American Campus Communities, Inc.
Q4 2020 Earnings Call Transcript

Published: 23 Feb 2021

[Operator:]

Good morning, ladies and gentlemen and thank you for standing by. Welcome to the American Campus Communities, Incorporated 2020 Fourth Quarter and Year End Earnings Conference Call. I would like to remind everyone that this conference is being recorded. And I would now like to turn the conference over to Ryan Dennison, Senior Vice President of Capital Markets and Investor Relations for American Campus Communities. Please go ahead.

[Ryan Dennison:]

Thank you. Good morning and thank you for joining the American Campus Communities' 2020 fourth quarter and year end conference call. The press release is furnished on Form 8-K to provide access to the widest possible audience. In the release, the company has reconciled the non-GAAP financial measures to those directly comparable GAAP measures in accordance with Reg G requirements. Also posted on the company Web site in the Investor Relations section, you will find an earnings materials package, which includes both the press release and the supplemental financial package. We are hosting a live webcast for today's call, which you can access on the Web site with the replay available for 1 month. Our supplemental analyst package and our webcast presentation are one and the same. Webcast slides may be advanced by you to facilitate following along. Management will be making forward-looking statements today as referenced in the disclosure in the press release, in the supplemental financial package and in SEC filings. Management would like to inform you that certain statements made during this conference call, which are not historical facts, may be deemed forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act of 1995. Although the company believes the expectations reflected in any forward-looking statement are based on reasonable assumptions, they are subject to economic risks and uncertainties. The company can provide no assurance that its expectations will be achieved and actual results may vary. Factors and risks that could cause actual results to differ materially from expectations are detailed in the press release and from time-to-time in the company's periodic filings with the SEC. The company undertakes no obligation to advise or update any forward-looking statements to reflect events or circumstances after the date of this release. Having said that, our Chief Executive Officer, Bill Bayless will be providing our opening comments today. He is joined by the following members of senior management for the call. Jennifer Beese, Chief Operating Officer; William Talbot, Chief Investment Officer; Daniel Perry, Chief Financial Officer; Kim Voss, Chief Accounting Officer; and Jamie Wilhelm, our EVP of Public-Private Partnerships. With that, I'll turn the call over to Bill for his remarks. Bill?

[Bill Bayless:]

Thank you, Ryan. Good morning and thank all of you for joining us, as we discuss our Q4 and full year 2020 financial and operating results.

[Operator:]

We will now begin the question-and-answer session. Our first question comes from Derek Johnston with Deutsche Bank.

[Derek Johnston:]

Can you share some deeper thoughts on summer camp ancillary income from camps conferences or other historical tenants? Meaning is 2021 summer, likely to see some rebound in revenue and demand or is this another total washed year similar to 2020, certainly looking for a quarterly comp basis.

[Daniel Perry:]

Yes, hey, Derek, this is Daniel. As you may recall, last year, we talked about typically we're able to generate about $4.5 million in revenue during the summer camps and conferences that we hold at the residence halls that of course are empty during the summer months. It pretty equally splits between Q2 and Q3 and of course, last year, we did not have any summer camps and conference businesses absolve suspended amid the height of the pandemic. Typically, those contracts are signed up throughout this spring semester as we go into the summer. So, we don't have a lot of insight into it yet. But at the midpoint of our expectations, as we thought about the year, it was hard for us to think that would be something that would be back to normal levels. Certainly this year and likely that we wouldn't have much of it. Many of the schools are thinking that, there's the risk that it could impact their ability to get back to normalcy for the fall, which is their primary focus at this point. The summer camps or middle schoolers and high schoolers and so to bring hundreds of kids on to their campus when their primary focus is to return to normalcy as much as possible this fall. They don't want to interrupt that. So, it's hard for us to expect much, we won't have a lot of insight into it until later this semester and so that's our expectations right now.

[Derek Johnston:]

Okay, got it. Thanks. And then the Disney lease up. Can you share some more details on the leasing velocity and future demand expectations? And this is really giving your talks with Disney management. Did they give any details about possible reopening dates? Or their current thinking or did they hire a 2021 intern class that you know of?

