When most people think of student housing, images from the movie “Animal House” usually come to mind. It’s a common misperception, and one that continues to influence investment decisions today. The reality of student housing, however, is far removed from wild parties and drunken revelry.
In fact, student housing has evolved into a niche sector within the commercial real estate world and now includes three publicly-traded real estate investment trusts (REITs): American Campus Communities Inc. (ACC), Education Realty Trust (EDR) and Campus Crest Communities Inc. (CCG).
In 2004, ACC went public as the nation's first student housing REIT. Today, the sector has a market cap of just over $3.3 billion, representing less than 1% of the REIT industry’s total market cap.
Both institutional and retail investors are attracted to student housing’s strong growth prospects. But, they must do their homework because the three student housing REITs that exist today have vastly different investment stories and strategies.
“I like student housing – it has a lot of growth opportunities ahead of it,” says Alexander Goldfarb, a managing director with Sandler O'Neill + Partners LP. “With that said, it’s important to differentiate between the different companies and stocks. You have to understand the sector, and you also have to understand the stocks.”
Recession-Resilient Sector
While student housing often is considered a sub-section within multifamily, it is vastly different from conventional apartments. Student housing properties can be located both on-campus and off-campus, and they lease by the bed rather than by the unit.
Student housing is more operationally intense than apartments because of its resident profile and the compressed timeframe for leasing. Students require additional supervision and increased social programming to keep them entertained and active, while the school calendar determines schedule for leasing, make-ready and move-in/move-out. Students typically move in during a two-week period in August every year, giving owners and operators a very short period in which to make the space ready for new tenants.
Student housing is widely recognized for its “recession resilience”. While it is impacted by economic downturns, it bounces back more quickly than other commercial real estate sectors – making it even more attractive to investors.
The most recent recession certainly tested the sector’s resilience, but Green Street Advisors notes that pre-leasing for the 2011/2012 school year is ahead of last year. Additional, rental rate growth is trending well for all three student housing REITs.
For example, ACC’s 2010/2011 ending occupancy rate was 99% with projected rental rate increase of 3%. Likewise, EDR’s ending occupancy for the same period was 94% with a projected rental rate increase of 4%. CCG’s ending occupancy is slightly lower at 89% with a project rental rate increase of 2%.
Despite the strong fundamentals, the sector’s investment performance looks weak. Year-to-date total return for student housing REITs was just .92%, well below the SNL US REIT Equity Index return of 10.56% and the S&P 500 total return of 6.45%.
The anemic return for the sector this year can be attributed to underperformance by the sector’s newest REIT, CCG, which went public in October 2010. CCG had a year-to-date total return of -13.99%. Excluding CCG, the year-to-date return for the sector was 8.38%
Meanwhile, the average dividend yield for the student housing sector, year-to-date is 3.92%. The dividend yield falls right in the middle of the entire REIT industry, with dividend yields ranging from 6.22% to 2.06%, according to SNL Financial.
CCG went public $12.50 per share. As of May 17, 2011, the REIT’s stock was trading at $11.89 per share. In comparison, the sector’s leader, ACC, was trading at $34, while EDR was trading at $8.25, according to SNL Financial.
College Dreams
Much of the student housing sector’s strong fundamental performance can be attributed to the overall growth in the number of high school students and the increased percentage of students who go to college.
“The case is strong to invest in student housing REITs,” says according to Paula Poskon, a REIT analyst with R.W. Baird & Co.
She points to the robust demographics driving the sector – millions of high school graduates matriculating to university – in addition to the lack of quality student housing in most college markets.
The National Center for Education Statistics (NCES) forecasts record levels of secondary enrollment through at least 2019. About 3.3 million high school students are expected to graduate during the 2010–11 school year, exceeding the high point during the Baby Boom era in 1975–76, when 3.1 million students earned diplomas.
College enrollment was a projected 20.6 million in fall 2010, according to NCES, higher than in any previous year. College enrollment is expected to continue setting new records from fall 2011 through fall 2019. Between fall 2010 and fall 2019, enrollment is expected to increase by 14%.
Increased enrollment numbers correspond to shifting attitudes about educations. For example, the percentage of Americans who believe college is essential for success in the work world remains at a high point (55%, up 24 percentage points since 2000). Additionally, 90% of parents of high school students surveyed believe that their child is going to college.
