A Profitable Lesson in Student Housing REITs

Despite all the issues facing students these days, such as growing debt, higher tuition and diminished job prospects, enrollment at U.S. universities and colleges continues to rise. According to the National Center for Education Statistics, college enrollment will keep increasing through 2019 as more than 3 million high-school students are expected to graduate annually until the 2018-19 academic year. That’s well above the roughly 2.5 million students who graduated in 1993-1994.

A series of demographic shifts is behind this trend. The echo boomer generation — children of baby boomers born after 1980 — are reaching their peak college attendance years. Overall, a higher percentage of high school students are graduating and electing to attend college full time. Plus, that college experience is getting longer: The average length of time that young adults spend in college has grown from 4 to 5.5 years.

All in all, these factors pose an interesting opportunity for investors in the “college renaissance.”

While some investors have preferred to play this trend with for-profit education stocks like Corinthian Colleges (NASDAQ:COCO), the best way may be in a small but growing segment of the real estate market.

Dorms Gone Upscale

While communities surrounding college campuses have long been filled with houses and apartments catering to students who have tired of living in dorms, today’s student housing real estate market is completely removed from its former Animal House glory days. While the kegs of beer are still there, many parents of today’s college students prefer them to live in the manner they’ve become accustomed to at home. Kitchens, private bedrooms and bathrooms, study lounges and even pools and tanning beds are necessities, and are quite commonplace among today’s student housing locations.

Catering to those upscale tastes is a small but growing group of real estate investment trusts — and their business is booming.

The student housing sector has grown from a fringe alternative property investment just 10 years ago to a global market worth around $200 billion. According to data from real estate group Jones Lang LaSalle (NYSE:JLL), student housing has emerged as the best-performing property asset type in both the U.S. and U.K. real estate markets. The sector has produced strong double-digit returns on the back of robust rental growth. Rents on average increased by more than 5.1% this year for U.S. student property owners.

Driving that rental growth is the sheer increase in the number of students. Space-challenged institutions are already grappling with more students than available dormitory rooms, and large state schools are facing budget caps due to the economic and fiscal issues at the state level. Overall, funding simply isn’t there to build new housing or dormitories for many colleges.

So, third-party property owners have stepped in and have been quite successful at providing the necessary supply, though it remains tight with vacancy rates at about 3%. That’s less than one-third of vacancy rates anywhere elsewhere in the property sector,  aside from the data center providers. Analysts expect the key players to generate double-digit funds from operations (FFO) growth until at least 2013.

Those FFO projections don’t even take into account the new trend in student housing called cottage living. Companies in the sector have begun to build upscale houses rather than traditional apartments buildings, with individual bedrooms and Bosch appliance-filled gourmet kitchens and access to clubhouses with luxury amenities like steam rooms  and yoga studios.

These cottage-style communities have caught on with parents and students, with occupancy rates at 96%. This compares with 93% occupancy for apartment-style housing. Not to mention that rents for these cottage homes are more than 10% higher versus traditional apartments.

The Big Three

Like the general apartment sector, which has been on fire for the last few years after the housing crisis, student housing REITs have also surged — averaging more than 35% in total return. However, unlike the apartment sector, student housing is largely unaffected by falling home prices and the return to home buying rather than renting. This fact has attracted a variety of banks and private equity players to the sector. For example, Carlyle Group (NYSE:CG) recently launched a new vehicle to own three student housing properties in central London.

As long as kids continue to go to college — and they should considering how the economy is still plodding along — investors in student REITs should prosper.

U.S. investors have only three dedicated student housing real estate investment trusts to chose from: American Campus Communities (NYSE:ACC), Education Realty Trust (NYSE:EDR) and Campus Crest Communities (NYSE:CCG). While each has their own pluses and minuses, the big favorite has to be American Campus.

The REIT is the largest provider of beds in the sector, with more than 169 properties in its portfolio and a 97% occupancy rate. American Campus continues to add to that number, recently paying $862.8 million to buy 19 student housing properties across the country from Kayne Anderson Capital Advisors as well as purchasing a new cottage-style development from Landmark Properties.

These deals will ultimately help continue to boost ACC’s FFO and support its 3% dividend. FFO for the latest reported quarter stood at $28.9 million, up from $23.7 million in the year-earlier quarter.

Total revenue during the quarter increased 24.8% year-over-year to $118.8 million. This was mainly due to the company’s aggressive property acquisition program, the addition of newly developed properties an a very aggressive hike in rental rates for the 2012-2013 academic year.

Overall, American Campus’ size and leadership in the sector — it was the first student housing REIT to go public — should make it the first stop on investors’ checklist for playing the growing college renaissance.

As of this writing, Aaron Levitt didn’t own a position in any securities mentioned here.

Article printed from InvestorPlace Media, https://investorplace.com/2012/11/a-profitable-lesson-in-student-housing-reits/.

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