Most investors are looking for two things out of their retirement portfolio, safety and reliability. This is typically accomplished by finding and buying lower-risk investments that provide a consistent return.
American Campus Communities (NYSE: ACC), the largest developer, owner, and provider of student housing in the United States, was a great example of the type of real estate investment trust (REIT) you'd want in a retirement portfolio. That was until COVID-19. The recent pandemic and closures of universities and colleges around the U.S. have presented some major hurdles for the company.
Let's take a look at where the company stands and if it's a good fit for a retirement portfolio in the long haul.
Higher quality of student housing
American Campus Communities currently owns 206 communities across 96 campuses, providing community living both on and off campus. The company largely focuses on ground-up development but also owns several pre-existing buildings that have been renovated to fit its standard of housing for students.
American Campus Communities is unique because of the quality of housing it provides students, with many buildings having LEED certification and modern single rooms or shared housing with amenities such as a pool, gym, community room, and study area, at rates similar to on-campus housing.
Where it stands today
It comes as no surprise that the pandemic has negatively affected income and revenue for the REIT. Its Q2 2020 earnings reported a 14.2% reduction in revenue and a 20.9% decrease in net operating income (NOI) when compared to the same quarter of the prior year. Modified funds from operation (FFO) -- typically the best indicator of the health and profitability of the REIT -- also saw a decline, coming in at $50.9 million or $0.37 per fully diluted share in Q2 2020, compared to Q2 of 2019, which reported $77.4 million or $0.56 per fully-diluted share. The $30.6 million decrease in same-store revenue can be attributed to payouts relating to its Resident Hardship Program, which provided financial assistance and rent relief to tenants in need as well as "lost revenues from summer camps and conferences, increased uncollectible accounts, waived fees and other COVID-related items."
Loss of revenue for many would be a warning sign that the company was in turbulent waters and going under, but that's not necessarily the case for ACC.
Long-term outlook and how it fits into your retirement portfolio
Many of the challenges facing the company today are temporary. The virus won't be around forever and campuses will reopen, helping operations resume back to normal. Occupancy is one of the largest factors for profitability for the company. As of Q2 2020, 63 of the 68 universities served by American Campus Communities are set to reopen fully or reopen with a hybrid of online and in-person classes, which is a positive sign. Pre-leases for the 2020-2021 school year are at 90.1% as of July 17, 2020 -- only a 3.4% shortfall from July 2019's pre-lease rates -- demonstrating the desire for college students to return back to that setting, pandemic or not.
Beyond its current setbacks, the REIT's financials are strong and forward-looking projects are positive. The company has $31.0 million in cash and $813.5 million available on its unsecured revolving credit facility. American Campus Communities also has promising projects in the works, including the first phase of the Disney College Program, which is estimated to yield 6.8% in 2023 once completed.
However, with COVID cases still on the rise in many states, it's unknown whether campuses will fully re-open as intended and what the fall semester will look like. American Campus Communities appears well positioned to ride out the storm, but there's still risk in how long the storm will last and how much damage it will cause for the company in the meantime. While investors can still enjoy a $0.47 quarterly dividend payout, it may not be sustainable if the virus continues to negatively impact the company. Its current payout ratio of 127% is not unheard of in the REIT world, but it's far above its much more sustainable and in-line payout ratio of 83% that was achieved the same time last year.
All in all, I think American Campus Communities has a ton of potential and will likely survive these turbulent times, making it a good fit for a retirement portfolio. Just keep in mind that there is still a lot of uncertainty for this company, which adds risk to the investment. With shares going for $36.10 at the time of writing, the 5.2% return can make for an appealing addition to a retirement portfolio, especially for a company with such a strong track record.