Thursday, March 23, 2017

CPPIB, GIC Betting on US College Housing?

Komal Khettry of Reuters reports, CPPIB joint venture buys U.S. student housing portfolios for $1.6 billion:
Canada Pension Plan Investment Board (CPPIB), Singapore wealth fund GIC and property owner Scion Group LLC said on Thursday their joint venture had bought three U.S. student housing portfolios for about $1.6 billion, in its second major deal in the United States.

CPPIB, which manages Canada's national pension fund and is a major global dealmaker, had formed the student housing joint venture with GIC and Scion in January last year.

Canadian pension funds have been buying real estate assets around the world to diversify their investments.

CPPIB and GIC will each own a 45 percent stake in the three portfolios and Scion Group will own the remaining 10 percent.

The companies said on Thursday their joint venture, Scion Student Communities LP, plans to buy more student housing properties in the United States.

The parties struck a similar deal for a student housing portfolio early last year, buying University House Communities Group and its 19 properties for $1.3 billion.
Last week I discussed why the Caisse and CPPIB are investing in Asian warehouses, betting on demand from the rise of e-commerce and a burgeoning middle class in southeast Asia.

Earlier this week, I discussed why CPPIB is looking to increase its investments in China over the long run, again to better position the fund on secular trends in that country where e-commerce is just taking off and where long-term growth remains solid (even if there will be hiccups along the way).

Today I want to cover this latest joint venture with Singapore's GIC and the Scion Group which is a sizable investment in US student housing.

CPPIB provides a lot more detail on this transaction in this press release:
Canada Pension Plan Investment Board (CPPIB), GIC and The Scion Group LLC (Scion) announced today that their student housing joint venture entity, Scion Student Communities LP (together with its subsidiaries, “the Joint Venture”), has acquired three U.S. student housing portfolios for approximately US$1.6 billion. These portfolios comprise:
  • US$385 million acquisition of six Class-A properties located primarily in the southern U.S.;
  • US$640 million acquisition of 11 Class-A properties in premier university markets across the U.S.; and
  • US$550 million in recapitalizations of 12 legacy Scion-owned and operated communities situated in leading campus markets across the U.S.
Since its inception in January 2016, the Joint Venture has completed US$2.9 billion of investments, including the previously announced US$1.3 billion acquisition of University House Communities Group and its 19 properties in June 2016. The Joint Venture has deployed over US$1 billion in equity capital. CPPIB and GIC each own a 45% interest in the three portfolios and Scion owns the remaining 10%.

“The U.S. student housing sector is an attractive investment opportunity, driven by secular strength in enrollment growth and favourable supply dynamics,” said Hilary Spann, Managing Director, Head of U.S. Real Estate Investments, CPPIB. “Achieving scale in this sector is an important global investment objective for CPPIB, and we are pleased to further this goal in the United States with our partners at GIC and Scion.”

The Joint Venture’s well-diversified national portfolio now includes 48 student housing communities in 36 top-tier university markets, comprising 32,192 beds. The average age of the properties is less than five years and over 75% of the assets are located within one mile of their respective campuses.

Adam Gallistel, Regional Head of Americas, GIC Real Estate, said, “These high-quality, revenue-generating assets are good additions to our global student housing portfolio. We remain confident in this sector’s long-term fundamentals and are pleased to continue our strong partnership with Scion and CPPIB.”

The Joint Venture will pursue additional opportunities to acquire high-quality student housing assets primarily in Tier 1 university markets in the U.S.

“We are thrilled to be partnering with two of the world’s premier real estate investors in the ongoing consolidation of the student housing sector,” said Robert Bronstein, Scion’s President. “We especially appreciate the confidence and support of GIC and CPPIB implicit in the volume of investment activity completed by the Joint Venture during its first year of operation as well as the significant commitment of additional growth capital to the partnership. We look forward to the Joint Venture’s continued growth and success.”

About Canada Pension Plan Investment Board

Canada Pension Plan Investment Board (CPPIB) is a professional investment management organization that invests the funds not needed by the Canada Pension Plan (CPP) to pay current benefits on behalf of 19 million contributors and beneficiaries. In order to build a diversified portfolio of CPP assets, CPPIB invests in public equities, private equities, real estate, infrastructure and fixed income instruments. Headquartered in Toronto, with offices in Hong Kong, London, Luxembourg, Mumbai, New York City, São Paulo and Sydney, CPPIB is governed and managed independently of the Canada Pension Plan and at arm's length from governments. At December 31, 2016, the CPP Fund totalled C$298.1 billion. For more information about CPPIB, please visit www.cppib.com or follow us on LinkedIn or Twitter.

