A student housing REIT named American Campus Communities has experienced a recent fall in its funds from operations (FFO) per share, which is basically the cash flow from its operations calculated by adding both amortization and depreciation back to its earnings. As a result, it should come as no surprise to learn that some of its investors have become concerned about its dividends even though it has been paying either similar or higher dividends for 11 years straight now, which is an impressive record that most REITs cannot match.
On the surface, it would seem that these investors are correct to be concerned about American Campus; however, the company is experiencing a period of significant appreciation, which can be seen through its metrics. Industry wise, student housing has seen a falling capitalization rate and a vanishing premium versus multifamily residences, which are significant on their own, but become much more when taken in at the same time.
For starters, its adjusted funds from operations (AFFO) multiple is closing in on 20x, which suggests that it is one more in a long list of overvalued residential REITs. Furthermore, it has had a below-average dividend yield of 3.4%.
With that said, not all is lost, particularly since American Campus seems to have been putting its resources to excellent use in preparing for the future. For example, it has been selling older student housing that are situated further from the campuses in preference for focusing on newer and more convenient student housing, which is obviously more attractive from the customer’s point of view. Similarly, it has been using the cash raised from the recent issuance of 18 million shares to pay down its outstanding debt, so much so that its ratio of net debt to EBITDA has fallen from 7.4x to 5.6x, which is so impressive that S&P has upgraded its credit rating from BBB- to a much more respectable BBB.
Although it is not guaranteed that American Campus will prosper in the future, their moves are nonetheless encouraging, particularly since the student housing market still retains enormous potential. After all, the successful management of student housing needs specialized expertise and experience from specialist REITs such as American Campus, meaning that investors are more interested in entrusting their investments to them than banking on new ventures. Combined with the fact that the student housing market is enormous as well as the fact that the REIT should be more than capable of covering its expected dividends (payout ratio is 58%), there are no signs that American Campus plans to break its streak anytime soon.
Source:American Campus Communities, I(NYSE:ACC)
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