Preferred Apartment Communities (NYSE: APTS) has reportedly put its student housing portfolio on the block again. The real estate investment trust (REIT) previously had a deal in place to sell the eight-property collection for $475.4 million last year, but the deal fell through. It currently values the portfolio at about $480 million, despite the impact of the COVID-19 outbreak on the real estate market. While it's open to selling the properties individually, it's preferred approach would be to sell the entire portfolio to one buyer.
Given the current uncertainty in the student housing market, it will be interesting to see how this sale plays out as well as whether other student property owners will also look to exit this sector.
A well-placed portfolio
Preferred Apartment Communities' student housing portfolio has held up relatively well despite the impact of COVID-19 on universities. The properties have maintained a 96% occupancy rate while rent collections averaged 96% in both April and May. That's a much higher collection rate than other real estate types, with many retail property owners receiving 60% to 70% of their rent in those two months.
One driver of this portfolio's solid performance is the location of its properties. Its complexes are within a mile of the following schools: Arizona State University, Baylor University in Texas, Florida State University, Kennesaw State University in Georgia, Texas A&M University, Texas Tech University, the University of Central Florida, and the University of North Carolina-Charlotte. These well-known universities have an average student enrollment of nearly 45,000 and have enjoyed an average enrollment growth of 7.5% over the last five years.
Meanwhile, the outlook for these properties seems bright since all eight schools expect to reopen for the fall semester. Further, regional demographic trends show that the population of potential students in those states will increase 10% by 2023.
Despite its name, Preferred Apartment Communities has a diversified real estate portfolio. In addition to those eight student housing properties, the company also owns 35 multifamily communities, 54 grocery-anchored shopping centers, and nine office buildings across most of America's sunbelt states.
However, the weakness in the real estate market has put pressure on the company's balance sheet. Because of that, it slashed its dividend earlier this year to conserve cash, which will allow it to continue funding its development program. By selling its student housing portfolio, Preferred Apartment Communities would bring in some much-needed financial flexibility.
Does the trend continue?
Publicly traded REITs have been steadily exiting the student housing market in recent years. In 2018, Greystar Real Estate Partners bought EdR for $4.6 billion. Meanwhile, in 2016, Harrison Street Real Estate Capital acquired Campus Crest Communities for $1.9 billion in 2016. These sales left just one publicly traded REIT focused on this residential subsector: American Campus Communities (NYSE: ACC).
Most of the country's other leading student housing owners are private real estate companies, with Greystar and Harrison Street among the top five owners. One of the few public companies with some student housing exposure is Brookfield Asset Management (NYSE: BAM) and its real estate affiliates Brookfield Property REIT (NASDAQ: BPYU) and Brookfield Property Partners (NASDAQ: BPY). Brookfield currently owns 50 student housing properties across Europe via its private equity funds.
These trends suggest that student housing is in high demand by private real estate investors. It will be interesting if that starts reversing. With COVID-19 shutting down schools, some of these private investors might want to cash out by either taking their student housing portfolios public or selling them to other REITs.
An interesting sale to watch
The number of publicly-traded REITs that own student housing properties has shrunk in recent years. That trend appears as though it will continue, assuming Preferred Apartment Communities sells its portfolio to a private buyer. However, with COVID-19 disrupting schools, private investors might also start selling off their investments, making this sales process one that REIT investors should keep an eye on.