College Dorm Dividends

As a dividend growth investor, I’m always on the lookout for new and interesting income investment opportunities. This usually leads me down the path of your typical dividend aristocrats but every once in a while you come across an interesting sector or business segment that a) you never thought existed and b) could potentially fulfill a void in an overall dividend income portfolio.

 

 

I thought I already knew every type of real estate development company out there and REIT type that existed. A while back I wrote an overview about timber REITs and recently have been reading about some buys among our fellow dividend bloggers in EPR Properties (EPR), an entertainment, recreation and eduction REIT. Who knew you could invest in water parks, ski resorts and golf courses? When we typically think of REITs we automatically tend to gravitate to the more well known REIT types such as healthcare, industrial, retail and even office. But did you know you could invest in college dormitories?

 

College dorm investing has been very hot so far this year and is essentially dominated by just two players. Of course, a low interest rate environment helps any real estate related business as borrowing and development costs are cheaper but another tail wind is seemingly pushing this real estate segment along: Aging and worn out existing dormitory facilities many of which are at least 50 years or older. It’s funny to think of aging as a tailwind for any industry. Typically we cite an aging baby boomer population to boost healthcare REITs in the coming decades but aging college dormitories present the same long term opportunities. With that being said, let’s take an overview of the two prominent players in the college dorm space.

 

First up is American Campus Communities, Inc. (ACC), the nation’s largest owner and manager of student housing. ACC currently yields 3.2% but seems a bit pricey at current levels with a P/FFO of 23. It’s five year average P/FFO is 19 and with a significant run up in 2016 this stock is clearly on a hot up trend. In fact, ACC is up about 28% this year alone and has an annualized five year total return of 10.6%.

 

The other major player in the college dorm space is Education Realty Trust (EDR). Like ACC, EDR is a REIT that invests in college campus housing by developing, acquiring, owning, and managing collegiate housing communities located near university campuses. EDR also yields 3.2% and sports a P/FFO of 28 well above its five year average of 22. Like ACC, EDR is also having a banner 2016 gaining approximately 26% year to date. It’s annualized five year total return of 15.8% clearly demonstrates the long term tail winds that this sector is currently experiencing. In fact, EDR this month just raised its dividend 3%, it’s sixth straight increase in dividend.

 

Both REITs definitely seem like an interesting place to invest for the foreseeable future. With literally thousands of crumbling dorm facilities across the U.S. it looks like these two REITs have a lot more runway to put up impressive growth numbers.

 

Have you ever considered investing in college dormitories? Do you think either of these companies have a place in your dividend income portfolio? Please let me know below.

 

Disclosure: Long NONE

Image courtesy of: Sira Anamwong at FreeDigitalPhotos.net

16 thoughts on “College Dorm Dividends

  1. Interesting space. I wonder if there is a “bubble” in education though? There is a ton of student debt out there and I think the tide of opinion is turning against borrowing heavily for school. At any rate, I’m full up on REIT allocation. Thanks for bringing this to my attention.
    Financial Velociraptor recently posted…Options trades 25JUL2016My Profile

    • Hi FV,

      While it’s true that a negative sentiment seems to exist around college education and its associated expense, the reality is such that there are still plenty of students borrowing and attending schools all across the country and they all need a place to live. Whether in a campus dorm or a collegiate apartment community they all need a roof over their heads. I have a feeling these REIT business still have a lot more future growth. Of course, if you are already fully invested in the REIT space I can understand you foregoing these two opportunities. Thank you for sharing your thoughts.

  2. Great article DivHut. This hits home for me because as you know I have a daughter in college. She lived in the dorms last year, but now that she’s 2nd year student, she’s moved into one of these college apartment communities. I’ve been building her credit since she turned 13, so she had the credit score to qualify without me, but the complex she lives in requires a co-signer for anyone under the age of 21. So, if a kid drops out, her parents or co-signer are on the hook for that school year. That’s nice back-up to have as an investor.
    Investment Hunting recently posted…Pokémon Go – An Epic FailMy Profile

    • Hi IH,

      Glad you enjoyed this post and could relate. Those college apartment communities always seem to have every angle covered when it comes to collecting rent. As an owner it’s nice to know that every year you’ll have a steady stream of potential renters and with a co-sign guarantee making it even better. These REITs definitely look interesting and their performance simply highlights their past growth and potential future opportunities as more and more college campuses look to upgrade their existing dorm facilities and surrounding collegiate apartment communities look to do the same. Thank you for commenting.

