The student homes market continued to develop despite the financial crisis. Christopher O’Dea reports on a REIT market growing in tandem
Despite tepid news about the US jobs market, the demand for college degrees shows no sign of abating. Undergraduate enrolment at public, private non-profit and private colleges is projected to increase from 17.7m to 20.2m students between 2012 and 2023, according to the US National Center for Education Statistics – with most of that growth at public education institutions.
It is easy to see why young people are still pursuing degrees despite headlines about more than quarter of a million recent graduates working in minimum-wage jobs. A recent Pew Research Center report found the largest pay disparity between college-educated young workers and those with only a high school education in at least four generations.
Pew’s survey of people currently employed between the ages of 25 and 32 found those with a college degree earned a median full-time salary of $45,500 a year – $17,500 more than the median salary of $28,000 for full-time workers with just a high school diploma.
Numbers like those illustrate why real estate investors see long-term potential for student housing property. What makes student housing so attractive is that the underlying drivers are different from regular apartments, says the head of research at a major US real estate private equity firm that’s eyeing a new fund in the sector. “A university degree has become a requirement in today’s knowledge-based economy,” he says. “It pays to go to college.”
For investors, it can pay to house students. Education tends to be counter-cyclical, as people often return to school during recessions to improve skills or change careers. That makes student housing less correlated and provides a diversification benefit. In general, analysts say student housing investments can yield 50 to 100 basis points more than conventional apartments.
The three large REITs that dominate the US student housing market are adapting to new opportunities and deal structures as demand for housing extends to include university faculty and staff, and partnerships with land-owning institutions become more common. While acquisitions by the major REITs have slowed in the past year, there are now several major requests for proposals (RFPs) for student housing. With more expected from large public universities later in 2014, it won’t be long before the student housing REITs will be increasing their activity in development, if not acquisition.
In a vehicle where consistent FFO growth is the goal, the emerging student housing landscape offers the potential to move beyond the seasonal rental and revenue cycle that arises from dealing in primarily post-freshman undergraduate units. And as partnerships extend to management and development services, the REITs are starting to find new ways to monetise their expertise in housing studious youth on American campuses.
Austin-based American Campus Communities started in 1993 with a single suite in what is now the hipster mecca of the US. Today it is the largest developer, owner and manager of student housing, with a market cap of just over $4bn, a property portfolio of just over $5.3bn and revenue of more than $183m for the first quarter of 2014. Goldman Sachs assigns an FFO multiple of 16.4x for 2014 and 15.7x for 2015, on FFO of $2.35 and $2.46, respectively.
ACC is expanding its American Campus Equity (ACE) programme into a new segment – faculty and staff housing. In ACE deals, the REIT serves as the college or university’s sole partner and does not charge fees up front. Instead, it receives long-term cash flows.
This summer, the first phase of faculty and staff units for Princeton University will be delivered. It is ACC’s second project for the school and its first faculty and staff housing development for a US university. The units will consist of one, two and three-bedroom apartment and townhome units, less than half a mile from the main campus, and are expected to receive LEED Silver certification. ACC will develop, own and manage the units through a 70-year ground lease with Princeton. The REIT has used ACE on projects at Portland State University, University of New Mexico, Arizona State University and Northern Arizona University, and Drexel University.
In April, ACC won a contract for a new 500-bed student housing facility on the campus of Butler University. Under the initial agreement, ACC will build and maintain the facility, while Butler and American Campus will share in the revenue; the appropriate partnership model is currently being negotiated, Butler said in a statement.
The deal is a boost for ACC – Butler described it as the start of a long-term relationship, and its housing plan calls for renovation or redevelopment of up to 1,500 units by 2020. Deals like that could recharge ACC’s development pipeline, which dipped from 10% to 7% of market cap, according to Goldman. ACC’s FFO per share has also declined recently, from 12% in 2012 to 10% in 2013 and 6% in 2014. Yet an increase in leasing to 74% in spring 2014 from 68% a year earlier is driving rental rate increases, which the company expects to top 2% for 2014.
While that may sound like a modest rise, rent increases on student housing are somewhat limited by changes in the on-campus dormitory rate, so a modest rent increase doesn’t mean that a property owner is falling behind the comparable market rate. And the payment streams carry virtually no default risk because students are more creditworthy tenants than the average apartment renter. Student housing agreements call for a sponsor, typically a student’s parent, to guarantee leases.
Strategically, the partnership model appears to be the way forward. Campus Crest Communities (CCG) said on its first quarter 2014 conference call that all 2015 developments will be undertaken with a partner. With a market cap of $565m, CCG concentrates on off-campus new construction across the US. The REIT’s strategy is based on the fact that 70% of students at four-year colleges live off campus. CCG is vertically-integrated, encompassing development company, a general contractor, a supply company, property manager and asset management business.
Speaking at REITWeek in New York in June, company executives said this enabled CCG to build at a discount. Perhaps more importantly, each CCG project is associated with one of the REIT’s three brands. The primary brand is The Grove, which is focused on apartments adjacent to campuses for sophomores and juniors. Copper Beech targets seniors and graduate students. The third, and newest, is Evo, a concept targeting both undergrads and graduate students in the urban context. The first Evo properties are under way in Philadelphia, and the second group is coming on line in Montreal, to serve schools such as McGill and Concordia.
As the new initiative comes on line, CCG noted at NAREIT that leasing for the REIT’s core portfolio in 2014 was 470 basis points up on last year. But Evo may test CCG’s strategy, which is based mostly on serving four-year public schools. The Philadelphia project will serve not only second-tier Drexel University, but also the Ivy League University of Pennsylvania.
But the partnership concept is operative. The 33-story, 850-bed student housing tower is a joint venture between CCG, Brandywine Realty Trust and Harrison Street Real Estate Capital, a private equity firm that owns about 25,000 student housing beds across its $3.5bn real estate portfolio.