American Campus Communities: Student Housing - Back To School, Finally

Summary

• American Campus Communities - along with the broader student housing sector - have delivered a swifter-than-expected rebound as students at flagship universities returned to campus for the 2021-2022 academic year.
• Despite the broader enrollment declines at the national level due to a myriad of short-term and structural headwinds, student housing fundamentals in these top-tier university markets have improved above pre-pandemic.
• Non-student apartment rents are soaring by double-digit rates, which allowed ACC to achieve robust rental rate growth of 3.8% and occupancy at 95.8% for the Fall 2021 semester- near record-highs.
• Beneficiaries of the soaring rents across the nation, ACC also delivered double-digit same-store NOI growth last quarter and now expects to see a full return to pre-pandemic FFO in full-year 2022.
• ACC has made several positive strides to unlock value through improved corporate governance and capital allocation. Given its deep NAV discount and the ample institutional interest in student housing, ACC is also a takeout candidate.
• This idea was discussed in more depth with members of my private investing community, Hoya Capital Income Builder. Learn More »

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REIT Rankings: Student Housing

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American Campus Communities (ACC) - along with the broader student housing sector - have delivered a swifter-than-expected rebound as students at flagship universities returned to campus for the Fall semester. American Campus - the lone public student housing REIT following the acquisition of Campus Crest by Harrison Street in 2015 and EDR by Greystar in 2018 - is the single-largest institutional owner of student housing properties in the United States and the eighth largest multifamily REIT.

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As the lone publicly-traded REIT, ACC has built a strong reputation as the leader in student housing development and as a stalwart of the public-private partnership model. Several other publicly-traded companies own invest in student housing portfolios including Blackstone (NYSE:BX) - which has joint ventures with Landmark Properties and Greystar and Brookfield Asset Management (BAM) - which has a joint venture with The Scion Group. Other major institutional owners of student housing portfolios include Harrison Street, Campus Apartments, The Preiss Companies, and Vesper Holdings.

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Despite the broader enrollment declines at the national level due to a myriad of short-term pandemic-related effects and structural headwinds related to demographics and the shift to online education, student housing fundamentals in top-tier university markets have returned to pre-pandemic levels.

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Per recent data from National Student Clearinghouse, enrollment at highly selective schools - which ACC targets - has actually increased from pre-pandemic levels, and recent data suggest that momentum is building into the 2022 academic year. Enrollment trends have followed a direct correlation with competitiveness and interestingly, graduate enrollment has seen strong growth as "work-from-home" unlocks additional time to pursue advanced degrees.

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Importantly, ACC's focus on highly-selective flagship universities across Sunbelt markets - most of which offered in-person classes throughout the pandemic - has proven to be especially critical. ACC owns 166 student housing properties containing approximately 111,900 beds within a portfolio primarily consisting of high-value on-campus or near-campus purpose-built student housing facilities at major flagship 4-year public universities. ACC is also currently developing more than $10k beds for the Disney (DIS) College Program which, upon completion in 2023, will be ACC's largest market.

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RealPage reported that student housing rents ended the Fall 2021 leasing season up 2.3% from the previous August, the best year-end rent growth since 2016 when rent growth hit 2.6% while occupancy rates climbed to 94.1% - a record-high in RealPage's data and a larger-than-average 200 basis points above the final pre-lease rate of 92.1%. Notably, a quarter of the RealPage 175 universities recorded rent growth at or above 4% in Fall 2021, compared to just 16% of schools a year earlier. In total, more than 56% of the RealPage 175 achieved better than 2% rent growth in Fall 2021.

RealPage

RealPage reports that the positive momentum has continued into the early pre-leasing season for the Fall 2022 semester. Three months into the Fall 2022 pre-lease season, 31.5% of beds at the core 175 universities tracked by RealPage were leased for the Fall 2022 school year, nearly identical to the pre-pandemic rate of 31.7%. 20 schools in the RealPage 175 claimed pre-leasing at or above 50% in December - double the number of schools that claimed at or above 50% pre-leasing in December 2020. Leases were signed with rent growth averaging 3.1% - double that of the pre-pandemic December 2019 and December 2018 rates of about 1.5% annual effective rent growth.

RealPage

As discussed in our REIT Earnings Recap, American Campus reported impressive third quarter results, citing strong enrollment trends at tier-one universities and limited supply growth. Driven by a 95.8% opening all occupancy and 3.3% average rental rate growth in the Fall semester, same-store NOI growth jumped 10.5% from last year. That compares with ACC's initial expectation of 93% leased with 2.5-3.0% average rental rate growth. CEO Bill Bayless commented that ACC is "experiencing the most substantial fundamental tailwinds we've seen in many years."

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Strong results from ACC followed a slate of stellar results across the residential REIT sector as rents across essentially all property types and regions continue to soar with no signs yet of slowing down. With the majority of ACC's portfolio comprised of off-campus housing units - unaffiliated with a university - there should be an implicit level of "fungibility" or correlation with the broader non-purpose-built housing stock that appears to be under-appreciated by the market based on current valuations. Zillow reported last month that multifamily and single-family rents are soaring at the fastest pace on record. Realtor.com echoed these trends, also reporting that rents rose to record-highs in November with national rental rates growing by 19.7% from the prior year.

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Student Housing Performance & Valuation

Plunging nearly 60% at the bottom during the worst of the pandemic last April, American Campus has delivered a steady rebound over the last eighteen months. Despite the continued uncertainty over the timing of the full return to on-campus learning, ACC posted total returns of just shy of 40% in 2021, roughly matching the returns on the broad-based Vanguard Real Estate ETF (VNQ), but still lagging its multifamily peers by roughly 20 percentage points.

