Last week, American Campus Communities (ACC) reported financial results for the quarter ended Sept. 30, 2016. Sandler O'Neill said the REIT beat expectations, driven by strong NOI:
Occupancy outperformance was helped by 790bps improvement in [the] <95% occupied bucket of assets. Finally, development program continues with 2 more ACE deals commenced.
Here's more from the release:
We are pleased with our performance this quarter, which included same store NOI growth of 5.0 percent and the successful completion of our Fall 2016 lease-up, positioning us for the opportunity to produce strong NOI growth moving into 2017.
Reported net income attributable to ACC of $9.6 million or $0.07 per fully diluted share, versus $1.9 million or $0.01 per fully diluted share in the third quarter 2015.
Increased quarterly FFOM per share by 4.7 percent to $0.45 per fully diluted share or $60.4 million, versus $0.43 per fully diluted share or $48.7 million for the third quarter prior year.
Increased same store wholly-owned net operating income ("NOI") by 5.0 percent over the third quarter 2015 with revenues increasing 3.9 percent and operating expenses increasing 3.0 percent.
Achieved same store wholly-owned occupancy of 97.4 percent as of September 30, 2016 compared to 97.0 percent for the same date prior year, with an average rental rate increase of 3.5 percent. Same store properties exclude assets classified as held for sale.
Delivered seven new owned development projects containing 3,191 beds into service for the 2016-2017 academic year totaling $314.9 million in development cost.
Executed a purchase and sale agreement for $508 million for the disposition of a 19-property non-core portfolio of assets containing 12,083 beds with closing anticipated to occur in the fourth quarter, subject to various contingencies and closing conditions.
Commenced construction on two on-campus American Campus Equity (ACE®) developments, one in partnership with Virginia Commonwealth University and a second phase with Butler University. The living-learning communities total 2,172 beds scheduled for delivery in Fall 2018 and represent a total development cost of $134.6 million.
Acquired University Crossings - Charlotte, an infill community located adjacent to the entrance of the University of North Carolina at Charlotte, and subsequent to quarter end, acquired U Point, a community located in a prime location pedestrian to Syracuse University. The properties are located an average of less than one-tenth of a mile from their respective campuses and offer operational efficiencies by joining existing ACC properties in those markets.
Awarded the right to begin pre-development services for a proposed third-party development project on the campus of Northern Kentucky University.
"We are pleased with our performance this quarter, which included same store NOI growth of 5.0 percent and the successful completion of our Fall 2016 lease-up, positioning us for the opportunity to produce strong NOI growth moving into 2017," said Bill Bayless, American Campus CEO. "The sector continues to experience tailwinds with industry participants reporting another successful lease-up, especially with regard to core pedestrian assets, at the recent National Multifamily Housing Council Student Housing Conference, and Axiometrics is forecasting limited new supply in the coming year. With these robust underlying fundamentals, we are currently targeting rental revenue growth for the 2017-2018 academic year in the range of 2.7 to 4.2 percent through a combination of occupancy and rental rate growth."
Third Quarter Operating Results
Revenue for the 2016 third quarter totaled $196.4 million, an 8.6 percent increase from $180.8 million in the third quarter 2015, and operating income for the quarter increased $10.7 million or 57.8 percent over the prior year third quarter. The increases were primarily due to increased occupancy and rental rates for the 2016-2017 academic year and growth associated with recently completed development deliveries. Net income for the 2016 third quarter totaled $9.6 million, or $0.07 per fully diluted share, compared with net income of $1.9 million, or $0.01 per fully diluted share, for the same quarter in 2015. FFO for the 2016 third quarter totaled $61.1 million, or $0.46 per fully diluted share, as compared to $48.6 million, or $0.42 per fully diluted share for the same quarter in 2015. FFOM for the 2016 third quarter was $60.4 million, or $0.45 per fully diluted share as compared to $48.7 million, or $0.43 per fully diluted share for the same quarter in 2015. A reconciliation of FFO and FFOM to net income is provided in Table 3.
NOI for same store wholly-owned properties was $65.9 million in the quarter, an increase of 5.0 percent over $62.8 million in the 2015 third quarter. Same store wholly-owned property revenues increased by 3.9 percent over the 2015 third quarter due primarily to an increase in occupancy and average rental rates for the 2016-2017 academic year. Same store wholly-owned property operating expenses increased by 3.0 percent over the prior year quarter. NOI for the total wholly-owned portfolio increased 15.1 percent to $85.9 million for the quarter from $74.6 million in the comparable period of 2015. A reconciliation of same store NOI to total NOI is provided in Table 4.
During the quarter, the company completed construction and delivered $314.9 million of owned development assets into service. The company also progressed with construction of its $737.7 million owned development pipeline with expected delivery in Fall 2017 and Fall 2018. These recently completed and under construction developments are all core Class A assets located on campus or pedestrian to campus in their respective markets and remain on track to meet their collective targeted stabilized development yield in the range of 6.5 - 7.0 percent.
