A Dividend with a College Degree

08/17/2009 1:00 pm EST

Focus: REITS

Bryan Perry

Editor, Cash Machine, Premium Income, Quick Income Trader, Instant Income Trader

Bryan Perry, editor of Bryan Perry’s Cash Machine, finds a REIT tied to the one area of the real estate market that’s booming: college housing.

All across America, college town populations are rising much faster than practically any other real estate market on a national basis. That's because enrollments on a national basis are on a steady rise, and graduate school programs are rapidly expanding as well.

With more and more colleges unable to keep up with rising demand in on-campus housing, there's a rush for affordable, off-campus student housing in these college towns.

So, while it's still early to call a bottom for real estate in a number of regions—especially in commercial properties—one thing is for sure: Parents will give their right arms to send their kids to great colleges.

As a result, there are multiple construction projects happening year-round in college towns to keep up with demand for affordable housing. And this growing demand is not just because these leading universities are expanding their student enrollments. Retirees are moving back to their college towns.

This stealth bull market for apartment growth in major college towns is widespread, and rents are only going to rise in the years to come as the broader economy rebounds. So, if there were a definition of bullet-proof real estate, investing in college apartments would come to mind.

Enter Education Realty Trust (NYSE: EDR), a real estate investment trust that provides high-quality student housing throughout the US. Founded in 1964 and based in Memphis, EDR has a management team with more than 200 years of shared industry experience. And it [is] one of the largest owners and operators of collegiate student housing communities in the US, [owning and managing] 65 communities in 21 states.

EDR has posted solid results in recent quarters. Most recently, the company announced that second-quarter funds from operations (FFO) earnings of 22 cents per share, which was two cents higher than expectations. Plus, EDR reaffirmed its full-year guidance of 70 cents to 80 cents per share, while most analysts were projecting 73 cents.

EDR also announced the closing of its public share offering, with 28,175,000 shares purchased. From the sale, EDR received about $116 million in proceeds at $4.35 [per share]. Now, the stock is trading [above $5]. 

In regards to dividends, EDR is not subject to federal corporate income tax, as long as it distributes at least 90% of its taxable income to shareholders, since it is structured as a REIT.

So, EDR pays a quarterly dividend of $0.1025 per share, or 41 cents per year. That translates to [a 7.5%] yield. And the fact that EDR affirmed its outlook for the balance of 2009 signals that forward dividend payments are good money.

I believe EDR's FFO will continue to improve, making this entry point very attractive for purchase.  My one-year price target for shares of EDR is $8, but I wouldn't be surprised if that target were hit by year end.

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