American Campus: Sound The Bell, School's 'Almost' In
Summary
- I’ve become increasingly certain that the campus housing sector won’t become some sort of apocalyptic wasteland.
- My college experience was meaningful because 1) the relationships I fostered 2) in-person experiences that allowed me to develop skills beyond merely memorizing data.
- As I told my son, obtaining a college education is important, especially the social interaction aspect of it. Besides, "You’re too legit to quit."
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I was recently reading an article in Barron’s titled “A Return to Campus, But Not to Normalcy.” It was written by Stephen K. Klasko – the president of Thomas Jefferson University and CEO of Jefferson Health – and Mark L. Tykocinski, the school’s executive vice president and academic affairs provost.
In the article, the duo explain how:
“Almost every university in the U.S. has suffered painful financial losses – refunding room and board to students, forgiving revenue-producing summer events, and paying for online technology to help sustain learning for spring and summer programs.”
For the record, it was no picnic on the parents' and students’ end either. Believe me.
Last month, my daughter graduated from college. She plans to begin grad courses this fall and was able to obtain a partial refund for room and board. And my son will be starting his freshman year at the same time, causing more COVID-19 questions and solution seeking.
It’s been quite the shutdown so far. For everyone involved.
But I might have some good news.
The New Normal Won’t Be Completely Different
Back to that article, the co-authors went on to explain how:
“In a very compressed time span, we have begun to define the higher education of the 21st Century. What we’ve seen is a future marked by virtual tools, hybrid delivery of curriculum and, most importantly, the need to be nimble, creative, and imaginative in meeting the challenge of an increasingly digital world.”
As such, Thomas Jefferson University will be resuming an in-person educational format. However, it does recognize that:
“Some students may be concerned to join an in-person class. Where possible, we’ll create an all-digital option. Some classes will have extra sessions to maintain smaller sizes. Residence halls will be set up for single rooms, and we’re exploring off-campus housing options.”
No doubt, it won’t be alone in any of those conclusions as its fellow institutions of higher education begin to pivot to post-coronavirus learning strategies.
I’ve become increasingly certain that the campus housing sector won’t become some sort of apocalyptic scene. In short, I simply don’t buy the argument that students will conduct all learning like robots. And the co-authors agree:
“Computers can draw a building; it is human architects who can ensure the building is meaningful.”
As I’ve told my five kids, my college experience was meaningful because of the:
- Relationships I fostered
- In-person experiences that allowed me to develop skills beyond merely memorizing data.
My fondest memories of those days were made in dorm rooms or the library. (Or attending fraternity parties, though those particular memories are admittedly a bit vague).
As the article also states, the shutdowns may have accelerated society’s digital shift… but that just means “universities, like office buildings, will be rethought as gathering and innovative spaces, not places to find your desk.”
The Business Model
That’s good news for American Campus (ACC), which owns roughly:
- 110,000 of the more than 5 million purpose-built student housing beds that house many of the nearly 20 million individuals enrolled at four-year universities in the United States.
Source: ACC Investor Presentation
ACC's portfolio primarily consists of high-value, on-campus or near-campus housing facilities at major flagship public universities.
Source: ACC Investor Presentation
Purpose-built student housing facilities are generally cheaper options compared to typical off-campus housing facilities. Yet they’re equipped with more applicable amenities.
Generally rented "by bed" rather than "by unit," there’s generally a much shorter "leasing window." That’s because beds that are unfilled at the start of the school year are likely to sit vacant until the next one.
Student housing assets – especially off-campus units that aren’t part of a university partnership – also are exposed to changes in university housing policies that can result in significant asset impairment, whereas ACC provides a modern, purpose-built product at comparable price points.
Source: ACC Investor Presentation
Compared with their conventional multi-family peers, student housing also typically operates at lower margins. That’s due to increased costs associated with leasing and more frequent turnover.
Student housing assets average less than 65%, compared with 50% or less for typical multifamily properties and less than 30% for single-family rental operators. However, student housing developers and operators such as ACC typically pay lower average property taxes. As part of university partnerships, some on-campus facilities are actually exempt altogether.
Generally, facilities closer to campus are believed to have higher barriers to entry and less exposure to oversupply or other idiosyncratic risks. Certainly, over the last decade, rent growth and occupancy metrics have been significantly stronger at these locations.
Source: ACC Investor Presentation
Some More About Student Housing REITs
Student housing REITs have historically been one of the most countercyclical real estate sectors. You see, student enrollment trends are typically inversely correlated with job growth.
Another intriguing fact about them is that while real estate ownership is their primary revenue source these REITs also offer development, consulting, and management services to their university partners. As illustrated below, American Campus in particular has relationships with some of the top academic institutions in the U.S.
Source: ACC Investor Presentation
Of course, there are risks involved – even outside the COVID-19 pressures and oversupply concerns. The student housing sector also faces additional secular headwinds related to college affordability issues and a strong labor market that has pulled would-be students into the workforce.
(At least it was a strong labor market at the beginning of the year.)
Concerns regarding rising tuition costs, however, are overstated by the widening gap between “sticker prices” and net costs.
Interestingly, the "list" price of college has risen by nearly 6% per year since 1993. But the "net" cost for the average student – after accounting for scholarships and tax subsidies – has risen at a more modest 2.4%, barely above the broader rate of inflation.
On the downside, this reflects an increased burden placed on taxpayers and middle-to-upper income families. But it’s likely also increased access to traditional four-year universities to lower-income students, keeping enrollment growth steady despite economic and demographic headwinds.
Annual average in-state tuition costs at the 61 public universities served by American Campus is less than $11,000 and annual net tuition and fees is less than $10,000 for 77% of students at four-year public institutions (after grant aid). Also, student loan default rates average sub-4% at Power 5 and Carnegie R1 institutions.