[WilliamTalbot:]

Hey, this is William as it relates to the turn of the DCP. We're obviously in constant communication with Disney as it relates to that, it is not our current expectation that that program will return in 2021. But it really, as Bill said in his opening remarks, it really is tied to the expanded capacity of the parks, which obviously Disney is monitoring very closely. And once those parks expand capacity, there is the ability for the DCP program to come on board at much larger volumes in a traditional cast member housing leasing philosophy. So that still in flux, as Bill mentioned in the opening remarks, but something we're constantly in contact with him and optimistic to hopefully see that program return in '22, and then build up quickly thereafter. The second part of your question on the Disney leasing velocity, we're at 88 leases to-date, we've got an additional 11 applications in the process. We've kind of seen a trend of about, right in line of that 50 leases on our trailing 30-day. And so when we talk about that range of 25 to 100 leases volume, we certainly we saw that, here earlier in the year and expect that accelerate. And that also was directly tied to as you see the additional capacity at the parks brings on more cast members working at the parks.

[Operator:]

The next question is from Austin Wurschmidt with KeyBanc.

[Austin Wurschmidt:]

I'm just curious, what you've seen at your properties in terms of how traffic has trended, whether it be in person virtually, or however you track that data. And then also could you share how many May ending leases you backfilled historically within the existing portfolio?

[Bill Bayless:]

Yes, morning Austin, this is Bill, I will handle the first part and kick it over to Daniel for the May ending leasing. As we mentioned in our comments and while online velocities have been good, from Thanksgiving through the end of January, with the extended spring break, we did see a lesser velocity than usual in terms of walk in traffic, which is something that we did fully expect. And also, as we mentioned, once the students came back from that extended spring break, we did indeed see a pickup in velocity more consistent with what you would see in terms of historical interest. Now, obviously, in Texas, the last week, there was a major slowdown in velocity just in this particular state, given the weather conditions. But as we did mention where we really were -- on the last call I put forth, we're really not going to really have the type of indication that we can give in terms of trajectory in making really sound projections until we get through April, May and June, where you had the inversion of the slowdown last year that we expect the acceleration to occur in velocity. And so it will really be more toward the end of the second quarter. Before we have comparable data on there's been enough time passed in stabilizing what was normalized period last year that is currently slower, versus in the April, May and June when we will have an increased velocity over that period of time. So that's where we talk about transitionary, it's going to be a little bit of time, we will throw color into that.

[Daniel Perry:]

And then I'll jump in Austin on the May ending leases. So, and of course, just to make sure everybody's clear that we're talking about May ending leases with regards to our 12-month properties, of course, we have a residence halls that have May ending leases as well, where we're not doing a lot of backfilling. And that's, in many cases where we're doing that summer camp and conference business in a normal environment. But with regard to the 12-month properties, where we do sign to May ending leases, it's typically about 1000 leases per year that are May ending. And we're able to backfill about 50% of that in a normal year, which is about a million dollars in revenue. About two-thirds of that hits Q2 being the May and June months, and then the other third hitting July. So that's really the area where, again, a lot of those leases, like the summer camp and conference business aren't signed until later in the spring semester. And it's hard for us to have a lot of insight into it. But just being still in the middle of COVID, it's hard for us don't have some expectation that there could be some softness there.

[Austin Wurschmidt:]

That's helpful. You mentioned rates have been flattish to slightly up at this point in the year but it seems when not if velocity will accelerate. So how are you thinking about rate growth trending once you see the pace pick up, given what you're seeing, just in terms of applications and admissions data.

[Bill Bayless:]

Yes, it's going to be a delicate balance and something obviously, that we're going to be utilizing our internal systems to manage. There's significant upside, as everyone's aware, in occupancy this year at the 90.3 that we ended up last fall, in terms of however much progress we can make from that point more toward normalized operations. And so, we're certainly going to make sure that under all circumstances, we do not jeopardize velocity to maximize occupancy in terms of being overly aggressive with rate. Also, when it comes to pricing, the one thing that we've been very pleased with throughout last year's lease up with COVID. And this year's lease up is the owners market has been very patient in terms of realizing that the velocity is related to COVID and not supply demand and people been very balanced in terms of their pricing policies. Obviously, that's something that helps create stability that we're referencing in those rental rates. And so, as we move into the period, again, of April, May and June, when we do expect those increased velocities, we will utilize our systems as we always have to maximize the combination of occupancy and rent, being very thoughtful, that our greatest opportunities are indeed in occupancy.

