by Lawrence Meyers | November 11, 2013 12:01 pm
When I was in college, a few landlords owned the majority of off-campus housing. They were all generally reviled, and treated the student tenants like the slugs we were because demand vastly outstripped supply.
I remember this being my first lesson in real-world economics, because I knew they were probably making a fortune on real estate. They had a captive, repeat customer. What could be better?
It took a long time, but a few companies have figured out that the student housing model is the closest thing out there to Starbucks (SBUX). Every year, landlords are guaranteed to have most of their student housing rooms filled. Those tenants are likely to make good on their rent, because if the kids have the money to even get to college, they likely have the funds to stay there. If someone does default, someone else is likely to fill that space in short order.
Bottom line: This is a great cash-on-cash business, provided the property is obtained at a reasonable price, the mortgage isn’t too onerous, and the kids don’t trash the place to the point where capex improvements such you dry.
American Campus Communities (ACC) may be on to something. The $3.65 billion REIT has 160 properties with almost 100,000 beds in 32,000 units, spread across on- and off-campus housing across several states. It also handles management and leasing services for 27 properties, encompassing 22,500 beds in 9,000 units. And from what I can see, these are nice, upscale properties that have a lot more amenities than the crappy places I lived in.
The company has been growing in very solid fashion. FY08 generated $218 million in revenue that resulted in a $9 million operating loss. By FY12, revenue has grown to $491 million and a $57 million operating profit. Funds From Operations — an important figure when it comes to dividends — has increased almost four-fold over this period, from $45 million to $168 million. Much of this FFO has been paid out as dividends, and the stock’s yield currently sits at 4.3%.
During that same period, the portfolio increased in value from $2.18 billion to $5.12 billion. These assets began with $1.1 billion in secured debt and $115 million in term loans, and yet only carried $1.5 billion in secured debt and $712 million in term loans by the end of FY12. Thus, the company basically takes on leverage to buy properties, which generate increasing amounts of FFO for dividend payments. It has also issued equity during the period.
With revenue, net income, and FFO all trending solidly in the right direction, including into FY13, I see the company as being on very sound financial footing. I believe the dividend is sustainable, and I like the overall secular trend.
If I had any concerns, it might be the backlash that is apparently brewing against sending kids to college. Tuition has gone through the roof, and many parents are questioning the necessity of a college education. Overall enrollment could drop over time. In the near-term, we’ve seen community college enrollment explode. If kids are living at home, that doesn’t bode well for the ACC. For the time being, however, this trend does not appear to be impacting the company.
Other stocks to look at in the sector include competitors like Education Realty Trust (EDR) which carries less leverage and pays a 4.8% yield. Campus Crest Communities (CCG) pays a 6.6% yield, and also has a Preferred Series A with pays about the same.
Lawrence Meyers owns shares of CCG Pref. A.
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