American Campus: At the Head of the Class

08/09/2019 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 169 student housing properties with about 108,800 beds. Including third-party managed properties, the company’s managed portfolio encompasses 203 properties with 133,000 beds, explains Jacob Kilstein, an analyst with Argus Research.

ACC’s housing is considered more modern and comfortable than older college dormitories and privately owned apartments. Amenities include gyms and spacious rooms.

ACC’s financial performance is directly tied to its ability to lease its properties on an annual basis. Declines in student enrollment or the construction of competing off-campus developments could hurt the company’s occupancy rates.

However, enrollment in U.S. colleges and universities is expected to increase 15% between 2010 and 2021, according to the National Center for Education.

In 2Q19, ACC continued work on seven projects scheduled for delivery in 2019 through 2021, and two presale developments, with a total cost of $877 million.

During the quarter, the company completed the sale of College Club Townhomes, at Florida A&M University, for $9 million. Subsequent to the end of the quarter, ACC disposed of a student housing center at Valdosta State University (in Georgia), which was surrendered to the lender in satisfaction of the property’s $27 million mortgage.

The company also recently signed a $615 million agreement to build dormitories with approximately 6,200 beds for Disney interns, which we see as a favorable long-term opportunity. The development will be delivered in multiple phases in 2020-2023.

ACC has completed financing and begun construction on an on-campus development project at the University of California, Riverside. The company expects to earn $7 million in fees through the current construction phase and to provide management services when the project is completed in late 2021.

Along with earnings, management reiterated its 2019 FFOM guidance of $2.35-$2.45 per diluted share and 2019 FFO guidance of $2.40-$2.50 per diluted share.

We are raising our 2019 FFOM estimate to $2.44 from $2.41 per share based on the company’s better-than-expected 2Q results.

We think that rental rates will continue to increase over the next year and expect new development projects to add value over time. We are also raising our 2020 estimate to $2.52 from $2.49 per share. Our long-term FFO growth rate forecast is 4%, raised from 3%.

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.

We think the 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 think the time is right to upgrade ACC. Our target price is $53.

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