[Austin Wurschmidt:]

And just one quick follow up to that Bill, if I can, in years, where you kind of held back on rate, where have you seen final occupancy range across the portfolio?

[Bill Bayless:]

It wouldn't be a generalization that you could transfer into what's taking place right now. And also in the context of answering that question in a broader portfolio perspective, when you look at what is taking place and the disruption that COVID has caused, it is a market-by-market conditions on the ground, that there may be great variation in terms of how we're implementing those policies. So I don't think there's anything that we can talk about on the broader historical trends of pricing velocity and results that we could translate into this environment this year and draw conclusions.

[Operator:]

The next question is from Neil Malkin with Capital One Securities.

[Neil Malkin:]

It's going to be William for you. You had obviously the Berkeley you were chosen, as you did the ACEs development or under, you expect to start next year? Just wanted to be clear, were you selected to be the developer for the entire 6000 bed master plan? And then, are you -- can you maybe give any details on sort of the updated P3 activity sort of where you are there any breakdown of ACEs versus third-party developed and sort of kind of how you see that playing out maybe over the next couple years?

[WilliamTalbot:]

Yes, for sure. In particular with Cal Berkeley, that phase or that pre-development that we announced this quarter, that was related to our selection as the master developer of up to 6000 beds on their campus, Berkeley does have other housing they're pursuing on their own, namely the People's Park project that, but the 6000 bed master developer, this is really the first project to be moved to pre-development under an ACE structure. And we're actually working with them on a number of other potential housing projects as well. So we're excited to see certainly in this COVID environment, the projects moving forward and seeing that progress and universities really starting to focus in advance their housing. Now that now that they're starting to focus on campus returning to normal. As it relates to the overall P3 activity business, as Bill mentioned in his prepared remarks, we're tracking over 60 current potential opportunities out there, we've really started to see momentum, both in those projects that we had been awarded and pre-development pre-COVID are starting to move forward and see progress where there was a slight pause, and with the procurements and the universities, actively picking up activity to address these housing needs that really -- the weakness in the consumer demand was exasperated in COVID. And we believe the majority of those will be looking to P3 solutions. But it's really too early to tell if that would be an equity, a solution, or a third-party finance type solutions. And again, one of the big benefits we bring to our university partners is, we can offer all those solutions and evaluate all those with them as we go through the process.

[Bill Bayless:]

The only thing I would add to that from a capital allocation perspective is, while there's certainly we believe a greater opportunity in the in the years ahead, obviously, as it relates to ACEs is going to enable us to even be more selective in terms of where we want to invest our equity owned campus with a broader range of opportunities. And we will continue to assess ACE investment the same way we do all investment decisions in terms of making sure that they meet our criteria.

[Neil Malkin:]

Okay. And then just a follow up on that, would you expect then, at schools you're in -- your assets are off campus? Would you expect maybe like over the next like, say one to three years, given the sort of hesitant about the dorms and the shared bathrooms, would you expect to see an up tick in occupancy for your off campus product as maybe kids and parents are shipped away or kind of make choices that are with COVID in mind?

[Bill Bayless:]

That depends on whether or not they have the opportunity to do so. And let me explain what I mean by that. Many universities have housing requirements. And so, obviously, through COVID, they realized that those properties as well, you mentioned, are not conducive from a consumer perspective to what students and parents want in that type of environment. And it made them realize that if indeed, they need to prepare to have more modern products for all situations, now, many schools will go back to their on campus housing requirement where the students won't have a choice, they will have to continue to live in that product for as long as it remains on the campus. And again, that's why we love our ACE transactions and when we build on a campus housing, is that we are covered by those housing guarantees and housing expectations. We mentioned in our comments, Arizona State University, where we have modernized the housing has a first year housing expectation of the students, unless you are commuting from the local community, they expect you to live on campus and the only reason they don't require it is they historically don't have enough beds for the entire first year class. And so that is something on campus that universities will still be able to benefit from, but as well you mentioned, they realized that those antiquated facilities do need to be updated in many cases, and we'll move forward with those activities, where there are open market choices, universities, we could see a small outflow in terms of students living off campus. But as we always talk about with regard to on campus investments that we make, universities really have great advantage in terms of walking up the first year students as they come in, in terms of administering their own processes.

