American Campus Communities, Inc.
Q3 2017 Earnings Call Transcript

Published: 24 Oct 2017

[Operator:]

Good day, and welcome to the American Campus Communities 2017 Third Quarter Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Ryan Dennison. Please go ahead.

[Ryan Dennison:]

Thank you. Good morning and thank you for joining the American Campus Communities 2017 third 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 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 as we discuss our operational and financial results for the third quarter of 2017. Consistent with our prior announcement detailing the results of our fall lease-up and the expenses associated with Hurricanes Harvey and Irma, the operational financial results for the third quarter did not meet our internal expectations. This, coupled with two other nonrecurring and/or timing related items discussed in Daniel's quote in the earnings release last night, have led to the updated guidance range which Daniel will discuss in detail in his prepared remarks. Before we get started, I'd like to address the results of the 2017, 2018 academic year lease-up and how they may correlate the broader student housing fundamentals. I'd also like to provide brief insights related to the implementation of our strategic business plan and capital allocation strategy. While our fall lease-up at 96.6% occupancy with 2.9% rental rate growth led the industry and provides our 13th straight year of same store rental rate and rental revenue growth. It was 60 basis points in occupancy behind the prior year, and while it fell within our guidance range it was a full 100 basis points below the occupancy target at the midpoint of our guidance. As we discussed in our late September press release update, the rental revenue shortfall can be entirely attributed to the prior-year variance in occupancy and rental rate in three markets, Lubbock Texas, Champaign Illinois, and Rochester New York. Our remaining 57 same store markets achieved 98% occupancy representing a gain of 50 basis points over the prior year in those markets, and saw strong rental rate growth at 3.2%. The performance of these 57 markets speaks to the sound long-term fundamentals that continue nationally in the sector, while the underperformance in the three markets reflects the short-term impact and challenges that can arise as new supplies absorbed. When combining our new store assets which are currently 86.6% occupied, our same-store property groupings for the '18, '19 academic year lease-up is currently 95.5% occupied, providing an opportunity for improved rental revenue growth moving into Q4 of 2018 and into 2019. I’d now like to briefly address the status of our strategic business plan and corresponding capital allocation strategy. As those of you who have followed the company since IPO know, we've always preached the fundamentals of our investment criteria focused on one; securing locations that are pedestrian and/or bicycle distance to the Tier 1 flagship universities; two, product differentiation with a particular focus on affordable and diversified rental rates within each market and three, being located in sub markets with barriers to entry where new development hopefully takes place outside of our locations versus between us and the campus. If you go back just a decade ago, American Campus stood alone in the core belief of these fundamentals. As such, during our first decade of growth as a public company and as the industry consolidator, when we undertook the larger portfolio transactions, we usually had to take a portion of assets that were not always consistent with our own market selection and inherent to these fundamentals. As our investment theses held true throughout the years, consistently producing industry-leading results in a stable stream of rental rate, rental revenue and same-store NOI growth, the industry transformed to where American Campus' investment criteria has now become the bedrock fundamentals for the entire industry with Cap rates for core assets in major Tier 1 markets that meet our investment criteria now trading in the force. Over the last three to five years, nearly all of our competitor's new developments meet ACCs investment criteria. This industry maturation coupled with our emerging proprietary business intelligence platform now provides us with the opportunity -- the opportunity to be even more sophisticated and more discriminate in implementing our strategic growth plan and corresponding capital allocation strategy. As you know, over the last several years we've disposed of nearly all of our non-pedestrian non-bicycle locations, previously acquired in larger M&A transactions, these sales taking place at cap rates ranging from 5.75 to 6.25 allowing for accretive reinvestment into our high-yielding development pipeline. While two thirds of our growth to-data has been of the acquisitions, the disposition of these non-core assets has left us with a higher-quality portfolio of core assets that is comprised approximately 50-50 of ACC developed assets versus acquired assets. Within this higher-quality portfolio, we believe there remains a significant opportunity for accretive capital recycling, especially given the opportunity to take advantage of the current market cap rate environment for core assets. As such, it is our intent to monetize the outright sale or joint venture, some of the value we have created over the years to fund new higher growth accretive opportunities, especially in the areas of owned development and the presale purchase of competitor's developments. Our first evolution of a more discriminating investment focus relates to our target market selection where we now intend to predominantly focus on power five conference schools and our one research universities as classified in the Carnegie classification of institutions of higher education. We believe these institutions have the highest degree of residential housing demand, stability and growth. This has been reflected in cap rate maturation that is occurring in the sector. Overtime, this will likely lead to the strategic exit of some markets that we currently are in that do not fit both or one of these profiles. We then intend to utilize our business intelligence platform to proactively identify those markets that offer the greatest long-term growth and value creation and expand our market share accordingly, while also gaining operating leverage through multiple asset market efficiencies. Within these markets, we'll also seek to harvest value when appropriate and reinvest in higher growth opportunities in those same markets. Once again, we believe our emerging business intelligence and our proprietary operating platform provide us with unique opportunity to proactively take advantage of future market trends versus reacting to market conditions as to the fact. As we look to implement this strategy in conjunction with our current cost of capital and current market conditions with core market cap rates ranging from 4% to 5%, we prioritize our capital allocation decisions as follows. First, owned development, both on campus the RAAs program and off campus with stabilized yields for each ranging from 6.25 to 6.75. Second, pre-sale development purchases with stabilized initial yields ranging from 5.75 to 6.25, and third acquisition opportunities only when they include a significant presale development component that provide stabilized initial yields at 50 to 125 basis point spread to current market cap rates. By strategically harvesting some of the value created within our portfolio at the current market cap rates, each of these investment opportunities is accretive and should further improve our internal growth prospects. The recently announced core spaces transaction is consistent with this refined investment thesis in capital allocation strategy. As the transaction exemplifies our refined target market strategy, builds upon our expansion of market share in those markets we believe provide the greatest future growth opportunities, offers multiple property market efficiencies in five of the seven markets and includes a significant component of presale development that enables a 5.4% nominal stabilized yield with accretive funding expected to come in the form of asset sales or joint ventures consummated at cap rates consistent with the 50 to 125 basis point accretive spread just discussed. Our prior deleveraging activities in 2015 and 2016 were undertaken to place are balancing in the position allowing us to execute upon the opportunities as they arose this year, and we remain committed to using the most attractive sources of capital to maintain a balance sheet that allows us to be opportunistic in executing our growth plan going forward, maintaining an upper leverage target of 35%. Based on the current public versus private market valuation disconnect, we expect the most attractive source of capital available to us will be the recycling of our own assets. With this significant dislocation between public and private market valuation, acquisitions that do not include higher-yielding presale development components simply do not make sense at this time. As such, again our current capital allocation strategy is focused on development, presale development purchases, and acquisitions only when they include a significant presale development component where the blended stabilized yield provides an appropriate spread to current market cap rates. With that, I'll turn it over to Jim to discuss our operational results for the quarter.

