Not Your Typical College Dorm

Among the more memorable dwellings I lived in while attending college was a duplex with a glass window embedded in the back door. The window had a tendency to shatter anytime we would host festivities. Ultimately, the situation was rectified by installing Plexiglas. My roommates and I thought we had it made at that "estate." However, I will have to concede that some of the housing options currently offered to college students by American Campus Communities (NYSE: ACC  ) might have topped us by a little bit. After visiting the company's website, I've got to say that not all of their communities are what one tends to see when visualizing a typical college dormitory. Many are more reminiscent of paradise resorts.

The company's current featured community, Callaway Villas, advertises a movie theater, sand volleyball court, outdoor swimming pool, hot tub, and fitness center among its plush accommodations for students attending Texas A&M University in College Station, Texas. Having attended college in Buffalo, N.Y., I could have used the hot tub, although the sand volleyball court might have looked out of place.

American Campus Communities is a real estate investment trust headquartered in Austin, Texas, that is engaged in the acquisition, leasing, and management of student housing properties. The company owns 38 communities in its portfolio and became the first publicly traded student housing REIT in 2004. Since this REIT went public, shareholders have been met with nothing but success. The stock appreciated by 14% in 2006 alone. It also offers investors a Foolish 4.7% dividend yield.

The pros
From an operations standpoint, 2006 was a solid year for the company. For the nine months ended Sept. 30, 2006, the company saw its revenues increase by 48% and operating income increase by 63% versus the comparable time period in 2005. The increases are attributable to the acquisition and completion of new properties. The company has remained proactive on this front, as it just recently began a $138 million construction project for a new student housing development at Arizona State University.

As you might imagine, occupancy has not been a problem for this REIT, given the overwhelming demand for student housing in the United States. The average occupancy rate has remained steady at 96%. Students turning to apartment complexes not affiliated with their schools in the major metropolitan markets will not find much relief in terms of vacancies or price. For example, in their most recent earning releases, it was reported that the apartment communities maintained by traditional apartment REITs such as AvalonBay Communities (NYSE: AVB  ) , Apartment Investment & Management (NYSE: AIV  ) , and Archstone-Smith Trust (NYSE: ASN  ) maintained total average occupancy rates of 97%, 94%, and 96% respectively.

The risk
One of the primary risks associated with the stock is the debt taken on by the company. American Campus Communities has a debt-to-equity ratio of 1.33. This ratio is not that unreasonable. However, the additional debt taken on to finance the acquisition of new properties bumped up the company's interest expense by 56% for the nine months ended Sept. 30. This increase ultimately caused the company to just barely miss breaking even in terms of net income for this time period, despite its solid operating performance.

The fact that the debt has been used to finance construction and acquisitions is positive, at least from the standpoint that it will provide for future growth. One just needs to remain watchful that the debt does not rise to a level that overwhelms the company's cash flow. Presently this does not appear to be an issue. Proceeds from equity offerings in 2005 and 2006, coupled with cash flows from operating activities, have been more than sufficient to cover the company's debt payments and investing activities.

The verdict
At first glance, an investment in American Campus Communities might appear to be a bit speculative, given that the company is currently in the red. However, I think the company's continued expansion and ability to grow its revenues will ultimately push it into the black. In the meantime, investors will be rewarded with the REIT's healthy dividend yield. Clearly, the demand for this company's business will not be subsiding anytime soon. Patience with this youthful company should be rewarded over the long run. And were I a shareholder, my vote would be that the annual shareholders' meeting take place at the Callaway Villas.

For further luxurious Foolishness:

Foolanthropy is celebrating its 10th year! To learn more about our five Foolish charities or to make a donation, visit www.foolanthropy.com.

Looking for other high dividend-yield stocks to pad your portfolio's returns? Motley Fool senior analyst James Early will show you the way with a free trial of our Income Investor newsletter. Income Investor outperforms the market by 8%.

Fool contributor Billy Fisher does not own shares of any of the companies mentioned. The Fool's disclosure policy thinks that fat, drunk, and stupid is no way to go through life, son.


Read/Post Comments (0) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 519475, ~/Articles/ArticleHandler.aspx, 7/23/2014 5:02:27 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement