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Ryan Morphin:

Welcome to Non-Beta Alpha, I’m Ryan Morphin. On today’s episode, we have Brian Nelson, CEO and founder of NB Private Capital talking to us about the back to school applications for student housing. This is Non-Beta Alpha. Brian, welcome to the show. Thanks for coming back. We’re super excited to have you back. It’s a very timely conversation today. It’s back to school and you guys are on the ground at many universities across the country. What’s going on in higher education today in America?

Brian Nelson:

Well, you’re seeing everything. A whole popery of reactions to the virus, you’re seeing some schools have an outbreak, other schools have decided to delay in-person classes until late September or early October, and they’re taking a wait and see approach and they’re seeing what some of these universities that have had these outbreaks have done. But really what you’re really seeing is universities try to get their arms around what’s causing the outbreak, what activities are driving it? They don’t believe it’s happening in the classrooms or on campus which is great because the staff, the professors, they don’t feel vulnerable. It’s the outside activities, it’s the frat parties, it’s the things that the universities can’t quite control. So they’re trying to do the contact tracing and whatever they can to really break down and get a sense for what’s causing this and then what actions can they take to avoid getting students together.

Ryan Morphin:

And early on, I think in August two universities Notre Dame and University of North Carolina, they were open and they shut down and I’m sure you guys were watching that. What are your thoughts about that and do you think there’s going to be more schools that have to shut down just because of, like you said, the social interaction of being young, right? You’re going to be out at frat parties, pool parties. What are your thoughts on that?

Brian Nelson:

Yeah, I think New York Times reported that there’s about 26,000 cases at over 750 schools across the country as of yesterday and you’re going to have some schools have larger outbreaks. I think it’s going to happen. And the way the media works, you’re going to only hear about those schools. A lot of schools have kept it pretty well mitigated and they’re jumping all over it. Most of them have set aside dorms or have completely moved students out of dorms. So they’re in a position where they can quarantine students. They could contact tracing and quarantine other students who may have been in contact. Universities can control their own a lot better than a mayor or governor can and so I think you’ll see that the university of model’s a little bit more effective. What you’ve seen though is university administrators grapple with this concept of do we send all the students back to mitigate our liability or do we keep them here and avoid them going back to the community and taking a virus back to mom or dad or grandma and grandpa who might be more vulnerable.

Ryan Morphin:

And what is the liability for school, can students sue the university if they get sick while they’re in school?

Brian Nelson:

I don’t think so. I think it’s going to be very difficult but in our society you just don’t know. And there’s always going to be the university administrators are going to look for every possible area they can to cover, so there’s no negligence on their side. They’re educating students. They’re doing everything they can and it’s a really difficult balance for them because the easy answer was to go do all online classes but the reality is most students aren’t going to pay full tuition if they’re going to do that. You’re going to have a lot of students transfer to schools that are in person and then there’s just think of a lot of trades that you have to learn on site. And so there’s enough of a push where the university administrators and the presidents have to do something to offset practical balance between the two. And I think they feel pretty comfortable they can mitigate liability but there’s always that risk.

Ryan Morphin:

Well, you brought up a great point about paying full tuition. What are you seeing right now in your portfolio of schools that you guys are at, what percentage are coming back and what percentage are staying online?

Brian Nelson:

Yeah, I think a lot of it has to do with the loyalty to the school. Harvard University or USC kids are gonna come back, they’re going to stay loyal, they’re not going to like it going online. Actually, almost 800 or 900 undergraduates at Harvard tried to sue the school for not going online. But at the end of the day, most students are still pretty loyal. They’re doing what they can if they are online we’re in the student housing business, surprisingly, we’re seeing about 70% of the students living on or near campus to be around their friends, to be close to school, to have group study, even though the school is completely online. A lot of them, most of them aren’t staying home and that surprises a lot of people. We’ve seen some schools try to push away from that because they don’t want kids to gather and we’ve seen a lot of national experts promote that because they’d rather have students together where there’s a little bit more control and they’re not interacting with more vulnerable people to the virus.

Ryan Morphin:

If you had to ballpark because I know it’s probably hard to tell, like what percentage of schools, universities and are they going online versus saying, “Hey, come back and we’re going to give it a try.”

