American Campus Communities, Inc.
Q2 2017 Earnings Call Transcript

Published: 25 Jul 2017

[Operator:]

Good morning ladies and gentlemen and thank you for standing by. Welcome to the American Campus Communities Incorporated 2017 Second Quarter Earnings Conference Call. Today’s call is being recorded. At this time all participants are in a listen-only mode. [Operator Instructions]. 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 Gary. Good morning and thank you for joining the American Campus Communities 2017 second quarter 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. If you do not have a copy of the release, it's available on the Company's website at americancampus.com in the Investor Relations section under press releases. Also posted on the Company website in the Investor Relations section you will find a supplemental financial package. We're also 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 and 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 would 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 will turn the call over to Bill for his opening remarks. Bill?

[Bill Bayless:]

Thank you, Ryan. Good morning and thank all of you for joining us to discuss our second quarter and 2017 financial and operating results. As you read in the release last night, it was a productive quarter highlighted by high quality external growth with transactions advancing at four Power-5 flagship schools. Off campus at the University of Washington and Auburn University and on campus the University of Arizona and the University of California, Berkeley. We also made meaningful progress as we neared the homestretch of our fall 2017 lease-up. With our same-store portfolio, now being pre-leased to 94.1%, 30 basis points ahead of the 2016 lease-up as of the same date. Also you'll hear from Jim we delivered solid operational and financial results despite beds being taken offline at three projects for summer repairs. And as William will cover industry fundamentals remain strong with solid transaction activity and continued cap rate compression for high quality core pedestrian assets at Power-5 schools. In addition Axiometrics is forecasting a decrease in new supply nationally for fall 2018, with a corresponding decrease in new supply expected in ACC markets for fall of 2018. With that I'll turn it over to Jim.

[Jim Hopke:]

Thanks Bill. We're pleased with our second quarter 2017 operating and leasing results and our field and corporate teams remain focused on completing our lease up managing our annual turn cycle and preparing our properties for move in. On Page 5, of the supplemental package you can see the second quarter same-store NOI increased by 2.2% over Q2 of 2016 on a 2.7% increase in revenue and a 3.3% increase in operating expenses. We are pleased with the revenue performance that slightly exceeded the quarterly budget included in our annual guidance overcoming revenue diminishment from three properties with beds taken offline in the second quarter for fire repairs and maintenance activities as well as additional may-ending leases, which our leasing team did an impressive job of backfilling. As we discussed on our fourth quarter call, we expected expense growth in the first two quarters of 2017 to be more inflationary in nature. And the 3.3% year-over-year growth in same-store operating expenses slightly exceeded those expectations. Higher growth in our marketing and utility expenses were essentially offset with positive variances and payroll and insurance costs. Moving into the second half of the year, we remain focused on delivering on our operational and asset management initiatives with a focus on achieving same-store expense growth of 1% to 1.5% that is included in guidance. Our 2017, 2018 leasing status is updated, on Page 8. As Bill noted, as of Friday July 21, our 2018, same-store wholly owned portfolio was 94.1% leased. 30 basis points ahead of the 93.8% lease for the same date in 2016. We are especially pleased with the property group being currently occupied at 95% or below having a velocity of 880 basis points ahead of the prior year. We are still projecting an overall rental rate increase of 2.9% for the 2018 same-store portfolio. When considering our historic trends and current pre-leasing dynamics we are maintaining our previously provided 2018 same-store leasing projections, which are detailed on Page 17. Our 2017 new development projects are 78% pre-leased for the upcoming academic year. As previously discussed, our guidance assumes that these 10 developments leased to 88% in fall of 2017 with certain projects expected to stabilize in fall of 2018. As always our late third quarter and fourth quarter results are dependent on our ability to complete our lease stuff and manage the no-show process. And I would like to take a moment to thank the operational, marketing and leasing and facilities teams for their hard work and dedication during the most operationally intense period in our annual cycle turning our beds and preparing to welcome our residents for the 2017-2018 academic year. With that, I will turn the call over to William to discuss our investments activity.

[William Talbot:]