[Neil Malkin:]

Okay, great. And then, the other one for me, is related to the growth 2030, the strategic investment in development acquisitions and the JV partnership side. Anything under contract are in the works maybe, are you waiting for the new board members, and maybe that new allocation committee to sort of get the lowdown on prospect and everything going on before, I guess, when you kind of see that starting to take off.

[Bill Bayless:]

Yes. And certainly we continue to make progress in terms of our selection of partners in that regard. As William said, on the call, it is a slow transactionary environment at the moment. And we believe the bulk of activity will come as it relates to Q4 in terms of when you'll see an increase in acquisition type opportunities. And so certainly, we are advancing those initiatives. And of course, we will always involve the board in those processes. The new capital allocation committee will help us in terms of prioritizing the numerous opportunities that we have before us in the future.

[Operator:]

The next question is from Nick Joseph with Citi.

[Mike Bowman:]

Hey, it's Mike Bowman, here with Nick. So I just want to come back, Bill, on the board. How do you sort of see the interaction relationship with this new capital allocation committee? And help us understand how I get the formalization of this committee compared to what the previous board oversight was and involvement in all of your capital allocation decisions? I guess what has changed between now this formal committee and what you had for, I don't know if there was a certain threshold? I don't know if the whole board wasn't involved in your decisions, and just go through what in fact, this capital allocation committee is going to have oversight of all acquisitions, development, dispositions, equity raises, strategic alternatives, where does their mandate start and end?

[Bill Bayless:]

Yes. Certainly, as you went through the litany of purview that they can have insight into. First of all, historically, the board has always been intimately involved in our capital allocation, decisions, equity raises all of those items, and certainly have had complete influence and control over that. As we move into this capital allocation committee and we're extremely excited about the caliber of the three individuals that are joining the board and the specific capital allocation expertise that they're bringing and also that it's very recent and fresh capital allocation expertise. And then, certainly Craig is a known entity to the real estate industry and highly regarded in terms of all the work that he's done throughout his career and Alison Hill has just exceptional purview into the role that she has played at Prologis and their strategic capital platform and Herman Bulls is the Vice Chair of JLL, certainly intimately involved in terms of the real estate market and capital allocation, specifically in tune to higher education. And so I think we're bringing in some refreshed firepower that really has their fingers on the pulse of the market, in terms of what the opportunities are and how best to approach them. And so that the interaction will continue to be at the board level, as it always has been. However, we're going to take advantage of that expertise. And so that capital allocation committee matter of fact, we're meeting today at 3 o'clock as part of our normal board meetings going in and that groups meeting in advance for a longer extended period of time. And with the again, we're going to have a plethora of opportunities available to us as we go forward giving the emerging market opportunities down the road. And we do have limited capital. And so as we do look at prioritizing and maximizing value for our shareholders on all fronts, drawing off of their expertise and having their purview into the transactions on all fronts that we're doing. We really have involved the board. And we'll continue with this committee on all transactions that we do. The management team, typically every quarter is taking every transaction to the board, regardless of size and whether it's over under any threshold. And so we got a lot of good expertise and firepower coming in. And certainly with Craig and Allison, you combine that with Cydney Donnell, and John Rippel from the private equity side that is very, very active still in his professional career capital allocation. There's a lot of benefit that they're going to bring in terms of the purview of the shareholders into the intimacy of what we're doing. And so we as management, have raised it, we're excited about it. And we look forward to it to working with them intimately on it.

[Mike Bowman:]

That's helpful color, Bill. I guess, what was done before and I think you've just mentioned that everything was taken to the board. Was there a subcommittee previously on your capital allocation decisions? Obviously, I'm not discounting the fact of trying to bring in this firepower to your board to improve capital allocation. But it's also an admission that something was wrong before. And I'm just trying to get a little bit more color about how it got to that point, what did you not have the appropriate people on the board, you do not have the right processes? Were the management have more influence? I mean, this is a pretty major thing to go through an activist campaign and put new members on the board and form a capital allocation committee. I'm just trying to get a perspective of what had happened before that led to it.