Brian Nelson:

Yeah, right now I think we’re about 80% do in-person schools or some hybrid where they have a balance of in-person. What you’re really seeing is instead of having the 300 student auditorium class five days a week, they’re having two classes or class twice a week, three courses online and they’re having 40 students that are socially distanced and masked when they come in. So the schools have gone out of their way to make sure everybody’s safe, but we still think about there’s about 80% that have in-person, about 10% have been online all the whole time dating back to June and another 10% have moved to purely online over the last two months. We right now it’s really hard to read the tea leaves, but most schools anticipate going to a hybrid model where even the schools that are online expect to have some in-person classes in January.

Ryan Morphin:

I was just a guest lecture on Monday morning at George Mason University and there’s a hundred kids in the class and I got to tell you, it was an interesting experience. I mean, you could tell kids were just logging on but they were probably doing other things. Maybe it was the quality of the speaker or it’s just commonplace I guess that they’ve got to be forced to be online to get participation scores. But do you think this online experience for kids is going to yield good educational outcomes for future workforce labor supply?

Brian Nelson:

Not at all. No. I think where it helps is that students appreciate the in-person experience so when they get back to it they’ll pay more attention and they’ll take it less for granted. The students absolutely loathe it. I have three teenagers at home. I have one son in college and he specifically transferred from one school to another. He’s going to Utah state now because they have in-person. I think you’ll see a flat out rejection of it. And here’s funny thing about teenagers, even though you’re lecturing and they’re on their phones they’re still listening to you. You just don’t see it because they’re they can play games mindlessly and still take it in. It’s a different generation but the in-person classroom is definitely something they prefer. And I think it’s going to prep them better for the real world. I think if there’s anything we’re worried about this online experience is that students take so much of business, so much of real-world is relationships, it’s communication, it’s nonverbal communication, they need those skills and it’s going to be imperative going forward. So I think they’re going to have to get back to in-person quickly.

Ryan Morphin:

Well, you brought up tuition earlier. I mean, for that are going online and going to Harvard, it’s all online, I mean, that’s an insane amount to take an online course. How do you think the revenue model for universities is going to shake out after this?

Brian Nelson:

Well, we saw a study this week from New York Times where they had asked staff members, there’s a lot of people are concerned about going in person because they’re worried the professors are worried and they might be older or more vulnerable. And ironically, the number one thing that they were worried about was their peers. The other staff members. They were less than fewer than 30% of them were worried about their own safety. They weren’t worried about the student’s safety, fewer than 20%. So you know that they recognize this demographic is not that vulnerable. What they were worried about, number two, on the list was the institution, the financial health of the institution itself.

Brian Nelson:

So it’s talked about, it’s discussed, it’s a big deal. The Pac-12, right before they canceled school or canceled football, it’s a big hit for schools like that. They took out a pretty substantial loan. It’s going to really weigh in on the schools for a lot of reasons and that’s why I expect most of them to get back to the in-person model quickly because a lot of the students who were doing online at Harvard or USC, they’re doing it because this is what you have to do this semester and then you go back in-person and you still get that degree. If you continue to do online, I think it didn’t really have an impact on what they can manage of the tuition and they’re going to struggle with it.

Ryan Morphin:

Yeah. Revenue from sports programs is a huge budget surplus for a lot of these schools. Do you think some of like the Big Ten, the Pac-12 over are going to come back to maybe do the sports after the second wave in the spring?

Brian Nelson:

I have a hard time picturing personally envisioning spring football. I think that’s something you say to keep fans and everybody and players training and happy and particularly the recruits. I have a hard time seeing it. I think that’s why you’re seeing the Big Ten in discussions to try to move that data closer to Thanksgiving. In college football a lot of it is how does my conference, how does my school compare on the national level and if you’re one of only two conferences playing in the spring, I don’t think you’re going to get the audiences, I don’t think you’re going to get the TV viewership. You have football coming right around the fall again.

Brian Nelson:

So you’re going to have some players reluctant to go all in. I don’t think it’s a good model. I think they’re going to watch closely how the ACC and the Big 12 and the ACC play out. We already saw a big outbreak at Clemson and we’ve seen another one in Oklahoma. And I think a lot of the Pac-12 school still feel like case counts and outbreaks is the enemy. Where you see in the South with these other conferences their sense is we can handle it. The case fatality rate is pretty low and we’d rather have these students under our watch being tested frequently if not every day and under our care than at home doing stuff that we can’t control. And it’s a very good argument but I think you’re going to see the Big Ten and the Pac-12 watching very closely how the next couple of weeks unfold.

