On March 9, MLV & Co. released its latest update on the asking rents for the three REITs focused on owning and operating student housing:
- American Campus Communities, Inc. ACC
- Campus Crest Communities, Inc. CCG
- EdR - Education Realty Trust EDR
Tale Of The Tape - Past Year
MLV believes "that student housing stocks can outperform the broader REIT indices in the coming months," noting "external growth" as the main driver for sector relative outperformance.
MLV - American Campus Communities: Hold, $46 PT
ACC's average asking rents [per MLV survey] "reflected a 2.4% increase over the same period last year vs. management's guidance for rents up 2.9%" for the 2015/16 school year.
- MLV's "$46 year-end 2015 price target is based on a 10% premium to [its] NAV estimate, which is driven by a 5.75% cap rate."
- The MLV valuation "is supported by a discounted cash flow assuming an 8.0% cost of equity and a 3.0% terminal growth rate."
- MLV's 2015 year-end $46 PT represents a 12.4 percent upside based upon ACC's $40.92 March 11, closing price.
MLV - Education Realty Trust (EdR): Buy, $42 PT
EDR's average asking rents [per MLV survey] "reflected a 2.3% increase over the same period last year vs. management's guidance for rents up 3.0%" for the 2015/16 school year.
- MLV's "$42 year-end 2015 price target is based on a 5% premium to [its] NAV estimate, which is driven by a 5.75% cap rate."
- The MLV valuation "is supported by a discounted cash flow assuming a 9.0% cost of equity and a 2.0% terminal growth rate."
- MLV's year-end 2015 PT of $42 represents a 22.5 percent upside based upon EDR's $34.27 March 11, closing price.
MLV - Campus Crest Communities: Hold, $7.50 PT
- MLV does not currently track data for Campus Crest properties specifically. However, "as of 3/6, average asking rents for the 2015/16 school year across the 909 student housing data points [MLV has] compiled reflect a 2.4% increase over the same period last year."
- MLV cautions against "reading into any implications for CCG given that the company continues to undergo a period of retooling its business, which may cause the company's lease-up to differ from these results."
- MLV's "$7.50 year-end 2015 price target is based on a 5% discount to [its] NAV estimate, which is driven by a 6.25% cap rate."
- The MLV valuation "is supported by a discounted cash flow assuming a 7.0% cost of equity and a 3.0% terminal growth rate."
- MLV's year-end 2015 PT of $7.50 represents a ~2.8 percent downside based upon CCG's $7.72 March 11, closing price.
Student Housing Investment Risks
MLV noted that all three of these REITs could potentially be impacted by:
- "Deterioration in rent and occupancy levels driven by increased levels of competitive supply or deteriorating demand would likely negatively impact valuation and investor sentiment."
- "Secondary offerings are possible and often result in earnings dilution, as REITs must distribute 90% of taxable income to shareholders by law."
- "Expense pressure could cause NOI results to lag investor expectations."
- "Development delays or cost overruns could materially impact near-term investor expectations."
- "Additionally, demand for both American Campus Communities and EdR properties could be dampened "by a reduction in student enrollment at Tier 1 universities."
MLV FFO Estimates
Notably, MLV's 2015/2016 estimated FFO for EdR represents a Y/Y growth rate of ~19.8 percent, while estimates for both American Campus and Campus Crest vary up or down by only a penny for the same time period.
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