[Jim Hopke:]

Thanks Bill. Turning to our operational results for the quarter, as Bill noted we experienced a challenging third quarter due to the final leasing results, as well as Hurricanes Harvey and Irma affecting many of our properties in our Texas and Florida markets. We were fortunate that we have no reported resident our staff injuries and the damage was generally limited to unit water intrusion, landscaping cleanup, and roofing repairs. These were the primary factors in our third quarter same-store NOI declining by 0.8% compared to third quarter of 2016 on a 1.3% increase in revenue, and a 3.3% increase in operating expenses. On Page 5 of the supplemental, we've noted that third quarter NOI would have increased by 2% excluding the expenses related to the hurricanes and lost revenue related to the Province in Tampa which was impacted by fire in the first quarter and Lofts54 in Champaign which was out of service this summer for nonroutine maintenance. Expenses relative to our forecast in payroll, utilities and insurance were lower than expected but more than offset by the $1.9 million of hurricane expenses and $700,000 of real estate tax and related consulting fees that were above expectations. Excluding these two uncontrollable costs, quarterly expense growth would have been only 0.2%. Turning to supply, for ACC's 68 owned markets, we are projecting that between 25,000 and 27,000 beds will be delivered in 2018 representing a decrease of 7% to 14% in new supply from 2017. We are anticipating new supply in only 29 of our 68 markets, and as always we focus on markets where we have significant presence. This year, those markets include Austin, Tallahassee, and College Station. As Bill highlighted, our 2018-2019 academic year same-store portfolio was 95.5% occupied on September 30, and based on our initial rate-setting exercises and occupancy projections, these properties are expected to produce rental revenue increases for the 2018-2019 academic year same-store in a range from 2.5% to 4%. On the expense side, we continue to implement asset management initiatives that should drive additional cost controls and improve operating margins over the long term. We look forward to updating the market on our fourth quarter call regarding the specifics of our guidance expectations. With that I'll turn the call over to William.

