American Campus Communities (NYSE: ACC) is the largest owner, manager, and developer of student housing communities in the U.S. Because of that, the real estate investment trust (REIT) can tell investors a lot about what's happening in the sector. Here's a closer look at the residential REIT's second-quarter results for 2021 and what they're signaling about the industry's recovery.
More students are back on campus
Overall, American Campus Communities reported strong Q2 results. Same-store net operating income (NOI) jumped 11.6% during the quarter, as revenue grew much faster than expenses. Meanwhile, its modified funds from operations (FFOM) improved from $50.9 million (or $0.37 per share) in Q2 2020 to $58.8 million (or $0.42 per share) in Q2 2021.
CEO Bill Bayless commented on the company's results in the earnings press release, stating that "we outperformed our operational and financial expectations for the quarter." That strong performance suggests that demand for student housing is recovering as more schools brought back in-person learning this year.
Bayless also noted on the Q2 conference call that "quarterly rental revenue and ancillary income, including parking fees, utility, retail income, among others, were stronger than anticipated." That increase in ancillary income is another good indicator that more students are on campus as many of those revenue sources are usage-dependent.
Looking beyond the numbers
The real story this quarter is what the REIT sees ahead for the 2021-2022 school year and beyond. Bayless stated in the earnings release that "fall 2021 lease-up moved ahead of the prior year's pace in early July," with the REIT's pre-leasing for that academic year currently standing at 91.7% -- an improvement from 88.6% at the same time last year.
Further, the CEO commented that "our pre-leasing velocity is now trending at a level that we believe will result in occupancy and average rental rate gains producing opening rental revenue growth for the 2021-2022 academic year of 5.1% to 7.6%."
While Bayless cautioned in the earnings release that "the short-term impacts from the COVID pandemic will linger into fall of 2021 at varying degrees geographically," he believes "we will return to our historic range of occupancy for the 2022-2023 academic year." He further commented that "long-term fundamentals of our sector are strong and appear to be gaining tailwinds."
Bayless noted several factors driving this upbeat view on student housing. First, demand is strong. Bayless stated on the Q2 conference call that "tailwinds include record admission applications at the four-year public and private universities we serve and target, universities nationwide resuming in-person academic and social activities and reinstating their on-campus housing policies for first-year students in the fall of '21."
These factors will enable the company to increase its marketing program as it kicks off the 2022 leasing season, driving even higher occupancy and rental growth for that academic year, given those demand trends.
Meanwhile, Bayless noted that there's a "significant downward trend in national new supply continuing at least through the 2022-2023 academic year, including a currently projected decrease of over 20% in ACC markets." In addition, the company is seeing a return of public-private partnership opportunities with schools to modernize on-campus housing, which is currently exceeding pre-pandemic levels.
With demand rising and supply tightening, American Campus Communities expects to deliver strong growth in the coming years. Not only should it see improved occupancy and rental rates at its existing properties but also more opportunities to invest in development and redevelopment projects. That combination of "robust internal growth and high-quality external growth in the years ahead" should enable the REIT to create significant value for its investors.
A great time to invest in student housing
American Campus Communities' Q2 results suggest that student housing is recovering. Because of that, the sector represents an attractive investment opportunity for real estate investors over the next few years as demand improves amid tightening supply. While there are many ways to invest in this trend, American Campus Communities is an excellent way to play the sector's recovery and future growth.