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American Campus Communities (NYSE: ACC) is the only pure-play real estate investment trust, or REIT, that specializes in student housing. The company pioneered the off-campus student housing industry in the mid-1990s and has evolved into a portfolio of 166 properties, some of which are off-campus housing communities and others are physically located on the campuses of major universities. American Campus Communities grows by acquiring properties but prefers to develop its own communities from the ground up.
The best part of the company's business model is that its product essentially sells itself. American Campus Communities targets universities where the average on-campus housing facility is more than 50 years old and lacks modern, student-focused amenities and infrastructure.
What's more, American Campus Communities properties' is cheaper than the inferior options offered by the schools. In fact, the average rent in one of the company's housing units is $767 per month for a private bedroom, as compared with $757 for a shared room or $966 for a private room on campus. Approximately 61% of American Campus Communities units are below the median rent level for their market and nearly all are closer to campus than the competition.
Short-term uncertainty is weighing on the company
Obviously the COVID-19 pandemic has taken a toll on American Campus Communities' stock price. Although it has rebounded significantly since the March lows, the share price is still down 22% in 2020.
The problem is uncertainty. When the outbreak worsened, virtually all colleges and universities closed their doors. But for American Campus Communities, the million-dollar question is whether they'll be open in the fall. In a nutshell, leasing up its properties by the start of the fall semester can make or break the company's profitability, and widespread campus closures could be devastating.
The good news is that most of the universities where American Campus Communities has properties are planning to open. Just 5% of schools have announced that they plan to operate online-only in the fall, while 76% have announced plans for at least some level of in-person instruction. The other 19% are considering their options or are waiting to decide what to do.
So far, 82.6% of American Campus Communities' units are pre-leased for the fall. This is about 2 percentage points lower than the same time last year but isn't exactly a cause for alarm. American Campus Communities typically rents about 97.5% of its units to start the fall semester, and if this were to drop to 95% or even slightly less for the 2020-21 school year, it certainly wouldn't be devastating. Plus, American Campus Communities has a solid balance sheet, an investment-grade credit rating, and $567 million in liquidity to make it through the tough times if it needs it.
Having said all that, it's important to realize that the COVID-19 pandemic isn't over, and with nearly 20% of the company's universities still undecided on what to do in the fall, there is still quite a bit of uncertainty at this point.
Clear long-term growth trends
There's a clear trend toward purpose-built student housing in the U.S. If you drive through any major university campus in the United States, you'll likely see several student housing communities under construction or recently completed.
Currently, just 23% of the housing supply in American Campus Communities' markets is purpose-based student housing, and enrollment continues to steadily grow. As I mentioned, the company's average property has been 97.5% occupied at the start of the fall semester, and per-unit rent has steadily risen throughout the company's history.
To sum it up, while nobody has a crystal ball, I'd be shocked if American Campus Communities isn't a significantly larger company a decade from now. Despite the short-term headwinds, the reality is that college students simply don't want to live in the dorms when there is a superior cost-effective option that isn't much further from their classes. And as the industry's leader, American Campus Communities is well-positioned to take advantage.
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