As of September 30, 2016, the Fall 2016 development deliveries were 90.9 percent occupied. When excluding Merwick Stanworth Phase II, a community which will serve Princeton University faculty and staff members and is expected to stabilize in a manner consistent with a multi-family property during the first academic year, the company’s Fall 2016 development deliveries were 97.4 percent occupied.
American Campus Equity (ACE)
The company commenced construction on a 1,524-bed modern student residence hall located in the center of the Virginia Commonwealth University campus. The $95.7 million living-learning community will permanently replace 857 beds at Gladding Residence Centers I and II. Upon delivery in Fall 2018, the community will provide residents with academically oriented modern on-campus accommodations including approximately 12,000 square feet of academic success space situated in 44 study rooms and social lounges in addition to state-of-the-art ground-floor amenity space including a multimedia center and community fitness center.
Subsequent to quarter end, the company commenced construction on a 648-bed modern student residence hall on the campus of Butler University which is slated for delivery in Fall 2018. The $38.9 million second phase community will be included in the University’s three-year housing requirement and permanently replaces 450 beds at Schwitzer Hall. The living-learning community, which has been designed to achieve LEED Silver certification, features over 12,000 square feet of amenity and common space including social and recreational lounges, study facilities and a fitness room.
In August, the company acquired University Crossings - Charlotte, a 546-bed infill property located directly across from the main entrance to the University of North Carolina at Charlotte. The community initially opened for occupancy in Fall 2014 and joins two pedestrian ACC properties in the market. Additionally, subsequent to quarter end, the company acquired U Point, a 163-bed property which opened for occupancy in August 2016 and is located in a prime downtown location pedestrian to Syracuse University and in close proximity to our existing Park Point asset.
Totaling $63.1 million, these core acquisitions offer the potential for operational efficiencies by expanding the company’s presence in existing markets, and in the case of U Point, offers an unusual value creation opportunity resulting from an academic year 2016 opening occupancy of only 85 percent at a significant rental rate discount to other comparable properties in the market despite superior floor plans and a premium amenity package in a prime location.
After total investment of $3.2 million of upfront capital improvements, the acquisitions target a year-one cap rate of 5.2 percent nominal and 4.9 percent economic with stabilized third year cap rates targeting 6.8 percent nominal and 6.4 percent economic reflecting the significant upside potential. In addition, multiple property market efficiencies are expected to generate additional yields of 25 to 50 basis points above the going-in cap rates.
The company has entered into a purchase and sale agreement for the disposition of a non-core portfolio of 19 assets containing 12,083 beds for $508 million which is anticipated to close during the fourth quarter. The transaction is subject to the satisfaction of various contingencies and closing conditions and therefore no assurance can be given that the transaction will close on these terms or at all. The non-core portfolio averages 16 years old and consists almost entirely of assets located non-pedestrian to campus at an average distance of 1.6 miles.
The company’s post-sale portfolio is located at a median distance to campus of only 0.1 miles. The transaction is expected to include the prepayment of $197.7 million of secured mortgage debt and to represent an average economic cap rate of 6.1 percent based on in-place rental revenue, escalated trailing-12 operating expenses and historical average capital expenditures.
Capital Recycling Summary
The company previously announced its intent to strategically target its non-core assets for disposition during 2016, representing as much as $600 million in total sales. As part of these efforts, the company completed the sale of two non-core properties during the first quarter, and as noted above, expects to complete the disposition of an additional 19 non-core assets during the fourth quarter, cumulatively totaling approximately $582 million. The company continues to market two remaining non-core assets with a potential sale occurring in early 2017.
During the quarter, the company completed, delivered and commenced management of The Nest, a 440-bed third-party development project on the campus of Northeastern Illinois University.
During the quarter, the company was awarded the right to begin pre-development services for a proposed third-party on-campus development project at Northern Kentucky University. The full scope, fees and construction period have not been finalized.
At-The-Market (ATM) Share Offering Program
During the quarter, the company sold 1.2 million shares of common stock under the ATM program at a weighted average price of $50.98 per share for net proceeds of approximately $62.4 million. Subsequent to quarter end, the company sold an additional 0.3 million shares of common stock at a weighted average price of $51.51 per share for net proceeds of approximately $12.7 million. The proceeds were primarily used to match fund the $63.1 million in previously mentioned acquisitions and to maintain capacity for the company’s development pipeline. Total net proceeds of $75.1 million have been raised under the ATM program in 2016 at a weighted average price of $51.07, leaving approximately $425 million of capacity under the current program.
The company is tightening its 2016 outlook primarily to reflect management’s updated expectations with regard to the expected timing of non-core dispositions, the results of the Fall 2016 lease-up, and the financial results achieved through the third quarter of 2016. Based upon these and other factors, management anticipates that 2016 FFO will be in the range of $2.29 to $2.33 and FFOM will be in the range of $2.23 to $2.27 per fully diluted share, respectively. For additional details regarding the company’s updated 2016 outlook, please see pages 16-17 of the Supplemental Analyst Package 3Q 2016.
All guidance is based on the current expectations and judgment of the company's management team.
A reconciliation of the range provided for projected net income to projected FFO and FFOM for the fiscal year ending December 31, 2016 is included in Table 5.