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PODCAST: CIBT Education Group President and CEO Toby Chu on Building Revenue in the International Student Housing Market

— James West

 

CIBT Education Group Inc. (TSE:MBA) (OTCMKTS:MBAIF) is one of the largest private colleges in Canada, as well as a student housing company. With the company witnessing the doubling of international student enrollment, President and CEO Toby Chu speaks to James about building on the momentum in the Metro Vancouver area, as well as doubling their stock price within a year.

 

TRANSCRIPT:

James West:     Toby, thanks for joining us today.

Toby Chu:     Thank you.

James West:     Toby, why don’t you give me a quick overview: what is it that CIBT Education Group does?

Toby Chu:     Okay. Well, first of all, thanks for the call. CIBT is one of the largest private colleges in Canada. We have about 550 employees; we’re headquartered in Vancouver. We own and operate domestic and international colleges. We also have partnership programs and recruitment offices totalling about 44 locations. We enroll about 15,000 students a year.

We also own a student housing portfolio in Metro Vancouver totalling about $600 million. I think we’re named one of the biggest private student housing companies in Western Canada, and we’re in the process of building an education supercentre and an education mega-centre with a combined development budget of nearly $450 million.

So essentially, we integrate school assets with student housing properties and generate great income. We’ve been doing this for 24 years and enjoy doing it!

James West:     Wow! So the company is profitable?

Toby Chu:     Yes. We are earning about $0.07 as reported on the Q3 and $0.11 toward the end of this year. Our year-end is fiscal August 31, 2017.

James West:     Okay. And so, tell me about the revenue model – how does it work? Students come from, looks like a lot of your students come from China, and what do you do? You put them together with an education program and a place to live?

Toby Chu:     Yeah. Actually, our students come from 42 countries; Chinese students account for about 12 to 15 percent of our total student population. So, up to 15,000 students we enrol every year. One half is from domestic Canada; the other half, like 15 percent of the other half, of the 8,000, are from China, and then we have a lot of Korean students, Japanese, Middle East, Brazilian, and Latin America. So we have a wide mix of students, and our students will either enroll into our schools, and we also provide accommodations to major universities and colleges in Vancouver, such as University of British Columbia, Simon Fraser, Emily Carr University, Langara College… all these are our clients or partnerships.

So we provide education. We provide student accommodation to our own students as well as about 140 other public and private schools operating in the Lower Mainland Vancouver.

James West:     Wow. That’s significant. So you say you’ve been in business for 24 years. How is it that the market in general has overlooked this little gem?

Toby Chu:     Yeah, the international market has grown substantially. I mean, private colleges have been around for like 40, 50 years; in fact, Sprott Shaw College, which we owned, has been around for 117 years. But in the past 10 years, the major growth at this point is not domestic students, but many from international, because Canada just became the number one best education country in the world, surpassing United Kingdom and Unites States for the first time in history.

James West:     Wow, that’s very interesting. So your revenues have been growing rather dramatically, and your share price reflects that. You’ve essentially increased in value by roughly 50 percent in the last year. Has there been a dramatic upswing in the rate of enrollment as a result of this new status of Canadian education?

Toby Chu:     Yeah, I think there are two growth patterns that we have experienced. One is obviously the education; international enrollment has doubled compared to the year before, so that’s a great growth in terms of tuition and education revenue. But the significant gain is really in the student housing properties. When we purchased our properties over the past three years, it cost us close to about 400 million, and then of course, the projects under development. This student housing portfolio has increased in value by nearly 125 million by itself, and not surprisingly to a lot of people, because of the real estate in the Vancouver market. Plus the fact that we’re able to maximize the density, provide integrated solutions to students, increase the rental income…so our growth on the real estate side as well as the education side.

James West:     Wow, that’s fascinating. So your $600 million real estate portfolio, you own it?

