Student Housing REITs: Steeper Share Price Drop

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American Campus Communities (NYSE:ACC) is the largest student housing REIT, exceeding EdR (NYSE:EDR) in market capitalization. With 83 percent of its NOI being generated in a 1/2-mile radius of the campus, the company announced better numbers at the beginning of June than on the same date last year — same-store wholly-owned portfolio was 86.7 vs. 85.8 percent leased, with a 2.9 percent current projected rental rate increase for the current units. However, share price has not been so good during the first half of 2015.

With regard to stock performance within the student housing subgroup, American Campus outperformed EdR and Campus Crest (NYSE:CCG), but as a subgroup it performed below all other residential REITs. In the first half of the year, ACC dropped by 8.9 percent, compared with 14.3 percent for EdR. Such also happened this June, when they dropped by 3.4 and 4.8 percent respectively. Unfortunately, among the 22 residential REITs we follow, those in student housing have not done well. ACC, EdR and CCG occupied the 18th, 20th and 22nd positions in the residential ranking during the first half-year.

The steeper drop in share prices could be interpreted as a market sign towards the historical risk premium. Over the past quarters, student housing risk premiums versus multifamily houses have eroded. Student housing cap rates were once at least 50 basis points above those of the latter, but this appeared not to be the case during Q4 2014 and Q1 2015.

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UBS might be thinking the same way: It has recently downgraded ACC to sell, reducing its share price target from $41 to $35. The share price is currently trading around $38 for a 52-week range between $35.69 and $45.38. Realizing that the stock drop provided a good opportunity to buy back shares, ACC launched an at-the-market equity program of up to $500 million — over 10% of its market capitalization. Today, it looks like the entry point is slightly below the residential REITs. ACC’s price-to-FFO has been 16, as opposed to 18 for EdR and a little below that for the residential REIT median.

risk premium erosion

Source: American Campus Communities, Education Realty Trust, Fast Graphs

Written by Heli Brecailo

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