Good Grades for American Campus

11/12/2019 5:00 am EST

Focus: REITS

Jacob Kilstein

Associate Analyst, Argus Research Company

American Campus Communities (ACC), the largest student housing company in the U.S., owns 168 student housing properties with about 113,000 beds, notes Jacob Kilstein, an analyst with independent research firm Argus Research.

Including third-party managed properties, the company’s managed portfolio encompasses 205 properties with 140,000 beds. Its housing is considered more modern and comfortable than older college dormitories and privately owned apartments. Amenities include gyms and spacious rooms. The company is a self-managed and self-administered equity real estate investment trust (REIT).

We believe that ACC’s direction is positive, as the company continues to transform its property portfolio with new projects for Disney and the University of California Riverside. The company recently signed a $615 million agreement to build dormitories with approximately 6,200 beds for Disney interns; the development will be delivered in multiple phases in 2020-2023.

In 3Q19, ACC continued work on nine projects scheduled for delivery in 2020 through 2023, and two pre-sale developments, with a total cost of $1.2 billion.

ACC pays a quarterly dividend of $0.47 per share, or $1.88 annually, for a yield of about 3.8%. Over the past five years, ACC has raised its dividend at an annual rate of 4.7%. Our 2019 dividend estimate is $1.87 and our 2020 estimate is $1.91.

The shares are trading at a projected 2020 price/FFO multiple of 19.7, above the midpoint of the five-year historical range of 13.8-24.3 but slightly below the peer average of 21.5.

We think that ACC’s relatively low valuation made sense during the firm’s period of asset sales. However, with dispositions wrapping up, demand for high-quality student housing increasing, and the Fed lowering interest rates, we believe that the stock offers a favorable buying opportunity.

Overall, we think ACC is undervalued. We are raising our price target to $55. Our revised target reflects recent operating results, valuation, and the stock’s underperformance relative to other REITs.

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