Thanks Jim. During the quarter we have made great progress on further enhancing our best-in-class portfolio through diversified investment in core pedestrian student housing assets through core acquisitions, off campus development, and our ACE on campus development. Turning to development first, we have continued to build our pipeline of owned off campus developments. We are pleased to announce we have begun a construction on a new Class A community pedestrian to the core campus of Auburn University. This development, which totals 495 beds and $59 million in cost, will represent our second asset in the Auburn market having developed 160 Ross in 2015. 160 Ross has averaged over 99% occupancy and over 6% annual rental rate growth since opening. Including having reached 100% applied for the upcoming academic year by the first week of February and it is getting incredibly strong pent-up demand for quality product in the market. The new development, scheduled for delivery in 2019 is located three blocks closer to campus than 160 Ross, and is one block north of the famous Toomer’s Corner, which is a center for student academic and social activity. During the quarter, we entered into a pre-development agreement with the University of Arizona for a 1,042 bed residential Honors College under our ACE structure targeted for the fall 2019 delivery. We continue to make progress on pre-development, however the transaction remains subject to final lease negotiations, feasibility and scope. In total our own development and pre-sell pipeline for 2017 through 2019, now includes 20 projects, over 15,200 beds and represents in excess of $1.35 billion of development costs consisting entirely of core Class A communities located either on campus or pedestrian to tier one universities with an average distance of less than 0.1 mile to campus. We are targeting between 6.25% and 7% stabilized nominal yield for these developments. In addition, we have been awarded the exclusive right to negotiate a second on-campus development at the University of California, Berkeley. The proposed development is projected to include a 130 units of faculty, staff and graduate students housing. Expansion of a current parking garage and a third-party development of a 34,000 square-foot academic building to serve the prestigious Goldman School of Public Policy at Cal. The project is in the initial stages of pre-development and the full scope timeline transaction structuring and feasibility are not yet finalized. Our activity for P3 projects remain as strong as ever, we’re currently under construction or in predevelopment on 17 on campus projects totaling 12,200 beds and $1.1 billion in development cost. The overall P3 pipeline remains vibrant, as colleges and universities look to modernize their student housing stock without impacting their balance sheet and debt capacity. And ACC is actively pursuing 38 potential procurements consisting of both A's and third party developed projects. Turning now to acquisitions. In June, we successfully entered the highly desirable University of Washington Market with the acquisition of TWELVE at U District. This major MSA market has been targeted by ACC for over ten years as the University of Washington is one of the most underserved Power-5 markets in the country, where close to 1,000 existing purpose built off campus beds and 8,200 on campus beds serving over 46,000 students, leaving over 36,000 students to find alternative housing. The property was developed by AvalonBay in 2014 under their AVA brand to target young professionals but due to their attractive location four blocks from campus in the popular U District student retail and restaurant corridor, we currently estimate the property is 70% occupied by students despite little direct marketing to students. We plan to completely convert the asset to student housing leased by the bed increasing beds by offering a limited number of double occupancy accommodations, adding furniture where appropriate and converting the property to an academic year leasing cycle. After $3.5 million budgeted for amenity upgrades, upgrades to on-site technology, FF&E purchase and other upfront capital improvements the core pedestrian acquisition represents a 4.5% nominal and 4.4% economic cap rate in the first year. While the asset transitions from a continual conventional multifamily leasing cycle to academic year leasing of a projected stabilized cap rate of 5.5% nominal and 5.4% economic in year three after the conversion is complete. With regards to the overall transaction market for student housing, the sector remains in high demand. According to CBRE’s second quarter student housing market overview transaction volume in the first half of 2017 reached $4 billion. An increase of $250 million over the record first half of 2016, when excluding the 2016 Harrison Street Campus Crest transaction. And a 60% increase over the first half of 2015 transaction volume. Investment in the sector continues to be driven by new and continued interest from foreign institutional investors and funds with over 50% of all transaction volume occurring from international buyers. Cap rates have remained stable overall for student housing but the spread between pedestrian and non-pedestrian cap rates widened to 54 basis points in the first half of 2017 with a 35 basis point compression in pedestrian cap rates since 2015. CBRE reports that core pedestrian products trades at 5% to sub 5% with cap rates in the four becoming more commonplace. Cap rates for assets located within Power-5 conference markets continue to command a 67 basis point lower cap rate than assets located in non division one markets and 26 basis points lower than other assets in non-Power-5 division one markets. Turning to supply, as expected for 2018 Axiometrics is currently projecting a 9% decline in national student housing deliveries if all properties currently tracked but not yet under construction are completed in 2018. For ACC’s 66 own markets, we are projecting between 24,000 and 25,000 beds delivered in 2018 representing 11% to 14% decrease in overall supply from 2017. We are currently projecting that only 26 of our 66 markets will incur new supply in 2018. Lastly turning to dispositions, during the quarter we successfully executed on the sale of The Province, serving Wright State University in Dayton, Ohio for $25 million. The asset was eight years old and although located adjacent to university land, there was over a 1.5 mile drive to the academic core. The sale represented a 6.1% economic cap on in-place revenue, escalated T12 operating expenses, and historical capital expenditures. With that, I’ll now turn it over to Daniel to discuss our financial results.

[Daniel Perry:]

Thanks, William. For the second quarter of 2017 we reported total FFOM of $72.5 million or $0.53 per fully diluted share. This was slightly below the second quarter budget included in our annual guidance primarily due to the three previously announced properties, which are experiencing vacancies for non-routine and extensive repairs that needed to be completed. Specifically the 41 beds damaged by a fire in March at our Province in Tampa property at the University of South Florida are resulting in lost revenue of about $30,000 per month until they can be repaired and brought back online. Ultimately this will all be covered by loss business income insurance but the funds will likely not be received and recorded until 2018. Also the repairs being completed at Barrett Honors College at Arizona State and Lofts54 at the University of Illinois required complete vacation of the properties during the summer months resulting in the loss of approximately $400,000 of revenue. Both of these properties will be fully operational in time for the start of the falls academic year. Even with these short-term disruptions, our overall operational performance year-to-date has been in-line with expectations. Total FFOM was relatively flat compared to the prior year quarter despite the loss of 10.8 million of NOI from the 20 properties sold since the second quarter of last year. This was more than offset by a $2 million or 2.2% increase in same-store NOI. The production of 5.8 million of new NOI from developments and acquisitions completed in the last twelve months and a $5.5 million reduction in interest expense resulting from the dispositions completed in 2016 and 2017. Moving to capital structure as of June 30, 2017 the Company's debt to enterprise value was 26.5%, debt to total asset value was 32.6% and the net debt to run rate EBITDA was six times, which has typically elevated this quarter as our upcoming fall development deliveries are almost fully funded but are not yet generating EBITDA. As disclosed in the capital allocation and long-term funding plan on Page 15, of the supplemental these future ratios are anticipated to range within our targeted levels of 30% to 35% debt to total asset value and in the mid-five times area for net debt to run rate EBITDA. In terms of capital activity since our last call, we raised approximately $108 million under our ATM program at an average issue price of $47.65 per share, essentially match funding the TWELVE at U District acquisition in Seattle. The remaining debt maturities for the next three years are $189 million or only 8% of total outstanding indebtedness. Our floating rate debt currently stands at 21% of total debt, however we intend to manage our floating rate exposure with the bond offering currently planned for the fourth quarter in our guidance. With regards to our 2017 guidance for the balance of the year, the most significant factors that will impact where we will end up within our FFOM guidance range are as follows. For property NOI, we previously communicated total owned NOI of $405 million to $412 million. Our ability to meet our NOI expectations is dependent on our success with backfilling any vacancies that occur in the remainder of the summer months and the ultimate success of our fall 2017 lease up and no-show management process. Management feels positive about the current pre-leasing status, but as we have discussed throughout the year, we are closely monitoring the leasing progress of a few of our upcoming fall development deliveries. Of course the NOI produced for the year is also always dependent on achieving our budgeted expense growth for the reminder of the year as Jim discussed. The two acquisitions completed in the first half of the year are expected to contribute an additional NOI of approximately $3.8 million for the full year. But as we have matched funded a significant portion of those transactions with opportunistic activity under the ATM they are expected to be earnings per share neutral for 2017. Concerning third party services revenue, the fee range included in guidance for 2017 is fully achievable but will be dependent upon our ability to successfully structure and close the four remaining third party transactions to be closed this year. In summary, we are maintaining our previously stated FFOM guidance range of $2.32 to $2.42 per fully diluted share. And we will update you with any changes on our next earnings call after the fall 2017 lease-up has been completed. With that I'll turn it back to Bill.

