138 Student Living long term inflation play

The growing population of university students, attending colleges within the Kingston area means a steady demand for affordable accommodation for students. Apart from Jamaicans, there are many overseas’ students attending the universities and in need of accommodation.
Historically, the Mona Heights homeowners utilized their helpers’ quarters to accommodate many youngsters and generate added income at the same time. These were very popular with students, as they were within walking distance of the colleges. The university’s population has grown vastly, since the 1960s and seventies, when these units could have provided a decent supply of rooms for the community. According to 138 Student Living Jamaica Limited who are seeking capital to build out the development of 1,584 student residence units, there is currently a shortage of on – campus student accommodation at the UWI Mona campus, which has in total 3,356 rooms for student accommodation. In the 2013/14 academic year, 5031 first year students applied for the 1,678 available allocated rooms for first year students. The remaining rooms were allocated to returning students. Helping to push demand is that enrolment at Mona has nearly doubled since 2001 moving from 8,758 students to 16,518 in 2013, 138 Students Living states.
The company is partnering with UWI Mona, under the Concession Agreement to construct and manage 1,584 rooms. The UWI guarantees 90% occupancy of the constructed units in any 51 – week period for as long as the Concession Agreement is in place, which is currently contemplated to be a minimum of 30 years and a maximum of 65 years.
Opening|Effective November 27, the Company invites applications for up to 82,900,000 Ordinary Shares at $4 each and initially, 33,680,000 subject to an increase up to 60,000,000 Cumulative Redeemable Preference Shares at $5.
The issue is underwritten by JMMB, the Underwriter, who has given an irrevocable commitment to subscribe for any of the 82,900,000 Ordinary Shares and/or the 13,680,000 Preference Shares that are not taken up by Applicants on the Closing Date of the Invitation up to a maximum of $400M. The existing shareholders are also selling 15,716,667 units. The offers will close on Thursday, 4 December 2014. With the ordinary share issue have been fully underwritten it is expected that the directors will be making the application to the Jamaica Stock Exchange the Ordinary Shares and the Preference Shares on the Main Market.
The preference shares| Cumulative preferential dividends will be paid at a rate equal to the Government of Jamaica 180 days Weighted Average Treasury Bill Yield plus 3% per annum (WATBY + 3%). Dividends will accrue from the issue date, and paid on the 4th anniversary. Thereafter dividends will accrue and be due and payable semi-annually. With 182 days Treasury bills rate is now at 7.385 percent the yield initially will be just over 10 percent, but that is sure to decline within months and could remain pretty low going forward as the country sorts out its economy and enter a period of economic stability. The listing will provide a market for investors to quit early, if they so desire, the question then will be at what price?
The Company is a special purpose real estate investment company. It was established by the Founder, its majority shareholder K Limited, which is a company owned and controlled by the Chairman of the Company John Lee former PriceWaterhouse Partner and his immediate family members inclusive of his wife Director Marrynette Lee. Under the direction of John Lee and Marrynette Lee, K Limited has in the past 7 years developed a number of multiple – residential accommodation complexes comprising over 100 units in the aggregate, in and around Kingston and Saint Andrew.
Future income| On the positive side, it could be a good dividend payer with the potential for steady revenues due the demand for housing at UWI and the agreement they have with UWI re guaranteed income. The real payoff will be long term as interest cost falls while revenues grow.
The projections are for a loss in 2016 of $71 million and profit of $28.4 million in 2017, then $161 million in the following year and $269 million in 2019. The projection factors in very high levels of debt servicing cost that exceeds 50 percent of projected income. That of course is going in the opposite direction to what is happening to interest rates currently and could redound to the benefit of investors with increased profits, if interest rates decline. That is assuming the company is not tied into high fixed interest rates on loans to fund the development, as Jamaica comes to grips with its high interest cost, which it seems poised to do, with government’s focus on wiping out high fiscal deficits and reduction in its debt load. At November 13, the company had incurred $436 million in construction of the units so far.
The overall project, to cost $4.4 billion, is to be funded by $3.8 billion of debt and would make the company highly leveraged with long-term capital of just over $900 million. While the company could and should raise added equity capital going forward, the projection for high debt funding, could delay or derail the full build out of the units in the time frame expected which is up to 2017 as such the forecasted.