Source: ACC Investor Presentation
The Balance Sheet
American Campus has a strong balance sheet with substantial liquidity to absorb the disruption COVID-19 has caused. It has approximately $570 million in liquidity that consists of cash on hand and availability under the revolving credit facility.
The company has no remaining debt maturities in 2020. And it only has a manageable $168 million in secured mortgage debt maturing in 2021.
Source: ACC Investor Presentation
As of Q1-20, American Campus had a total asset value of 39.7% (net of $177 million in cash) and net debt to EBITDA (earnings before interest taxation, depreciation, and amortization) of 6.9x.
The company is rated BBB/Baa2, and stable.
Source: ACC Investor Presentation
The Latest Earnings
In Q1-20, American Campus Communities reported funds from operations (FFO) of $97.6 million, or $0.70 per fully diluted share. That was $0.01 above the high end of expectations.
The company said that about 93% of residents had “made April rent payments.” As such, it was realizing approximately $3.7 million in delinquent rent” at the time.
It is pursuing those payments. But it’s:
“… also working on a case-by-case basis with students and parents who have endured financial hardship due to COVID-19. Based on requests received (as of Q1-20), the company expects to provide approximately $1.6 million in rental assistance for the month of April related to financial hardships.”
Source: iREIT on Alpha
Also its quarterly same-store property net operating income (NOI) actually increased by 1.2% on a 0.7% increase in revenue. And operating expenses were flat.
The company said:
“We exceeded our expectations for the quarter. And while we certainly saw cost savings in March, as we pivoted our operations and business focus to meet pandemic protocols, we had also performed well in the first two months of the quarter.”
Source: ACC Investor Presentation
At the end of April, ACC announced a regular quarterly dividend of $0.47 per share payable on May 22, 2020.
Source: ACC Investor Presentation
More on COVID-19
On the latest earnings call, ACC’s CEO Bill Bayless explained:
“Because our modern residence halls were better suited to achieve CDC guidelines and social distancing, our ACE properties were typically not required to be vacated. But, ultimately, students were given the choice and the option to vacate and to receive a prorated refund.
“These on-campus abatements and refunds of rent were not a substantial percentage of the overall 2019-2020 total contract revenue given that all these residence halls had May ending leases.
“The total on-campus abated refund of rent is expected to be in a range of $13 million to $17 million.”
He added:
“… for many students, their college housing is their only home, and they had nowhere else to go… many students wanted to stay in their primary college residence and did not want to go home and risk exposing parents and grandparents who were likely in a higher-risk category for complications from COVID-19.”
Another consideration in their favor is ACC’s commitment to modernization. Many of today’s existing dorms were built back in the ‘50s and ‘60s for the Baby Boomer generation.” That makes them COVID-19 unfriendly.
Bayless explains:
“We want to ensure the universities look at all the modern housing inventory available to them both on and off-campus for the fall, especially if they continue to have concerns regarding housing students in their older traditional dorms with group restrooms and common bedding facilities. We hope this outreach and information will aid universities and being comfortable and making the decision to return in-person classes in the fall.”
Source: ACC Website
U Can't Touch This
Remember MC Hammer’s song “U Can’t Touch This,” where he sang:
Why you standin' there, man?
U can't touch this.
Yo, sound the bells,
School's in, sucka.
U can't touch this.
Well, based on what I can see, at least South Carolina’s schools will be “sounding the bell” again in around 90 days. And that means dormitories will begin filling up again with college students.
FAST Graphs
As shown above, ACC didn’t cut its dividend during the Financial Crisis. And its FFO payout ratio was well-positioned before the shutdowns at 82%.
The company has since pulled guidance for 2020. But analysts forecast earnings will decline by 10% in 2020, thereby increasing the payout ratio to about 92%.
Shares are yielding 5.8% with a P/FFO multiple of 13.9x vs. a normalized P/FFO of 18.7x. This suggests a meaningful margin of safety exists.
Source: FAST Graphs
Also, according to 11 analysts, the 2021 consensus estimate for ACC’s FFO per share is over 11%. If so, the company could get back on track in 2021 and the payout ratio should normalize in the low 80s. Also, the growth estimate for 2022 is +9% (four analysts).
We Maintain a Strong Buy.
Certain property sectors such as malls and theaters will likely see longer-term collateral damage. But we consider student housing to be an ideal pick.
One last thing I want to mention here is that while we believe that the international studies programs will slow substantially, as students cannot travel to the U.S., they should be offset by juniors who will not be able to travel abroad for the same reasons. Thus, we view this as neutral, in terms of the impacts from COVID-19 for international travel.
As I told my son, obtaining a college education is important, especially the social interaction. Besides, “You’re too legit to quit.”
Source: FAST Graphs
Author's note: Brad Thomas is a Wall Street writer, which means he's not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: written and distributed only to assist in research while providing a forum for second-level thinking.
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This article was written by
Brad Thomas has over 30 years of investing experience and has acquired, developed, or brokered in excess of $1B of 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 the team of 10 analysts he leads, runs the investing group iREIT© on Alpha. It 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. The group provides weekly Zoom meetings and frequent CEO interviews. Learn moreAnalyst’s Disclosure: I am/we are long ACC. 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (36)
Something I hadn't thought about.
Seems if there is a uptick in COVID in the fall that there could be a pullback of the stock?
Appreciate the idea.
Happy investing!
Seems to me that mall REITs would be more riskier.
So short term mall REITs are less riskier?
Overall I think ACC much better long term versus mall REITs.
I do believe ACC go have pull back & will monitor closely.
Happy investing.