[William Talbot:]

Thanks Jim. Turning first to the core spaces transaction announced in September, we're pleased to have acquired seven high quality assets, which include three higher yielding presale developments. The portfolio features four Class A core pedestrian assets, totaling 2,276 beds, including the recently exercised option on the hub Seattle. In addition, the transaction includes three presale assets that will deliver in 2018 and total 1500 beds. In total, the portfolio assets are located 0.2 miles to campus averaged under one year in age and served universities of an average enrollment over 35,000. The assets are all located in ACC target markets consistent with our refined investment thesis. Via the transaction, we also expand market share in five existing ACC markets that we believe offer some of the greatest growth potential, as we average 99.4% occupancy and 3.8% rental rate growth this year in those markets. In addition, we have the opportunity for yield expansion through multi-asset efficiencies in the five existing markets. Upon completion and stabilization, we are anticipating a 5.4% nominal and 5.2% economic yield for the 2019 academic year which represents a 50 to 125 basis points spread over stabilized cap rates for similar core pedestrian assets in similar markets. Turning next to development. We successfully delivered 10 own developments on time in August, 2017 totaling 7454 beds and a development cost of $609 million. We are currently under construction. We’re on the final stages of predevelopment on 13 own developments and presales including the three core spaces presale developments for delivery in 2018 and 2019 totaling 9348 beds and $966 million with all projects targeting between 6.25 to 7% nominal yield for developments and a 5.7% to 6.5% for presales. In addition, we are pleased to announce we've executed a predevelopment agreement for second phase of our highly successful ACE project on the University of Southern California Health Sciences Campus. The new project consists of 297 beds and total development cost of $42 million and will share amenities and be operated out the existing first phase which has maintained 99% occupancy since opening and is already over 100% applied for next fall. The next phase is targeted to open in fall 2020. With regards to on-campus third-party development, we completed two projects this fall at the Texas A&M San Antonio and Corpus Christi campuses and we are currently under construction on our fourth phase of development on the campus of University of California Irvine for delivery in fall 2019. In addition, we are in predevelopment on third party developments on the campuses of the University of Illinois at Chicago and the University of Arizona and expect both to commence construction in the fourth quarter. Overall, the interest and activity for public private partnerships continues to remain strong. We recently completed or currently under construction are in predevelopment on 19 on campus projects totaling 12,200 beds and 1.1 billion in development cost and are currently tracking nearly three dozen potential procurements for future P3 development. Turning now to acquisitions. In October, we successfully continued our expansion strategy at the highly desirable University of Washington market in Seattle with the acquisition of the Bridges @11th. The 258 bed asset located immediately adjacent to TWELVE at U District acquired in June is under a long-term ground lease with the University of Washington that includes some marketing assistance, branding rights and priority leasing for faculty and staff essentially making this an ACE acquisition. After $1.2 million budgeted for amenity enhancements upgrades to on-site technology, FF&E purchase and other upfront capital improvements based on current occupancy levels of 98% for the first year, the acquisition would represent a nominal cap rate of 4.7% and economic cap rate of 4.5% for the first year. Upon further stabilization and increased density via shared accommodations, the project is expected to achieve a stabilized cap rate of 5.3% nominal and 5.1% economic in year three. In addition, there's an opportunity for 25 to 50 basis points of additional yield for our three Seattle assets through multi-asset efficiencies. With the completion of the core spaces portfolio and our expansion within the Seattle market, our near-term investment strategy will primarily focus on growing our significant development pipeline and focusing on predevelopment sales opportunities. With regards to the overall transaction market for student housing, the sector remains in high demand. According to CBRE's third quarter student housing market overview over $5 billion of student housing product has transacted to the third quarter of 2017. With the large number of assets currently under contract and expected to close in the fourth quarter, most brokers are anticipating that transaction volume will meet or exceed record levels of 2016 of $8 million when excluding Harrison Street's entity purchase of Campus Crest. International, institutional and fund buyers make up over half of the transaction volume today in 2017 indicating continued strong demand for investment in the sector based on the strong fundamentals of the industry. With that, I'll now turn it over to Daniel to discuss our financial results.