Spoiled Students
Today’s college students have very high expectations for their living quarters. They’re used to having their own space – the majority of them had their own rooms and home and probably didn’t even have to share a bathroom. They have their own cars, their own laptops and their own iPhones. Some would say they’re spoiled.
While small rooms and community bathroom were the norm for student housing 20 years ago, modern student housing mimics the comforts of home. Universities have found that the quality of their student housing is a major factor in attracting students. It’s not enough for colleges to have superior academic and athletic facilities; they must also have state-of-the-art housing.
“Kids are used to a lot of comfort, and existing housing facilities are not satisfactory,” Goldfarb notes. “In order to keep attracting students, universities need better dorms.”
Today, 70 % of students live off campus – and not always by choice. Many institutions have had to turn away students who want to live on-campus because they have inadequate housing. Even worse, most don’t have the financial capacity to address their housing needs, believing they should focus on funding new academic facilities.
“Stretched budgets have institutions searching for private partners to fund their housing needs,” according to a report from Green Street Advisors. “This is creating a target-rich environment for well-capitalized and operationally savvy student housing developers. The public REITs are well suited to fill this need.”
Name: American Campus Communities Inc.
Ticker Symbol: ACC
Headquartered: Austin, Texas
IPO: August 2004
Market cap: $2.3 billion
Portfolio: Owns 106 student housing properties containing approximately 65,900 beds. Including owned, joint venture and third-party managed properties, ACC's total managed portfolio consists of 141 properties with approximately 91,300 beds.
Notable: The American Campus Equity Program, or ACE™ program, allows ACC to develop student housing on-campus with its own equity instead of third-party equity or drawing on the university's debt capacity. The REIT also is working toward an investment-grade rating so it will be able to issue corporate debt and further eliminate any possible impact to a university’s credit ratings regarding on-campus projects.
Analyst commentary: “I think ACC in particular is one of the few true growth stories in REIT today,” Goldfarb says. “ACC is one of the true truly successful companies out of the gate IPO. They’ve been the poster child for the sector. They’ve been a great leader, and they deserve a lot of credit. Based on the implied cap rate and the dividend yield, it’s cheaper than apartments. I feel it is a good time to invest in ACC.” – Alexander Goldfarb, managing director of Sandler O'Neill + Partners. The firm has a Buy rating on ACC.
“ACC sets the industry standard for student housing REITs. We view a premium as warranted given ACC's best-in-class profile and strong balance sheet.” – Paula Poskon, a REIT analyst with R.W. Baird & Co. The firm has an Outperform rating on ACC and a price target of $40.
Name: Education Realty Trust Inc.
Ticker Symbol: EDR
Headquartered: Memphis, Tenn.
IPO: January 2005
Market cap: $605 million
Portfolio: Owns or manages 57 communities in 23 states with nearly 34,000 beds within more than 10,600 units.
Notable: The REIT’s balance sheet is the strongest it has been in five years. It currently has acquisition or development capacity – assuming neutral leverage – of approximately $300 million. It has focused on disposing of non-core assets and is looking to build its portfolio and create external growth with acquisition and development opportunities near larger universities.
Analyst commentary: “EDR is a turnaround story. It is under new management, and the new CEO Randy Churchey has been fantastic. He’s reduced leverage and re-energized the company. The REIT has done a lot of fixing. The challenge now is that it’s time engage in growth strategy.” – Alexander Goldfarb, managing director of Sandler O'Neill + Partners. The firm has a Buy rating on EDR.
Name: Campus Crest Communities
Ticker Symbol: CCG
Headquartered: Charlotte, N.C.
IPO: October 2010
Portfolio: Owns interests in 27 student housing properties containing approximately 5,048 apartment units and 13,580 beds.
Notable: Operates all properties under The Grove(R) brand. The REIT focuses on serving universities and colleges in smaller secondary markets. Its strategy is to serve the housing needs of the upper-income students attending smaller schools.
Analyst commentary: “CCG’s whole strategy is focused on development. They plan to deliver seven to nine properties per year. When they were private, they racked up a lot debt, and that was part of the reason for the IPO. There is a higher level of risk with their strategy because it’s based on development. Also, the company had a disaster with its fourth quarter earnings; they bombed right out of the gate and shattered investor confidence. The next two months are going to tell a lot about whether they are on track.” – Paula Poskon, a REIT analyst with R.W. Baird & Co. The firm has a Neutral rating on CCG and a price target of $11.
