American Campus Communities, Inc.
Q1 2018 Earnings Call Transcript

Published: 24 Apr 2018

[Operator:]

Good day everyone, and welcome to the American Campus Communities 2018 First Quarter Earnings Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation there will be an opportunity to ask questions. [Operator Instructions]. Please note, this event is being recorded. At this time, I'd like to turn the conference over to Ryan Dennison, Senior Vice President of Capital Markets and Investor Relations. Please go ahead, sir.

[Ryan Dennison:]

Good morning and thank you for joining the American Campus Communities 2018 first 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 website in the Investor Relations section you will find an earnings materials package which includes both, the press release and a supplemental financial package. We're hosting a live webcast for today's call which you can access on the website with the replay available for one 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, I'd now like to introduce the members of Senior Management joining us for the call. Bill Bayless, Chief Executive Officer; Jim Hopke, President; William Talbot, Chief Investment Officer; Daniel Perry, Chief Financial Officer; Jennifer Beese, Chief Operating Officer; and Kim Voss, Chief Accounting Officer. With that, I'll turn the call over to Bill for his opening remarks. Bill?

[Bill Bayless:]

Thank you, Ryan. Good morning and thank you all for joining us as we discuss our first quarter 2018 financial and operating results. As Jim will discuss, our Q1 property operating results were largely in line with our expectations with the exception of costs associated with the extraordinarily cold and prolonged winter and related storms. He will also provide comments related to our current leasing status for the upcoming academic year. William will then discuss how our industry’s strong fundamentals and stability of cash flows continue to foster vibrant interest from global institutional investors and continue to drive transaction volume and increasing private market valuations. He will also provide an update on our capital recycling activities as we continue to pursue only the highest risk adjusted return opportunities. Daniel will then review our Q1 financial results, balance sheet condition, our ability to further capitalize on private market conditions as strategic funding alternative if we so choose and reaffirm our 2018 guidance and underlying assumptions. With that, I will turn it over to Jim to get started.

[Jim Hopke:]

Thanks, Bill. As Bill mentioned, our first quarter 2018 same-store operational results were largely in line with our expectations with the exception of $500,000 in operating expense associated with the unusually cold winter and related storms. As seen on Page S5 of the supplemental, quarterly same-store property NOI increased by 0.1% on a 1.9% increase in revenue, and an increase in operating expenses of 4.5%, consistent with the flatter growth profile for the first half of the year that we highlighted in the guidance discussion during our fourth quarter 2017 call. Our revenue increase for the quarter reflected the results of our ‘17 - ‘18 academic year lease up compared to the prior year. We expect our revenue growth for Q2 and part of Q3 will continue to be moderate as we conclude the ‘17 - ‘18 academic year. Expense growth in the first quarter was largely in line with our expectations with the exception of the repairs and maintenance and utilities increases which combined to exceed our budget by approximately $500,000. This excess was a result of the recent series of winter storms that affected much of the country, primarily in snow removal, plumbing repairs, and other miscellaneous costs associated with the prolonged and intense winter weather. Excluding these costs, our same-store expense growth would have been 3.8%. Our property tax increases compared to the prior year quarter were expected and were largely driven by the assessments for our recently developed properties that enter that same-store grouping in 2018. Adjusting for these properties, our property tax growth would have been 6.4%. While our marketing spends in the first quarter reflected 12% growth over the prior year, it was only $160,000 over planned for the quarter. Our portfolio’s leasing activities continues to trend within our expected leasing trajectory. And at this time, we are reaffirming our projection for opening same-store rental revenue growth of 2.9% to 4.4% for the 2018-19 lease up. We look forward to updating the market as we progress through the remainder of the year. I will now turn the call over to William, to discuss our investment activity.

[William Talbot:]