Ryan Morphin:

Well and talking about tuition as well, I mean, international students, I mean, there was a lawsuit brought against the administration about I guess they were not going to allow visas for kids to come back internationally if the school wasn’t having in-person classes. It seems to me that they’ve quietly reinstated that. Are you seeing any data to suggest that they are or not?

Brian Nelson:

Yeah, I think there’s been pushback on international students, no question. I mean, some of our properties that have a big international constituency we have fewer occupants and there’s a lot of reasons for that. I think the president was trying to, in my opinion, was really tried to push schools to open in-person and not to use the international students falling behind as an excuse. But at the end of the day, I think what you’re seeing is pent up demand for US education. So you’re seeing more and more students wanting to come here. I think they’re having a more difficult time doing that. So they’re doing online where they can but I think January this winter semester and I think in particular next fall, I think you’ll have one of the largest enrollment in applications that we’ve seen on from the international community.

Ryan Morphin:

There’s a professor at NYU who’s suggesting that about a third of the we’ll call the tier three schools will have such a hole in their budget this year that they may go out of business. What are your thoughts on a comment like that, do you think there’s any feasibility to some of these schools folding because they’re having to carry all the administrative costs?

Brian Nelson:

I do. I don’t think the numbers that high. I think some of these schools will always have some powerful alum in the state legislature or other ways that they can amortize some of the debt that they’re taking on. They’re going to have to furlough, they’re going to have to cut expenses. I do think there’s going to be some regional schools that are going to struggle. There’s going to be Liberal Arts Schools that really frankly are too expensive and don’t really have the ROI to begin with. So I think whenever you have a pandemic like this, it really focuses back to who has the fundamentally sound business model from a university standpoint, who’s getting a return on investment for their education and those universities are going to continue to thrive. They’re going to get harder and harder to get into. And you’re going to see some schools, particularly in areas where there’s a declining population, where they just don’t have the growth. They can’t command their tuition premium and it’s just doesn’t make sense.

Ryan Morphin:

No, it’s an interesting time for administrators at universities to figure out, like you mentioned what their ROI is for the students and I think it’s brass tax time now. I mean, people are looking at ROI and education to figure out if they want to stay at the current university. And it’s interesting to me because as some of these big name schools pivot to online courses, I’m wondering if it might convince them that, “Hey, you know what, we don’t need to have everybody in Southern California or in Boston, we can have an online program because we did it for a year and it worked out pretty well.” And start to democratize or internationalize the Ivy Leagues, if you will. Do you think there’s any risk to the in-person model cannibalizing or like Ohio State’s starting to say, “Hey, you know what, we’re going to look at giving Ohio State degrees in Abu Dhabi through our online course?”

Brian Nelson:

If it expands their business in areas where does it cannibalize students coming here, I think there’s an opportunity for that. It’s still very difficult for them because it’s hard to get a four-year degree online. It just, regardless of what your discipline is and imagine employers are they going to be impressed by that? So it would have to depend on what the market is for local at that international or that country. How local, really local employers react or respond to that degree. In terms of Ohio State, you’re never going to replace the experience in Columbus, Ohio. Kids want to go to school. They do not want to be at home, I’m telling you. Mom and dad, if anything the quarantine we’ve all learned, it said, mom and dad living at home if you’re 20, 21 years old, no way. Both sides agree to that.

Brian Nelson:

Mom and dad see that you’re not coming home at 12 o’clock or one o’clock on Saturday night, they’re starting to ask questions. They don’t want to police a 20, 21-year-old. They’re worried. They’re worried about the virus and what’s going on. Kids at home or when kids are at school they’re on their own, they’re learning, it’s a rite of passage. They’re going to the whatever Greek system for frats and sororities. They’re making lifelong friends. They’re going to the football games, but there’s just an experience. And I think employers are going to value that experience too that people have said, “Hey, I’ve moved away from home. I figured out what it took to get into this particular program at the school and I got my degree.” I just think there’s so much value in that that I don’t think you can replace it all online.