[Daniel Perry:]

Thanks William. For the third quarter of 2017 we reported total FFOM of $61.2 million or $0.44 per fully diluted share. While the results of the annual lease-up that had been discussed had a negative impact on earnings this quarter of approximately $0.02 per share, we also had two unusual events that negatively impacted the quarter by an additional $0.02. As previously noted, the cost of repairs this quarter following Hurricanes Harvey and Irma were $1.9 million. We also had record approximately $700,000 of non-cash interest on the blank and common property currently in receivership while final transfer to the lender is being settled. Finally, although same-store operating expenses only increased 1% this quarter excluding the hurricane expenses, we were targeting approximately $1 million or $0.01 less and expense growth in what we ultimately achieved. As Jim mentioned, the primary expense areas where we saw overages versus our goals were in property taxes, and nonroutine repairs and maintenance costs. While we have had success with the cost control and efficiency initiatives assumed in the 1 to 1.5% annual same-store expense growth we targeted in guidance, it would be fair to say that we didn't leave ourselves enough room for unexpected overages in these less controllable expense areas. Moving to capital structure, as of September 30, 2017 the company's debt to enterprise value was 31.2%. Debt to total asset value was 35.8% and the net debt to run rate EBITDA was 6.4 times. From a balance sheet management perspective, we closed on a $300 million term loan during the quarter as an interim financing vehicle for the initial phase of funding on the core spaces portfolio. Also we accelerated the timing of our bond offering originally planned for later in the year to take any interest rate risk off the table. This leads us in a good position from a capacity perspective to have ample capital to execute on our growth pipeline. With regards to capital allocation, the staggered timing of funding over the next two years of both the core spaces transaction, as well as our development portfolio allows us the flexibility to pursue the most attractive sources of long-term capital as we continually manage the health of our balance sheet with an upper end debt to asset value target of 35%. In light of this, as disclosed in the capital allocation and long-term funding plan on Page 16 of the supplemental, management intends to monetize approximately 400 million to 450 million of investment in select existing core assets in our portfolio via disposition or joint venture partnerships thereby taking advantage of the very high demand environment we are seeing for core student housing from private capital around the globe. Turning now to our 2017 outlook. Taking into consideration the final results of our lease-up for the '17 '18 academic year, and the year-to-date financial results as well as capital and external growth transactional activity, we are revising our 2017 FFOM guidance range to $2.28 to $2.32 per fully diluted share. The primary factors that cause this reduction and guidance are as follows; first, the occupancy levels from this academic years lease-up were slightly above the low end of our expectation for the same store properties, and slightly below the low end of our expectations for the new store properties. This is expected to result in approximately $0.04 per share or approximately $5 million less in revenue for the fall semester than originally anticipated at the midpoint of our guidance. With regards to the impacts of Hurricanes Harvey and Irma, we expect to repair costs for the year to have a $2 million or $1.05 negative impact on our guidance. Next, while we included an unsecured bond offering in our original guidance for the year, we ultimately executed it two months earlier than we contemplated at the midpoint of the original guidance which will result in $2 million or $1.05 of additional interest expense in 2017. And finally, the decision to transfer blank and common a non-core property in Valdosta Georgia back to the lender was not originally included in our guidance and will result in approximately $1.3 million or $0.01 in lost NOI in excess non-cash interest expense that had to be recorded. These items along with changes to other components of guidance that were net neutral to earnings expectations are detailed on Page 18 on our earnings supplemental. With that, I'll turn it back to the operator to start the question-and-answer portion of the call.

[Operator:]

[Operator Instructions] And our first question will come from Nick Joseph of Citi. Please go ahead.

[Nick Joseph:]

Bill, wanted to know how you evaluate your current business model in capital allocation strategy is working and what investor should expect to see earnings growth going forward? And I asked this question in the context of the last few years performance and not just what's happened in 2017. So if you go back to 2013 core FFOM is 2.27 and this year core FFOM is expected to be 2.30 at the midpoint. So over the four years it's 1% total core FFO growth. Over that time period you've averaged same-store NOI growth of about 3% done over 2 billion of developments and acquisitions, and I recognize you sold about $1 billion of assets and delevered but still there's been very minimal core FFO growth.

[Bill Bayless:]