Thanks, Jim. Turning first to the overall transaction market. The strong demand for investment in the student housing sector experienced over the past 2 years continued into the first quarter of 2018. Demand for global and domestic investment groups resulted in approximately $1.6 billion of transactions in the first quarter of 2018 for CBRE data. As discussed at the recent interface conference, that saw a record attendance of almost 1,300 people of funded capital that still chasing investment in the sector with demand continuing to significantly outpace available product for sale. Cap rates for core assets position [ph] to Tier 1 universities are routinely valued at 4.25% to 4.75%. The sector has a long runway and investor demand as she continued to produce strong levels of investment in student housing facilitating the execution of our capital recycling activities. As it relates to our capital recycling activities to fund our announced growth, we executed a non-binding term sheet with a joint venture partner for a minority interest in a portfolio comprised of our existing assets. As previously discussed the valuation is in line with our previously provided range of economic cap rates expected in the mid-4% range. As we are largely through due diligence and in the final stages of negotiation of winter [ph] documents, we still expect the partnership to close in the second quarter of 2018. Turning now to development, we are under construction and making great progress on our 2018 pipeline of owned developments and presales which totals 10 projects approximately 7000 beds and $673 million in development costs. For 2019, we are pleased to announce we have entered into a presale agreement with [indiscernible] companies a prominent and well-respected developer student and conventional apartment communities for a core development pedestrian to the University of Oregon and located just west of the recently announced $1 billion-night campus for accelerating scientific impact. The 443-bed development is located directly between our existing pedestrian assets in the market providing further diversification with regards to products, location and price point offerings of our communities at the University of Oregon. The presale purchase price at $70.6 million which includes $2.4 million of ACC elected upgrades and specs and materials is expected to close in fall 2019 shortly after occupancy. [indiscernible] is retaining the development and delivery risk, and ACC is responsible for the initial marketing leasing and operations of the community. With this addition, our 2019 owned and presale development now totaled 5 projects 3160 beds and $405 million in development. All 2018-2019 developments are located either on-campus or pedestrian to major tier 1 universities and are targeting stabilized development yields between 6.25% and 7% and presale development yield between 5.7% to 6.25% representing attractive spreads of 125 to 200 basis points of our current valuations for stabilized assets within these markets. Turning to our third-party on-campus business, we are pleased to announce we have begun pre-development services on our night development on the campus of [indiscernible] University. The proposed development represents our 14th project as part of our 23 year highly successful partnership with the Texas [indiscernible] University system. The company anticipates providing management for the 520-bed project upon completion of a full scope, feasibility, fees and timing have not been finalized. We are also making great progress on our predevelopment of our third-party developments at The University of California Riverside, The University of California Berkeley, Goldman School of Public Policy and Delaware State University. We continue to pursue a deep set of on-campus opportunities totaling over 40% projects. We will update the market as we make continued progress. I will now turn it over to Daniel to discuss our financial results for the year.

[Daniel Perry:]

Thanks, William. FFO win results met our expectations for the first quarter of 2018 as we reported total FFO win of $85.8 million or $0.62 per fully diluted share as compared to $83.2 million or $0.62 per fully diluted share for the first quarter of 2017. FFO win increased by $2.6 million but per share amounts reflected an increase in weighted average shares outstanding of 3.4 million shares or 2.5% resulting from $191 million in ATM activity in the first half of 2017 to fund approximately 223 million in three individual property acquisitions. We also acquired a partial interest in four operating properties for 282 million as part of the Core Spaces portfolio transaction and delivered 10 new developments totaling $609 million. As compared to the first quarter of 2017, the 17 growth properties contributed $13.2 million in FFO offset by $9.8 million in additional interest expense and lost NOI from dispositions. As Jim discussed, same-store NOI contribution for the quarter was relatively flat which was slightly below budget due to impact of expenses associated with the excessive winter storms experienced in the first part of the year. Moving to capital structure, as of March 31st, the Company's debt-to-enterprise value was 37%, debt-to-asset value was 38.6% and the net debt-to-run rate EBITDA was 7 times. We intent to use the proceeds from the joint venture transaction targeted close in the second quarter to pay down our $300 million term loan maturing this year and other outstanding floating rate debt and expect at that time to be able to bring debt-to-asset value back below 35% and net debt-to-EBITDA down to approximately 6 times. Our floating rate debt which currently stands at 30.4% of total debt will also be reduced below 20% after the transaction. As William mentioned, given significant demand for core student housing product in the private market, we also have the opportunity to execute on additional capital recycling to further strengthen our balance sheet and position the company to continue to execute on an attractive development pipeline. With regards to our 2018 guidance, we are maintaining our previously stated FFO and guidance range of $2.33 to $2.43 per fully diluted share. For the balance of the year, the most significant factors that will impact our annual results are property NOI performance, interest rate fluctuations and third-party service fee income. For property NOI, we previously communicated total owned NOI of 462 million to 470 million. Our ability to meet our NOI guidance is dependent upon the final results of our fall 2018 lease up as well as our success with backfilling any vacancies that occur in the remainder of the spring or summer months due to short-term leases. Final NOI produced for the year will also be dependent upon our ability to maintain operating expenses including term costs within anticipated levels, final property assessments and any additional dispositions in excess of guidance. It's also important that we've reemphasized our continued expectation for same store NOI growth that will be slightly negative to slightly positive for the first six months of year with an improvement in the same store growth profile in the second half of the year due to increased revenue growth anticipated from our fall 2018 lease up. Our guidance range also includes third party fee income in the range of $16.5 million to $20.5 million with $4.3 million to $7.5 million expected to be recognized from third party development projects commencing in the second half of the year. At the low end of the guidance, we have assumed only Delaware State in the first UC riverside project commenced and start producing fee income, while at the high-end of guidance, we also assume the UC Berkeley and [indiscernible] Phase 9 projects commence constructions. All of these projects are in the process of feasibility evaluation and document negotiation. You can also refer to pages S16 and S17 in the earnings supplemental to get complete details of each of the components of our 2018 guidance. In this quarter we've added column reflecting year-to-date actual results to facilitate reconciling each component of our guidance to the company's consolidated financial statements. With that, I'll turn it back to the operator to start the question-and-answer portion of the call.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. And our first questioner today will be Alexander Goldfarb with Sandler O'Neill. Please go ahead.

