Spring Break Means 'Spring Bargain' For This Campus Housing REIT
Summary
- At four-year public universities, 40% of students graduate with no debt, and of those graduating with debt, the average student loan balance is only $27,000.
- Student loan default rates remain low, at roughly half the levels from two decades ago.
- Today, college housing is like living in a four-star hotel.
- Compared to the traditional multi-family REITs, campus housing is considered cheap.
While most college kids are thinking about spring break, I am sitting here at my laptop sweating out REIT picks, wishing I was sitting in the shade...
However, if I am diligent with my job as a REIT analyst, I could possibly take a much-needed vacation somewhere soon. Of course, the key to success is selecting a basket of high-quality dividend paying stocks with a history of uninterrupted dividend payments.
Honestly, I am counting the days. I have written way too many articles over the last few months - over 1700 articles since 2010, to be exact. I’m long overdue for a few “boots on the ground” trips to Hawaii or Costa Rico.
Anyway, it’s time for spring break, and as I began to ponder my destination, I am reminded of all of the college kids (like my daughter) who are planning “fun in the sun”. I don’t know about you, but most of my kids have stashed away enough cash away for spring break.
In fact, the perception of increased student debt has been driven by private for-profit institutions. In the public four-year university markets targeted by American Campus Communities (ACC) and Education Realty Trust (EDR), the environment remains healthy. At four-year public universities, 40% of students graduate with no debt, and of those graduating with debt, the average student loan balance is only $27,000.
Student loan default rates remain low, at roughly half the levels from two decades ago, as evidenced by the chart below:
The composition of current housing supply in the U.S. creates significant opportunity for campus housing REITs. Until the mid-1990s, student housing was virtually ignored by property developers, who failed to see the opportunities to replace traditional dorms built in the 1950s to 1970s.
Most universities only provide housing for 20% of their students, traditionally freshmen. They force them out after that into off-campus housing, often dilapidated buildings owned by absentee landlords.
For campus housing REITs, like American Campus Communities, modernization is opportunity. Many colleges and universities outsource their food services and bookstores, so outsourcing their student housing isn’t as much of a stretch as it might seem. Campus housing REITs provide a modern, purpose-built product at comparable price points to obsolete existing product, and that is their value proposition.
Modernizing student housing has mostly taken the form of new development, although some markets have buildings that can be renovated to meet student needs. Student housing isn’t just about real estate, it’s about creating an environment for academic achievement.
College students appreciate living in an impeccably maintained class-A community, and they respond positively to management’s organized alcohol-free events and zero-tolerance policies for property damage.
While some investors have expressed concern that rising tuition costs and the availability of online education could slow demand for new student housing, developers maintain that those issues are not having an impact.
Today, college housing is like living in a four-star hotel with resort-style swimming pools, tanning salons, fitness centers, sand volleyball courts, fire pits, cafes with wood-burning fireplaces, and bedrooms with walk-in closets and private baths. Heck, who needs spring break when you can live like this...?
American Campus “Consolidator”
American Campus Communities has capitalized on the opportunities in the industry, with over $9 billion of external growth since its IPO. It is the largest campus housing REIT (since 2008) in the US, and the company owns 168 student housing properties containing approximately 104,000 beds. Since its IPO in 2005, ACC has grown from 16 to 169 properties, while generating average annual same-store NOI growth of 4.1%.
The growth in the specialty campus housing sector is driven by strong demographic trends - primarily college enrollment trends. Between 2009 and 2020, college enrollment is projected to increase by 13% to approximately 23 million students.
The strong demand for campus housing is driven by an increase in the number of students attending college and the fact that many college students take longer than four years to finish college. ACC's current market share is 5%, suggesting the company has substantial opportunity to grow the platform. It has achieved 12 consecutive years of internal growth in same-store rental rate, rental revenue, and NOI:
American Campus’s risk-adjusted same-store NOI growth is the highest among both the student housing and apartment sector peers since going public:
The REIT's Tier 1 markets provide stability and opportunity for growth through modernization. Its target market composition is as follows:
- 4-year public flagship institutions with enrollment exceeding 15,000 students.
- Addressable market of approximately 6.1 million students at 255 schools.
- The markets exhibit consistent annual enrollment growth of 1-2% and an insufficient supply base.
Student housing is highly fragmented and still in its infancy.
- Largest 25 owners' cumulative market share of only 7% in ACC's target markets.
- Few well-capitalized companies and/or proficient, specialized operators.
- ACC's targeted market exposure of 10% of enrollment yields addressable potential of 610,000 beds, equivalent to six times the current portfolio size.
There is limited supply. In ACC's markets, consistent levels of new supply are manageable, with little to no impact expected on well-located assets. The new supply landscape has remained consistent in its markets since the IPO, amounting to only 1.3% of enrollment each year, on average.
At the current rate of new supply, the obsolete alternate student housing stock is decades away from achieving modernization. Recent decline in supply growth is due to developer focus on pedestrian locations where fewer sites are available.
