Steady Occupancy

Since going public in 2004, after starting off in 1993 as a developer and manager of student housing, American Campus Communities (ACC) has grown rapidly, today boasting an enterprise value just shy of $7 billion. Even though student housing falls under the multifamily umbrella, ACC hasn’t seen the sort of swings in occupancy and rents associated with multifamily properties. The company has seen steady occupancy—in the range of 96 to 98 percent—at its carefully chosen locations in the last 10 years, even during the recession. For this year’s fall season too, the company is ahead on its lease-up goals, says Bill Bayless, CEO of the Austin-based company. Bayless recently talked to MHN Contributing Editor Poonkulali Thangavelu about ACC’s strategies.

Is this a good time to buy, sell or hold student housing?

Because we are not a mature sector, student housing is still very much in the ramp-up mode. And when you look at modern student housing products as a percentage of the enrollments in the markets that we do business, the supply equals only about 21 percent of the total enrollment. Because of that modernization taking place, there is opportunity for plenty of people to develop and sell to companies like American Campus. And so buying, selling and holding are taking place across the board, with great opportunity for everybody on all sides of those equations.

In speaking with the brokers that serve the industry, they expect there to be sales packages between now and the end of
the year, from all of the companies in student housing, probably in the area of
$2 billion to $3 billion for trades of acquisitions and dispositions.

What are your investment and development strategies in the current market? 

We’re focused on owning student-housing real estate across the nation at what we refer to as tier-one flagship schools. Every state has those four or five institutions that are the premier institutions that every student prefers to go to and have a heritage of a residential campus. The thing that we are focused on as an investment strategy is how do we enter that market at the lowest cost base possible, acquiring or developing assets that have characteristics that will give us the greatest advantage to drive their operating income. There are three ways that we have of entering the market: through acquisitions, if we can buy cheaper than we can develop; through development, which is the opposite, if we can develop cheaper than we can buy; and we also see if there is an opportunity to be in partnership with the university. And what we focus on is three things—proximity to campus, interest in our product and location.

We may perhaps be able to buy cheaper in a market than build, but if we feel that we can build a unique competitive product that will have a higher growth, then we may develop. Our strategy has been consistent for the last 10 years.

What are your current projects under development and what are you selling?

First talking about dispositions, we have an active disposition program where each and every year historically, and this year also, we’ll sell between $100 million to $200 million of our assets. And when we’re disposing of those assets, it is typically for one of two reasons. When we buy larger portfolios, in many cases there will be a small percentage of those properties that don’t meet our long-term investment criteria. And so, on an ongoing basis, we will sell those properties and reinvest that capital into core, pedestrian assets closer to campus. That typically drives our disposition strategy. The other area is that if we are entering into an on-campus ownership with a college or university, we may sell our private off-campus assets so that we don’t have a conflict of interest.

Turning to development, this fall we are delivering about $262 million in development. We also have under construction another $355 million for fall of 2015. So we have about $500 million in development. One of the great properties we have under development is a property coming online this year in Orlando at the University of Central Florida. It’s called the “Plaza on University.” It’s a $112 million development that includes about 65,000 square feet of retail and 1,300 student residences above it. And it’s really a poster child for the modernization of student housing. It is immediately across the street from the university’s main gate, the closest off-campus property to the campus. It is already full for its inaugural opening this fall. It is a vibrant community where the students not only have an environment where they can study and relax, but also have all of the vendors and restaurants and services they need right below them.

Could you tell us about your ACE program and how it works?

Colleges and universities were at the height of their capital constraints in the economic downturn of 2008 and 2009. And so we’ve developed a program where colleges and universities can rely upon American Campus and our balance sheet, and more importantly our core competency and our consumer understanding, to privately own on-campus student housing.

Where we pioneered this project is Arizona State University, in conjunction with President Michael Crow. At Arizona State, American Campus privately owns 5,000 beds on campus, more than $350 million of investment on our part. The university leased us the land for 85 years and then we privately develop, own and manage that housing in concert with the university. Typically we can deliver the products on campus for 50 to 75 cents on the dollar of what it would cost the university to do themselves. And so the students have lower rent than they do in the off-campus competitive properties, no taxpayer dollars are used, and the university actually gets cash flow in the form of ground rent. It’s one of the safest investments we can make given our premier location on campus.

How do you go about financing
your projects?

We have been moving to an unsecured balance sheet, versus property-level debt, to give us greater flexibility and also ensure that we are being good stewards of our balance sheet. We have assumed about 100 loans from properties that we have bought. As that debt has rolled off, we have been utilizing unsecured debt. In June we did a $400 million, 10-year corporate bond; the coupon was about 4.16 percent. With that said, the sector as a whole is very well served by the entire debt community.

Are demographics favorable for student housing going forward?

They absolutely are. You will read headlines related to “Concerns over Enrollment Decreases” or “Student Loans and the Value of Education.” When you read those headlines, you have to remember that they are taking data related to 4,000 universities and colleges of all types—for-profit, not-for-profit, online, community colleges. You can’t take those headlines and apply them to the top 100 residential colleges where we do business.

While there’s a dip in the population of 18 to 22 year olds, a higher percentage of that group continues to go to college. If there is ever a significant decline in the amount of students attending college, where you will see the impact is in community colleges, your small tertiary markets. And that’s just not where we do business.