Toby Chu:     Yes, we own it with LP Partners. How we operate is that we create limited partnerships; we attract investors, they enter into LP partnerships; we take a percentage of ownership, but we are the general partner as well as the managing party, just like a hotel per se, Hilton: not necessarily owned 100 percent by Hilton, but Hilton would be operating it, and they might have a stake in every property. That’s our model: we own some percentage, and we are the GP and we consolidate and manage all the properties.

James West:     Okay. So on your statement of income it indicates that in the last quarter ended May 31st, that you made $9.9 million from educational income, and then it references $2 million in rental income, but I don’t see a line item that sort of covers that general partnership income or direct real estate income as a result of – I mean, apart from the rentals. So, where would we find that in your income statement?

Toby Chu:     Yeah. Actually, we consolidate everything, so when you see the $9 million rental income, and by the end of this year, we’re looking toward about $12 million, it’s consolidated. That income actually is, let’s say we have a property, that property generates about $3 million in rental income. The whole thing roles into CIBT’s consolidated statement, because we are the minds that management and control and the GP. So that entire revenue comes up to us, and then we net it out at the very bottom it says NCI, non-controlling interest, so whatever percentage we net it back out.

So overall, we get the full impact of the positive revenue growth as well as our net profit, and then we net it out as one line item, as NCI to LP holders.

James West:     Ah, okay. Well, that’s interesting. So the item in your Statement of Financial Position, Investment Properties, $95 million for the three months ended May 31st – is that the portion of the $600 million portfolio that could be attributed to the equity of CIBT Education Group as far as the real estate is concerned?

Toby Chu:     That is part of it, because when we consolidate, we have to consolidate after we take possession of the properties. So what you see right now is only two properties out of a total of seven; one more property just got rolled in this past year, so it bumped up the asset value or obviously the corresponding liability. As more properties get rolled in when they complete construction, then the whole impact of the asset and liability will come in, and typically, we have a 30/70 percent split. So 30 percent of the asset, 70 percent would be the long-term mortgage. So all that will roll into our financial statement.

Coming this quarter, one of the projects was delayed because of a construction delay, and they will be rolling in the fourth property at about Q1, which is now we’re into Q1. Close to about $40 million in costs, current appraised value is $87 million.

James West:     Yeah, wow. This is quite impressive. It’s almost like a real estate deal masquerading as an education deal. But so in terms of the future of the education business, what does the compound annual growth picture look like for your sector in terms of the education side?

Toby Chu:     I think the growth will continue, at least in our portfolio. This year we are looking at close to about $55 million in education revenue, as compared to fiscal 2017 at about 42 million. Part of that growth is contributed to our acquisition of a chain of defunct language schools that we bought April 1st of this year. And we consolidated and integrated them.

James West:     KGIC?

Toby Chu:     Correct, that’s the KGIC acquisition. And our acquisition for education assets will likely sort of steady, not aggressive, 1 percent per year, and kind of keep it that way, because acquiring schools and education assets requires a lot of human capital. Growing too fast is not healthy. So we want to maintain a steady growth on education as compared to real estate or development; those we subcontract it out and it’s more manageable as compared to a human capital-type of business growth.

James West:     Right. So then, in terms of competitors in the Canadian market – and first of all, is your focus strictly the Canadian market?

Toby Chu:     Yes and no. we have a strong presence, because my belief of international expansion is not flying to every single country every morning and try to learn a new culture; we learned that long and hard lesson back in our 24-year experience. So our business model is international customers coming from all over the world, and we earned it here in Canada. That way we can ensure quality, to manage the growth and expectations of our customers, which is the students, and we’ll continue to grow it from international and attract more and more students coming to study here in Canada.

James West:     Well, fascinating, Toby. That’s a great introductory interview. We’re actually going to follow you very closely. I’m going to come back to you in a quarter’s time and we’ll discuss your progress at that point. Thank you very much for joining us today.

Toby Chu:     Thank you for having me.

James West

James West

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I employ a Capital Efficiency Model that dictates money should never be exposed for longer than is absolutely necessary to the possibility of being lost. Thus, I routinely sell half my position when a stock doubles from my entry price, and I sell stocks that lose 20%, unless there are...
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