Ryan Morphin:

I think that’s the marketing campaign right there. We’re going to teach your kids life skills to get out of bed and brush their teeth. Hopefully, the first 18 years did that for them but if not the learn it on their own and I think your point is spot on. My roof, my rule. That’ll get kids to get out of the house right away at 19. So let’s switch gears a little bit and thank you for the insights on the educational trends if you will. What’s going on in student housing, how has occupancy, how has rents, how are the kids dealing with it? Have you guys had outbreaks, how are you dealing with that and what’s the state of play in student housing today?

Brian Nelson:

Yeah, we’re across the board. So a lot of it starts with what’s happening at the university. So a handful of universities are all online. In theory, a lot of people thought that would be death to the student housing properties. It has definitely crushed the market. Those markets are about 50% to 60% occupied. Our particular properties in those markets are closer to 80 to 90. We’ve done, okay top of market. But part of that is we’ve been very proactive in marketing the parents, everything I just told you. That they’re better off away from home. They’re safer. Mom and dad, you are safer. We had to convince them in a lot of the different things we’re doing, we have a molecular disinfected that we spray that has a 30-day shelf life. But we talked about really three core things. It’s safer here. It’s more fun and honestly, kids are getting better grades when they’re closer to campus and they’re surrounded by other students.

Brian Nelson:

So that’s a really effective campaign that’s resonated. Also most students feel the classes are going to be in-person in January. So we’re still seeing steady occupancy. We have more and more students touring now and we expect that we’ll be signing leases all through October, November, December as they get tired of living at home and moving on. For universities that are doing the hybrid model or that are all in in-person, we’re actually doing way better, far better than previous years and the driver for that is what we call the de-densification of a lot of the universities nervous about viral spread, also about liability have gone away from the concept of shared dorm rooms and so they’re de-densifying they’re asking you essentially setting a policy where one student, one bedroom.

Brian Nelson:

And what that has done is it’s put about half of the freshmen now looking for private off campus housing and so you add 1,500 to 33,000 freshmen to the market that is already pretty stabilized and you could see why a lot of properties are having some of their best years ever. So we’re seeing a little bit of mixed bag but for the schools that are on have any type of in-person, it’s been a terrific year.

Ryan Morphin:

And I’ve heard that some upperclassmen are being forced to not allowed to have university housing there on their own, where they can stay home to make room for this one student one room. Is that a trend that you’re seeing being implemented so that the universities can grab the freshmen and I’ll say indoctrinate them, but grab them and pull them into the university community?

Brian Nelson:

Well, that’s part of why they always like having freshmen on campus is because even though it’s expensive for the universities to do it and they don’t really like to be in the housing business, but the graduation rates, there’s such a correlation between such a strong correlation between kids who live on campus their freshman year, meet their friends, get acclimated to go into the games and being part of the school, there’s a substantially higher graduation rate. So I think you’ll see a lot of universities still try to keep that dorm presence. But at the end of the day, I have a hard time seeing them going back to a policy of shared bedrooms especially when students now are acclimated, nobody wants to share a bedroom if they don’t have to. So I do think there’s some permanence in what they’re doing, they’re also setting aside about 10 to 15 dorm rooms that are just empty and vacant and the idea is that’s quarantine space in case we need students to have a place where we know we can look after them.

Ryan Morphin:

Fascinating. Have there been any defaults that you’ve experienced with people saying, “You know what, I’m not showing up.” Are there kids that are leaving once they find out that they’re going to go online, I mean, what is the, I guess the transferability or mobility for these students today?

Brian Nelson:

Yeah, I think that’s a great question. It’s really difficult because all of our leases have parental guarantees. And typically if they’ve been impacted by the virus economy they’re not signing new leases right now or over the summer when we did a lot of our pre-leasing. So inherently, most of the students come from parents who are pretty stable. Who are in a financial position to support their son or daughter and so I don’t know that mom and dad, typically mom or dad really want to risk right, ruining their credit to push back on rent especially on something they just signed freshly. We have seen of some movements where universities have gone a hybrid model and then went all online like you referenced North Carolina and that’s where you see parents pushing back. They’ve leaned on the school to help them get out of some of the leases.