A Disciplined Balance Sheet
As of Q4-17, ACC’s debt-to-enterprise value was 34.8%, debt-to-total asset value was 38%, and the net debt-to-run rate EBITDA was 6.8x. However, with the joint venture transaction anticipated to close in Q2-18, the company expects that it will bring debt to asset value back down below 35% and net debt-to-EBITDA below 6x.
ACC’s floating rate debt, which stands at 27% of total debt, is also expected to be reduced to the mid-teens through the repayment of outstanding floating rate debt with the proceeds from the transaction.
With regard to capital allocation, the company's staggered timing of funding over the next two years (of both the core spaces transaction and development portfolio) allows it flexibility to pursue the most attractive sources of long-term capital. ACC is rated BBB (by S&P) and EDR is rated BBB-.
ACC has made significant progress on the strategic initiatives mentioned on the Q3-17 earnings call to explore joint ventures and its core dispositions in order to fund the development pipeline. On the Q4-17 earnings call, ACC’s CEO, Bill Bayless, said:
“We want to acknowledge that both, management and our Board of Directors are cognizant of our slow growth profile and FFO and per share over the last three years.
However, we believe during this period we have significantly improved the quality of our portfolio, our operating platform, and our balance sheet. We have sold over $1 billion in non-core assets, invested significant financial and human capital into the ongoing development of our next-gen systems and business intelligence platform and raised over $1.2 billion in equity at an average premium to NAV of approximately 3.5%, lowering our leverage from the mid-40% range to the mid-30% range and prompting an increase in our credit rating from both, Moody's and S&P.”
Latest Earnings Results
For Q4-17, ACC reported total FFO of $99.6 million, or $0.72 per fully diluted share, representing a 10.8% increase in earnings per share over Q4-16. It also reported full-year 2017 FFO of $316.4 million, or $2.31 per fully diluted share, compared to $297.7 million, or $2.27 per share, for the full year 2016.
The final results for the year finished above the midpoint of the company’s revised guidance expectations, primarily driven by outperformance in both same-store and new store NOI.
In ACC’s earnings release, it provided an initial FFO guidance range for 2018 of $2.33-2.43. The major assumptions are as follows; same-store property NOI is expected to increase 1.1% to 2.9%, driven by 2.1-2.7% revenue growth and 2.5-3.8% operating expense growth.
Here’s a snapshot of the FFO/share, using F.A.S.T. Graphs data:
As you can see, ACC is forecasted to grow FFO/share by 7% in 2019 and 6% in 2020. Historically (over the last 4 years), the company has raised its dividend by an average of 5%. If you look at the trend, ACC's history since 2013 has been to provide the increase in the May dividend each year
The Payout Ratio is safe:
"Spring Bargain" For This Campus Housing REIT
ACC's dividend yield (4.7%) and P/FFO multiple (16.2x) are attractive:
The company appears to be nearing the conclusion of a multi-year phase of "capital recycling," and enrollment is positive. The Q4-17 and year-end earnings were solid, and the sentiment appears to be improving. Compared to the traditional multi-family REITs, campus housing is considered cheap, suggesting that it may be a good time to deploy capital into the sector and my favored campus housing REIT, America Campus Communities.
Note: Brad Thomas is a Wall Street writer, and that means he is not always right with his predictions or recommendations. That also applies to his grammar. Please excuse any typos, and be assured that he will do his best to correct any errors, if they are overlooked.
Finally, this article is free, and the sole purpose for writing it is to assist with research, while also providing a forum for second-level thinking. If you have not followed him, please take five seconds and click his name above (top of the page).
Source: F.A.S.T. Graphs and ACC Investor Presentation.
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This article was written by
Brad Thomas has over 30 years of real estate investing experience and has acquired, developed, or brokered over $1B in commercial real estate transactions. He has been featured in Barron's, Bloomberg, Fox Business, and many other media outlets. He's the author of four books, including the latest, REITs For Dummies.
Brad, with his team of 10 analysts, runs the investing group iREIT® on Alpha, which covers REITs, BDCs, MLPs, Preferreds, and other income-oriented alternatives. The team of analysts has a combined 100+ years of experience and includes a former hedge fund manager, due diligence officer, portfolio manager, PhD, military veteran, and advisor to a former U.S. President. Learn moreAnalyst’s Disclosure: I am/we are long ACC, AHP, APTS, ARI, BRX, BXMT, CCI, CHCT, CIO, CLDT, CONE, CORR, CUBE, DDR, DEA, DLR, DOC, EPR, EXR, FPI, FRT, GEO, GMRE, GPT, HASI, HTA, INN, IRET, IRM, JCAP, KIM, LADR, LAND, LMRK, LTC, MNR, NXRT, O, OFC, OHI, OUT, PEB, PEI, PK, PSB, QTS, REG, RHP, ROIC, SBRA, SKT, SPG, STAG, STOR, TCO, UBA, UMH, UNIT, VER, VTR, WPC. 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.
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