As word spreads throughout the industry about a possible take-private sale of EdR (NYSE: EDR), the student housing industry is abuzz with reaction and speculation on the potential positives and negatives for the companies involved and the sector.
While the Wall Street Journal has reported that Greystar is the lead bidder in a take-private deal valued at around $3.1 billion, industry sources report that other investment groups, including ones led by The Scion Group and Harrison Street — whose past acquisitions have included institutional capital partners — are also possible buyers for EdR. And while the potential sale is huge news for the sector, sources SHB spoke to are not surprised about a pending deal due to the growing appetite that institutional and foreign capital has had for student housing over the past three years.
REIT analyst Alexander Goldfarb of Sandler O'Neill + Partners says the report of a proposed acquisition did not come as a surprise to him. “Asset values in the public student housing space have gotten too cheap,” he says. “You have strong fundamentals, and EdR had some particular issues that were making it hard for them to trade close to NAV (net asset value) and the company had to seek alternative sources of capital. It’s not a surprise; the pricing is a little bit above where we would have expected based on the reported $41.50 per share offer. Our best guess would have been $39.40. The offer seems to represent a good value for shareholders.”
While the possible loss of another public company is a blow to the industry, on the positive side, the remaining REIT, American Campus Communities, should have an easier go on Wall Street.
“If you want exposure [in a public vehicle], you will only have one choice,” says Goldfarb. “Secondly, it means that ACC only has to deal with its own results. They don’t have to be influenced by how EdR performs, and recently EdR has had some issues as far as earnings and development. There’s room for more public companies, but the bar is high and certainly in the private space, there’s a lot of interest in student housing. It’s a net positive for ACC and it shows public investors that private values remain pretty strong.”
EdR has been widely punished in the market for hitting the low end of its expectations, especially in its leasing results for 2017-18, and that has been a stumbling point in the company’s ability to raise its stock price and performance. EdR’s CEO, Randy Churchey, cited in the company’s fourth quarter 2017 earnings call — and again in its first quarter 2018 earnings call — that EdR was trading at an implied cap rate of 6.5 percent, while privately held student housing companies’ assets were trading at a cap rate of 5 percent or less. Peter Stelian, CEO of Blue Vista, made a point at this year’s InterFace Student Housing Conference in April that while individual investors expected a straight-line 3 percent revenue growth on each individual deal a company is underwriting, both public companies had between 1.8 percent and 2.5 percent annual rent growth.
“I think the proposed sale is a result of the fatigue between trying to deliver attractive top line rent growth with the destabilization of three markets per year because of new supply bringing down the weighted average of portfolio rent growth, along with the relentless pressure of analysts and investors on the company,” Stelian said in an interview with SHB.
Stelian sees a lot of similarities in the proposed Greystar acquisition to the company’s September 2017 acquisition of Monogram, an apartment REIT Greystar acquired for $4.4 billion. In that transaction, Greystar partnered with Singapore wealth fund GIC, Netherlands-based APG Asset Management and Canada-based Ivanhoe Cambridge.
“The strategy here is likely very simple: take a portfolio that has low leverage, refinance it at 60 to 65 percent loan-to-value, generate enhanced cash yields and have a long term hold,” says Stelian.
EdR’s stock price has remained relatively unchanged over the past 12 months, closing at $36.54 per share on May 31, just before reports of a sale began to surface.
“I am not surprised [about the proposed deal] based on where the stock was, or where REITs in general have been trading, and the ability to obtain financing for a trade like this,” says David Adelman, CEO of Philadelphia-based Campus Apartments.
Adelman believes the potential acquisition should be viewed as a one-off transaction, not an industry trend of consolidation. “You have a number of asset managers who have a following of institutional investors that create a great platform. Institutional investors are circling around managers they trust; if the manager they trust has a transaction it likes, then the capital is following.”
“To me, this proves that once again that the capital markets are efficient,” says Frederick Pierce, president and CEO of San Diego-based Pierce Education Properties. “Private equity is more patient than public company-shareholder capital. EdR is undervalued in the public domain; there remains a tremendous amount of private capital interested in the student housing space, particularly in portfolios. I’m not surprised there are multiple suitors.”
Like Adelman, Pierce believes the proposed transaction is a strong opportunity for the buyer, but not an industry trend.
“There are times in any business, including student housing, when being a public company is a tremendous asset in terms of cost of capital,” says Pierce. “There are other times when the public markets, perhaps disproportionately, penalize a public company and that can provide a buy-side opportunity on their stock.”
Student Housing Business will continue to report as new information arises.