Higher Interest Rates Mean Hard Times For American Campus Communities

| About: American Campus (ACC)

American Campus Communities (NYSE:ACC) is a REIT that owns and operates student housing properties throughout the United States. The company owns 200 properties with approximately 126,900 beds and has the distinction of being the largest owner and developer of student housing properties in the United States. The company has a market cap of $649 million and a dividend of $1.44 that yields 4.3%.

American Campus reported third quarter earnings on October 22nd. The earnings results were mixed and below analyst expectations. Revenues totaled $159 million up 41% from $112.8 million in the third quarter of 2012. Net operating income was $15.2 million up 13.7% from $13.4 million in 2012. The increase in revenues and operating income was primarily due to additional rental income from 2012 property acquisitions. Net income was $47.2 million up from $627 thousand in the third quarter of 2012. The increase in net income came primarily from the sale of five rental properties for $169.7 million.

While revenues and earnings were higher, the quality of the earnings was disappointing. The company's loss from continuing operations increased to $5.6 million, up from $700 thousand in the third quarter of 2012. During the third quarter earnings call, American Campus explained the increased loss from continuing operations as follows: Loss from continuing operations increased by $4.5 million over the prior year third quarter primarily due to an increase in interest expense related to loans assumed in connection with 2012 property acquisitions and the $400 million senior unsecured notes offering in April 2013.

American Campus Communities Moving Forward

American Campus like many other REIT's saw its stock price plummet over the last year because of anxiety over rising interest rates. Higher interest rates can be especially devastating for a company like American Campus because it carries a high debt load. The company carries $2.43 billion in debt and has a debt to equity ratio of 90.63. As a result of the third quarter earnings disappointment and the poor environment for REITs, analyst reduced their 2014 earnings estimates for American Campus to $2.40 per share from $2.54 per share. Analyst at Zacks currently rate the stock as a (Strong Sell).

American Campus Plans for the Future

In response to the higher interest rates and poor earnings environment, the management team at American Campus has decided to tighten the company's purse strings, and focus on internal growth. During the third quarter earnings call, William C. Bayless, the CEO of American Campus said, "On the growth front, beyond completing the one-off acquisitions that we have in our -- that we've had in our pipeline all year, we plan on sitting on the sidelines during this acquisition season, and rather are focused on more accretive development opportunities which will be funded via additional dispositions as necessary. Bottom line, our main focus for the next year is on internal value creation."

American Campus versus its Competitors

American Campus has two direct competitors that have been reporting stronger earnings, Education Realty Trust Inc. (NYSE:EDR) and Campus Crest Communities (NYSE:CCG). Of the three companies, Campus Crest is the cheapest to buy in terms of its funds from operation (FFO) which is the best way to measure REIT earnings. Campus Crest currently trades at a price to FFO ratio of 12.6 compared to Education Realty whose price to` FFO ratio is 16.1 and American Campus whose price to FFO ratio is 21. What sets Campus Crest ahead of its competitors is that it brands three types of student apartments. Its apartments include the basic dorm rooms, along with the more modern better appointed apartments and finally what it calls Evo apartments. The Evo apartments are upscale apartments that feature biometric security, a social media presence, private baths and more. This innovative way of branding its products allows Campus Crest to benefit from students of varying financial levels. It is also the key reason that Campus Crest has a better FFO than its competitors.

American Campus Stock Analysis

With the increase in interest rates, most REIT stocks have suffered losses in their stock prices. However the stock price of American Campus has fallen by more than its competitors. Over the last 52 weeks, its stock price has fallen by 26%. During the same period, the stock price of its competitors Education Realty and Campus Crest are down 13.5% and 11.5% respectively.


The decision by American Campus to stop making acquisitions was a good first step towards slowing their losses, from continuing operations. Unfortunately, the interest expense that the company incurred from its purchase of $1 billion in assets during 2012 will continue to drag down the company's earnings. In order for American Campus to improve earnings, it will need to reduce its interest expense and try to introduce innovative marketing methods similar to those of Campus Crest Communities. Unfortunately, the company will not be able to make these changes quickly because interest rates are not likely to go down and it will take time for the company to change its product offerings. For those reasons, I would recommend investing in the REITs of its competitors Campus Crest with a yield of 6.6% and Education Realty Trust with a yield of 5% over American Campus. In addition, the stock of REITs that own retail properties such as Inland Real Estate (NYSE:IRC) yield 5.4% and CBL & Associates (NYSE:CBL) yield 4.9% are also more attractive than American Campus.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.