Value investors should consider Toll Brothers (TOL) as an attractive new way to gain exposure to higher education, in addition to exposure to the wider market for luxury apartments.
College REITs
Prominent bubbles in recent history include the tech bubble, the commodity bubble, and the residential real estate bubble. Today an inflow of funds from hedge fund investors into rental properties may be the harbinger of another set of investor disappointment. The record increase in student loan debt, in addition to student loan delinquency, has also prompted many to wonder if education itself is in a bubble.
One group of investments that may be getting frothy is college rental properties:
Ticker | Company | P/E | P/S | P/B | D/E | Div Yield |
Campus Crest Communities | 44.93 | 3.64 | 1.36 | 0.8 | 5.3% | |
American Campus Communities | 71 | 11.19 | 2.03 | NA | 5.9% | |
Education Realty Trust | NA | 8.72 | 1.6 | 0.42 | 2.9% |
Data from FinViz.com
None of the REITs on this list-Campus Crest Communities, American Campus Communities, and Education Realty Trust-is trading at attractive valuation multiples. In fact, some of these REITs saw substantial capital appreciation over the past year. Campus Crest Communities did the best with 27% total return, American Campus Communities, the biggest student housing REIT, had a total return of 18%. Education Realty Trust was close to flat with a 3.2% total return.
Toll Brothers, on the other hand is starting to build luxury dorms. Toll Brothers is the largest builder of luxury homes in the U.S., and it makes sense that it would explore this market. It is currently attractively priced as a homebuilder and is the most attractive entry into college apartments.
Back to School
Currently Toll Brothers is developing high-end college dormitories at two East Coast universities. The buildings will be furnished with amenities like a bathroom for each resident, gyms and movie-screening rooms. Toll Brothers CEO Douglas Yearley Jr. stated, "Not the dorm living I experienced." Toll Brothers, which has built reputation for building upscale single-family houses, has diversified into rental apartments, urban high rises and senior home communities in its search for additional sources of revenue to cushion cyclic disruptions in the housing market.
Toll Brother's share price has increased 59% over the past year although lesser compared to the 78% increase for the Supercomposite Homebuilding Index. Yearley cited the amount of closings and the number of visitors to the company's model homes as signs that point to a very encouraging spring. Toll expects to add 74 communities this year bringing its total to around 230, and sell out about 50 of these.
Simultaneously with Toll's entry in the dormitory market, Gibraltar Capital and Asset Management - its real estate investing division will be liquidated and all its employees will be reassigned to other jobs within the company. Toll's $135 million investment in the "distressed" division has been reduced to $125 million. Gibraltar was formed in 2010 to buy non-performing loans and foreclosed properties from banks but Toll Brothers failed to build any subdivision out of the former's acquisitions which include a Minneapolis shopping center, a condominium project in Las Vegas, a winery in Georgia and a student housing at Western Kentucky University among others.
The National Association of Realtors reported that existing home sales for 2012 reached 4.94 million, the highest since 2007 but lower than economists' estimates. Axiometrics, a research firm specializing in apartments expects college enrollment to go up 10% by 2016 which in turn would increase demand for student housing in the near future. However, demand during the first semester 2012-2013 was not as researchers expected. Green Street Advisors Senior Associate Andrew McCulloch said, "A challenging economy, new supply and overly aggressive rent hikes were the main culprits. Newer, more amenitized assets in close proximity to campus have been, and are expected to continue to be, outperformers."
Another Perspective
Many parents try to save money when they send their children to college. However, many do not. Toll Brothers would not be servicing the entire student body with these dorms, only those students whose parents are willing to pay for great college apartments.
To be clear, for-profit education stocks are much cheaper than Toll Brothers. When compared to education stocks, Toll Brothers is not a bargain:
Ticker | Company | P/E | P/S | P/B | P/FCF | D/E |
Apollo Group | 6.46 | 0.54 | 2.2 | 6.57 | 0.1 | |
Bridgepoint Education | 4.24 | 0.56 | 1.15 | 4.09 | NA | |
DeVry | 14.7 | 0.79 | 1.19 | 14.29 | NA | |
ITT Educational Services | 2.85 | 0.3 | 3.02 | 4.4 | 1.1 | |
Grand Canyon Education | 16.81 | 2.19 | 4.91 | 16.8 | 0.13 | |
Strayer Education | 8.67 | 1.18 | 10.46 | 61.52 | 1.58 |
This is what cheap looks like. These stocks offer educational services to budget-conscious students and families. However, they are not servicing the same students who will be occupying the high-end Toll Brothers college housing.
Campus Crest Communities, American Campus Communities, and Education Realty Trust provide housing for students who are somewhere in between the clients of luxury housing and for-profit colleges.
Residential Construction Valuation
Toll Brothers is trading at a lower earnings multiple and a higher revenue multiple than most of its peers:
Ticker | Company | P/E | P/S | P/B | P/FCF | D/E |
DR Horton | 8.08 | 1.56 | 2.03 | NA | 0.72 | |
Lennar | 12.91 | 1.9 | 2.27 | NA | 1.35 | |
MDC Holdings | 137.89 | 1.8 | 2.07 | NA | 0.87 | |
NVR | 28.71 | 1.55 | 3.35 | NA | 0.41 | |
PulteGroup | 37.13 | 1.58 | 3.58 | 10.19 | 1.21 | |
Ryland Group | 47 | 1.31 | 3.41 | NA | 2.25 | |
TOL | Toll Brothers | 13.01 | 3.27 | 1.97 | NA | 0.72 |
It also trades at a lower price-to-book value than its peers. All-in-all, it is reasonably priced.
Conclusion
Toll Brothers is an interesting way to gain exposure to campus properties. Investors should consider Toll Brothers over college REITs and over many residential construction companies. However, it is not a substitute for for-profit education stocks that service an entirely different market.
Please read the article disclaimer.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
