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Rating Action:

Moody's affirms all ratings of American Campus, stable outlook

21 Aug 2019

New York, August 21, 2019 -- Moody's Investors Service ("Moody's") has affirmed the ratings of American Campus Communities OP PRS LP and American Campus Communities, Inc. (collectively "American Campus" or "ACC"). The outlook remains stable.

The following ratings were affirmed:

Issuer: American Campus Communities OP PRS LP

Senior Unsecured Rating at Baa2

Senior Unsecured Shelf Rating at (P)Baa2

Subordinate Shelf Rating at (P)Baa3

Jr. Subordinate Shelf Rating at (P)Baa3

Outlook, Remains Stable

Issuer: American Campus Communities, Inc.

LT Issuer Rating at Baa2

Preferred Shelf Rating at (P)Baa3

Outlook, Remains Stable

RATINGS RATIONALE

American Campus' ratings reflect its status as the largest and the sole public REIT dedicated to purpose-built, private student housing in the US. Since its formation in 1993 and IPO in 2004, ACC has built a strong franchise and a wide network of long-term partnerships with many large, four-year public and private universities and colleges. With ground-up development as a core strength, the REIT's owned portfolio has grown over nine times to approximately 109,000 beds since 2004, with an additional 9,000 new beds under construction or in the planning/funding stages for delivery between 2019 and 2023. With an average age of less than 12 years, the portfolio is predominantly unencumbered and is mostly located on campus or within half a mile to campus. Moreover, the REIT is benefitting from a favorable operating environment, whereby the sector is highly fragmented with barriers to entry, and rising institutional demand for more modern student residences as the average age of on-campus housing is approximately 50-years old. However, this is partially tempered by new supply in some of ACC's markets as well as certain emerging secular trends and potential mid- to long-term effects from rising student housing unaffordability in some markets, expected changes in the population of college-age bound students, potential changes in federal/state-level funding of higher education, and increasing penetration of online studies in higher education. However, considering the top-tier quality of the university markets targeted by the REIT, these emerging trends may not directly affect ACC, may not have a quantifiable economic effect, or perhaps may serve as a positive benefit to the company. Nevertheless, we will continue to monitor these developments.

For the second quarter and the first six months of the 2019, ACC posted healthy same property net operating income (NOI) growth of 3.5% and 4.3%, over the same period last year due to increased occupancy, higher rental rates, and operating expense control. At second quarter-end 2019, average physical occupancy for the same portfolio rose 220 basis points to 90.6% from 88.4% and EBITDA margins remained in the 50% range. Management has strengthened and maintained broad access to capital and good financial flexibility to meet its near-term capital needs, supported by a large unencumbered asset base at approximately 82% of gross assets and a fixed charge coverage ratio of 3.7x. Furthermore, the REIT has a moderate Funds from Operations (FFO) payout ratio in the mid-70% range, providing dividend protection and permitting the reinvestment of free cash flow for debt repayment and development.

However, the REIT's main challenges are its leverage levels, which are elevated for its rating category and in comparison to Moody's rated multifamily REITs. Other concerns include the risks associated with development, partially mitigated by the company's proven expertise, as well as the releasing of the entire portfolio on an annual basis. With regard to leverage, even prior to the adoption of the new lease standards for operating lease liabilities in the beginning of 2019, to which Moody's adjusts in its debt ratios, ACC's net debt to EBITDA has historically fluctuated on average in the low to mid-7.0x range during periods of rapid expansion and asset culling/asset recycling. The fluctuations in cash flow are largely attributed to the REIT's development pipeline, which has been accretive, and the seasonality of its capital inflows and outflows relative to both the timing and volume of its construction starts as well as the delivery and lease-up of its completed projects. These projects are delivered for occupancy prior to start of the Fall academic term each year.

While ACC applies a slightly different approach to its leverage calculations, on a Moody's adjusted basis, the REIT's total debt plus preferred stock relative to its gross assets and TTM net debt to EBITDA were 40% and 7.3x, respectively, as of June 30, 2019, compared to 35% and 6.4x for the same six-month period last year. ACC's total indebtedness rose 25% to $3.53 billion in the first half of the year due to the recording of $285 million of operating lease obligations on the balance sheet and increased borrowings under the unsecured revolving credit facility. Excluding the lease obligations, debt to gross assets and net debt to EBITDA for the same period were 37% and 6.8x. Positively, secured debt stood at less than 10% of gross assets at second-quarter end 2019. Looking forward through 2023, management targets operating with total debt to total asset value and net debt to EBITDA in mid-30% range and 5.5x to 6.3x, respectively, based on the delivery of its announced development pipeline in combination with potential asset sales and new equity funding.

Considering that development is the main catalyst for ACC's growth, our stable ratings outlook incorporate the expectation that the REIT will maintain its disciplined approach towards its growth strategy and funding, while reducing leverage to better absorb its cash flow fluctuations. The rating outlook also entails the expectation that ACC will keep, at the very minimum, its liquidity profile and financial flexibility at current levels.

Upward rating movement for ACC would be difficult in the near-term and would be predicated upon the REIT achieving and maintaining the following criteria on a sustained basis: 1) net debt to EBITDA (Moody's adjusted) below 6.0x; 2) total debt to gross assets in the mid-30% range; 3) unencumbered assets above 80% of gross assets; and 4) fixed charge coverage ratio approaching 4.0x. Additionally, the company must maintain ample liquidity on its committed lines of credit at all times.

Downward rating pressure would result from the following criteria on a sustained basis: 1) net debt to EBITDA above 7.5x (Moody's adjusted); 2) total debt to gross assets approaching 45%; 3) unencumbered assets approaching 65% of gross assets; and 4) fixed charge coverage ratio approaching 3.0x.

The principal methodology used in these ratings was REITs and Other Commercial Real Estate Firms published in September 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Based in Austin, Texas, American Campus Communities, Inc. [NYSE: ACC] is dedicated to the ownership, acquisition, development and management of purpose-built, on-campus and off-campus student housing at large, four-year, public and private, higher education institutions in the US. As of June 30, 2019, the company reported total assets of approximately $7.4 billion and book equity of $3.4 billion.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Juan Acosta
AVP - Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Philip Kibel
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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