Brian Nelson:

In some cases we’ve seen the school get involved. Now, of course, schools can’t do that, that’s a private contract. For the most part though, the students want to stay. I think maybe we’ve had the online schools maybe, we’ve had five to 10% pushback at the most and in many cases we’ve been able to talk to the parents and they’ve ended up backing away. So it’s pretty small. I mean, it exists, but it’s fewer than 3% even in the online schools.

Ryan Morphin:

That that’s interesting that the some of the universities are going to try to put their nose on that. That seems like a big contractual no-no for them. But as it relates to the student housing industry going forward, what are some things that you’re going to be watching as indicators for the health of the higher education system in the United States?

Brian Nelson:

Yeah. Great question. And a lot of it depends when the universities come back. Whether they go full swing in some of the higher revenue producing models like football. You’ll watch the Pac-12 closely. Are they going to come back in January with a lot of layoffs or are they going to cut back on a lot of the lavish expenses they have for the athletes and things like that or are going double down and say, “Hey, look we need revenue from every source, this is a big driver?” Or are they going to start focusing on disciplines in programs that make more money? For example, a lot of schools have a higher premium for their MBA program for example, because there’s a better ROI. Are they going to expand that and maybe contract on some of the other less profitable disciplines or are they going to be committed to just higher education and the breadth that it provides?

Brian Nelson:

We’re going to look for a lot of that but for the most part, I think you’ll see that these institutions have been around for close to 200 years for a lot of them. They have money, they have deep pockets, they can get access to money if they’re in trouble, they have alum that will help. They have state legislatures that are typically support that are typically an alum. Picture Mississippi or Kansas, half of the people went to University of Mississippi or Mississippi State that are in the State Legislature. So they’ll find ways to get support. Now, of course you have a presidential election and there’s been a lot of push for free college. So there’s a lot of balls in the air but I think you’ll start seeing them go back to business but I think you’ll start seeing universities pay off some of the debt that they’re incurring by being a little bit more shrewd and a little bit smarter from a business model perspective.

Ryan Morphin:

Well, this is in season two we’re calling the human factor. So I was going to ask you six questions just quick, yes, no type of answers. If there’s a vaccine available in November, you’re gonna take it.

Brian Nelson:

Yes.

Ryan Morphin:

Who’s going to win the election, Trump or Biden?

Brian Nelson:

Trump.

Ryan Morphin:

What type of shape, letter, shape recovery are you going to have the, V, U, W?

Brian Nelson:

Tough data to answer that question, but we were going to have a, it’s an awkward V. It’ll be like an L, a turned L yeah.

Ryan Morphin:

We’ll call it a drunk V. I like that one. Anything that you achieve this summer that you’re super proud of, non-work-related?

Brian Nelson:

Yeah. I spent more time with my kids than I ever could have dreamed of. This was great. There were a lot of negatives and depression with the quarantine and sensitive to that but there’s time with family that you just, you can’t replace that.

Ryan Morphin:

Absolutely. Any silver linings in the economy that you see for 2021?

Brian Nelson:

Yeah, quite a bit. I think there’s a lot of money on the sidelines that’s just waiting to come in especially international money wanting to invest. I think a lot of people in the downtime have great business ideas, great innovations. I think one of the number one drivers of the economy are new industries and I think you’re going to see some new innovations that just create more opportunity. I think the next three or four years are going to be fantastic and of course that’s going to be very inexpensive. That’s going to help to.

Ryan Morphin:

Anything that you’re watching, listening to, or reading that you’d like to share with the viewers?

Brian Nelson:

I’m reading a classic Seven Habits of Highly Effective People. It’s a little older, so everybody’s been there done that. But there’s some pretty solid principles in there that I think have been forgotten in the 21st Century business practice.

Ryan Morphin:

Absolutely. Well, Brian, thanks so much for coming back on our back to school week. We appreciate you guys keeping us informed of what’s going on in student housing and wish you guys nothing but the best and we’ll be keeping an eye out for hopefully some type of college entertainment whether it’s football, ACC, Big Tens anything we’ll take care of at this point.

Brian Nelson:

We’ll take it, agreed.

Ryan Morphin:

Be a great be well, and I’ll talk to you guys soon.

Brian Nelson:

Great. Thank you.

Ryan Morphin:

Thanks for watching Non-Beta Alpha. Before we go, please remember to like, and subscribe on Apple Podcasts, Spotify and our YouTube channel. This is Non-Beta Alpha, and now you know.

Speaker 3:

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