[Bill Bayless:]

Thanks Daniel and again thank you all for joining us to discuss our Q2 results. In closing I'd like to echo Jim's earlier sentiments and thank the ACC team in advance for all the efforts they are now putting forth related to the annual term process, the completion of the 2017-2018 lease-up, the administration of our annual no-show process and all the preparations being made to warmly welcome nearly 120,000 students who will move into an owned or managed American Campus Community in the next four to seven weeks. With that we’ll open it up for Q&A.

[Operator:]

We will now begin the question and answer session. [Operator Instructions] The first question comes from David Corak with FBR. Please go ahead.

[David Corak:]

Good morning guys.

[Bill Bayless:]

Good morning David.

[David Corak:]

On the external growth – on campus building acquisition I kind of checked all the boxes, but do you continue to see similar opportunities out there on the acquisition side and how are you thinking about that versus your cost of capital and then on external growth may be some color on the overall P3 and that would be helpful.

[Bill Bayless:]

And as first it relates to acquisitions and the one general comment that we have been making and certainly when you looked at William’s the data that he covered in terms of the transaction activity. In the first half of 2017 you can see there continues to be a vibrant pipeline of product that has come to the market and continues to come to the market. What we've been talking about for the last 12 to 18 months is that given that the industry has shifted to the focus of developing core pedestrian assets in major tier one markets of Power-5 conferences, a lot of the portfolios and individual properties that are coming out, more and more meet our investment criteria. And so, as we look at those acquisition opportunities in relation to our cost of capital and capital allocation, as we talked about in the past first and foremost we always make sure that we're preserving capacity for the highly accretive development opportunities that we have. But we certainly do look at the quality of the acquisitions that are out there, what we think corresponding growth rates are, with those income streams and some of the legacy assets and always look at whether it makes sense to self fund through ramping up dispositions on properties that may or may not have that type of growth rate. And look at reinvestment, so always stay abreast of what's happening in the acquisition environment and make those decisions on a case-by-case basis. As it relates to the P3 environment as William commented, at May REIT someone asked a question, when are we finally going to see a pop in the P3 environment. The pop has already kind of taken place. When you look at the numbers that William just went through in terms of right now under construction or in predevelopment 17 on campus projects 12,000 beds, 1.1 billion in development with ten of those being ACE transactions. And so that segment continues to be vibrant. Again the big paradigm shift that you've seen is the names of the schools that we're announcing. You just heard another transaction of Berkeley, UofA, last year the other Cal Berkeley deal in Southern California and so that continues to be vibrant as William commented, still actively pursuing 38 procurement or direct discussions. So the external growth continues to be probably the most attractive story as we continue to look at the maturation of the sector.

[David Corak:]

Okay great. And then switching over to the expenses side. You said previously that you expected the expense growth to be more inflationary in the first half of the year and I think you said that again today, which it was for the most part maybe a sketch above but that moderated in the second half. I think if you can mention potentially – negative. So are you content with the results thus far or have there been any bigger surprises. And I don’t know if it is quarterly guidance though but how should we think about the pace for the rest of the year.

[Bill Bayless:]

Yeah, as we've talked about starting on the Q4 color earlier in the year, we did expect expense growth in the first half of 2017 to be more normalized and inflationary. As we look at our first half results, we’re really right about a quarter of a million off of that number, so not material at all in any form or fashion about 0.2%. And as we look at the second half and we talked about we expect to see our asset management issues materialize come to fruition we're looking at expense growth in Q3 in the area of a 0.5% to 1%. And in Q4 actually going positive on expense savings in the area of up to 1%. And so we still feel good about where we are and believe we have a good opportunity to maintain that expense guidance through the full year.

[David Corak:]

Okay. And then, last one for me. It looks like the maintenance assets that you mentioned, you are leaving them in the same-store pools, can you just talk about that decision a little bit there.

[Bill Bayless:]

David I'm sorry, you were a little muffled in ending the question, if you could ask it one more time.

[David Corak:]

Yes, the maintenance assets the 41 beds and the other two assets that you have taken offline for the summer. It looks like you are leaving them in the same-store pool. Could you just talk about that decision, to leave them.

