property appearance, physical responsibility, market leadership and impactful leadership. At the retreat, we have our department heads interpret what those points mean for them. It is very impactful when they are speaking to the operations teams. It has been instrumental in being able to train to the same set of values around the country. And it really helps us duplicate our excellence from one area to the next. We have also recently been named a ‘Great Place to Work.’ We have all the same capabilities as many of our peers to buy and develop, and we have some of the best expertise operationally, including some proprietary software tools from our IT team that set us apart as well. All of these things come down to people. We put our people first, and they put our customers, investors and vendors first.
SHB: What are some of the challenges the industry is facing? And how is Horizon addressing those?
Smith: The biggest challenge — which I touched on a little bit before — is the potential oversupply of student housing in some college markets. The industry was so fractional 20 years ago that you could continue to add purpose-built student housing — and there was a need for it — to replace obsolete housing or non-purpose-built student housing. Here we are 20-plus years later and a lot of that obsolete housing has been addressed. At the same time, you have well-heeled developers adding more. There has to be a limit at some point unless the university is continuing to grow meaningfully, because you have already pulled out the target market from the obsolete housing. Some markets don’t need thousands of new beds of housing. I also have concerns about sustaining the value proposition of student housing. One of those concerns is the cost of education is going up. At the same time, the value of it from the employer perspective may not be keeping pace.
SHB: What do you do outside the office to get your mind off work?
Smith: Along with the other founding partners, we are evolving to what I would term as a very engaged board of directors type of role. All three of us are very engaged in the business, but we have a lot of young, talented employees performing a lot of the day-to-day roles that we used to do. That has afforded me some time. My wife and I enjoy a home 80 miles east of Seattle in the mountains. We spend a lot of time there in the summer. We also enjoy a home in the desert in the wintertime in Southern California. I’m an avid golfer, so both of those are centered around golf courses. We spend a lot of time at home in Bellevue as well, as we have one daughter still at home who is a senior in high school. I don’t have a lot of stress from business at this point, because things are going well at a macro level, and we have great people running operations day-to-day.
—Interview by Randall Shearin and Richard Kelley