by Lawrence Meyers | May 7, 2014 6:00 am
Two REITs came onto my radar last year — Campus Crest Communities (CCG) and Education Realty Trust (EDR). I’m always on the lookout for companies that operate in niche spaces because said spaces tend to be highly fragmented, and clear leaders often emerge. Choosing the winner can lead to enormous returns.
What these bogeys have in common is that they own, rent, and manage student housing. This is a business model I like because the U.S. has managed to brainwash its citizenry into believing a college education is absolutely essential to getting a good job. As a result, colleges and universities have been able to run tuition rates up (subsidized by generous and easy-to-access government loans).
All those students need to be housed somewhere. For many years, in college towns across the nation, there were landlords eager to rent their property to tenants who would return year after year, no matter how the economy performed.
Then companies like these stepped in and bought up properties, and renovated them. Off-campus housing, in some cases, became quasi-resorts. Even better, these companies are structured as REITs, paying good dividends. So how are these models working out?
In its first quarter, CCG stock delivered a year-over-year increase in Funds from Operations Adjusted of 29.1%, up to $10.8 million from $8.4 million. Same-store net operating income came in at $11.5 million at 90.5% occupancy, with a 55% margin. This, however, was a YOY decline.
With the same number of beds and properties as last year, occupancy fell from 93.4%, revenues declined by half a million dollars, and net operating income margin fell by 30 bps. I’m not thrilled by anything less than 100% occupancy. That says to me the properties aren’t marketing strongly enough, or word is out that there are better deals, or they aren’t pricing properly compared to local competition. Nevertheless, with an annual dividend of 66 cents, and annual FFOA in the range of 72 cents to 77 cents, the company can make good on its high yield of 7.7%.
CCG stock has struggled as the company works through some bad tenant debt. There are also questions surrounding the company’s investment in a JV, for which an upcoming option to purchase a larger share looms. There’s a possibly substantial upside if everything gets straightened out. More conservative investors may want to look at the 8% Preferred A shares.
EDR stock reported core FFO of $19.4 million, up from $16.4 million last year — an increase of about 18%. Same-store revenue increased 3%, and net operating income increased 6.8%. The company also has a solid balance sheet and liquidity: $9 million in cash was available, along with $123 million on an unsecured credit line, which can further expand another $157 million.
Even better, EDR stock added a $187.5 million unsecured term loan, divided into five and seven-year tranches. It is set to continue expansion and construction. I think EDR stock is on more solid footing, and I’ll gladly take its high-yield dividend — 4.4% — along with a potential for capital gain appreciation. There’s no preferred stock available here, but this is the kind of company that just might issue some if it seeks additional financing.
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As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at email@example.com and follow his tweets at @ichabodscranium.
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