[Alexander Goldfarb:]

Hey I have just two questions. The first one, Daniel in your comments you talked about the strong demand for assets and obviously we saw that it interface just the everyone who wants in. so that's not the question, but for you guys as a public company, the market wants growth, the market wants dividend growth, there is NAV which is investment metric but it's not tangible to outside investors that you can attract capital for general as trying to invest in REITs if you're trying to deliver growth. So how do you guys balance the fact that yeah, your assets are worth more in private hands and to the extent that you can match funding continue to grow earnings and grow the dividend that's a good thing. But how do you balance it against -- and I don't know maybe you're not going there but other REITs have done would they diluted growth and then investors at the moment are left with flat prospects when they were originally thinking there were growth prospects, how do you balance those?

[Daniel Perry:]

Certainly. And it's an ongoing conversation we have with our board from a capital allocation standpoint. Looking at NAV growth relative to earnings per share growth. And if we're doing the right things to drive improvement in our overall returns, both of those should benefit from it. The consideration we have to think about during periods like this is with a good shadow development pipeline and good capital allocation opportunities when you're looking at attractive valuation for existing assets being able to harvest that and deploy it into high yielding developments. That certainly makes sense from a capital allocation standpoint. So, you have to consider, well do you want to de-risk that growth and consider that cap rates may move on, so you go ahead and harvest that capital now or do you try to more match timing. And so that’s an ongoing assessment for us. We will certainly continue to try to balance it and drive as much growth as we can while managing our balance sheet.

[Alexander Goldfarb:]

Fair. But I mean I think part of the issue that we’re seeing in the sector is that for “value creational development” it gets wiped away on the capital recycling side. So, it seems like you guys found a good niche here to sell low cap to fund higher yielding development. So hopefully we will continue to see earnings growth going forward as opposed to flattening. I mean I know you’ve not given ‘19 guidance but hopefully the message is that we’ll see growth unless you are telegraphing that we should think of ‘19 as a flat year.

[Bill Bayless:]

We are not telegraphing anything at this point Alex going into ‘19, but certainly the point that you made is valid obviously -- this is Bill, the point you made is very valid where the prior year’s acquisitions where the recycling of the value add for business came with a higher cap rate, we’re now in a much better situation with the private market environment and having the core portfolio that we do that any dispositions that we are undertaking are going to be the significantly accretive spread for the investments that we would be making in development pipeline. As William mentioned in his script, typically the pre-sale and the development opportunities we are looking at are 125 to 200 basis points of accretive spread in nature. And so, the private market is a private market, cycles come and go in that area too but right now where it seems to be with the long runway that William talked about, certainly for the near to mid-term seems to put us in an opportunity to be advantageous as we consider when it is [indiscernible] the opportunities.

[Alexander Goldfarb:]

Okay. And then the second question, you mentioned the pre-sale, as you guys are looking at new pre-sales mezz developments, are you finding all the developers moving up their targets dates for deliveries such that everyone is now targeting sort of a May, June or some of the deals that you’re looking at still targeting sort of an August delivery, where there’s a risk that it may not complete on time?

[William Talbot:]

Yes, Alex, this is William. Certainly, there’s been a renewed focus on the on-time deliveries in the industry, you’ve heard ourselves and EdR publicly talk about it. We are seeing other developers focus on that as well. And so, I think they are continually balancing the cost of accelerating the delivery to offsetting the risk of delivery. So, we specifically on our own [ph], we do pre-sales and our mezzanine agreements. We have very defined liquidated damages as it relates to delivery dates. So that delivery risk stays with the developer in that case. But we are seeing more and more sensitive through the industry to making sure that the on-time deliveries occur.

[Operator:]

And out next questioner today will be Nick Joseph with Citi. Please go ahead.

[Nick Joseph:]

Thanks. Just following up on Alex’s question. What’s your appetite, you did one in the quarter of pre-sale developments, obviously it comes with a dilution in terms of funding it and you’re not getting as high as growing yield as you are on your existing development pipeline?

[Bill Bayless:]

Nick for us it’s very, very selective. When you look at the two pre-sales we are talking about in this cycle and the next it is with our holdings at Florida State at Stadium Center that are core to those holdings and have great opportunity beyond the initial going in yield because they are part of the multi-asset market initiative in the long-term markets that we want to be in. And so, we're much more selective in terms of looking at those presales and look at that yield not just in the context of the headline but what it means in the more strategic aspects of what the company is looking in terms of market selection and or the efficiency growth. And then also as William pointed out we're mitigating all of development delivery risk associated with that and have the ability to mitigate that risk and walk away.

[Nick Joseph:]

Thanks, and then on the potential JV. How many assets are going to be included and work ACC's retained ownership percentage?

[Daniel Perry:]

This is Daniel. I think we've talked about on the last call that would include 6 assets. We did not give an exact percentage on the transaction, but it would be a majority interest maintained for ACC with minority interest from the partner. And ACC would maintain operational and asset management control the properties.

