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How Colleges are Providing More Income & Growth for Investors

December 05, 2019

There are always opportunities for outsized income and growth over time in the real estate and real estate investment trust (REIT) markets.

The real assets of land and buildings provide a base of asset security, and leases provide cash to pay dividends. As the old adage goes—Buy land… they’re not making it anymore.

That’s mostly true, but the real key to getting reliable income and safer growth is to be in a captive market with controls on supply and strong demand.

When it comes to a captive market for real estate, few locations are more restricted in supply than college and university student housing.

This is why student housing attracts so much heavy money from hedge funds and private equity.

Campus Crest Communities was a favorite recommendation of mine for some time until it was acquired by Harrison Street Real Estate Capital in 2016 for $1.9 billion.

That provided a hefty profit, but they took it private, which took away a nice income-producer.

And last year, one of my former Profitable Investing holdings, Education Realty Trust, was acquired by Greystar Real Estate Partners and Blackstone Real Estate Income Trust.

The deal netted $41.50 a share, which resulted in a nice double-digit return for the model portfolio.

Now, it was reported this morning that Brookfield Asset Management (BAM) and Blackstone Group (BX) are discussing bids for iQ Student Accommodation (private), which could result in a buyout amounting to over $5.3 billion.

This comes as iQ, along with major investor Goldman Sachs (GS), is also reported to be working with HSBC (HSBC) and Citigroup (C) on other potential deals, including a potential initial public offering.

And last month, two UK-based student housing companies—Unite Group (UTGPF) and Living Liberty Group—merged in a $1.8 billion deal.

As you can see, college dorm properties continue to rise in investment demand around the globe, as returns on capital and returns on operations are increasingly deemed to be more reliable than for other real estate or REITs in commercial, retail or other residential properties, which can be buffeted by ups and downs of local and broader economies.

My Favorite Campus Pure-Play

This brings me to the last pure publicly listed US college property REIT: American Campus Communities (ACC).

The company was formed in 1993. Since it came to the public market in August of 2004, it has returned 432.83% to date, for an average annual equivalent return of 11.53% per year.

ACC Total Return Since IPO—Source: Bloomberg Finance, L.P.

It has 206 properties in 25 states that house 133,000 student beds. Out of these assets, 168 properties and 104,000 beds are owned by ACC, with the remaining leased or under management contracts. The occupancy rate for its traditional enrollment tenant properties is running at 97.5%.

The housing stock is comprised of both on-campus and convenient off-campus facilities around the US.

The schools served include many well-known universities, including Princeton, Rochester Institute of Technology, Drexel, Temple, Virginia Commonwealth and San Diego State.

The key attraction of the REIT market is that there are limited supplies of student housing facilities and available real estate for development of new properties.

And there is always demand for housing given the reliable flow of student tenants from the well-respected and highly sought-after universities.

The internal rate of return (capital rate) for the on-campus properties was recently reported at an estimated 15%, making it attractive for the REIT segment overall, which averages at 5.50% for residential multifamily REITs.

Revenues are steady and rising, with gains over the trailing year of 10.6%. And ACC runs itself with efficiency, as its general and administrative costs run at just 5.2% of net operating income. Funds from operations are running at 11%.

Shares are cheap relative to the rest of the US REIT market, as tracked by the Bloomberg US REIT Index, with ACC valued at 1.98 times its book value compared to the index average of 2.96 times.

The dividend is also a tick better at 3.92% compared to the index average of 3.77%.

Furthermore, I would imagine that ACC may well become a potential target for another acquisition given the ongoing developments in this segment.

As for all US REITs, ACC should be purchased in a taxable account to take advantage of the 20% deduction on dividend income for Federal income taxes under the Tax Cuts & Jobs Act of 2017.

How to generate even more income

Generating cash from the attractive student housing market is just one of the of 65 income streams I’ve featured in my recent book: Income for Life.

If you’re looking for better returns in the market or just want to make some extra cash, I highly encourage you to check out Income for Life.

It includes nearly 400 pages of income-producing investment strategies for all economic conditions as well as additional income-generating “side hustles” that anyone can use successfully.

All My Best,

Neil George
Editor, Income Investor’s Digest & Profitable Investing
Author, Income for Life