Student Housing Faces Pressure To Make Grade As Econ Weakens

NEW YORK -(dow jones)- Student housing, previously a bright spot in the battered real estate investment trust sector, may be falling off the dean's list as the economy weakens.

The group's two public players, american campus communities Inc. (ACC) and Education realty trust inc. (edr), have enjoyed high occupancy rates, but some analysts worry that with the economy's continued deterioration, even college beds could be affected.

So far this year, REITs, which distribute the bulk of income to investors via dividends, have fallen roughly 38%. manhattan office company sl green realty corp. (SLG) has plummeted nearly 62% year-to-date, while shopping center company kimco realty corp. (KIM) is down nearly 42% for the same period.

american campus communities, still digesting its purchase of competitor GMH Communities Trust's student portfolio, has lost more than 8% so far this year, recently gaining 2% to trade at $24.61. Education Realty Trust has plunged nearly 62% this year, recently falling 2.7% to trade at $4.30.

"Student housing could be more recession-resistant but not recession-proof. We believe there will be an impact ... from the declining economy," noted UBS analyst Michelle Ko.

In an earnings call Tuesday, Education Realty detailed its third-quarter funds from operations loss of $500,000, down from a positive FFO of $1.8 million last year. It said three weak markets - Kalamazoo, Mich.; Gainesville, Fla.; and Oxford, Miss. - were hurting from flat or declining university enrollments caused by increased job losses in those areas and a "significant new supply" of competition.

"We will continue to focus on improving occupancy at these properties, but know it will take time for the imbalance to at least reach a level of equilibrium, especially in Michigan," said Paul Bower, Education Realty's president and chief executive.

Michigan, which has been hammered by job losses from general motors corp. (GM) and other automobile companies, had one of the country's highest unemployment rates in September, at 8.7%, according to the Bureau of Labor Statistics. The national unemployment rate in September was about 6%, a number expected to rise as layoffs increasingly mount. American Express Co. (AXP), for example, said Thursday it will shave nearly 10% of its global work force, while Motorola Inc. (MOT) will lay off 3,000. Still, Bower said the fundamentals of the business " remain sound. In this tough economic climate, posting occupancy (rates) in the low 90s is reasonable and, in combination with generating good rate growth, provides for solid cash flow."

American Campus - which said Tuesday that its third-quarter FFO came in at $ 5.1 million, down slightly from a year earlier - also expressed confidence. In its earnings call Wednesday, it said occupancy at its company-owned properties at the end of September was 96.3%, compared with 95.5% the year prior. The company said overall, it's on track: Occupancy, rental rates and net operating income are all up.

"We are optimistic that we will continue to be much more recession-resilient than the general real estate sector," American Campus President and Chief Executive Bill Bayless told dow jones Newswires.

Still, while American Campus' leaders said they haven't seen any impact from the declining economy, they are being "somewhat more conservative" in setting 2009 and 2010 rental rates for the buildings with the highest prices, UBS' Ko said. Even so, management expects occupancy to increase and the rental rate to climb 3% at core assets, she said.

"We believe management's expectations could be slightly aggressive," Ko noted, as she lowered 2008 and 2010 estimates. This comes as student budgets are under increased pressure, with education experts predicting steeper tuition hikes for next year. American Campus is also making a splash building upscale developments such as Arizona State University's Vista del Sol, which boasts a tanning salon, amphitheater and sundeck with lounge cabanas. That development has done well, but in tighter times, students might bypass such luxury in favor of cheaper dorms or being crowded with more roommates - read: cheaper rent - in traditional apartments.

A report Wednesday from nonprofit education group the College Board said that tuition prices rose slightly faster than the consumer price index in the 2008-09 school year. But some education observers worry that with the stock market's volatility and more homeowners facing foreclosure and depressed housing values, both public and private colleges may find themselves in some financial pressure, potentially forcing bigger tuition increases and less generous financial aid in the future.

After widespread criticism for bloated endowments, some schools have seen their donors flee and endowments start to dwindle. Thirty-nine states face budget shortfalls this year, with at least 17 implementing cuts to public universities, according to the Center on Budget and Policy Priorities, a nonprofit research organization.

"I am concerned that we are entering a period - as we did following the recession of the late 1980s and early 1990s - when we will see a sharp spike in tuition prices at both public and private institutions," said Molly Corbett Broad, president of the American Council on Education, in a statement. "Given the economic strain on state budgets, the pressure on state governments to shift the cost of education to students and families may prove irresistible."

But this doesn't worry American Campus' Bayless. "Tuition increases have always outpaced inflation - that's a continuing trend," he said. The strain on state budgets "creates an opportunity for us. We can build dormitories so that state schools don't have to."

Tags: kimco realty corp,realty trust inc,american campus communities,sl green realty corp,university enrollments,estate investment trust,recession proof,real estate investment trust,manhattan office,real estate investment,general motors corp,declining economy,kimco realty,funds from operations,gainesville fla,student portfolio,occupancy rates,dow jones,communities inc,edr

Thursday, October 30, 2008 |

---