[Nick Joseph:]

Thanks, and can you provide any color on the partners, the domestic and foreign capital and do they own another stream helping assets versus the first entry to the space?

[Bill Bayless:]

As we said on the last call, we didn't really specify the specifics to the partners and certainly once we close the JV we will be providing more specifics. But when we brought out the joint venture opportunities we saw a lot of interest from both the large global institutional and domestic. And certainly, one of those tight groups is who we are working with. So, this time, we don't want to give any more specifics until the transaction is closed.

[Nick Joseph:]

Alright, thanks. And just finally on 2018. Did the Oregon presales 2019 development in presales now complete or is there an opportunity to continue to add there?

[William Talbot:]

This is William again. Yeah, I mean at this point being where we are in this cycle, it would be very difficult to add to that presales flash development pipeline unless there is something unexpected came in or someone who's already under construction wanted to potentially do a presale to eliminate or reduce their stabilization risk. But for now, I would assume that you would not see any additional projects to the '19 pipeline.

[Operator:]

And our next questioner today will be Austin Wurschmidt with KeyBanc Capital. Please go ahead.

[Austin Wurschmidt:]

Hi, good morning. You guys have previously talked about some challenges particularly on the supply side in markets like Austin College Station and Tallahassee. As we sit here at this point in the preleasing season, are there any other markets that are showing similar challenge or where maybe there is been unexpected anomaly similar to what happened at Rochester last year for example?

[Jim Hopke:]

Of the three markets that you've pointed out are the three that we have watched closely, continue to watch closely in Austin [indiscernible] and College Station. College station is probably the softest supply market in the nation, certainly was last year, will continue to be this year. Between new supply and vacant beds last year totaled 9000 beds to be absorbed this fall. The team there candidly is doing an incredible job last year we significantly outperformed the market, we basically held the rental revenues flat where other people were down in the 70% occupancies and rental rates diminished as much as 10% to 15%. And the team this year is doing an incredible job again and right now based on our training we expect to be able to hold pretty close to flat again. And not having any diminishment in that market which maybe we done like company that's making that comment may currently. And in Austin and Tallahassee. In Austin, obviously in Austin and Tallahassee we do expect slowing velocity this year with new supply, but in both of those markets we continue to hold on to right as an indicator of how strong demand is. Austin rental rates are still trending for the portfolio above 3%, Tallahassee about the 2.5% above. So, we continue to watch those. As Jim commented, the overall portfolio of leasing, when you look at the rest of the markets, we are confident in terms of the trend being within the historical confines that we historically have seen that gave us comfort to reaffirm the guidance range of 2.9 to 4.4 in the rental revenue growth. There is -- we don’t at this point in time see the trend you saw last year in Lubbock, Champaign and RIIT. And again, Lubbock was more than half of those three properties combined with the 3,000 beds there. And so, at this point in time we do not see any of those anomalies developing and the three that we identified we continue to watch closely and manage.

[Austin Wurschmidt:]

I appreciate the detail there Bill. And then as far as College Station, I mean what do you think the absorption period is? You mentioned 70% occupancy for some of your peers last year. How long do you think it takes that market to get back to more stabilized occupancy level?

[Bill Bayless:]

There the university’s growth has been prolific. Last year I believe enrollment growth was up 2,500 and so they are having one-year gains. I believe enrollment is now in the low 60,000s and the university has made a statement that they intent to take enrollment to a 100,000. And so, with that kind of enrollment growth I think College Station will mature slowly. We do think a lot of the development folks are going to get hurt, I mean their performance has not been met, some built too far from campus. So, it may be a great buy opportunity in the next 18 to 36 months. But on the long-term it will be fine. College Station again, we are very proud. I do want to salute the College Station team publicly on the call and it is really a testament to our investment strategy and our overall management capabilities to have been able to weather probably what is the worse overbuilding situation in any single market in our company’s history and to have flat rental rate growth and not having it diminish. So, for us it’s probably the best unsung accomplishment we had as an organization recently.

[Austin Wurschmidt:]

I appreciate that, and then next question, in the last three to six months, just curious how much upward pressure you’ve seen on construction cost over that period particularly? And then if you are seeing any differentiation by region in particular in maybe hurricane impacted markets?

[Bill Bayless:]

Yes, and certainly for the ‘18 and ‘19 pipeline the rental construction, those jobs are fully bought out, we don’t have escalation risk in that. But as we look at underwriting 2020 deals and beyond, typically we are seeing a 4% to 8% in escalation. As you all may have heard wood is at an all-time high and so you are seeing some pressures on stick frame pricing, obviously some of the tariff discussions related to steel can impact steel buildings which depending on geography and what you got concrete as an alternative. But certainly, that’s something we look too as we underwrite deals in 2020 and beyond is looking regionally for that escalation which we see ranging between 4% and 8% make sure we are underwriting appropriately and having pro formas based on that escalation versus being surprised and pulling the trigger on something down the road it doesn’t have the yield we want.

[Austin Wurschmidt:]

And then you think geographically that’s differentiating?