Certainly the biggest driver to the drag on the FFOM per share growth is indeed the deleveraging activities and the asset sales that took place to put us in a position to execute on the plan. And so that certainly was a large delay in terms of the meaningful FFOM per share that we would like to produce. The focus in the plan has always been and continues to be in creating net asset value in the core portfolio and growing thoughtfully to create long-term value creation. Certainly we believe the earnings per share following the deleveraging will follow that in the long term perspective. For us and one of the most unique things about our business when we think about capital allocation and you heard us touching in our remarks is that, in a mature sector of real estate which most of the other REITs operate in, the capital allocation decision of when to hit the gas, and when to hit the brake and markets acting in unison, you hear multifamily company in 10 major markets, the market tends to move in unison in terms of the growth opportunity, the declines and when it is very clear what decision you should be making. In the student housing business, we have a little bit of uniqueness, a little bit more complex but also much more opportunistic and that when you the look at the 68 markets that we are located in and you look at - when we think of real estate we say where are we in the cycle and usually at the macro level those are very easy answers to make. When you look at our business and our opportunities and you say where are we in the cycle, well the first aspect of that cycle is from a supply and demand perspective and so when we talk about the modernization of student housing and the amount of purpose built student housing in each marketplace, and that competitive level that has a big influence in terms of driving the future growth rate and the opportunities in those markets, we have a very wide range, the University of Washington which we've been talking about at Seattle here recently 2% purpose built beds as a percent of supply to demand being enrollment. That provides an incredible underserved opportunity typically you don’t see in other sectors of real estate. On the flip side of that ranging up to some institutions like Austin and College Station where that number is now maturing at a higher level in the 40%. And when you look within each one of those markets, even within those markets, you have various assets this is the campus and product types they also don't act in unison. It can have variation in their income potential and growth streams. And so when we look at the internal growth opportunity and proper capital allocation decisions in terms of external growth, one of the things - in many cases people I've heard the statement over the last couple months is that our consistency of stabilized growth and rental rate rental revenue and NOI is based on our operating platform. And while that’s certainly true to a significant degree, it is as importantly based upon our capital allocation decisions and understanding through what our references are emerging to business intelligence function, the understanding of opportunities in terms of evaluating the 68 markets that we're in, what our current asset base is and more importantly what the growth profile of that asset base is, and then looking at the ability to achieve much greater growth and much greater yields and the opportunities that present themselves in growth opportunities. And in that regard it speaks directly to the comments that I made in my opening remarks related to capital allocation and using the core transaction as an example. Certainly we believe first and foremost we need to preserve our capacity for the highest growth that we have which is in the development opportunity especially the on-campus and the else that we see there. But simultaneously and at certain times like this when the private market to public market disconnect is what it is, the opportunity to harvest value especially in assets where we may have done an excellent job in creating that broke value, we have the opportunity to harvest it at very attractive levels in the cap rates that you see today, and to reinvest that in growth that has a much higher yield based on the market and asset characteristics that we described is what we’re always thinking about in terms of long-term value creation. And so we have always believed that if you take care of the real estate business and you are constantly being a good student of your capital in terms of always investing and reinvesting and things that are accretive in a higher growth profile in the long term those things will play out and certainly I do believe the earnings-per-share will follow. The $1 billion of dispositions of the non-core absolutely was large, large drag on the FFOM per share. And so we believe the growth opportunities that we’re undertaking it now, we're getting in a position where the dispositions that we do for self funding are not a value add cap rates that were not accretive for reinvestment as the type of opportunities that I described but we're now in that points where the assets that we can look at monetizing being in the range of the force. Now we have the opportunity for instantly much better match funding and accretive growth as we implement the strategy that I described in my opening comments.

[Nick Joseph:]

So would you expect quarter-over-quarter growth to start turning positive really in 2018 or we are still little ways away just get into the capital allocation decisions over the last 12 to 18 months?

[Bill Bayless:]

Certainly the results of this lease up in the comments that I made there is when we expect to start seeing the growth impacts in Q4 of 2018 and moving in the '19.

[Nick Joseph:]

Well just on capital allocation, given the size of the development pipeline, the future opportunity which you have spoken about, the targeted value creation and the forward capital commitments associated with that business model. Why do large-scale acquisitions make sense and how do you think about the overhang that staggered acquisitions create?

[Bill Bayless:]

In large acquisitions that do not encompass a presale component, do not make sense. So first and foremost, the core transaction of the case in point started as a marketed portfolio of 13 assets and that made no sense for us whatsoever. But when you look at the strategy that we outlined in terms of the target market strategy, the building of scale in the markets, we believe have the greatest growth coupled with the efficiencies, we were able to customize that transaction, include the large component of the presale. When we take - we couldn’t - we would've loved to have only cherry pick the presale assets, that transaction could not have got done in that manner. And so we were able to do it in a fashion to where we do have 50 to 125 basis point spread from the deleveraging activities will take your assets sales over the core assets to be able to create the room in our balance sheets to pursue those opportunities. And so in a prioritized fashion certainly again, own developments 6.25 to 6.75 yields are first and foremost the greatest opportunity and will receive the highest priority. But what we will always do is again as we look at a large portfolio of our 166 assets over 68 properties. And we look at the ability to accretively monetize as much of that that is necessary to invest in opportunities as we described that have greater growth and greater value creation, then we will undertake that, I hate to refer to, I think but this transactional engineering to create growth for you.

