Student housing has evolved over the years, and colleges and universities are increasingly outsourcing their housing needs to third-party operators. This practice is freeing up resources while providing students with better options.
One of the leaders in third-party student housing is real estate investment trust (REIT) American Campus Communities (NYSE: ACC). Here's a closer look at the buy thesis of this REIT.
What it does
American Campus Communities is a residential REIT focused on owning, managing, and developing high-quality student housing communities. It's the largest company focused on this sector in the U.S. and the only publicly traded REIT dedicated to student housing.
As of the end of 2020's third quarter, the REIT owned 166 student housing properties with 111,900 beds across 69 markets. It manages another 38 properties with 28,000 beds for third-party owners. The company focuses on owning properties on campus or within walking distance. It targets schools in Power 5 conferences (the top-five athletic conferences) and Carnegie R1 institutions (doctoral universities with very high research activity). Overall, its top ten markets contribute 41.8% of the company's NOI.
The REIT generates most of its revenue from its owned properties by leasing beds to students for the semester. In 2019, the company got 93% of its revenue from its owned properties, roughly 4% from on-campus participating properties, and about 3% from third-party development and management services.
The COVID-19 outbreak impacted American Campus Communities' operations in 2020. Schools sent students home early for the spring semester while some opted against bringing them back for the fall. That affected the company's financial results. For example, during the second quarter, NOI at its properties declined 20.9% compared to the prior year.
Driving the decline was the rent relief it provided to some students, lost revenue from summer camps and conferences, increased uncollectible accounts, and waived fees. NOI also declined in the third quarter -- down 14% compared to the previous year -- due to many of those same factors and lower occupancy levels as some schools offered a hybrid learning model or only had online classes during the fall semester.
The pandemic also impacted the REIT's development program. While it completed the first and second phases of its Disney (NYSE: DIS) College Program development during the second and third quarters, that company's interns didn't occupy those facilities because of Walt Disney World Resort's closure. The partners are considering opening up the property to the broader rental market until Disney resumes its internship program. Meanwhile, the company plans to continue construction on the $614.6 million development project's remaining phases, keeping pace with the original 2023 completion date.
American Campus Communities also finished projects for the University of Southern California Health Sciences and San Francisco State University during the third quarter. However, occupancy levels were below expectations due to the pandemic.
The REIT launched an updated strategic plan in 2020 -- Pursue Growth 2030 -- to create long-term value for its shareholders. The company intends to pursue student housing development and acquisition opportunities. In addition to leveraging its balance sheet to fund growth, the company wants to access outside capital through strategic joint ventures and private capital sources. That financing strategy would help boost its fee income, which it also intends on growing by increasing its third-party management platform.
How has it treated investors?
One reason American Campus Communities revamped its strategic plan with a focus on creating shareholder value is that it has done a poor job at that in recent years: