Student Housing REITs: Making the Grade?

This article is republished with permission from REITCafe.

As schools let out for the summer, student housing real estate investment trusts (REITs) are already looking past vacations and ahead to the next school year. As an influx of new construction was met with declining college enrollment this year, these REITs were faced with hurdles to jump. Two of the three publicly traded dedicated student housing REITs—American Campus Communities (ACC) and Education Realty Trust (EDR)—posted strong stock price appreciation for 2014, but their values have declined between 3 and 8 percent so far in 2015. The third, more troubled REIT—Campus Crest Communities (CCG)—the smallest of the three student housing REITs, has experienced a stock decline of about 30 percent since the beginning of 2014.

Each REIT specializes in a particular student housing niche. ACC, the largest student housing REIT with a market cap of $5.6 billion, primarily invests in student housing within walking distance of large, four-year public universities. It also has joint ventures with universities for on-campus housing. EDR invests only at schools with at least 10,000 full-time students. Campus Crest invests primarily in properties within walking distance of primarily nonflagship schools.

Overall college enrollment is declining, and enrollment at the largest schools where student housing investors are most active is growing modestly at best. U.S. college enrollment has declined slightly in recent years, partly because of the slowly shrinking 18-to-24-year-old age cohort and also because the government has taken steps to limit the availability of federal student aid for students at career colleges. Despite these factors, total U.S. college enrollment topped 18 million in the spring of 2015, according to the National Student Clearinghouse Research Center. About 60 percent of that total enrolled at four-year public or private nonprofit schools.

The construction pipeline is at a record high for the fall of 2015, including 48,000 new beds, according to Axiometrics. Deliveries have declined from the previous two years, when a cumulative 123,000 new beds were completed. Construction activity is widespread among 73 universities, and new units, with their abundance of amenities, generally lease quickly. However, oversupply has become a concern for specific metropolitan areas and schools.

Preleasing for the upcoming lease term is mixed compared with year-ago levels.

• In March, ACC reported leasing of new and same-store wholly owned properties totaling 76.2 percent, which was down slightly from 76.8 percent one year earlier. Last year’s occupancy totaled 97.5 percent. ACC projects a 2.9 percent rental rate increase for the 2015–2016 academic year.
• EDR also reported in March that its same-community portfolio preleasing for the 2015–2016 lease term was 76.6 percent, which is 140 basis points higher than last year. EDR projects a 2.5 to 3.5 percent increase in revenue for the upcoming lease term. EDR also has 2,982 same-community beds and 1,610 new-community beds being delivered to the University of Kentucky in 2015. The beds are oversubscribed, but have not yet been assigned.
• In May, CCG reported that preleasing for its total portfolio for the 2015–2016 academic year was up by about 240 basis points. Preleasing of the company’s same-store portfolio trails 2014, but the company has experienced strong growth in leasing of its 2014 deliveries.

Activist investor Clinton Group is pushing CCG to improve its results. The company suspended its dividend payment in April, and CCG’s board of directors appointed an interim chief executive officer and chief financial officer to help reposition the company for a possible sale.

Not all news from the student housing REIT sector is doom and gloom, however. EDR reported first-quarter 2015 funds from operations (FFO) of $0.48 per share that slightly beat analyst estimates and that were about 9 percent higher than year-ago levels. ACC’s first-quarter FFO of $0.67 per share was up slightly from 2014 and met Wall Street expectations.

Significant demand for student housing assets also has driven values up. REITs are competing with pension funds, insurance companies, sovereign wealth funds, private equity funds, and high-net-worth individuals for student housing assets. Student housing cap rates fell to an average of 6.1 percent in the first quarter from 6.6 percent one year earlier, according to data firm Real Capital Analytics.

As pupils are enjoying the summer sun, student housing REITs will continue to expand their portfolios and secure leases, as these coming months will be critical to their performance.

* TREPP-i Survey Loan Spreads levels are based on a survey of balance sheet lenders. For more information, visit Trepp.com.

** - 10 yr. Treasury Yield as of 5/22/2015.