Student Housing REITs Appear Poised To Outperform Market Through End Of 2012

Includes: ACC, CCG, EDR, SPY
by: Zvi Bar

College students must usually choose between three options when it comes to housing while in school: (1) they can stay at home; (2) they can stay in dormitories and other on-campus housing options that are affiliated with their school; or (3) they can stay in housing options that are near their college campus that are not affiliated with their school. While it is difficult for investors to allocate into the first option, the second and third are accessible to equity investors through student housing REITs.

There are not many options when it comes to investing in student housing, but a select few apartment REITs have focused their businesses around building and managing portfolios of apartments either for schools or near campuses. There are currently three publicly traded REITs that primarily own and operate such properties within the student housing category: American Campus Communities (NYSE:ACC), Education Realty Trust (NYSE:EDR) and Campus Crest Communities (NYSE:CCG).

The largest such student housing REIT is American Campus Communities, with a market cap of around $4.23 billion and a yield of 2.93 percent. ACC has appreciated 9.65 percent since the start of 2012 and 19.85 percent over the last 12 months. Though ACC's equity has steadily appreciated over the last several years, since bottoming with the broader market, the REIT has not increased its quarterly dividend, currently $0.3375, since the start of 2005. See the recent performance chart for ACC below:

click to enlarge images

Education Realty Trust is another student housing REIT. EDR has a market valuation of about 1.1 billion dollars and a present yield of about 3.5 percent. EDR's quarterly dividend has fluctuated from a high of 30 cents in early 2005, to a low of five cents at the end of 2009. In mid 2011, EDR increased its dividend to seven cents per quarter, and then again increased its dividend last quarter to ten cents. Since the start 2012, EDR shares have appreciated by 11.83 percent, and they have gained 25.71 percent over the last 12 months. See the recent performance chart for EDR below:

Campus Crest Communities is the smallest of these three student housing REITs. Campus Crest, which markets its properties under the Grove name, has a market valuation of $431 million and a yield of 5.72 percent, making it the highest yielding of the three listed REITs. CCG has only been publicly traded since late 2010, and started off paying a quarterly dividend of 13 cents. The company increased its quarterly dividend to sixteen cents to start 2011, and has since maintained that rate. CCG has appreciated 11.23 percent since the start of 2012, and is relatively flat over the last 12 months. See the recent performance chart for CCG below:

Both ACC and EDR have performed very similarly over the last year, while the considerably smaller CCG has noticeably underperformed them. See the 1-year comparison chart below:

Over the last month, though, CCG has outperformed its peers and generally moved in a closer correlation to them ACC and EDR than it had throughout the first half of 2012. See the 1-month comparison chart below:

On June 29, Congress sidestepped a potential doubling of interest rates for new federal student loans, which is a good thing for these student housing REITs. Under the bipartisan compromise, interest rates on new government subsidized Stafford loans will be maintained at 3.4 percent. Prior to this compromise, rates were set to double in July. Since this extension was announced, all three of these REITs have appreciated, but their performance has been in line with the broader market. In fact, though these student housing REITs initially reacted strongly to the extension, the S&P 500 has outperformed all three since the announcement. See a performance comparison chart for these three REITs and the S&P 500 (NYSEARCA:SPY) since June 29:

This low rate extension should be good news for the industries that service colleges and universities, including these above-mentioned student housing REITs, because the low rate should help convince students and their parents to choose on or near-campus options over commuting from home. Most student housing options are chosen over the summer, with leases signed in the third quarter. As such, this extension appears to have arrived at a good time for the industry, since it was announced just before the third quarter began.

Student housing REITs should be expected to report reasonably strong Q3 results, including new leasing information that should help increase quarterly revenue estimates for the coming quarters. Moreover, though these REITs have all appreciated since the announcement of the 3.4% Stafford rate extension, since their performance has generally been in line with or below that of the broader market, these REITs appear poised to outperform the broader market through the end of 2012.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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