Student Housing: Fundamentals Remain Challenged

Feb. 21, 2018 11:05 AM ETBlackstone Inc. (BX), EDR-OLD, IYR, VNQ10 Comments

Summary

  • Student Housing REITs were among of the worst-performing real estate sectors in 2017. Supply growth has outpaced enrollment growth in each of the past five years, which has weakened fundamentals.
  • The demographic boom of college-aged Americans peaked in 2011. A strong economy, rising wages, and increasingly negative attitudes towards traditional liberal arts college curriculum have resulted in declining enrollment.
  • Development remains the modus operandi and growth engine as both REITs have expanded their portfolio by roughly 10% per year. Institutional demand for student housing assets remains strong.
  • While development is highly accretive when trading at a NAV-premium, the opposite is true when trading at a discount. Wide NAV discounts have forced these REITs to scale back development plans.
  • Despite the short-term valuation dislocations, the long-term secular growth story appears intact. Cash-strapped universities will increasingly utilize private-public-partnerships to modernize their aging stock of dormitories to remain competitive.

REIT Rankings: Student Housing

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Student Housing Sector Overview

Student housing REITs comprise 1% of the REIT Indexes (NYSEARCA:VNQ and NYSEARCA:IYR). Within our Hoya Capital Student Housing Index, we track the two student housing REITs, which account for roughly $7 billion in market value: American Campus Communities (ACC) and EdR (NYSE:EDR-OLD).

For student housing, "quality" is a function of several factors including the proximity to campus, the quality of the academic institution, and the barriers-to-entry characteristics of the markets each REIT targets. These firms own a mix of on-campus, near-campus, and off-campus facilities, oftentimes in partnership with the University. While real estate ownership is the primary revenue source, these REITs also offer development, consulting, and management services to University partners.

Generally, these REITs target large flagship state universities. While both REITs are diversified across the country, American Campus Communities has more of a west coast "PAC-12" presence, while EDR has a more "SEC" presence, particularly at the University of Kentucky, where EDR has built six projects for the university.

These REITs utilize several different models to create value. The most profitable of these models is the public-private-partnership. A university, in need of new dorms but without the capital to build one, leases land to the REIT, who then builds, owns, and manages the facility. The University gets an annual ground-lease rent check (without deploying any capital) and the students get a

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