[Bill Bayless:]

Certainly, when you get into heavy construction, typically your choice is concrete and steel. And so, when you get into those situations in the Pacific Northwest and the Northeast and you have your high rising [indiscernible] where you are making those decisions and tradeoffs. And for us that’s market-by-market local decision based on the type of pricing that we are getting on each one of those commodities. And obviously -- yes and yes wood frame, absolutely when you get into your traditional stick frame construction in the Southeast and Southwest where the hurricane was impacted and wood frame construction still the norm. Yes, you're seeing the pressures of wood [ph] geographically there.

[Austin Wurschmidt:]

Thanks for that. And does that make given the combination of rising construction costs as well as the upward pressure on property taxes you've talked about, does that make case more attractive than off-campus today as you look out 2020 and beyond given you don't pay property taxes on these deals and as well as the ability to kind of adjust the ground rent to back into your targeted deal?

[Bill Bayless:]

No, absolutely, the advantage that you've always had on the on-campus transactions is the valuation of land, it is the negotiation, it is the inverse of our acquired yield. And you do have a potential benefit in most of each transaction of not having real estate taxes. That's hugely offset by the University's expectations of a more institutionalized commercial product specially for the first-year residents halls and doing the dance with them in terms of the material specifications to ivory tower spec versus a private real estate owner. But certainly the [ace] transactions do tend to give you more flexibility to overcome the challenges that you see in the private market related to escalation, land cost and real estate taxes. And so, this year you have seen the development pipeline with 5 and 10 being [ace] transactions.

[Operator:]

And our next questioner today will be Juan Sanabria with Bank of America. Please go ahead.

[Juan Sanabria:]

Hi thanks for the time. Just a couple of questions for me. On the asset you're handing back to the lender. What's the latest with that, and could you remind us how much NOI if anything is associated with that asset and why the timing slipped back a little bit.

[Daniel Perry:]

Yeah Juan this is Daniel. So that assets and receivership with the lender right now. And we've been working on that for since middle of last year. As with most lenders, I don't want to own the assets long once they actually take them over. So, I think they are hoping to see some improvement in the lease up of the property to try to maximize their evaluation when they take it back out to flip it. The amount of NOI coming off of it was about $800,000 to a $1 million a year. So, in terms of effectively a disposition it's a very low cap rate about $27.4 million loan that's going away with that. So effectively that's the sales price.

[Juan Sanabria:]

Okay and then just on guidance. I mean you took the hit from the higher weather or from the colder weather and the storms. And I presumably floating rates that’s maybe were a little bit higher than you'd expected at least earlier in the year. Were there any other gives on the positive that kind of kept to your guidance unchanged or are you kind of more comfortable with the low end. Any color there would be fantastic.

[Daniel Perry:]

No, so on the operating expense side, the impact of the winter storms being about $500,000 were certainly notable on the operating expense growth for the quarter been about 70 basis points. But when you look at it for the year, you're talking about 15 to 20 basis points. And with property tax assessment still coming in, still finalizing our insurance renewals which is completed every May. Obviously, those can have a positive or negative impact on overall guidance expectations for same store operating expenses. And so, it wasn't material enough for us to change our guidance on operating expenses, at this point. As we get more information on the other larger components of operating expenses we'll be able to dial that in a little bit more. On the interest expense side, as we talked about in the prepared remarks, we're going to be paying down a lot of that floating rate debt with the proceeds from the joint venture during the second quarter. And so that reduces a lot of that exposure to interest rates. Obviously, another component is with regards to our bond offering that’s included in guidance during the fourth quarter and we did allow for increases in interest rates and our assumptions there and even with the run up that we’ve had to-date we are looking at pricing pretty much in line with what our expectation was. Although certainly if we continue to see additional increase in rates, at some point it could be an impact. The positive thing is certainly on the bond offering as we have seen some offset in the rate increases on the spread side of the equation. And so that’s helped maintain overall rates.

[Juan Sanabria:]

And just the last one from me on the University of Oregon and the pre-sale there. Could you just comment on what suppliers like in Oregon -- University of Oregon excuse me, and on the mezz loan, what’s your earnings there, kind of rate of your earnings and why does that deal require a mezz loan, just a little background there?

[William Talbot:]

Sure Ron, this is William. First of all, other than the subject development that we are working on, we are not tracking any other off campus development in the next few years. There is a potential on campus development RFP that is out there for a net of about 900 beds on the east side of campus that we are also reviewing. So not a lot of supply. And then on the other side of the enrollment, the university has actually made a very concentrated effort to grow enrollment by about 3,000 over the next eight years that actually hired out of state recruiters, have seen significant improvements in on stay enrollment. So pretty positive side on the supply demand metric. Specifically, to the mezzanine loan on the project we did a say 10% interest rate that accrued monthly and paid at closing, netted off the closing price. The -- we have seen this wide spread not just with -- from developers like [indiscernible] but with others that are still able to get attractive construction loans but at the LTVs or LTCs that they used to be able to achieve. And so, they are utilizing what is available to as attractive mezzanine rate with us to help bridge that capital stack to get a little bit higher from a loan standpoint and reduce fair amount of equity. But they are still putting in 10% equity so they’ve got significant spin in the game to complete the project.

