American Campus Communities Inc. (NYSE: ACC) based on the stock’s attractive valuation following the coronavirus selloff.
American Campus Communities property portfolio consists of student housing assets that are spread across the country, but skew towards Southern/Southwestern states such as Texas, Arizona and Florida. In our view, these states are less likely to send students home or cancel future on-campus semesters due to COVID-19. We also believe that ACC’s properties are better suited to social distancing/quarantining, with 86% of the portfolio comprised of apartment-style beds with 1-2 people per bathroom, and 12% consisting of residence halls featuring in-suite bathrooms with 1-2 people per bathroom. Both of these arrangements are more suitable in the current environment than traditional university-owned dormitories in which as many as 20 students share common sinks, toilets and showers.
We are also optimistic about the company’s recently announced strategic plan, the ‘Pursue Growth 2030 Plan.’ The plan will focus on driving earnings growth following mostly flat earnings from 2014 to 2018. We are optimistic about the plan, which we discuss in more detail in the Earnings & Growth Analysis section below. With favorable long-term trends still underpinning housing at large four-year universities, we think that the shares deserve to trade at a greater premium to peers.
The beta on ACC shares is 0.89.
American Campus Communities recently reported third-quarter results that beat analysts’ expectations. FFOM came to $45 million or $0.32 per share for 3Q20, down from $64 million or $0.46.
To date, two phases, or 1,600 beds, have been completed and delivered, with three phases or 8,800 beds remaining. We see the project as a favorable long-term opportunity, despite the near-term impact of pandemic-related delays.
Prior to the pandemic, the company expected 1.5%-3.0% growth in same-store rental rates in the 2020-2021 academic year, reflecting solid occupancy and prospects for generally strong lease-ups. However, the company withdrew this guidance in the first quarter.
EARNINGS & GROWTH ANALYSIS
During the third quarter, owned properties same-store revenue fell 9% to $183 million, as COVID-19 led to lower occupancy. Additionally, rent abatements, early lease terminations, and cancellations of summer camps and conferences weighed on revenue. Same-store NOI dropped 14% to $82 million. Same-store occupancy for the 2020-2021 academic year came to 90.3% leased versus 97.4% at the same time last year (for 2019-2020). For these 90.3% pre-leased properties, the average rent was $807 per bed, implying a 1.6% increase from the prior year.
In accordance with its Pursue Growth plan, management will use strategic ventures to make acquisitions below the public cost of equity. It will also expand the range of universities eligible for investment, take advantage of on-campus modernization opportunities, and use its strengthened balance sheet to weather short-term COVID-related slowdowns. In the past, the company has partnered with Allianz to share ownership of seven properties in exchange for a $350 million payment.
Our long-term FFOM per share growth rate forecast is 3%.
MANAGEMENT & RISKS
Bill Bayless is the CEO of ACC. He co-founded the company in 1993 and became CEO in 2003.
The company is also exposed to fluctuations in short-term interest rates. Higher rates would increase the cost of acquisitions and development projects and make REIT yields nattractive relative to bond yields.
We note that American Campus Communities has no direct peers in the student housing space (other student housing players are privately owned), though it may be compared to multifamily apartment REITs.
On December 2 at midday, BUY-rated ACC traded at $49.16, down $0.15.