[Bill Bayless:]

Yes. And certainly, we were forced to do nothing. And let me say this is something that I and this management team embraces and very much helped to drive. What had been done previously, it's not that anything was wrong, we always look to improve. And you can always look to improve the process that you put in place in both this board refreshment, and this capital allocation committee are in improvement in terms of advancing our initiatives in that area.

[Operator:]

The next question is from Alexandra Goldfarb with Piper Sandler.

[Alexander Goldfarb:]

Glad that you guys are getting your power back. And just for what it's worth the for the intro Bill, just having you speak and again in Q&A, definitely streamline things. So if that's a go forward, I don't know that you need to form a special board committee on earnings calls. But yeah, that was definitely a very good. Just going on to Michael's question. It's a little puzzling, actually, the capital allocation review, one, just the name, which gets overused in REIT lands, but two, you guys made a concerted effort a few years ago, to change your funding strategy, where you're selling sort of low four caps, to deliver to recycle that capital and do assets that basically are opening up, September 1 at 95 plus yielding six plus. So, you guys should actually transform your capital allocation overall, especially as you had sold out your legacy higher cap drive assets. So, on one hand, you guys already seem to address this. And I think two, you guys have also been pretty good at communicating that the growth of student housing, doesn't have the highs of multifamily, but doesn't have the lows, either, it's sort of a steady Eddy plus 2% to 3% business year-in year-out. So I guess from that perspective, what, I guess sort of from that approach, what was sort of driving this to have because, as I say, I think that you guys had already remedied on the capital markets. And that was really just in finding, the assets now that you don't have the higher cap, and you found the sustainable development pipeline of that 300 million range. And then two on the earnings front, I think that you guys had finally gotten that message through on the pace of earnings growth to be expected. So I guess from that perspective, what really caused you guys form this? And what changes would we really see versus just having people like Craig et cetera on the board just to be a part of this discussion?

[Bill Bayless:]

And Alex, thank you for pointing all that out, you really hit on some key points and we did -- with the -- we and the board together made the decision, really in '15, '16, '17, to undertake the massive refinement of the portfolio. And to transform it from the more eclectic portfolio that existed from a value-add core portfolio into the premier core portfolio that you see today, that we were then able to shift our capital allocation strategy coming out of 2018 in terms of better match funding with the sale of low cap rate 4 to 4.1, we transacted at and reinvesting that with a better match funding into 6.25 development opportunities that we had. And so, and this speaks exactly how I was answering Michael's question. And there was nothing that was wrong before, it is only in terms of continuing to strive to do better, and to better enhance the processes related to that. With that said, again, we as a company, and especially in the position that we are in is the only public company in our space and the opportunities that we have before us in the years ahead. It's only proven, the most important thing that we do as a company is capital allocation. And so to meet the expectation of the market in terms of utilizing the expertise that we have available to us, and a board of directors that has been and continues to be as we continue to refresh, exceptional real estate and capital allocation expertise, we of course, want to do everything we can to advance that movement forward. And so performing that committee, from our perspective, we as a management team are going to continue to be very selective and very disciplined as we procure opportunities, and always strive to undertake transactions, that for the long term will create the most value for our shareholders. And we'll always rely upon the expertise of the board that we have, whether it's in the confines of a committee, or the full board to help advance those initiatives. I do thank you, though, for pointing out the 5% earnings growth you start to see come in 2019 that we talked about in our comments and the tail winds in 2020, that we were very pleased with the shift that had taken place. And we now just want to continue to advance that.

[Alexander Goldfarb:]

Okay. And then just two other questions. So apologies, one, DP, on the OpEx you mentioned that the percentage impact from growth in OpEx in the second and third quarters, but from a modeling perspective, in aggregate on a growth portfolio, not the same-store, what, how much more millions of OpEx are we looking at in the second and third quarters?

