How To Invest In The Budding Student Housing Market

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.

Related Link: Diving Deep Into ARCP, Other REITs With A Wall Street Analyst

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.