[Bill Bayless:]

Yeah. The question related to leaving the three properties that were – had vacant beds through the summer to do those repairs leaving those in the same-store pool. Historically when you look at our same-store policies, the only time that we have taken properties out of the same-store pool is when we have done substantial renovations to reposition the asset, like you saw us do with the University of Crossings at Philadelphia years ago Commons on Apache, at Arizona State. And so typically we're refurbing the interior of the units. We're changing the rental rate price point and we're taking those beds offline to reposition. And so from our own internal policies and the accounting standards they did not rise to the level where we thought it was justified to take them out of the same-store. And so we chose to leave those in even though indeed, as Daniel talked about and quantified it was about a $0.5 million of impact in the quarter. But it just didn’t rise to the standards that we have as the definition of same-store.

[David Corak:]

Thanks guys.

[Bill Bayless:]

That number would look better if we took them out, but didn't rise to that level.

[Operator:]

The next question comes from Austin Wurschmidt with KeyBanc Capital Markets. Please go ahead.

[Austin Wurschmidt:]

Hey good morning. My first question really is around the Seattle acquisition. You mentioned that you've been targeting this market for over ten years now. So I guess why did you think that, that now was a good time to really enter the market and how did you think about entering via an acquisition versus development.

[Bill Bayless:]

Yes and this is a market on the long-term we are interested in both continuing acquisition and in developing, there are substantial barriers to entry in the university district there as it relates to the type of products that we would develop for student housing. There is some, a little bit of loosening in those standards that enables, we think some selective development take place in the years ahead and we certainly will continue to pursue that that route. As it relates to the acquisition opportunities, as William mentioned there's hardly any purpose built housing in this market. And when you look at the alternate products that may be worthy of student housing investment, there's only AVA and a couple of others candidly that were conceived more in the millennial concept and so they built the amenities more toward a student concept and then were adopted and accepted by the students versus the millennials. As William talked about, we estimated that the AVA product had about 70% of its current occupancy based in students. And so those, that particular asset because it was that AVA concept more toward the millennials, unlike a traditional conventional apartment, which most of the rest of the market is. It's location to campus and the amenity space that it allocated while we're going to do some reconfiguration and repurposing of that really enabled that particular asset to offer the opportunity to be fully converted to student housing, where your general conventional multi-family assets in the market do not. And so it provided, AvalonBay’s decision to sell that was the driver for us to be able – it's an asset that we have been looking at since we've been exploring that market for the last several years. And it offered that unique acquisition opportunity that there's only a handful of assets in that market of that nature.

[Austin Wurschmidt:]

So how should we think about, or how do you think about a spread over an acquisition to the extent you did move forward with the development in the market. And then also just curious how you think about the traditional product being built in that market as a competitive, as being competitive with both this project and any future developments that you would pursue.

[Bill Bayless:]

And certainly when we look at, any time we're looking at development that we will source ourselves. It is going to be fully purposed as student housing. So the differentiation in floor plans and the amenity off of technology packages, the things that William mentioned that we’ll be re-purposing in this building will be per the American Campus standards. And as we have seen in metropolitan markets, conventional multifamily just doesn't convert well in terms of competing with student housing largely because the square footage per person is very inefficient in those conventional designs. Again the particular millennial concepts here that a couple properties in that market had, had that smaller square footage thought process in terms of a per occupant basis that helped blend it's convert a little bit better towards student housing. And that's where the differentiation is, with conventional. When we look at and William talked about the cap rates in your Power-5 conferences are certainly when you look at the Seattle market that's a student housing market where we would expect cap rates to be in the 4 to 4.5 area. And so as we would look at development yields in Seattle, it would be very similar to how we look at Berkeley and that's where you'd see American Campus look at a 6 in the quarter when you're spread to the cap rates in the market be 175 basis points to 225 basis points. So very attractive.

[Austin Wurschmidt:]

Thanks for that and then just switching over to the supply you gave some good detail on supply being down 11% to 14% and new deliveries in 2018. Can you give us a sense of how you think of that as a percent of enrollment and then how that stacks up versus where you expect to shake out in 2017 and then maybe, add some historical perspective on that number as well.

[Bill Bayless:]

Yeah in that, on a per enrollment perspective, that is about 1.3% of enrollment, and so it's right in line with the historical 10-year trend that we've talked about with you all for the last several years of that 1.2 to 1.3. And so no changes in that, and again that the thing that we like with the supply we see coming in is a lot of that supply is in markets that meet our investment criteria and with product types that meet our investment criteria. So it continues to provide future opportunities for consolidation and growth.

[Austin Wurschmidt:]

So is it safe to assume that in 2017 the number was higher than the 1.3 that you just mentioned.

[Bill Bayless:]

Yes. It would have been slightly, if you look at the 2017, we were at 28,393 beds, so that would have been 10 basis point, 1.4 versus the 1.3 of next year.

[Austin Wurschmidt:]

Thanks for that and then just last one for me Bill. It sounded like you're monitoring some of the projects and lease up within the development pipeline, those 10 projects that you expect to achieve 88% occupancy. Can you just flag the ones that maybe it sounds like are lagging a little bit of where you thought you might be at this point in the lease-up cycle.

[Bill Bayless:]

Yeah and if you look at the – as we commented the midpoint of the guidance that we established for those assets was 88%. The range was 85% to 91%. The two that we have earmarked that are the ones that we have been following very closely Lubbock, which is in an one-year absorption issue there. You have 37,000 beds coming into the Lubbock market all at once. 1,300 of those are ours and the property at Baylor, which in Waco, which is one of the markets we commented. It did have late deliveries in the past, and the students are sensitive to the first year operations there.

[Austin Wurschmidt:]

Great, thanks for the time.

[Operator:]

The next question comes from Juan Sanabria with Bank of America. Please go ahead.

