Although many are familiar with the high costs associated with college, few are aware of a growing opportunity to profit from this area.
Thanks to the robust post-World War II economic boom, newly flush parents sought to send their kids off to college to better compete in that era's dynamic workforce. A full 45% of U.S. high school graduates were enrolled in college by 1960, according to the American College Testing Program.
Half a century later, that figure is now a stunning 70%. College admissions officers can pick and choose the best and brightest candidates, limited only by their ability to find housing and space for all those students.
Indeed, on many college campuses, landing a spot in a dorm can be challenging for upperclassmen. As many of these students go off-campus, a group of real estate investment trusts (REITs) have been meeting the challenge, building new housing facilities right on the outskirts of campuses.
My colleague Carla Pasternak recently highlighted new investment opportunities in the apartment REIT sector resulting from the growing imbalance between supply and demand for rental units.
She calls this growing trend "Renter Nation."
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I've found three REITS that are capitalizing on this trend. American Campus Communities (NYSE: ACC), Campus Crest Communities (NYSE: CCG) and Education Realty Trust (NYSE: EDR) now control roughly 6% of the nation's total off-campus housing market. In a fast-consolidating industry, that market share is poised to keep growing.
Take industry leader American Campus, for example. The company owned roughly $500 million in properties in 2005, but thanks to a series of tuck-in acquisitions, that asset base now exceeds $5 billion. Of course, those acquisitions have managed to soak up the company's free cash flow, so American Campus hasn't been able to boost its dividend in that time. The payout has remained constant at $1.35 a share (equating to a 3% yield) for seven straight years.
That frozen payout has created a bit of a conundrum for investors. American Campus is generally seen as the industry's strongest operator: 75% of its buildings are within a half-mile (or a 10-minute walk) from campus, compared with a 60% rate for its publicly-traded peers. This enables American Campus to charge slightly higher rents. Yet the middling yield isn't the best of the pack: Education Realty offers a 3.8% yield while Campus Crest offers a more enticing 4.8% dividend yield.
Stability and growth
Although dividend yields in the 3% to 5% range are merely acceptable but not robust, these REITs offer another pair of virtues that separate them from the rest of the REIT crowd. First, these firms can count on high occupancy rates, thanks to the steady enrollment levels at major universities. (American Campus has a solid 95% occupancy rate while Education Realty and Campus Crest have 90% occupancy rates.)