About GIC

GIC is a leading global investment firm with well over $100 billion in assets under management. Established in 1981 to secure the financial future of Singapore, the firm manages Singapore’s foreign reserves. A disciplined long-term value investor, GIC is uniquely positioned for investments across a wide range of asset classes, including real estate, private equity, equities and fixed income. GIC has investments in over 40 countries and has been investing in emerging markets for more than two decades. Headquartered in Singapore, GIC employs over 1,300 people across 10 offices in key financial cities worldwide. For more information about GIC, please visit www.gic.com.sg.

About The Scion Group

Scion is the United States’ largest privately-held owner/operator of student housing communities in major public university markets. Scion’s current portfolio includes 67 properties comprising approximately 46,000 bedrooms, plus management of two university-affiliated communities with an additional 2,200 bedrooms. Scion has focused exclusively on the student housing sector since its inception in 1999, and has provided advisory services and/or invested in over $6 billion of student housing projects. For more information about Scion, please visit www.thesciongroup.com.
So, what are my thoughts on this deal? It's another real estate deal based on long-term secular trends and it's a great deal for all parties involved, including GIC and the Scion Group.

You might not know a lot about the US or world student housing market but it's a huge market. In fact, I urge all of you to read Savills's latest World Student Housing report to better familiarize with global trends in this market.

The key investment highlights from the latest publicly available report are:
  • 2015 was a record year for investment in student housing with $15bn invested globally in the sector. The first half of 2016 saw lower total volumes but mainland Europe continued to rise off a low base.
  • US and UK student housing REITs outperformed their all REIT indices by 19 and 16 percentage points respectively.
  • Global cross-border investment in the sector accounted for 40% of all deals in the last three years as international investors sought to diversify portfolios
Not surprisingly, US college housing REITs are on the rise:
Like bond prices, real estate investment trust (REIT) values in America continue to soar, as more savers and income investors search for ways to quench their thirst for higher yield without having to take excessive risk with their money. College housing is one category of REIT that has not only been winning the hearts of investors in recent times, but also delivering remarkable returns to its owners. (See also, REITs: How Long Can They Stay This Hot?)

Double-Digit Returns

Since the $1.9-billion acquisition of Campus Crest Communities earlier this year, American Campus Communities (ACC) and Education Realty Trust (EDR) have been the only publicly traded REITs that primarily focus on the college housing market. The two REITs have seen their stock prices increase in the last 12 months by more than 47% and 55% respectively, easily trumping both the 12% increase in the Bloomberg North American Apartment REIT Index and the S&P 500’s total return of 3% realized during the same period. (See also, REITs: Still a Viable Investment?)

Reliable, Recession-Proof Income

With political uncertainty on the rise and weak economic data being released, many investors are beginning to put their efforts into hedging their portfolios in the event that the U.S. and other global economies weaken. One of the contributing factors for such a steep rise in student housing REIT valuations could be that investors are using them as a way to hedge their bets in the market. Unlike others forms of real estate that are susceptible to changes in market conditions, such as commercial property and apartment units, student housing, and college enrollments as a whole, are generally unaffected during recessions, at least in recent history. This may be partly due to the fact that students in the United States have relatively easy access to financing to cover their college-related expenses.
And, as reported by Bloomberg last August, some landlords are making a killing on college students:
College students aren't famous for their tidiness, sober living, or financial prudence, to name three qualities landlords might look for in a tenant. But despite the beer-soaked carpets and general flakiness, renting off-campus apartments to undergrads is turning out to be a great business.

Shares in Education Realty Trust, a Memphis-based landlord whose earnings report met Wall Street expectations this morning, are up 54 percent in the past year. American Campus Communities, the only other publicly traded student housing landlord, is up 44 percent. By comparison, a Bloomberg index of North American apartment landlords is up 12 percent over the same period (click on image).

Why are the student-housing landlords getting top grades?

The long-term theme is that college enrollment has boomed over the past few decades, and investment in new on-campus dorms hasn’t come close to keeping up. In the short term, the shares are likely rising because investors are looking to hedge against the possibility of a U.S. recession.

"In an environment of striking political and economic uncertainty, public investors are ascribing value to [the] certainty of cash flows in student housing," said Ryan Burke, an analyst at Green Street Advisors. "In [the] young life of purpose-built student housing, it's performed really well in good and bad times."

That's because kids keep going to college, and schools have run out of places to put them. Consider these striking data from the U.S. Department of Housing and Urban Development: 17.7 million students were enrolled in post-secondary, degree-granting institutions in 2012, up from 12 million in 1990. Over the same period, the number of students living in on-campus dorms increased by a bit more than 600,000. 