[Daniel Perry:]

Well, if you look, Alex at 2020, we reported on this, as we went through the year, in the second quarter, we came in about $8 million below our original expectations for the quarter, about 7.6 million for the third quarter. And so, as we're looking at 2021 and at the property level, we're 90 plus percent occupied, we're pretty much back to full, delivery of services and operations at the properties. And so, we expect that those expenses to materially return on top of the fact that we also will have some additional COVID cleaning costs as part of the operating response to COVID that we put into place. And so, when we look at 2021, we would expect to see the return of where we came in under with a lot of the expense activities that were halted. And really that kind of primary period, initial period of COVID in Q2 and Q3 of last year, to return to -- basically what we're looking at still some efficiency relative to what our original expenses would have been in 2020. But when you add the additional COVID costs, pretty much in line overall with those original expectations, if you go back and look at what we had provided from a guidance standpoint on expenses last year.

[Alexander Goldfarb:]

Okay. So just to be clear, so basically, we're looking at 16 million in aggregate higher operating expenses, and then perhaps a little bit more for extra COVID cleaning is that, that's what we should expect spread out over the second and third quarters?

[Daniel Perry:]

That's right. And if you go back, we talked at the end of last year, third quarter call in October that our expectations are that COVID cleaning costs will run upwards of $3 million. Obviously, we're trying to control that as much as possible. But somewhere in that up to $3 million range is what we're expecting that to contribute.

[Alexander Goldfarb:]

Okay. And then, just finally, your apologies for the third question, but, Bill, in your opening comments, you made a comment about student housing valuations having been diminished. And just, in our channel tracks from the folks that we spoke to, we have been hearing is that any asset that was impacted by NOI just wasn't trading and that otherwise, valuations and cap rates, et cetera have been unimpacted pre-COVID to post-COVID, so maybe I misheard you, or maybe…

[Bill Bayless:]

And obviously, Alex, if you have an asset that was unaffected and is 95% to 97%, adds to the story of occupancy and you traded its valuation was not impacted. But largely when you look at valuations of portfolios, in decisions of sellers to sell or not sell the decision to not sell the asset is based upon that impacted NOI and applying that cap rate to it. And so the -- you see selective trading taking place in terms of what assets are not impacted in going out, versus those that are being held for sale for a later period when they improve.

[Operator:]

The next question is from John Pawlowski with Green Street.

[John Pawlowski:]

In this upcoming fall, do you have a sense yet with your conversations with the universities on how many of your beds could be potentially just offline due to de-densification efforts on campus assets?

[Bill Bayless:]

At this point in time, John, it is still optimistic that there as it relates to our ACE portfolio that there will not be de-densification, of course, as we see universities, in many cases not -- they do have to react to public health officials if there's any concerns brought through on that. We're in very good standing and that the large majority and we only have two products that we've developed that have community bath bedrooms, in terms of VCU and Cal Berkeley. Cal Berkeley has come out very positively in terms of their expectations currently to return to normal in the fall. And so we are hopeful that de-densification will not be a major impact to us in the fall.

[John Pawlowski:]

Okay. And then, apologies if I missed it, can you share what the occupancy assumption that underpins the first quarter revenue guidance?

[Daniel Perry:]

Yes. So if you'll recall, we came in at I think 90 points, obviously for the fall 90.3, on our roll forward page where we show the roll forward to the 2021 same-store group on Page S10 of our supplemental, you can see fourth quarter was 90.5%. We typically see that drop in the range of 20 bps to 40 bps as you move into Q1 because you have some -- whether it's short-term leases you have for seniors that are graduating, or students who leave primarily on the ACE properties for spring co-ops or internships. As we mentioned, we did sign more spring starting leases this year than we historically have. So we think there will be some contribution to that -- they do start at different times throughout the spring semester, depending on the individual lease. But we do think there will be some offset to that 20 bps to 40 bps but still a little bit of a downtick relative to the fourth quarter 19.5 average.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Bill Bayless for any closing remarks.

[Bill Bayless:]

Again, we'd like to thank you all for joining us. I'd also like to, as always thank the American Campus team for their continued hard work and dedication. We look forward to talking to you in the quarters ahead as we have more clarity as the year goes on. Thank you much.

[Operator:]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.