This year has been anything but business as usual for American Campus Communities (NYSE: ACC). The onset of the global pandemic in March motivated a large number of colleges and universities to close campuses and move classes to an online setting. With the coronavirus pandemic still very much ongoing, many schools have remained closed in the fall, affecting demand for student housing both in the short and long term.
Preferences are shifting in the student housing space, which means some uncertainty over what the future looks like for American Campus Communities, the only residential real estate investment trust (REIT) specializing in on- and off-campus student housing. Let's take a closer look at where the company may be in three years.
Where American Campus Communities is today
Currently, American Campus Communities acquires, develops, and manages 206 high-quality student housing properties consisting of 133,000 beds, both on and off 96 different campuses across the United States and Canada.
It comes as no surprise that Q2 and Q3 earnings are down for the company. Despite many students wanting to get away from home and return to their colleges, lease rates are currently 90.3% for the 2020–2021 school year, 7.2% lower than the same time last year. This has pushed share prices down just under 15% from February highs.
Decreased demand caused by uncertainty around the safety of students returning to a school setting, in addition to the lack of summer program operations, a slightly weakened rental collection rate (averaging 94.6% for the third quarter), and extending $15 million in rent relief, resulted in a net loss of $19.5 million for quarter's end in September 2020. Net operating income is down 14%, and revenues decreased 9.3% when compared to the same quarter the previous year. Dividends remain at $0.47 per quarter, providing a payout ratio of 127%.
Despite a challenging year, the company has strong financial footing, with over $44.4 million in cash and cash equivalents and the ability to maintain the required capital to complete projects in development, which include two American Campus Equity (ACE) Disney (NYSE: DIS) College Program partnerships and a third-party on-campus development at Georgetown University. The properties American Campus Community owns and develops are in highly desirable areas close to top universities and colleges that traditionally have limited, expensive, or outdated housing options.
Despite their top-notch real estate portfolio, how greatly the company is impacted over the next three years will largely depend on how long the pandemic continues. The Disney College Program currently makes up $614.6 million of the company's development costs and is expected to complete in 2023. However, Disney's decreased operational activity means completed properties aren't leased. Luckily, Disney has agreed to pause ground rent until lease-up begins, which helps American Campus Communities tremendously in the short term.
Where American Campus Communities appears to be headed in the next three years
Over the next three years, I expect to see revenues in line with recent performance, which will likely include net losses and decreased or flat funds from operation (FFO). The company will prioritize cash conservation to help complete current developments underway and pay debt maturities due in 2021 and 2022. Its recent shortcomings have resulted in a payout ratio far above REIT norms, which, without financial improvement over the next few quarters, could result in a dividend cut in 2022 or 2023. The company has never cut dividends, so this will likely be avoided for as long as possible.
While the short-term outlook is a bit grim for American Campus Communities, there is hope: Student housing provides an essential service. While the company is experiencing temporary financial challenges, these setbacks won't be around forever. There are several companies, including Moderna (NASDAQ: MRNA) and Pfizer (NYSE: PFE), working hard to create coronavirus vaccines, which, at the time of this writing, are expected to be released in late spring or early summer of 2021.
This vaccine would greatly help the company maintain normal operations and allow it to focus on future developments, which include new acquisitions and developments, increased recurring fee structures, and adapting and modernizing current properties to reflect change in safety, health, and tenant preferences in a post-coronavirus era.