[Juan Sanabria:]

Hi, thanks for the time. I was just hoping you could speak to, on the development pipeline. It looked like an asset in Carbondale dropped off. If you could just give us a little background on what happened there.

[Bill Bayless:]

Yeah Juan, and we talked about this couple of quarters ago when we still had on the supplemental that is a piece of land that is fully entitled that we took through the design and pre-development aspect about eight years ago. The Carbondale market is one, this is an incredible site right across the street from campus and the university’s most recent student housing development that they did about six years ago. The State of Illinois itself has had some funding issues in higher education Carbondale is not one that we would consider a tier one university. Our investment criteria has really become more stringent over the last eight years. Since the time we've sourced that and so it’s something we have not pulled the trigger on. It is something that we look at, as the university looks at strategic growth and development in the future, it gives something that could play an on campus or it's something that we could package up and put into a dispose of development opportunity for folks that are exploring more of those tier two institutions. And, so at this point in time it's not something that we look at our capital allocation and where we want to be and when you look at the cap rate maturation that William talked about, this is just not one that we're excited to put a shuffle on the ground at this moment in time.

[Juan Sanabria:]

Okay, great and just a modeling question or guidance question. It looks like your share count guidance for the year was unchanged but your first half is running slightly above. If you can give us any comment on that, and should we assume that then that doesn't mean any more ATM issuance for the second half.

[Daniel Perry:]

Yeah Juan, this is Daniel. So, until we fully update guidance we don't get into updating the individual components of guidance as long as our total earnings per share is in line. Our expectation for total earnings per share is in line with what we originally guided to. Obviously, when we update after the completion of lease-up we’ll update all of those individual items. But we're at about 138 million shares outstanding now, if you run through the calculations, it gives you a little – about 137.1 million weighted average share count for the year, which is obviously an increase over the share count that was included in original guidance. But with the 3.8 million of NOI that we said we expected to come off of the two acquisitions we completed that's going to be pretty much earnings neutral. So it didn't impact the overall expectation for FFOM guidance and we’ll update the individual components as we move into next quarter or at the end of next quarter.

[Juan Sanabria:]

And just one last one on guidance. See you talked about being comfortable with your expense guidance, so should we assume then that you're also comfortable with hitting the midpoint of your same-store NOI guidance. Is that a fair comment.

[Daniel Perry:]

It's certainly still the goal. It’s all a big driver of where you end-up on your revenue growth for the year is the result of the lease-up and where we end-up with regards to our total rental revenue growth between occupancy and rental rate increase will have a big impact on that, but at this point time it is still our guidance.

[Juan Sanabria:]

Thank you.

[Operator:]

The next question comes from Alexander Goldfarb with Sandler O'Neill. Please go ahead.

[Alexander Goldfarb:]

Good morning.

[Bill Bayless:]

Good morning.

[Alexander Goldfarb:]

Hey, just a few question, there on – some of them are on guidance. At the end, you talked about four deals four third-party C deals, that needed to close for you to get your fee revenue, to hit your number for guidance. Can you just, talk about that are those deals that you guys feel comfortable with or are you sort of flagging that as an indication that some of those may not close in which case you may not hit the number.

[Daniel Perry:]

We are not actually flagging it, as we feel comfortable with our guidance, who obviously we have a range of guidance if you see. I think for third party development the range was $6.2 million to $9.6 million, what we're saying is that it is fully achievable even all the way up to the high-end. If you look on Page 11, of our supplemental, you can see the fees associated with the four deals that are out there and expected to be closed this year. We've got one being the Texas A&M University-Corpus Christi transaction, which is actually an advisory transaction on a sale to foundation of the University where we've recognized the full fees of that at completion this year. And then the other three will be a normal recognition process, where about 50% of that fee amount you see there would be recognized at commencement of construction and then the remainder being recognized throughout the construction period through fall of 2019 delivery. So if all four of those close, that would put us in position to achieve or maybe even exceed a little bit the high-end of that third-party fee guidance. We don't have to close all of those to be at the midpoint, and if you run through it, you can see the different combinations of the four that can close that keep you at the midpoint or even just achieve the low end. But certainly in a position to be able to achieve the high-end as well.

[Alexander Goldfarb:]

Okay and then on developments, you know that's been a growing topic over the past few earnings calls and just looking on your upcoming deliveries, obviously this year they're all scheduled for August but next year is scheduled for August and even in 2019 there's one August and one July. Is there a goal at least as far as the 18s and 19s to try and get those to be more of a July completion to allow first a mark to increase the margin, the buffer that has been sort of hitting some of the developments as far as deliveries go.

[Bill Bayless:]

Yeah, and Alex the first thing and the one thing we would again stress to the market is, this is not a national condition that exists in every market, but only a condition that exists in individual markets where previously developers really poorly missed and didn't handle it well. And, so we only have one off campus development that is opening in 2018 that we’re undertaking that is the Ole Miss project. There have been no construction misses at Ole Miss. So that's not a market, where the market has been pre-conditioned to have concern over that. All the other 2018 openings are on campus, where it's just that as we talked about earlier the ACE transactions are not an issue. We do have a presale at Florida State that's coming online in fall of 2018, and that is an additional face to our stadium suites development there that from the markets perspective we just have Stadium Club, we have more beds that are available. And so it's not even being marketed under a separate new development banner, but just part of the existing base. As we look at 2019 and looking at Auburn, Auburn is also a market where there have been no development misses. And as you saw in our 160 Ross which is there's only been several developments take place in that market because of the barriers to entry. That's one that you saw lease-up very early for us. And as you just heard William talk about it, it had 6% rental rate growth in the last two years and it is 100% pre-leased for fall. And so, of the off campus deals that have been identified in the future pipeline, while we’ll make sure construction is done well in advance. There's no pre-conceived issues in those markets that taint the student base in that toward construction misses.