[Nick Joseph:]

And then just finally, how did the Seattle acquisitions of Bridges @ 11th and 12th that you just start to fit into that presale strategy. It feels like those are more of, kind of, market stabilized assets versus the premium. Hope that you have more presale deals?

[Bill Bayless:]

Yes, and this is something we started talking about. I think two to three quarters ago we started talking about our focus on the University of Washington market in Seattle. And as I mentioned at 2% purpose built bed is a percent of enrollment. UDub is the greatest major institutes in America in terms of the underserved nature of the student housing supply demand equation there. This is a market that we believe on the - when you look at the markets that we've created the greatest value over the last 5 to 10 years. And you know the Austin’s and the Tallahassee’s. We believe UDub has that type of growth potential. So while on the surface these look as though they are fully priced assets in an acquisition, we believe that market has a great dynamic evolving role and value creation. We also and what we really like about this Bridges acquisition which we've been working simultaneous with the AVA acquisition but it took longer because as William mentioned it’s on a ground lease with the University. And so in essence it is an ACE acquisition. And we really like the strategic focus of forming a formal relationship via a ground lease with the University that we believe is the most underserved in America. And so in the case of UDub, this falls much into our target market strategy as it relates to the market that we believe have the greatest growth potential, that we believe would be a significant missed opportunity on the long-term value creation for our shareholders to not be in that market in gaining scale and taking advantage of what is again 2% supply to demand. And so there I think the business opportunity in value creation will speak for itself over the next decade

[Operator:]

Our next question will come from David Corak with FBR. Please go ahead.

[David Corak:]

I guess I'm just curious to get your remarks on the end of the leasing season. One of the themes coming out of NMHC last month was that, you know everyone had a really disappointing last 4 to 6 weeks of lease up but no one can really give a good sense as to why other than supply maybe some of the higher price points, but could you just give us your take on what happened last four to six weeks of the season?

[Bill Bayless:]

And it was if you go to and I heard those comments also and for us this year is really the tale of two scenarios and again you had the three markets where we had the underperformance but then when you look at the other 57 markets, we had really significant gain and strength in terms of 50 Bps gained in occupancy of 3.2% rate. Now I will say with that said, when you look at the trending up until when we released I think our last release prior to the final update we gave was July 21 and we were running 30 Bps ahead and so certainly the trending prior to the last four week if you go back to report before that and we were 20 Bps behind. So there was an acceleration that took place from June through that July 21 report that gave us and when we issued that report on the 21, we still believe that opportunity was in the midpoint of guidance because the velocity pick up we had seen in that prior period in June and July, from our perspective when you look at where we ended up especially in those 57 markets it wasn't so much the diminishment in the last 30 days as it was -- I am sorry the velocity in the last 30 days compared to prior periods, prior years, but rather the ramp up we were seeing right before it that really didn't continue with that same velocity. Now as we look at where we came in and what happened in the last 30 days, the first places we went to analyze and see if there's anything that we can put our finger on because we again we heard the same comments that you did in NMHC and it sound like other companies felt it much more than we did in terms of the core performance that we reported, the first thing, the one thing we got questions from investors was just international students and is from the late rush and our data shows that that wasn't the case at all. And again, we can't track country of origin per fair housing in our own numbers. So we actually have to wait for the universities to report their enrollment numbers because they do have those statistics and in the 11 markets and universities have reported actually, international enrollment is slightly up and even in the markets you look at the three markets that we had the most issues in terms of RIP champagne in Lubbock, champagne international enrollment was up, RIP it was down negligible 40 students in enrollment for the entire university and Lubbock has a very, very low percentage of international students in the mix and they actually have their largest freshman class is history and so where that came from domestic or international, that doesn't appear to be it. The one thing that we hypothesize and again this is only a hypothesis at this point, is that with the modernization and the maturation of the higher quality core pedestrian assets and their percent of supply increasing, they tend -- the students that want to live in those don't tend to wait till the very end. And if they are the highest demand products, they are the most desirable and so they typically aren’t the latest best to lease in the season in mass. And so perhaps as other companies again, others felt it much more than we did in that regard, but perhaps as other companies saw those because everybody has tended to improve their portfolios as we mentioned consistent with our philosophy of having more of that course. So I don't know if that really answers your question David is that as we looked at our own facts and statistics and analyzing that's kind of our thoughts.

[David Corak:]

You certainly answered my next question about the enrollment of international students. So I appreciate that, but just wanted to turn over to supply, appreciate the update on some of the numbers you gave, but I think we're all trying to figure out if supply will be more or less impactful in '18 and then in '17. So two questions, can you update us on the supply as a percent of enrollment in '18 and if that will be more or less than you saw in '17? And then second, how many of the schools of your schools receiving supply in '18 also received some supply in 2017 and is the compounding effect there pretty detrimental to certain schools?

