November 2006 Student Initiative By Alexei Smirnov Paul Bower wasn’t so sure about his career choice in August 1970. He had barely settled into his job as the property manager at a University of Wisconsin dormitory when one of the most publicized student riots against the war in Vietnam erupted in front of his office. It was mayhem. Students were running out on the street while Bower, being a good property manager, locked the doors behind them. He was concerned for the property and for his life—rightfully so, since a physics researcher was killed that night in the explosion of a van filled with ammonium nitrate and fuel oil. At that point, Bower didn’t even know that student housing could be a career.
Almost forty years later, he presides over one of America’s three publicly traded student housing REITs, Memphis-based Education Realty Trust. At 63, Bower is confident that he’s seen the worst of student behavior and comfortably ensconced in his career, most of which he spent at EDR’s predecessor, Allen & O’Hara.
Business Tennessee caught up with Bower in late August, a year and a half after EDR was listed on the New York Stock Exchange and shortly after its shares fell 15% on revised guidance for 2006 funds from operations (FFO). (FFO, a term widely used to gauge operating performance of REITs, adds depreciation, amortization and other non-operating items to net income.) The company also had corrected its outlook for the whole year and lowered the dividend rate from $1.19 to 82 cents. A slew of analysts downgraded EDR shares, and some even predicted possible leadership changes, hinting at future privatization as a way to make the company more attractive to investors.
But Bower, who has seen plenty of real estate cycles in his day, does not appear fazed by analyst downgrades. The fix, he says, is in setting more realistic expectations next time around. “We set too high a target when we went public. Most of our institutional investors had been encouraging us to lower our guidance. We said, ‘Let’s see what we can do,’ but eventually lowered it,” he says, rejecting the idea of privatization for the time being. “A lot of REITs are doing that right now. It’s not inconceivable, but we’re not going private so soon after we’ve spent all that money [on the IPO].”
Student housing is a curious niche in the commercial real estate business. REITs like EDR have to market to the parents as much as they do to the students. After all, when the lease is signed, parental opinion matters most. (The average resident in EDR’s communities is a 20-year-old college sophomore or junior.) Dads, for instance, often ask to reserve the top floor for their daughters. Those fill up the fastest, according to EDR’s Murfreesboro property manager Neil McMillion, despite the fact that young women might prefer to walk fewer flights of stairs when they carry in their groceries.
At present, EDR manages 17 student housing communities in 11 states, which amounts to 9,296 beds at 13 universities. As a REIT, it is not subject to federal corporate income taxes if it distributes at least 90% of its taxable income to its stockholders, an attractive trait for many investors.
A large part of what EDR does is buy student housing. When buying existing construction, the prices vary across the board. Average cost is measured per bed and fluctuates around $45,000. A student apartment complex in California might cost as much as two or more similar complexes elsewhere. The building that EDR bought in Statesboro, Ga., for $22,000 per bed, for instance, was a bargain. “It’s a classic example for what you’re looking for,” Bower says. “We think it’s worth $45,000 a bed.” But buying existing properties is harder now because “pricing is getting dear,” Bower says, so EDR also builds properties for universities. Those cost about $100 a square foot. An average 1,200-square-foot apartment houses three students who pay $450 each. (In all, EDR owns or manages 60 student communities—36,960 beds—in 21 states.)
It’s a good business to be in, says Dave Rodgers, analyst at RBC Capital Markets. The number of high school graduates is on the increase, and, as more students go straight to college after high school, parents demand safer places for students to live in. “Student housing in general is rundown, and there is not much competition,” Rodgers says. “It’s a lower growth, higher stability industry. More institutional investors are using student housing as an asset class.” For instance, the government of Singapore recently invested $2 billion in Philadelphia-based Campus Apartments. Until then considered a small-time real estate company, Campus now appears set for growth.
As more institutional investors take notice of the industry, universities recognize the likes of EDR as a long-term business partner. Schools already use food and beverage contractors to handle their student meal plans and catering. They don’t hire their own construction crews for improvement projects. Why should student housing be any different if third-party vendors can manage those properties better and help universities with cost savings, reduced liability issues and good maintenance?
EDR’s properties come fully furnished, but you can’t just buy the furnishings at Dillard’s, Bower says. Since it has to look appealing, in order to drive rental contracts, and durable. To avoid exorbitant amortization with a housing clientele prone to breaking things, EDR contracts with custom furniture shops such as Franklin, Tenn.-based Jamison, where the company and its predecessor, Allen & O’Hara, have been buying mattresses and box springs during the last 40 years. EDR buys chairs with high-pressure laminate and metal frames, with interchangeable parts. “It’s not prison furniture,” Bower says. "It’s contemporary, stylish, but durable." In other words, the company has mastered the art of buying furnishings that don’t break after the first keg party.
Still, despite the stigma attached to college-age youth, students are much tamer these days, Bower insists. Aside from an occasional missed payment (which eventually comes through once the kid applies for the next apartment and turns to EDR for a reference), modern-day students are “as pleasant as they’ve ever been,” he says.
Apparently, all students want these days are a tennis court, swimming pool, good parking and video games—not sit-ins and C-SPAN. All the better for EDR.
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