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Despite its rally from the lows in March, relative to the other REIT sectors and its multifamily peers, ACC appears quite attractive across most valuation metrics. ACC pays a dividend yield of 3.7%, well above the REIT sector average of 2.8%. Trading with a forward Price/FFO of 21.4x and a NAV discount of 10-15%, ACC trades at significant discounts to the average multifamily REIT, which trades at a P/FFO of 24.9x and a NAV premium of 5-10%. Given its deep NAV discount and the ample institutional interest in student housing, we believe that ACC is a potential takeout candidate.

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Deeper Dive: Student Housing Sector Dynamics

Purpose-built student housing facilities are generally cheaper and are equipped with more applicable amenities for students than typical off-campus housing facilities. Student housing facilities are generally rented "by bed" rather than "by unit," and there is generally a much shorter "leasing window," as beds that are unfilled at the start of the school year are likely to sit vacant until the next school year. Student housing assets, especially off-campus units that are not part of a university partnership, are also exposed to changes in university housing policies - or in this case, health policy - that can result in significant vacancy losses and long-term asset impairment.

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Student housing has emerged as a full-fledged asset class over the last half decade as institutional capital has flowed into the sector in search of a countercyclical asset class with a unique and uncorrelated return profile. With American Campus as the lone pure-play representative, student housing accounts for roughly 1% of the broad-based "Core" REIT ETFs.

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Once viewed as a riskier asset class than traditional multifamily apartment REITs, the student housing sector has matured over the last decade, no doubt helped by the robust demand for student housing associated with the enormous millennial generation. Rent growth at student housing facilities, however, has been more modest over the past decade due in part to slower enrollment growth and significant supply growth in purpose-built student housing. At 25 years old, the youngest of the millennials are now out of college and coming full steam into the traditional housing markets.

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While Americans' attitudes regarding the curriculum and cost of traditional four-year universities college have become increasingly negative over the last decade, the underlying value proposition of attaining a bachelor's degree still remains economically compelling. Research from Georgetown indicates that bachelor's degree holders earn 31% more than those with an associate's degree and 84% more than those with just a high school diploma as a bachelor's degree is worth $2.8 million over a lifetime.

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Compared with its conventional multifamily peers, student housing typically operates at slightly lower margins due to increased costs associated with leasing and more frequent turnover. NOI margins average 60-65% for student housing assets compared with 65-70% for typical multifamily properties. Student housing operators such as ACC, however, typically pay lower average property taxes, as some on-campus facilities (as part of a university partnership) are exempt from property taxes. Development deals that are made through a public-private partnership (P3) with a university or a similar deal with another private company - such as ACC's deal with Disney - often include a land lease from the institution to the student housing developer.

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Student Housing REITs are among the most active developers in the REIT sector and utilize several different models to create value. The most attractive of these models, we believe, is the public-private partnership. A university or business in need of new campus housing facilities but without the desire to expend the capital to build one leases land to the REIT, which then builds, owns, and manages the facility. The university gets an annual ground-lease rent check (again, without deploying any capital) and the students get a new housing facility, equipped with modern amenities. The university or institution, in turn, often guarantees a steady flow of renters. Revenue from this model comprises roughly a quarter of ACC's revenues.

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Takeaways: Back To School, Finally

American Campus Communities - along with the broader student housing sector - have delivered a swifter-than-expected rebound as students at flagship universities returned to campus for the Fall semester. Despite the broader enrollment declines at the national level due to a myriad of short-term and structural headwinds, student housing fundamentals in these top-tier university markets have improved above pre-pandemic levels. ACC has made several positive strides to unlock value through improved corporate governance and capital allocation. Given its deep NAV discount and the ample institutional interest in student housing, ACC is also a takeout candidate.

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Disclosure: Hoya Capital Real Estate advises two Exchange-Traded Funds listed on the NYSE. In addition to any long positions listed below, Hoya Capital is long all components in the Hoya Capital Housing 100 Index and in the Hoya Capital High Dividend Yield Index. Index definitions and a complete list of holdings are available on our website.

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of RIET, HOMZ, ACC either through stock ownership, options, or other derivatives. 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.

This is an abridged version of the full report published on Hoya Capital Income Builder on January 25th. Hoya Capital Real Estate ("Hoya Capital") is a research-focused Registered Investment Advisor headquartered in Rowayton, Connecticut. Founded with a mission to make real estate more accessible to all investors, Hoya Capital specializes in managing institutional and individual portfolios of publicly traded real estate securities, focused on delivering sustainable income, diversification, and attractive total returns. A complete discussion of important disclosures is available on our website (www.HoyaCapital.com) and on Hoya Capital's Seeking Alpha Profile Page. Nothing on this site nor any published commentary by Hoya Capital is intended to be investment, tax, or legal advice or an offer to buy or sell securities. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and should not be considered a complete discussion of all factors and risks. Data quoted represents past performance, which is no guarantee of future results. It is not possible to invest directly in an index. Index performance cited in this commentary does not reflect the performance of any fund or other account managed or serviced by Hoya Capital Real Estate. Investing involves risk. Loss of principal is possible. Investments in companies involved in the real estate and housing industries involve unique risks, as do investments in ETFs, mutual funds, and other securities. Please consult with your investment, tax, or legal adviser regarding your individual circumstances before investing. Hoya Capital, its affiliate, and/or its clients and/or its employees may hold positions in securities or funds discussed on this website and our published commentary. A complete list of holdings is available and updated at www.HoyaCapital.com.

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do you know the premium that Campus Crest and EDR were acquired at? based on ACC NAV discount vs comps, I'd assume 20% below fair value and another 10-20% buyout premium?