[Alexander Goldfarb:]

Okay and then just finally. Just going back to the expense savings for the back half. Looking through your – on Page 6, some of the increases it is utilities, marketing, some repair maintenance. Can you just give a little bit more granularity as far as where we would see the savings to allow, yeah you said zero to maybe up 50 basis points or something like that for the third and perhaps even up to 1% savings in the fourth. If you can just give a little granularity for where we will see the savings to provide some comfort.

[Daniel Perry:]

Sure Alex, this is Daniel so when we talked about the components of our operating expense guidance on the fourth quarter earnings call, when we gave guidance we said that in the areas of payroll, marketing, insurance, property taxes we were expecting more normalized 2% to 4% ultimate expense growth for the year, with the savings coming from maintenance, utilities, property G&A. And we specifically spoke about $1.6 million specifically identified savings over the prior years in those areas on the utility side, where we are undertaking a process with consultants to help us mitigate usage during peak billing hours, to minimize on utilities costs. Also, we've been launching more broadly across our portfolio in the first half of this year the implementation of LED lighting, which we expect to create significant savings as we've experienced in the initial phases that we've done already. We've also undertaken a broad renegotiation of national purchasing contracts given our footprint today. And then we're also seeing just good efficiencies and especially in our multi asset markets on the payroll side. The second thing that really puts us in a good position in maintenance is, we have a pretty soft comp in the fourth quarter. So when Bill talked about that, we actually expect to see a reduction in expenses year-over-year in the fourth quarter that's assisted by the fact that we had some more extraordinary maintenance expense items in the fourth quarter last year, that certainly wouldn't expect to occur in that manner – re-occur in that manner this year. So those are all the specific items, all in all you know we were expecting slightly a slight increase in the 30 bp to 50 bp range in the third quarter and then actual decrease of 1% or maybe even 1.5% in fourth quarter.

[Alexander Goldfarb:]

Okay, thank you very much.

[Operator:]

The next question comes from Drew Babin with Robert W. Baird. Please go ahead.

[Drew Babin:]

Very good morning.

[Bill Bayless:]

Good morning Drew.

[Drew Babin:]

One question back in Seattle quickly, the initial yield on that deal being 4.5 and building up to 5.5 over time on a nominal basis. Adjusting for seasonality, will there be any period of time where that yield may go down before it goes up due to renovation disruption or anything like that?

[Bill Bayless:]

It's fairly flat, we do have a good rent growth in, in terms of the conversion to student but there are times because we're changing the leasing cycle over to an academic year to match the university. As other leases burn off there could be a little glitches in terms of that first year but we don't see it going below the initial, but that's how it. Gets to the five it's not a straight line, it is a little choppy.

[Drew Babin:]

Okay, that is helpful and then you had mentioned in past quarters that in assets, in markets that are seeing elevated new supply, you actually have some of your best pre-leasing results, as it kind of brings more positive attention to the concept of private student housing, is that still the case this point in the leasing cycle.

[Bill Bayless:]

Yeah, and it varies again, you can't make it as a blanket statement all over, and there is – I talk about Lubbock and College Station it's certainly the level of new supply there. We do see a little bit of impact on pricing power and absorption, but then you look at other long-term supply markets. You it's Tallahassee and Austin have been probably the two most active new supply markets consistently in the last three to five years and they continue to be our strongest rental revenue markets. And, this is in you talked about the category of 98%, above where we talk about slowing velocity to gain rate. If you look at our top three rate markets, Austin we started the year at 4.6% increase, where it is 6.5% and we certainly slowed velocity throughout the season, is where they were still a little behind but we – you know we certainly will fill. Tallahassee, which again has been an incredible supply market over the last three to five years we started at 3.8 we are at 4.92. Same thing with Kennesaw. In Kennesaw State University in Georgia, started 4.5% and we are 5.4%. So those are all barks that have had new supply but they continue to do extremely well from rate growth.

[Drew Babin:]

It is very helpful and one last one. At the property that is being transferred to your lender in the third quarter, I deduced that is the [indiscernible] property given the 360 beds, can you go back over the economics of that and how much NOI is going away as that is transferred.

[Bill Bayless:]

Yeah let me kick-off and I will turn it over to Daniel for the numbers and certainly we hate to ever see a property go back to the bank. In this particular case it's 2008 acquisition that was part of the original GMH transaction, a drive property it appeared to University, that because of its location to campus, we could never just get over the hump and turn the corner. It was one of only two of the drive properties we had left, we did not put it in the prior disposition package because that was a great package Power-5 conference, schools. Had a great story there to attract source capital that we did. And it was just, it also wasn't the best interest of our shareholders to take a loss of that property on the sale and Daniel now you talk about the economics.

[Daniel Perry:]

Yeah as Bill mentioned, when we looked at where that property was being valued by in the private market, it was just at a significant discount to the debt. We've never had a hand back of a wholly owned property. So certainly not something we took lightly but knew that it was not the right decision on the behalf of our shareholders to pay off a loan on a property that was worth significantly less. Then the debt, it was sitting on the books for about $28 million. The loan is that loan maturing in August of this year, $27.4 million. We went ahead and impaired it down to where we think private market valuation is right now this quarter. That was the $15.3 million, impairment charge you saw and then what you should see is this rolls off hopefully next quarter or maybe into fourth quarter, it’s the remaining write-off of the asset and then ultimately the gain on the forgiveness of the debt of $27 million. So all in all for net income it will be a wash. The NOI associated with that property is just over a million dollars. So when you look at it effectively from a cost to capital and impact to earnings standpoint it is like a four cap disposition.