[Daniel Perry:]

And Ron, this is Daniel. Just to clarify, I don’t know if you caught what William said there on the interest paid on the mezzanine investments, the 10%. That is accrued and netted against the purchase price at closing. So, it’s a reduction in our bases and does not flow through interest income of on the income statement.

[Operator:]

And our next questioner is Drew Babin with Robert W. Baird & Company. Please go ahead.

[Drew Babin:]

Hey, good morning. Circling back to Alex’s question in the beginning, I know de-leveraging has come up in the past as that’s kind of kept go up at full growth, full end growth in check, I think also in terms of portfolio quality has also been behind that and I think Alex touched on that. In your research for this year are there any signs you are seeing in some of your more recently acquired assets that can scatter some of the existing Core Spaces assets things like that that really point to that outsized growth from some of these lower yielding assets that have been acquired, is there anything you could point to at this stage [at least] up that proves out that those assets might be able have a growth profile in the near term that exceeds maybe your average portfolio asset?

[Bill Bayless:]

Obviously, we're not going to be add. So, we finished this year's lease up and finalized those occupancies and rates. So, we're not going to be able to point to anything at this point in time where we're just in our first turn on those assets. But all of those assets that we undertook those lower cap rate initiatives are all based on our ability, Seattle is certainly our poster child, based on what we believe based on the supply demand metrics and the fact it's the most underserved market in America. That all of the purpose build student housing which is so limited. We're able to acquire and develop in that market. We'll offer outsized returns like you see similarly Austin over the last 7-8 years has averaged close to 6% to 7%. And so, we think the market metrics over the call it 2 to 10-year period offer substantial outsized returns in those areas. And so, we'll certainly as we have those case studies materialized based upon our successful point to them. But that is certainly the seek [ph] aspect in entering and undertaking those transactions.

[Drew Babin:]

Okay, that's helpful. And one more question on Texas A&M. obviously with holding rates steady, and things looking maybe a little more attractive than you would have thought initially. What's specifically do you attribute that to. is it more aggressive attitude towards leasing, is it just leverage on the location of your properties relative to supply…

[Bill Bayless:]

And my comments really started saluting the investment team and the American Campus Investment philosophy. When you look at our assets at College Station. And we're certainly we're one of the early companies in that market. We basically back in the late-90s and early 2000 brought all the larger land parcels pedestrian to campus. And so, the products that we built there were 3-story stick frame, right across the street at a very low basis. As the market began to become built out in more of your post-reach stand mid-rise and high-rise developments came in with heavy construction with the type of escalation you're talking about in those areas. We typically saw a $200 to $300 per bed premium by newer product that it was smaller unit plans in equal or worse locations than ours all of a sudden, our value pricing metric and again are built for the masses not the classes and the price point really proved and provided that staying power. And also, that's one of the markets where we have significant scale because of the number of properties and beds that we have there we're also be an official sports marketing sponsor of Texas A&M Athletics. And so, we have incredible presence in the Football Stadium, in the baseball stadium. And the brand recognition in that market is phenomenal. And also, College Station has been one of our always been one of our deadrock [ph] staff so we probably pull as many corporate personnel over the years as anywhere else and that team continues to just outperform in competition year in and year out. I've got a couple of ideas and then give me the given sign so.

[Operator:]

And our next questioner today Vincent Chao with Deutsche Bank. Please go ahead.

[Vincent Chao:]

Hey good morning everyone. just a couple of quick ones here. Just in terms of the winter expenses, obviously very clearly outline being impacted in the first quarter. I guess is there any extended costs that you think will be notable for next quarter. I know there is a few storms there in April as well early April. I was just curious if there is anything that you're aware of at this point?

[Daniel Perry:]

Certainly, with what we saw in the first quarter we have been keeping an eye on it for second quarter. We're only a few weeks in here. I will tell you that when we were in that February timeframe we certainly were hearing a lot more from the properties around [tight rates] than we've normally hear. Not hearing as much of that chartered right now because the temperatures aren’t as extreme, while they are not comfortable relative to the typical for this time of year, they are non-extreme enough to be facing that problem. And then on the snow side, again not as much. The storms have been unexpected, later than norm but also melting quickly. So …

[Bill Bayless:]

The other thing as we get into the end of Q2 and we get into June is hopefully that mild winter will translate into a mild summer. I know this weekend I had to go and get a jacket middle of the afternoon which is odd to do in Texas in the late April. So hopefully within the second part of June that we will see we don’t have an extremely hot summer but rather those mild temperatures will carry over to May, you will get a little benefit from that. But we have to wait and see how mother nature throws this curve line.