[Bill Bayless:]

And this year is really not any differentiation in terms of overall supply. It's going to be about 1.3% of enrollment, which has averaged for the last decade. Also, when you look at the amount of supply coming into each individual market, nothing out of the norm, as Jim mentioned in his comments, we always look at where we have the largest presence in the top 10 supply markets, and the three that we watched this year, that we’re watching this year are College Station which is continuing spot for the last four years, Tallahassee and Austin. Now when you look at the - give some stats here in terms of size of the capital allocation discussion we’re having with Nick in terms of understanding intricacies of each market. Take College Station as an example and that’s something probably our company's greatest accomplishment this year that you will have heard nothing about is our performance in College Station over the last three years and this year and that College Station is the one market that I would describe as your traditional real estate development market where there just been irrational exuberance over development and has continued. And that over the last three years, there have been 9500 beds of competitive apartment housing delivered at College Station and this year it was the highest delivery points that they had in a while, and when you look at our assets in College Station over that three-year period, we have actually been flat with all those beds coming online over that three-year period as it relates to occupancy and rental revenue where the market is down about 15 basis point in occupancy, and 10% in rent. And so this speaks to our investment criteria and implementation of that in terms of asset choices, price point and location and in a College Station we have weathered the biggest barrage of supply that you have seen and believe our assets for the long-term over the next decade, as now you have many less development sites available will continue to do well. Also on that list of the supply over the last several years, Tallahassee is in the top 10. And if they had over 3400 beds that have come in. Over that three-year period in Tallahassee, we have had 16% growth in rental revenue combination of rate Tallahassee all rate because the market has been full. And so as we've always said supply in and of itself because of the modernization that is taking place in the space is not typically the main concern that we have in our space and so this year we don't see a lot of differences from prior years but we do we will keep our eye on Tallahassee, Austin and College Station as the College Station continues to have another 2400 beds coming in this year, Tallahassee is going to have 2400, and Austin 1500. Now Austin and Tallahassee again have been big supply markets in the past, and the absorption there has been amazing and the rental rate growth has been amazing through that process, we certainly are optimistic that will continue but just any chance we have those supply numbers, we'll look at it very focused.

[David Corak:]

The data points are obviously helpful, but I guess overall do you feel better or worse about the supply impacts in the '18, '19 full year versus '17, ’18?

[Bill Bayless:]

Actually better, and the reason I say that as when we look at our big supply markets last year like Lubbock, and we knew Lubbock was going to be tough, we talked about it. Again with two of our three markets we’re focused on being Austin and Tallahassee and their historical performance for absorption and pricing, we feel better about that going into this season that did not last.

[Operator:]

Our next question will come from Juan Sanabria of Bank of America/Merrill Lynch. Please go ahead.

[Juan Sanabria:]

I was just hoping you could give a little bit more color on the internal growth prospects of kind of the new refined strategic assets you are targeting versus some of your older kind of legacy products and kind of differential in that growth rate we could expect to pencil in if we think about kind of like a five-year business plan and how that changes over time?

[Bill Bayless:]

And certainly as we talk about the last several years and as Nick brought about on his question, this was the year we'd hope to see that this lease up it hit and so the long-term historical numbers that we always talk about the 3% NOI hit high, 6% NOI growth from year-to-year are the targets historically that we believe that the portfolio is capable of. Certainly as you look at going into - we mentioned in the press release that we believe going into the '18, '19 academic year, the 2.5% to 4% revenue growth gives us the opportunity always depending upon the expenses to be into that more historical target range of 3% and north. And so, certainly the thing that enables that is indeed if you do look industry-wide in the actual metrics data has supported this now that is now transparent, the core pedestrian bicycle portfolios nationally have significantly outperformed the drive properties. The same holds true in this year's lease up. The axial metrics data, I have it here in front of me, your same-store portfolio of 411,000 beds is 94-5 versus 95-3. When you look at assets that are inside of a half-mile, their 95-3 from 95-8 where those outside of a mile had 180 basis points of the diminishment. And so certainly as we refined our portfolio in terms of the acquisition or the dispose we did on the non-core assets, we've got a better pool of assets now where we hope to even outperform the axial metrics national numbers is where we talk about our own capital allocation strategy, which includes two things; one, when we're doing acquisitions having better business intelligence than anybody else in terms of what we're choosing and the enhanced growth profiles of those. And certainly when it relates to ACC developed assets imploring our approach of building for the masses, not the classes, more affordable and diversified rental rates, which we believe give you better rental rate growth prospects.

