With August now coming to a close, millions of American families will undergo the same rite of passage — dropping their kids off at college.
Despite the hardships facing many students these days — such as rising student loans and higher tuition bills — going to college remains as popular as ever. Having a college degree is still deemed as a necessity for many industries. That fact continues to boost enrollment at Universities across the country.
According to the U.S. Department of Housing and Urban Development, more than 17.7 million students were enrolled in college in 2012. That’s up from just 12 million in 1990. And that number continues to grow even higher today.
But all of this continued rising enrollment begs an interesting question- Where exactly are these kids going to live?
REITs Are Filling The Void
The problem for American university students is there are just not enough beds on college campuses to fill the growing ranks.
For one thing, many institutions of higher education are significantly space-challenged. Dorm construction simply isn’t an option — especially when limited space could be used for potentially money-making lab space or sports-related buildings.
Secondly, there isn’t any money in the kitty to build more housing solutions. Many large state schools continue to face budget restraints due to the economic and fiscal issues at the state level. And private donors would rather see their names on so-called impact buildings rather than a “boring” dorm.
As a result, students have been forced to find other living arrangements. While the number of students increased by millions, according to the above study by the Department of Housing and Urban Development, only about more 600,000 students actually ended up living on campus.
The communities surrounding college campuses have long been filled with houses and apartments catering to students who either can’t live on campus or no longer desire to. However, today’s off-campus living spaces aren’t the dump frat houses of old. How does fire pits, high-end appliances and tanning beds sound?
For the REITs catering to this niche, it sounds like big-time profits.
Higher Rents & Occupancy Rates at EDR & ACC
Those sorts of amenities — which are now considered necessities by many younger Millennials entering college today — come with higher rents than traditional dorm rooms. Try about $1,600 a month for a one-bedroom apartment.
The combination of luxury and overall higher demand continues to push up occupancy rates for the big two REITs in the sector. Both EDR and ACC have been able to realize a greater than 3% increase in their rents for this school year.
Meanwhile vacancy rates stand at less than 5%. That’s an enviable position that many other property sectors and owners would kill to have.
But the two REITs also benefit from their recession-resistant nature. Unlike others forms of real estate such as office buildings or shopping malls, student housing is pretty much unaffected by the economic conditions.
Office buildings will lose tenants when the economy tanks and shopping malls will see store closures when consumers clamp down on spending. However, college enrollment and student demand is unaffected during recessions. The students keep coming and paying up for housing.
For the REITs, the combination of high rents, continued demand and a dose of bolt-on M&A transactions have helped propel their cash flows and funds-from-operations (FFO) metrics. That in turn has made the two REITs, dividend stalwarts over the years.
Making a Student Housing Play With EDR & ACC
Given the steady nature and potential FFO/dividend growth at both American Campus Communities and EDR, investors may want to add a dash of student housing to their portfolios. Both REITs currently pay roughly 3.4% in dividends and offer two distinct styles when it comes to student housing.
As the first student housing REIT, American Campus is the largest player in the sector with nearly 163 properties under its wing.
The key is that ACC targets only tier-one universities. These are public flagship state universities featuring enrollments north of 15,000 students. By focusing on these schools and their constant flow of students, ACC has managed to realize operating income growth at a 28% CAGR over the last decade.
Meanwhile, the REIT has managed to increase its FFO by more than 6.5% annually in that time.
Slightly smaller, EDR is more of a growth play. The firm downsized its portfolio of properties in recent years to focus more on tier-one schools. And that focus has been on the higher-end.
EDR has been one of the chief builders of so-called “cottage living” rental home communities. These upscale housing communities come with individual bedrooms, Bosch appliance-filled gourmet kitchens, luxury clubhouses, yoga studios … and more importantly, higher rents. They’ve been a huge hit with students and parents willing to take on the extra costs.
The segment has also translated into some hefty FFO growth. EDR saw its cash flows jump 31% last quarter and these new cottage and upscale properties drove the gain.
So the choice comes down to stability with ACC or more growth with EDR.
Personally, I’m inclined to go with the steady nature of American Campus. As the largest player in the sector, you’re getting the widest moat and ability to survive if things get tough. That’s not saying that EDR isn’t good either, but “slow and steady” may be a better pick for investors.
Bottom line, student housing continues to be a hot commodity. For REITs, ACC and EDR providing upscale housing solutions is translating into some big cash flows an ultimately, dividends for their investors.
Aaron Levitt is long both EDR and ACC. Also bitter that he never received his security deposit back from EDR’s “The Pointe” property back in his undergraduate days.