American Campus Communities, Inc. (ACC) was founded 23 years ago in Austin, Texas. While specializing in student housing and developments, ACC has grown to be one of the largest providers of student housing in the United States. American Campus Communities is a self-managed equity Real Estate Investment Trust (REIT), and in 2004 became the first publicly traded student housing REIT. ACC’s revenues are generated through leasehold agreements usually for the duration of one year per contract, with exceptions for one-semester leases. Total revenues for 2015 were approximately $753 million, a 2.7 percent growth from the previous year. By the use of strategic planning and research, the company is able to locate and acquire existing properties that can be acquired at a discount as well as partnering with universities. Partnerships with universities around the country provide ACC with great room for growth while also providing the university with the relief of not having to take on the debt of a new development to provide housing for students. A newly proposed project in Oxford, MS will join the nearly two-hundred other properties developed, owned, and managed by ACC; as well as new properties at Florida State University, Auburn University, and the University of Oregon, amongst many others. The number one focus of American Campus Communities is to provide the student residents of their communities with top notch housing and amenities at a reasonable price.
The large number of existing student housing developments maintains a steady supply for the increasing demand for such properties. One way that ACC takes advantage of the large number of competitors is by purchasing existing student housing properties. This allows ACC to eliminate competition and increase revenues. Competition for American Campus Communities is not limited strictly to the student housing market. With several other real estate investment trusts on the market, it can be difficult for ACC to exceed the market rate of return and maintain an edge on the competition. The top performers in American Campus Communities’ industry are: Avalon Bay Communities (AVB), Equity Residential (EQR), and Essex Property Trust (ESS). The current ratio for American Campus Communities is approximately 0.88. This liquidity ratio of current assets to current liabilities measures how well ACC can cover existing obligations with assets on hand. ACC’s current ratio is not much different than that of the competition. However, with a current ratio of less than 1, ACC should look into decreasing its outstanding liabilities to reduce the risk of liquidity issues.
The ratio of net income to total assets, or return on assets, is 1.93%. This number is somewhat low for the industry, but this difference can partially be attributed to the large number of new projects and their high initial costs. This ratio can be improved by cutting expenses and/or increasing the monthly rent of their properties.
The debt-to-equity ratio describes the total liabilities and how they relate to the total shareholder’s equity. In the case of American Campus Communities, the debt-to-equity ratio is 1.175. This ratio is on par with some of ACC’s competitors, though it is worth noting that the highest performing competitor of ACC operated with a debt-to-equity ratio of just 0.66. If ACC can decrease its outstanding debt or increase stockholder’s equity, this ratio will be improved.
American Campus Communities, Inc. is subject to both systematic and non-systematic risks. The risks associated with such a large company are arguably endless, but some of the most important risks are identifiable.
One of the most important risks that American Campus Communities faces is the risk of changes in university admissions. Changes in admissions policy and housing policy can have a significant effect on student housing properties. This is evident when you look at the University of Mississippi, a school that requires freshman students to live on-campus. This reduces the demand for off-campus student housing and if not accounted for early, can result in an oversupply of units and higher vacancy losses. It is necessary to consider the future of universities and their housing policies when planning a student housing development.
Another of the most important risks that American Campus Communities must deal with is liquidity risk. As with any real estate, the risk of having illiquid assets can have detrimental effects on an investment. It is understood that even in a bull market, real estate is one of the most illiquid assets that can be owned. When the market is less desirable, demand decreases while supply either increases or stays the same, resulting in some tough decisions for management regarding whether to hold the property or to take a significant loss due to the asset being illiquid. If the property is able to be sold quickly in a down market, it will usually result in a loss to the seller. Liquidity risk can be managed by analyzing and forecasting the company’s financial statements. See quotation #1 in appendix.
One more risk that affects American Campus Communities is the interest rate risk, not only in the market, but also the risk tied to a large adjustable rate debt that will be subject to increases in interest rates. This is stated as the primary risk for ACC in their annual report due to the possibility of higher interest rates on debt causing unfavorable financing terms that would result in a negative effect on future growth and earnings. It is necessary to pay attention to treasury rates and the effect that they have on returns. With a large outstanding debt, and the looming possibility of interest rate hikes, American Campus Communities should look into refinancing the outstanding debt or paying off more of the principle to reduce the liability. See graph #1 in appendix.
A risk that ACC faces that can have significant long-term effects on the company is the risk of holding land. The value of raw land fluctuates with market conditions, which can lead to losses on land value that may not be recoverable. This can be described as the opportunity cost resulting from holding raw land. Raw land is undeveloped property that does not yet have improvements such as infrastructure. This risk can be managed by holding less raw land to reduce the risk of incurring losses due to a decrease in value; this would, however, mean that ACC may miss out on opportunities if someone else purchases the raw land. The risk of holding land is described in ACC’s annual report: “Real estate markets are highly uncertain and, as a result, the value of undeveloped land has fluctuated significantly and may continue to fluctuate as a result of changing market conditions” (American Campus Communities, Inc., 10).
Appendix
Graph #1 (Harper)
Quotation #1
“In order to maintain our status as a REIT, the Internal Revenue Code imposes restrictions on our ability to sell properties held fewer than two years, which may cause us to incur losses thereby reducing our cash flows and adversely impacting distributions to equity holders.” (American Campus Communities, Inc., 9)
Works Cited
American Campus Communities, Inc. (2015). Annual Report 2015. Retrieved from: https://www.sec.gov/Archives/edgar/data/1283630/000128363016000038/acc2015123110k.htm#s630AA8F04B995DFD8355A4925C44A0F7
Harper, D. (2004, September). The Impact of Interest Rates on Real Estate Investment Trusts. Retrieve