Luxury College Housing: More Than Just an Outrage to Parents, It’s an Investment
Any high school senior who has visited college campuses recently knows that student housing, at least beyond the freshman year, doesn’t have to be his mother’s dorm room. These days, university-sanctioned apartment buildings with private rooms, wide-screen televisions and resort-style swimming pools house tens of thousands of students who talked their parents into paying for them.
Parents who come away from these tours worrying that college costs will suck their bank accounts even drier than previously feared might consider investing in the companies that build and maintain these grand dorms. Clearly, someone is making money on this. Some are making money for shareholders too.
Lately, it’s American Campus Communities (ACC) that’s profiting most from college housing. ACC, a REIT, and as such required to pay out 90% of its net income to investors, also has produced total shareholder returns in the past 12 months topping 32%. American Campus Communities' market cap has risen above $2.5 billion.
YCharts gives ACC good scores for fundamentals but puts the shares as moderately overpriced, largely based on the company’s recent revenue figures. That may change once the 13 projects it has under construction start taking rent. Two of those open up this quarter.
American Campus’s $2.4 billion in college housing assets makes it the largest of the college housing REITs and with its 2004 IPO, the first to go public. Like competitors Education Realty Trust (EDR) and Campus Crest Communities (CCG), it develops apartment buildings on or adjacent to college campuses that house college students exclusively. The company replaces the college as matchmaker for roommates and rent collector, and colleges themselves often are partners in the developments.
A typical apartment includes a private bedroom and bathroom for each renter in a suite surrounding a large kitchen and living room. They tend to be decked out with modern furniture, and many developments have the amenities of resort hotels; think beach volleyball courts and spas.
Demographics for this industry are good, as boomers will be sending their kids to college in record-setting numbers through 2015. Schools who feel they need to offer more than the loft bed and shower down the hall to remain competitive often are happy to exchange the income from a new development to a third party willing to shoulder construction costs.
American Campus developments run about 91% full at the moment, and last month the company increased its guidance for 2011 income. It pre-leased more than 95% of its rooms for the upcoming school year and raised rents about 3% overall.
Education Realty, American Campus’s biggest competitor, also reported increasing rents this year but only an 85% pre-lease rate. Ignoring for now the REIT preference for funds from operations figures (an argument for another day), basic earnings per share data show diverging fortunes for these two companies, despite roughly equivalent shareholder returns so far this year.
American Campus has about $48 million in cash on hand, as well as positive cash flow. Despite a big project list, its debt level is better than ever.
The risk for American Campus investors now is that a tougher economy will cause more parents to balk at the extra cost of posh accommodations. So far, however, plenty of parents are accepting the higher rent as just another piece of the already gargantuan cost of college. Tuition may be $50,000 a year, but keeping the daughter away from boy-packed dorms or gritty apartments? For some, that will always be priceless.
Filed under: Company Analysis