Student housing — A unique asset class
The 138SL (‘The Company’) has justifiably captured a fair amount of investor and media attention since the announcement of a potential additional equity investment was made on January 27, 2023. Dialogue continued after the February 9, 2023, announcement of the 138SL board’s approval of a consideration of resolutions to facilitate an additional public offering (APO). These were eventually passed at an extraordinary general meeting on March 20, 2023.
The Company’s primary business line is the provision of student accommodation at The University of the West Indies’ ( The UWI), Mona Campus. The rooms available for rent number 1,464 with an occupancy rate of 92 per cent as at April 2023. This occupancy rate is important as it is above the 90 per cent of accommodation revenues guaranteed by The UWI that will elapse with the conclusion of the concessionary agreement. This agreement directed the construction and operation of the halls of residence that will eventually be handed over by the Company to The UWI in the medium term, depending on whether the specified internal rate of return (IRR) is met.
In 2014, 138SL started as a public-private-partnership between the Company and The UWI, which saw the Company listed on the Main Market of the Jamaica Stock Exchange with the ticker 138SL in that same year. It raised $550 million of ordinary and preference share capital and private debt more than $4 billion for the construction and renovation of the towers that form the base of its operation. Revenues have grown from $0 at inception to $1,185,960,000 as of September 30, 2022, with a net profitability margin of 26.53 per cent or $318,362,000. This net profit margin is superior to all companies listed on the Jamaica Main and Junior markets of the stock exchange.
Student accommodation is a special asset class that incorporates items (1) and (2) and gives public investors unusual access to the demographic of university students. A significant difference between this segment and the average real estate venture is that the turnstile of new students manifests itself every 3-4 years in most cases and eliminates the risk of long-term tenancy. Such is the uniqueness of the asset class that leading private equity firm Blackstone (NYSE: BX; market capitalization — US$100 billion; assets under Management — US$975 billion ) found it fit to invest US$20 billion over four years in student accommodation ventures starting with $1.2 billion spent on EdR Student Housing Portfolio in September 2018, £4.7 billion for iQ Student Accommodation in May 2020 and the landmark $12.8-billion acquisition of American Campus Communities (ACC), Inc in August 2022.
It is likely that the following features of student accommodation would have appealed to BX:
1) The inelasticity of demand — ie, students will continue to pursue education and require somewhere to lay their head at night, regardless of external circumstances. Education is a fixture of human existence.
2) Predictability of cash flows/dividend yield — this is important for a fund like Blackstone that has redemption responsibilities and can ill-afford illiquid investments.
a) One that surfaced early in the day was the matter of receivables that at one time eclipsed $1 billion. Current financial statements reveal an aggressive fall in that number that continues a quarterly basis.
b) In the case of 138SL, it is anticipated that the dividend payout post-offer would be approaching 75 per cent of profits with a yield above 8.5 per cent.
3) Real estate — brick & mortar exposure
All told, there have been the usual unexpected events that accompany any start-up venture:
1) Differences of opinion on concession agreement with The UWI — now settled.
a) Further, at June 30, 2023, 138SL’s receivables were $987 million vs the $1.59 billion on June 30, 2022.
2) COVID-19 — that derailed projected revenue and cash flows for the bulk of March 2020 to June 2022.
3) Short-term Rentals — not forecasted but are now 10.79 per cent of revenues and growing.
The plain truth is that in terms of equity, the Company was under-capitalised from the outset, but the nature of greenfield, pioneering start-ups in 2014 — Jamaica under the auspices of a stringent IMF facility would have been faced with crippling scepticism and doubt. In a departure from that 2014 environment, the JSE has been crowned the world’s leading stock market twice while trading volumes and IPOs presented to the public have multiplied.
By extension, Jamaica has become a shining light in the global economy that was dubbed as an economic shining star in the Financial Times. While the option of greater equity participation was not available to the Company in 2014, with the shifting tide and proof of concept, equity investors can be more comfortable with the inherent possibilities that run alongside the opportunity.
To close, the average person could be forgiven for initially classifying student housing/accommodation as a mere real estate investment opportunity, but the facts demonstrate that it goes some way beyond that.
Ryan Strachan is vice-president of investor relations at GK Capital Management Limited, lead brokers & arrangers of 138SL’s Additional Public Offering (APO). Questions may be directed to email@example.com or firstname.lastname@example.org.