Student Housing REITs Announce Leasing Results: Business As Usual or Risky Business?
Three REITs specialize in student housing, either on campus, or in close proximity to institutions of higher learning: American Campus Communities, Inc. (NYSE: ACC), Education Realty Trust, Inc. (NYSE: EDR) and Campus Crest Communities Inc (NYSE: CCG).
Although this asset class is similar to multi-family apartments, these are essentially seasonal rentals (based upon the academic year). When new buildings or communities are developed, it is critical that they are delivered on schedule to allow for proper marketing efforts and move-in dates prior to the beginning of the fall semester.
Since student housing rents out by the bedroom, key metrics are usually reported based upon revenue per occupied bed.
The Big Picture YTD
All three of these collegiate housing REITs have now reported leasing results for the 2014/2015 academic year.
Business As Usual For EDR Investors
On September 29, $1.5 billion cap Education Realty Trust, or EdR, reported leasing results: "EdR's same-community portfolio opened the 2014/2015 lease term 96.3 percent occupied compared to an opening occupancy of 94.3 percent in the prior year. In addition, same-community net rental rates increased 2.0 percent over the prior year."
"We are proud to announce the end of another leasing season with strong, industry leading, same-community revenue growth of 4 percent,' stated Christine Richards, executive vice president and chief operating officer."
Business As Usual For ACC Investors
On September 30, $3.9 billion cap American Campus Communities reported leasing results:
"As of September 29, 2014, the Q4 2014 same store properties are 97.5 percent leased with a 2.1 percent final projected rental rate increase compared to 96.8 percent as of September 30, 2013. The total new store properties are leased to 98.5 percent. The combined total wholly-owned portfolio is 97.5 percent leased as of September 29, 2014."
“'We are pleased to report Fall 2014 same store occupancy of 97.5 percent, once again leading the public student housing sector and above the midpoint of our 2014 guidance range,' said Bill Bayless, American Campus CEO."
“With the 2.8 percent rental revenue growth generated by this lease-up, and our ongoing asset management efforts, we believe we are positioned to produce same store net operating income growth in excess of 3 percent for the 2014-2015 academic year.”
The Good News For CCG Investors
On October 7, Campus Crest CEO Ted Rollins updated investors on leasing progress as well as breaking out results by product type and new development performance.
Based upon actual results and management projections, overall leasing activity for 2014/2015 was projected to increase 190 basis points, to 91.2 percent from 89.3 percent actual results for 2013/2014. This improved aggregate performance still significantly lags its two sector peers.
The CCG Bad News
However, it was the performance of new student housing delivered in 2014 which concerned management -- specifically the new evo high-rise product built in Philadelphia and two evo towers in Montreal.
These are the first three evo high-end, high amenity projects which Campus Crest has developed, so there are no lease-up comparisons. However, initial absorption rates were shockingly low.
The evo towers in Montreal total 2,223 beds and Campus Crest expects 1,981 to be vacant during the 2014/2015 academic year. While the 819 bed evo Philadelphia tower is expected to be slightly more than half vacant.
There is no operating history to estimate the costs of operating these predominately vacant high-rise towers; nor are there any historical absorption rates to fall back on, when it comes to estimating leasing performance for 2015/2016 for this product type.
Additional October 7 Announcements
In a separate announcement Campus Crest detailed changes in its management team. This included the resignation of the Chief Construction and Facilities Management officer, a position that will be eliminated due to the reduction in future development; as well as the resignation of COO Rob Dann to pursue other interests.
Having a vertically integrated in-house development team had been one of the foundations of the Campus Crest business model since the company's $12.50 per share IPO debut in October 2010. The CCG closing price on October 8, 2914 was $6.51 per share, with the announced dividend currently yielding more than 10 percent. A dividend this high typically represents a red flag and can be indicative of perceived high risks moving forward.
During the CCG conference call for the quarter ended June 30, 2014 then COO Dann alerted investors that due to the "non-linear leasing activity for the academic year" that there would be clarity of "either underwhelming results or impressive progress" by late in the third quarter.
Also during the Q2 call, CFO Donnie Bobbitt had shared that there were "no plans to cut the dividend for the remainder of this year…" CEO Rollins added, "I think we should have this conversation again next quarter, because that would be really telling."
Based upon the recent leasing activity announcement, the safety of the dividend moving forward and revised earnings guidance will certainly be a topics of interest for investors and analysts alike during the Q3 Campus Crest earnings call that will be held at the end of October.
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