[Drew Babin:]

Okay that is very helpful. Thank you.

[Operator:]

The next question comes from Nick Joseph with Citigroup. Please go ahead.

[Nick Joseph:]

Thanks, just following up on that, looks like it was removed from the pre-leasing statistics, so what was the impact from removing [indiscernible] estate. What was their net benefit to you, in terms of pre-leasing year-over-year from that.

[Bill Bayless:]

That it was really flat.

[Daniel Perry:]

Yeah it was in-line with where the pre-leasing is in terms of comparison to the prior year and then from a same-store NOI perspective we looked at it and it was exactly the same 2.2% if you would continue to include it in same store NOI.

[Nick Joseph:]

Thanks and then in just, in terms of other properties that have mortgages, I know you don't have a lot of secured debt but are there any other assets that are currently underwater that maybe, came through any of the other large transactions over the years.

[Bill Bayless:]

That is really the only asset that was in that situation in the whole portfolio, the only other property that I would – we would probably have one other asset, that is at tier two institution, it was part of a portfolio at Florida A&M University that in hindsight we wouldn't purchase on a one off basis but that has no debt on that property. But certainly one that has underperformed, in the same nature.

[Michael Bilerman:]

Hey it is Michael Bilerman. How do you guys think about the Seattle acquisition, going in at 4.5, which seems like a pretty full cap rate and even taking that up 100 bps overtime. How do you think about doing that on balance sheet versus trying to bring institutional capital and sort of justify using those types of assets in the market place and just walk through some of the various options you went through.

[Bill Bayless:]

Yeah, but first Michael, in terms of how we looked at that asset was in a much broader context and that Seattle in UDub market is one that we want to be in, we want to be in for the long-term and we do want to build scale. And so as we looked at this one particular first acquisition we did think about in the context as this was going to be one of the core markets we want to be in for the long-term. And so first from that regard, it made sense to utilize our balance sheet, to undertake that given that we know we're going to have a bigger presence through a variety of methods of entering the future. With that I'll kick it over to Daniel…

[Daniel Perry:]

The only other thing that I was going to talk about there Michael is that when we looked at two things, when we looked at the cost of capital relative to the investments this year we had the Arlie acquisition earlier this year that we did at 5.5 and then this one that year one is about 4.5. We funded it with about 80, funded the two of them combined with about 87% equity through the ATM. So that’s a de-leveraging event and we were able to maintain pretty much earnings neutral. For the first year, matching up again those additional shares against the NOI. And when we can put ourselves in a position to build on that multi asset presence and get the efficiencies that we want to achieve with in those markets, which we always say is another 25 bps to 30 bps that we don't even underwrite in those yields or cap rates that we're quoting that really, and then with the NOI growth profile that we've talked about that really made that, makes sense for us from a capital allocation standpoint.

[Michael Bilerman:]

And what are the components, if you want to take this up to a 5.5, what are the components that drive that growth and when will it come.

[Daniel Perry:]

Yeah and Michael it is over an 18 to 24 month period, and that we are by virtue of its location pedestrian to the University of Washington, it's already even though it was not designed as student housing and specifically targeted and marketed to student housing, it by virtue of its location and product offering again, being more the AVA’s or AvalonBay’s millennial product that had much greater amenity base than your traditional conventional multifamily is what lent it to that. And so what we will be undertaking one, we will be specifically marketing it as student housing to UDub students. That will involve not reconfiguration of the physical walls within the units but accommodation configuration through furniture design, also offering by the bed leasing and directly marketing to you UDub students. And so that also changes the price point on a per square foot basis as the student looks at a shared accommodation in a two bedroom unit, those type things. The other things that we're doing is we are, while there's excellent amenity space within the building it is not conceived as American Campus would have in terms of the socialization space it's got a very large fitness center, with a lot of vacant floor space, where we will repurpose that. Technology we're investing about 400,000 dollars to bring it up to our technology standards, and what the student needs are from a broadband perspective. And so all of those things to reposition it adds a purpose, not a purpose built but a repurposed student accommodation following the universities academic year is what will enable us to take that from the mid fours to the mid fives.

[Operator:]

Our next question comes from when Gwen Clark Evercore ISI. Please go ahead.

[Gwen Clark:]

Hi guys, I just have a quick question. In the event that one of your developments were not to be completed on time but you’d already leased the beds, how would you handle that kind of situation.

[Bill Bayless:]

Yeah, and we actually, folks may forget it was, 2013 we found ourselves in this situation at a property called 601 Copeland at Florida State University where we – and first of all we first were in fear we were going to miss in about June of that year. We immediately notified all the residents of that community that were going to be impacted I want to say it was potential, like 108 students. At that point in time exactly where we were, we sent a letter the student, we sent a letter to the parents, and said this is exactly where we are in construction there's a chance that we could potentially miss the opening. What we have done is, we have booked a hotel room, X number of hotel rooms if we do miss that opening we've arranged for storage space for any of your belongings that need stored and we're going to transport you to and from campus during that time. We them gave them the option that you may terminate your lease, you may not start your lease until January, we did not lose a single lease, we did end up putting about 60 I believe those kids in a hotel for a two week period. That property maintained a 100% occupancy through that period, it had double digit rental rate growth over the next two years and did great. Then in the one thing we talked about, it's about how you miss, if you're going to. In the markets where we talk about there have been negative consequences, is when the developers did not do anything of the sort what I just described but rather mom and dad showed up in the station wagon and the minivan and were told at that moment. Hey your unit is not done, we're going to be putting you in the hotel down the street. And so we would tell you here at American Campus 601 Copeland I actually got probably 20 parent letters commending the company on making it painless for them and it turned out to be a positive customer service experience versus the negative. It's all about communication and customer service, if you ever find yourself in that situation.

