High Income Investments Reduce Exposure To Europe, Increase Returns: Part I

Includes: ACC, CCG, EDR
by: The Wall Street Transcript

Market volatility caused by the European sovereign debt crises continues to impact US investment portfolios. Securities paying high income and trading in major US exchanges can shelter domestic portfolios and create upside exposure to a slowly improving North American economy, while providing income greater than long-term Treasuries and adding little risk.

Oil and Gas Master Limited Partnerships (MLPs), especially those with US pipeline assets, have attracted investor interest after several large acquisitions made headlines in 2011. Similarly, Real Estate Investment Trusts (REITs) continue to rebound from their 2009 and 2010 lows, and the prices of the larger REITs are now hitting two- and three-year highs. These specialized investment vehicles were created under special laws to encourage investment in US infrastructure, and distribute 90% of all qualified earnings to holders of the trust. Buyers of these exchange traded liquid securities are considered limited partners, not shareholders.

These investment vehicles have subspecialized. University campus housing became a bright spot in multifamily real estate construction and development, and REITs like American Campus Communities (NYSE:ACC) and the Education Realty Trust (NYSE:EDR) are representative examples of this stable and growing sector of the US economy.

American Campus Communities has appreciated over 25% in value in 2011, and has distributed $1.36 per unit to this year. ACC is now trading near the high end of its range at just under $40/unit, so the current yield is 3.4%.

EDR has traded as low as $7.16/share this year but is currently priced at $9.36, or almost 30% higher than its low. In addition, the stock pays out 7 cents per quarter for a 3.9% annual yield.

Obviously, both of these education related Realty Trusts have seen significant capital appreciation this year. Fortunately, investors seeking yield and future potential capital appreciation have another choice in the education sub-sector of multi-family REITs.

Campus Crest Communties (NYSE:CCG) is trading at $10.08/unit and the annual payout provides an cash on cash yield for owners of 6.4%. Further confirmation of this attractive security was the recent disclosure of the Vanguard Group acquisition of slightly over 10% of CCG for investment purposes.

In an interview in the Wall Street Transcript this year, Ted W. Rollins, the Co-Chairman of the board of directors and the CEO of Campus Crest Communities (CCG), explained the economics underlying his business:

We started about seven years ago. We basically looked at the student housing market, and it was apparent that there was a real need for our product - not only in primary markets, but even more so in secondary markets, which is our main focus.

If you think about it in terms of any given state, you'll have a flagship campus - for example, in North Carolina, where we're based, UNC Chapel Hill is the flagship - but you'll also have a lot of great schools like UNC Wilmington, UNC Charlotte, UNC Asheville, these are all schools that need additional beds to continue to grow or to replace some obsolescent beds on campus. That really has been our primary target.

If you look at the industry as a whole, there are two general comments that you can make. One is that there is a limited supply. It's constrained because of the lack of capital available, and it's constrained with state budgetary cuts over the last few years. But at the same time, there is a growing demand. There are more kids going to college.

In addition to that, if you look at total enrollment, growth is continuing because the graduation rate at high schools is up. And of these graduates, a higher percentage are electing to attend college full time. In addition, foreign enrollment is on the rise.

A similar investment vehicle to the REIT is the Master Limited Partnership. MLP headlines have multiplied in financial news outlets this year. This follows a growing need for more basic information and specific investment advice about which are the best of breed MLPs and the best MLP funds.

More on this in Part 2.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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