In the late 1990s, an industry grew up to absorb demand from the roughly 85 percent of students who don’t live on campus, building off-campus apartments specifically for students, offering leases by the bed, and luring renters with choice enticements. The amenities at some of the more upscale student housing complexes have drawn scorn from those who wonder: Is there a good argument for racking up student debt to watch moving screenings from your swimming pool or eat meals prepared by a James Beard-award-winning chef?

But plenty of more pedestrian complexes offer things that students want, such as barbecue pits and tanning beds, and in addition to the two publicly traded landlords, a deep roster of private property managers is getting in on the act. In March, the private equity firm Harrison Street Real Estate Capital took a publicly traded landlord private in a $1.9 billion deal.

Part of the reason to own student housing is that, in a period of low interest rates, collecting rent has looked like a good way to earn good returns, whether you're renting out a shopping mall, an office sky-rise, or a self-storage unit.

Student housing has a slightly different appeal, according to one theory. Landlords should suffer when the economy tanks, as renters lose jobs or see wages stagnate. But college enrollment has increased in recent recessions, making student housing landlords an interesting hedge against an economic downturn.

That doesn't mean developers won't eventually overbuild. College enrollment has been declining in the years since the Great Recession, even as investment in off-campus student housing has soared. At some point, there will be so many student apartments that the industry will lose its appeal as a safe haven, Burke said.

In the meantime, landlords won't mind the occasional pool party or all-night kegger, as long as the rent is in the mail.
Yeah, let the rich kids party it up in US college housing, as long as mommy and daddy are paying the rent, the landlords don't care.

As you can see, investing in student housing is a hot sector, especially if investors are worried of an economic downturn.

CPPIB and GIC are investing directly in this market alongside their partner, the Scion Group, to avoid market beta. Very smart move and it shows you how the best real estate investors are always thinking of portfolio construction and diversification, especially now that interest rates and cap rates are at historic lows and real estate valuations are at historic highs.

Are there risks investing in US student housing? Of course, most US students are not rich, they pay their college tuition and expenses via student loans. And many of them are struggling, which is why more than 1.1 million borrowers defaulted on their federal student loans last year.

Quite shockingly, a staggering number of college kids are using their student loans for wild Spring Break trips, which goes to show you we are not dealing with the wisest and most prudent segment of the population (after my recent vacation in Florida, I'm actually shocked that any of these college students can obtain a degree after seeing the way they behave on Spring Break).

But the reality is the demands of an increasingly competitive economy means these students need a college degree at a bare minimum or they risk never getting a job. So rich, poor or middle class, they have to go to college to be able to compete and get a decent job (most of them need to in order to pay off their student loans for the rest of their life).

This entire discussion  on US college housing reminds me of my good old McGill University days when I was part of the United Nations club going to Ivy League universities in the United States to take part in mock UN debates.

Back then, I saw students from all backgrounds living on and off campus. I remember the dorms at Harvard and Princeton, two universities I loved visiting, and the pictures some of the students had on their wall really opened my eyes (like pictures of them with President Clinton).

But most students weren't rich and highly connected, they were poor or middle class and they needed affordable, safe student housing near the campus. The same goes for other universities I visited like Yale, UPENN, and Columbia.

If you broaden it out to include all US colleges, you'll understand why student housing is so popular. Parents want to know their kids are safe and secure, eating and sleeping properly, exercising and living nearby so they don't miss their classes even if they've been drinking too much the night before.

Whatever, you catch my drift. As far as Canada, student housing is a relatively small but growing niche.

Last year I was introduced to Centurion Asset Management, a leader in this space up here, and even got to chat with its President and CEO, Greg Romundt. You can read all about Centurion's success here but I found Greg's background -- he was a fixed income derivatives trader for many years prior to setting up this shop -- particularly interesting. He's sharp and shared my views on inequality and long-term deflation.

For a lot of reasons -- affordability (low tuition and low loonie), great education, proximity to the US -- I expect the student housing market to blossom in Canada over the next decade, but it's still a relatively small market.

Another factor that may help the Canadian student housing and hurt US student housing demand is how foreign students perceive US immigration policy as many are now questioning whether to attend US universities. That all remains to be seen however as it's too soon to tell whether this is the start of a big trend from foreigners to shun US universities.

Below, a YouTube video on the Scion Group, CPPIB and GIC's partner in this large transaction. Also, Daniel Pianko, Co-founder & Managing Director, University Ventures and CNBC's Rick Santelli discuss consumer credit and why so many students are defaulting on their loans.

Last week, the Trump administration issued its first policy on student loans, implementing more fees for student loan borrowers defaulting on their loans.

That might put a damper on all those wild Spring Breakers in Florida but I doubt it, just like I doubt this new policy will impact the demand for student housing in the long run. Keep your eyes peeled on this hot and growing real estate sector.


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