[Vincent Chao:]

Okay, thanks. And then just on the marketing expense side, I know you’ve framed that out as maybe 100,000 over budget. But I am just curious and it sounds like supply and demand in general is healthy outside of the three markets that you’ve highlighted in the past. I am just curious though, I mean is there any color you can provide, a few years ago there was some marketing expense overruns because they at least had begun ahead of you a little bit or behind you a little bit I guess and you had to play catch up. Are there any markets where you are in that situation today or any other color you can provide on whether or not these marketing expenses may remain elevated going forward?

[Daniel Perry:]

Yes, just speaking to what we saw a few years ago that was actually in 2013 where we had a period where we got behind early in our lease up as part of the integration efforts associated with the portfolio as we’d acquired in 2012. We had excess marketing spend in the second half of the leasing season, so kind of post this quarter because we had to do a lot of remarketing to try and catch up.

[Bill Bayless:]

And we were 700 bps behind, it was a one year we were completely outside of the historical cycle that we commented on we are within this year.

[Daniel Perry:]

Where this is occurring earlier in the season and then all along it’s really more part of our effort from a couple of different strategic standpoints. One, in markets where we are really trying to push rate, trying to get out and achieve as much of that early as we can, where we are trying to also in some markets get as much in renewals as we can. We have a tight window there to execute on that and so want to really market through that. And then certainly in the markets where we are trying to turn around from last year in Lubbock, in [RIT] in Champaign making sure that we get off to a good start in those markets. So, we feel like we are seeing the progress from the dollar spent and it’s been prudent….

[Bill Bayless:]

Yes. And it’s a small number. As Jim mentioned we are only $160,000 over our planned spend for the quarter which is just over $1 per bed. And so really well at 12% number looks biggest really not in the context but the nominal dollars being spent and certainly nowhere near the historical highest in that category.

[Vincent Chao:]

Got it. And then one last question just to clean up on the expense side. Last quarter you talked about insurance being up 19%. I know the renewal doesn’t happen until May I guess is your expectation that that line item will be sort of in that 19% plus range for the year?

[Daniel Perry:]

Yes, we are looking at some options there to try and control that. We are still finalizing the renewal. We look at whether we would ever increase our deductibles and to manage the rate increase on premiums. You are do making a tradeoff there for increased deductibles which will get more repairs and maintenance and then control your insurance growth and we go through the analysis and look well how much risk are we taking there and what kind of historical cost we had associated with claims and would it be worth to trade off. So still finalizing that but certainly you think that our guidance is going to cover from that side.

[Operator:]

[Operator Instructions]. And our next questioner today will be John Pawlowski with Green Street Advisors. Please go ahead.

[John Pawlowski:]

Thanks. I understand your comments on the robust product capital interest in this space. Just curious on the lowest quality segment in your portfolio, take a number bottom 5 or bottom 10%. Are you seeing as you expect to see any weakness in pricing in that quality?

[Bill Bayless:]

No. And when you look at the portfolio now, we're largely done with all of our drag properties towards the bottom portion of the portfolio was more of your half miles or mile what we would refer to through your bicycle properties. There is continued to be cap rate compression in that area also. And so that's probably today in the 5.25 to 5.5. And so, it continues to be a vibrant product category that is probably down to another 25 bps to 40 bps from where it was 12 to 18 months ago.

[John Pawlowski:]

Okay. And then Bill in the past, you mentioned talking to the on-campus development pipeline, you had roughly 30 deals in the hopper, you're currently working on. Curious over the next 5 to 10 years as universities assess their housing needs and perhaps an outdated housing stock, does that number head meaningfully higher?

[Bill Bayless:]

It has. The thing we've commented on was probably about 3 calls ago. The numbers we used to always say seem to be working 20 transactions tracking at a time and now it's 30. With the average age in the markets that we currently operate and again anything can go well beyond the markets we currently operate in. the average age of the existing housing stock is 52 years. And we're seeing more and more of the on-campus age A transaction, B the replacement of that older first year housing. And so, the universe for opportunity is continuing to expand. That is the one sector of our business that does continue to have the highest barriers to entry because for university this is not just about real estate it's about creating the living and learning environment which vary key companies, understand and have the ability to do like American Campus and EdR. And so, in that regard, we do see it as a stable and growing opportunity for the company. And would not expect those numbers to shrink over the years.

[Operator:]

And it looks to be no further questions at this, actually no, we do have a follow up question from Nick Joseph with Citi. Please go ahead, sir.

[Nick Joseph:]

Hey Its Michael [indiscernible] just under the wire.

[Unidentified Analyst:]

Great. Bill I'm just wondering at some point given the fact that the equity is trading at a pretty sizable discount to the inherent value of your assets. Do you evaluate to sitting the pause button on some of the external growth initiatives without commensurate funding of lifting your disposition proceeds? And so, I get it that you're working on the joint venture but you've continued to commit to presale development this quarter, the overall development pipeline. And I understand the growth needs, but when you can issue equity, guess why not be more aggressive that match funding when you are committing a new capital?

