Initiating Coverage on US Student Housing REIT (ASX: USQ)

July 13, 2022

The US Student Housing REIT (ASX: USQ) is a Real Estate Investment Trust (REIT) that listed on the ASX on 8 March 2022, raising $15.5m through the issue of 11.2m units at $1.38 per unit. The REIT invests in a portfolio of US student housing real estate assets within close proximity to top tier public universities across the United States of America (US) with the objective of providing unitholders with an opportunity to benefit from both stable income generation and capital growth. This will be achieved through exposure to a high quality, defensive portfolio of assets with favourable sector trends.

The Responsible Entity (RE) of the REIT is Equity Trustees Limited (ASX:EQT). The RE has appointed Auctus Asset Management Pty Ltd (“Auctus”) as the Investment Manager of the REIT and Student Quarters (“SQ”) as the Asset Manager. Auctus is a wholly owned subsidiary of Auctus Investment Group Limited (ASX: AVC), an ASX-listed private markets asset manager based in Melbourne, Australia, with over $490m AUM. SQ is an Atlanta-based student housing owner and operator. SQ manages in excess of >$1bn of off campus US student housing across 36 properties. Together, Auctus and SQ seek to become a large scale owner of US student housing assets.

The portfolio currently comprises nine properties located across six universities in five states in the US. The REIT is actively managed and will seek to grow the portfolio through additional investments in student housing assets as opportunities are identified.

IIR has assigned USQ a price target of $1.50 per unit. This represents a 22% premium to the market price as at 7 July 2022 of $1.23. The price target is based on a combination of a discounted cash flow model and the NTA per share. We have assigned a 50% weighting to each valuation component. USQ provides investors the opportunity to diversify the income allocation of their portfolio with a REIT that provides
a unique opportunity for domestic investors with USQ being the only listed REIT globally with a focus on US student housing. USQ provides a defensive style investment with the US student housing market historically proving resilient in economic downturns and the market dynamics providing the potential for a hedge against inflation. The REIT has secured long-term debt facilities at attractive rates. All but one of the debt facilities is fixed which is a key positive in the current increasing interest rate environment. As announced by the REIT, the properties have experienced strong rental growth for the upcoming school year and the Managers are expecting this strong rental growth to continue into the following year given
the current market dynamics. As such we are forecasting strong rental growth over the next two years for the REIT, this at a time when rental growth in other sectors may be under pressure due to the increasing probability of a recession.

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