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Education Realty is buying opportunistically, despite slimmer yields, execs say

has agreedto purchase roughly $184 million more in properties in 2016 than it originally plannedand may consider bidding on some assets within large portfolios that are currentlyon the market, company executives said in a May 2 earnings conference call.

Still,despite a wave of new acquisitions, including $284 million of new purchases thecompany announced with its first-quarter earnings,company leaders cast Education Realty's buying strategy as opportunistic, even asprices rise for prime student housing properties. The company is also pursuing newdevelopment projects, they said, though it has grown comfortable with slimmer yieldson those as well.

Amongthe new purchases are agreements to acquire a 946-bed facility at the Universityof Wisconsin, a 311-bed facility under construction at the University of Arizonaand three properties at Colorado State University with a total of 388 beds. TheWisconsin property is "truly the best student housing asset I've ever seen,"Chairman and CEO Randy Churchey said during the call.

Churcheynoted that the company traditionally has not acquired much — and had only forecast$100 million of purchases in 2016 — and said its approach has not changed, callingthe new deals "fairly unique."

"Wethink it's a great deal of upside, and so I wouldn't characterize it as, quote,'net seller' versus 'net acquirer,'" Churchey said. "I'd characterizeit as net opportunistic. We think these are great additions to our portfolio."

In theaggregate, the new acquisition deals carry unleveraged economic and nominal caprates of 5.3% and 5.4%, respectively, the company said. Churchey conceded that theyield falls short of the more than 7% yield that the company is expecting from itsannounced new developments. Yet, he added, "we can also make money for ourshareholders on these acquisitions, as well, at this lower cap rate."

In general,executives said, some student housing properties within walking distance of top-tieruniversities are being sold at cap rates below 5%, with most transactions just above5%. Farther from campus, cap rates are in the 6.2% to 6.4% range, with higher yieldsin tertiary markets, they said. While the company is not interested in the largerportfolios currently on the market, it may consider buying individual assets withinthose portfolios, executives said.

Risingasset prices are affecting the company's yield targets for new developments, executivessaid. Two years ago, virtually every development deal for properties within walkingdistance of top-tier universities carried a yield of roughly 7.4% to 7.6%, companyPresident Tom Trubiana said, adding that yields have shrunk to the low 7% rangemore recently.

Yet,he added, land costs have risen, and the company believes the appropriate spreadbetween acquisition cap rates and development yields is roughly 150 basis points.As a result, with acquisition cap rates in the low 5% range, Education Realty isnow considering lower development yields, just under 7%, he said. With the company'scost of capital still low, the tolerance for lower yields "opens up new opportunities,"Trubiana added.