[Gwen Clark:]

Okay, and I am sorry I may have missed it. What time of the year did you give out this initial notices.

[Bill Bayless:]

It was June.

[Gwen Clark:]

Okay, so the situation that developer didn't mix the year in the cycle. Have you seen that go well for them.

[Bill Bayless:]

No, I mean we have seen some pretty bad handling of those situations over the years.

[Gwen Clark:]

Okay, and just one more follow-up.

[Bill Bayless:]

The whole thing, you always need to be transparent to your resident base. If you believe you may be in that situation you just tell them you may be in that situation. And we through out the communication with the folks at Copeland we literally were giving them updates every week to two weeks on exactly what was happening where we were.

[Gwen Clark:]

Okay, that’s very helpful, just one more. In the event that the developer didn’t give that length of notice, was the backlash for that asset like for a couple of years on or did it to tend to recover quickly.

[Bill Bayless:]

It varies from market to market, like if you look at, take Waco where we talked about that Baylor we're specifically having that issue there issue. There was a property that opened last year, that and they didn't miss their opening, they made their opening but the prior the missed opening occurred by another developer they were at 60% their first year, this year they are a 100% full and doing fine on their pro forma rents. So it was a one year recovery.

[Gwen Clark:]

Okay, you were helpful thank you.

[Bill Bayless:]

If you look at one of the higher profile ones that you all followed as investors as you know folks may remember the CCC development EVO in Philadelphia which was a pretty painful miss that probably was not handled as well as it could have been and that asset did fantastic in the second year.

[Gwen Clark:]

Alright got it thank you so much.

[Operator:]

[Operator Instructions] The next question comes from Ryan Meliker with Canaccord Genuity. Please go ahead.

[Ryan Meliker:]

Hey, good morning guys. I just had two quick ones for you. First of all with regards to the development pipeline. You've got $600 million slated to come online this year another $400 million in 2018 and $200 million in 2019. As you look out to 2018 and 2019 you know do we think that we're going to see upside to those numbers. Do you think 2018 is kind of baked in at $400 million now, and you're focused on 2019, help us understand how we should model out for development?

[Bill Bayless:]

2018 is pretty fully baked at this point, in terms of the only thing that typically can add to the numbers at this point in time are pre-sales and we're nearing the end of that window, 2019 there's I mean plenty of opportunity. If we go back over the last three to five years we're talking about $300 million to $400 million as a good run rate of owned development, seeing the $600 million to $400 million I think that's probably a new booking for us to think about in terms of going forward when you include the pre-sell opportunities is $400 million to $600 million a year.

[Ryan Meliker:]

Okay. That's helpful. And so we should assume you'll be in that $400 million to $600 million for 2019?

[Bill Bayless:]

Yes. 2018 you look at the pre-sales were – 2018 were 433 when you look at all the announcements pretty sound 2019 is actually up at 310.

[Ryan Meliker:]

Got you, okay. So may be another couple $100 million there for 2019 over the next year so. That's helpful. And then the second question I had was just with regards to the leasing results obviously you had a little bit of acceleration versus early June, it looks like the Dayton property was in the early June numbers and pulled out of these numbers. I'm wondering did that property have a material impact on the modest acceleration or not at all?

[Bill Bayless:]

No, Dayton was already out on the June 2 number. The change you see in the design beds for same-store pre-leasing Ryan, is in – is the blank and common property that was asked about earlier that didn't come out this quarter and that property was flat to the prior years, so pretty much neutral to the pre-leasing.

[Ryan Meliker:]

Perfect. That’s fair enough. Thanks a lot.

[Operator:]

The next question comes from Ryan Lumb with Green Street Advisors. Please go ahead.

[Ryan Lumb:]

Hi, thanks. It looks like the low end of the targeted development yields on your pipeline was lowered just slightly this quarter. Do you want to talk about the reasoning or the thought process beyond that?

[Bill Bayless:]

Yes. And we – previously we have been looking at in that release we're talking about all the deliveries from 2017 through 2019 and the range there previously being 6.5 through 7 and certainly that as we had announced the Cal Berkeley transaction is at 6.25. And so we wanted to accurately reflect, what is the full range of the development yields that we have in place currently in terms of what's in the pipeline. And as I previously mentioned just little bit earlier on the call, especially your West Coast markets like we talked about the potential to someday develop in Seattle that certainly the type of market that we would look at it had a 6.25. And so while the current pipeline does average still about a 6.5 in terms of it stabilize yield. We do look at the full range given the cap rate compression that’s taking place and especially in your major Tier 1 flagship Power-5 metropolitan areas with the 6.25 is justified, when we see cap rates in the 4 to 4.5 range.

[Ryan Lumb:]

So and related does that mean that the spread between in acquisition separate and the development yield has changed at all or is that some intended…

[Bill Bayless:]

If you look at where we have done a 6.25 development, we would tell you it's actually widened the spread and certainly Cal Berkeley, we're pretty confident anyone selling a student housing asset at Cal Berkeley is going to get a four cap probably a flat. And so that probably represents about a 225 basis point spread, which would be on the high end of the spread that we see.

[Ryan Lumb:]

Great. Thank you. That’s all from me.

[Bill Bayless:]

Thank you, Ryan.

[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:]

We’d like to thank you for taking the time to joining us on the call and again would like to reach out to the American Campus team and thank them in advance for all the hard work that you're putting forth related to the finalization of the lease up, the turn in the make ready and welcoming our students this fall. We look forward to talking to all of you at our next update. Thanks so much.

[Operator:]

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