[Bill Bayless:]

Absolutely. I think when you look at priority of that. And it's in reverse order, presale off-campus development ace is the way do we think about how you scale back that growth to make sure you're only talking the highest, pursuing the best risk-adjusted opportunities in that regard. As I mentioned on my prior comments related to the Oregon pre-sale that’s where we are very selective and that in terms of undertaking those only when it absolutely makes sense from longer term strategic objectives of the organization. And it’s pretty easy given the environment to turn the faucet on and off as needed on the pre-sale and the off-campus developments also. The one Michael that we are very cautious to make sure that we maintain the capacity to pursue the opportunities that are great accretive long-term opportunity is the on-campus business. And we have a brand there, we always do go after that best-in-class transactions there and that’s where we want to make sure that we preserve the powder that we do have, and when we do have the opportunity to match fund through non-accretive dispositions that we take the opportunity to do so. But certainly, looking prudence and diligence and slowing down that faucet when we need to make sure we have done a good job of match funding, is something that is the forefront of our thoughts in our discussions with the Board.

[Unidentified Analyst:]

The capital is pretty scarce, right, and your stock price should be telling you something about committing significant new capital when leverage is already elevated. And I think you have been working on this joint venture for last nine months, I guess you haven’t really increased the disposition bucket that much, why not to accelerate the disposition side to put the balance sheet in a position where people won’t question doing a forward development pre-sale or increasing the ace assets or doing a large scale acquisition like you did last year that sort of put you into this box. I don’t understand why you are not being more aggressive on the disposition front?

[Bill Bayless:]

And certainly, the opportunity is there with what William talked about, to execute very quickly and timely on the dispositions. Lessons learnt to be in the box that we were after announcing the Core, the decision we made back at that time was to not do the disposition at the beginning of Core and take the dilution but rather go through a match fund. The good news is in hindsight from an accretive perspective it look as though it’s going to pan out given with the closing of the disposition, certainly we did pay the penalty in being in that box that you talked about. There is a lesson learnt from that. So, through the extent that we would see additional pipeline opportunities related to development, looking at pre-funding that through disposition, it is something we seriously consider and will look at, and are fortunate to be in an environment right now that if we choose to execute on that we have the ability to do so quickly.

[Unidentified Analyst:]

Arguably if your stock trading at six caps, your own portfolio would be the place where you would want to buy into rather than bringing new assets on, right? And so, you are sort of -- you can issue your equity, you probably would want to buy it back but your leverage is too high and it just becomes a little bit of a vicious cycle.

[Daniel Perry:]

Understood, I mean that’s an ongoing conversation we have with our Board and we will continue to look at what we have in the shadows as options for that. But with regards to alluding to stock buybacks, that’s also a conversation we have with the Board comparing that against external growth opportunities. The reality you have to figure out whether it’s going to be a persisting issue for you consider executing on that. And as you referenced you also don’t want to leverage up to execute on that given the pipeline we have. I think that the point to make with University of Oregon deal is that as Bill said that is a place where we are the most selective. We are not adding builds without fully considering the opportunity there and whether from a capital allocation standpoint we think the return is justified given the balance sheet risk. But understanding your point, and it's an ongoing dialogue we have with our board on how to really manage all of that.

[Unidentified Analyst:]

Yeah. And with all of us would love to have larger portfolio have lifted by the economy -- and have a bigger apartment. But I'm conscious not levering up and making sure that have the capital to do it. And so, there is always that push versus pull on nature of things. In the discussions you're having on the joint ventures. Had you thought about maybe going down the road and doing 2 joint ventures if there is all this interest and you're very pleased with the foreign as well as domestic capital why not cap and do two joint ventures. Once you go through all the brain damage of doing this stuff, why not have taking the time to really raise the capital of attractive on what appears to be extraordinarily attractive time?

[Daniel Perry:]

Yeah. And I think it's pretty widely known, and we've discussed that we actually ran a simultaneous process when we looked at this joint venture of full fee simple dispositions as well as the joint venture partnership so that we would have both options available to us or have one available with the other didn't work out. We saw great interest on both processes and that is something that is given us comfort in pursuing the University of Oregon deal knowing that we have that alternative route to additional capital raising capability. And what we're really trying to use that and be prudent and managing the balance sheet or knowing we have opportunities to managing the balance sheet while we're also driving as much earnings growth as we can to improve that profile.

[Bill Bayless:]

And Michael this joint venture process I will comment strategically to talk about how we approach and undertook it. When we are in a position here in Q2 to announce who it is and what we've done I think the Mark be quite pleased with the quality of folks we're talking about. This was very much not ran and selected as a one-off joint venture. But rather we picked a partner. That we look at as a joint venture partner that this could be the first of numerous transactions. And they certainly view from that same perspective and have an appetite for that. So, while it is a single joint venture was not a conceive nor put together in the context that this will be a one-off transaction.

[Operator:]

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

[Bill Bayless:]

With that, we as you know a pretty straightforward quarter with not a lot of activity. We're now entering the beginning of the summer months and heading forward with the last 4 to 5 months of closing our leasing and heading into Turn. So, I want to thank the American Campus Staff again for all their activities. And we look forward to talking to you all at summer conferences and on our next Q2 call. Thanks so much.

[Operator:]

And the conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.