  3. This is an interesting type of REIT that I was not aware of. I am compelled to look into these companies some more when I have some free time but given a good valuation they seem to be some great opportunities. Thanks for sharing and bringing this to my attention.

    • Hi MD,

      Always happy to bring a new investment opportunity to light. Like you, I was unaware of these types of REITs. Based on their past performance and potential future expansion via development and acquisition of existing collegiate housing it looks like these two REITs have a lot more room to grow especially in a low interest rate environment. As always, I appreciate your comment.

    • Hi DG,

      In recent years the trend for these types of REITs have been one direction, up. The fact that so many of the college dorms across the U.S. are in such bad shape bodes well for the future of these types of REITs as new development and rehab of existing facilities will allow these companies to continue to grow. The “aging” demographic at work once again. Thank you for commenting.

  4. Funny to see that trends can be similar across the ocean.
    In Belgium, there are also few REIT equivalents that start to invest in student housing. I looked at one that I liked. It is private equity for now. The minimal entry ticket is 100K. Just above my budget for one position…;-)
    ambertree recently posted…How many accounts do you need?My Profile

    • Hi ambertree,

      Often times business trends can mirror each other pretty closely even across continents. It looks like in the U.S. the REIT market is becoming a lot more diverse with new offerings cropping up every few months. I had no idea a college dorm REIT even existed prior to writing this post. Interesting to see a REIT like this pop up in Belgium, even though it is private equity. Thank you for stopping by and commenting.

  5. Wait, so college dorms are NOT campus-owned? The campus is paying rent on these things too? Are ALL campus buildings–housing, admin, etc–owned by these REITs? Or do they do off-campus housing? Or undergraduate apartments on campus? I understand REITs, but I’m confused by the business model of these specifically.

    Sincerely,
    ARB–Angry Retail Banker
    ARB recently posted…Follow Up On My Previous Article: The Guy Came Back!My Profile

    • Hi ARB,

      To answer your question, some college dorms are not campus owned. ACC for example has a portfolio of both on and off campus housing which they either, own, manage or developed themselves, so in essence they are separate entities from the university itself. I guess the next time you roam a college campus and look at the student housing you’ll know that some of those buildings are not actually owned or part of the university at all. I have to admit, this was a new sub-category of REITs that I had no idea existed prior to writing this post. Based on their past performance it looks like they experienced healthy growth and with the current condition of many college campus dorms it looks like a lot more growth may lay ahead. Thank you for commenting.

    • Hi BII,

      REITs are not traditionally valued using a P/E model rather a Price to Funds From Operations (FFO) ratio. The reason for using this calculation is because REITs, as you know, own real estate and when looking at any real estate cash flow analysis you must factor in depreciation as well as amortization costs. FFO = Net Income + Depreciation + Amortization – Gains on Sales of Property. Here are two great links that explain this in depth. Hope this helps.

      How To Assess A Real Estate Investment Trust (REIT)

      Funds From Operations – FFO

  6. Very interesting type of REIT Keith. I wouldn’t choose to invest in it myself, but I can see your points why it could have a good long term future. I partly think studying at home is going to become popular (like Open University if you’ve ever heard of that) so maybe that could affect these REITs negatively in the long run).

    Tristan
    Dividends Down Under recently posted…Dividend update: July 2016My Profile

    • Hi DDU,

      I found this to be an interesting REIT space too. Quite frankly, I never even heard of college dorm focused REITs before. From a structural perspective these REITs have a lot going for them as old buildings need to be updated or totally replaced. But, you do bring up an interesting point about home (online) studying at the university level where potentially fewer individuals will have the need to even live at or be near a university. Still, there’s no denying the awesome growth these two REITs have experienced going back quite a few years. Thank you for sharing your thoughts.

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