[Juan Sanabria:]

So the growth would be more outperforming on the occupancy perspective rather than driving higher rate growth or they…

[Bill Bayless:]

Well certainly on the short-term, the opportunity if you look at the same-store grouping in '18, '19 as we mentioned in the release were at 95-5 which is one of the lower base occupancies that we've had as a comp to grow off of and so when you look at the trend level we said 2.5% to 4% if you know if you're 95-5 next year with only 2.5% rental rate you're going to achieve that low end without improving occupancy at all. And then the opportunity for upside in terms of occupancy improvement getting you closer to the four. And so over the short-term, I would say it's a balance of occupancy and rate where the opportunity exist and over the longer term, probably more driven by rates in occupancies we get back to those historical performance levels close to 97% occupancy.

[Juan Sanabria:]

And then just following up on the previous question on the supply in '18 it seems like just three schools and a couple smaller schools that you guys don't typically talk about, hurt the overall occupancy. What's the degree of confidence that you're not have the same idiosyncratic risk at a couple universities particularly with three of your bigger universities having been comp 10 supply markets at the same scenario in '17 doesn't repeat this next coming school year?

[Bill Bayless:]

There is never a guarantee that you're going to be 100% successful in every market. And so we will continually strive to be and to outperforming in each and every market that we're in and utilize our data in systems to do so. That business intelligence component and operational data only gets better and better every year in early adaptation and in making the adjustments that we need to. And so certainly while it is our goal and objective that we have -- do not have what took place and in Lubbock and Champaign and RIP occur again next year. Certainly there's always possibilities those one-off markets can rise in hardship, but we focus on each and every day in the monitoring of our data and the decisions we make.

[Juan Sanabria:]

And just lastly quickly on the disposition/joint ventures that are targeted, do you have a preference and how would you think about structuring a potential joint venture? Would it just be a one on joint venture where you contribute your assets or would you look to grow that joint venture with a partner acquiring assets in the open market?

[Bill Bayless:]

And certainly we will look at both, we are looking at both alternatives and will evaluate the economic merits of straight disposition versus joint venture and that certainly will be a large driver in that regard. Also though as we think about the joint venture opportunity and this is certainly when you look at where the cost of capital was today from a stock price perspective, makes a joint venture relationship more attractive. And in terms of being able to execute on transactions that we know will be long-term accretive for all of our shareholders and having that ultimate source of capital available. And so if we do end up the joint venture route versus the disposition route, we would think of it in a relationship perspective but not a one-off it's something that we can look at systematically as a potential opportunity. Certainly the internal conversations that we have in the conversations we have with our Board is making sure that any joint ventures that we consider undertake or done in the simplest structures and formats to provide the greatest level of transparent and understanding to the market and in terms of valuation. But, it’s something we are seriously considering and think that it can't be a quiver in our - an error in our code that we have not had historically have been able to rely upon.

[Operator:]

Our next question will come from Alexander Goldfarb of Sandler O'Neill. Please go ahead.

[Alexander Goldfarb:]

Two questions for you. First Daniel, on the last call you had talked about possibly a 100 basis points expense savings in the fourth quarter. So, curious your update on that, and then as it relates to some of the early - your earlier comments about just the cushion in the expenses, if we think about how the expenses trended this year, and then we think about where the revenues coming in, it sounds like next year, you know, backing out the hurricane comparison, that NOI for next year is going to be below what we're seeing this year ex-the hurricane. So, just if you could comment on both of those?

[Daniel Perry:]

Well, first with regards to the expenses that you said, we did target lower expense growth in the third and fourth quarters relative to the beginning of the year to get to that 1% to 1.5% same-store expenses growth we were included in guidance. If you look at our guidance update, the expenses that we include at the same store in the review same-store grouping, we did get some comments that it would have nice for us to show those percent exchanges relative to the review same store group prior year that something will certainly include going forward. That group excluding the hurricane cost now would be 1.5 at the high end expense growth to 2.2% at the low end expense growth. That is 50 to 70 basis points above our original expectation primarily driven by the third quarter. We had about $1 million of averages as we talked about in the prepared remarks $700,000 in property taxes and related consulting fees, and then few hundred thousand dollars in repairs and maintenance nothing of non-routine incident response to that cost. In the fourth quarter, we expecting still to be relatively flat compared to the prior year and in terms of expense growth to get us to that high, 1% total expense growth excluding the hurricane cost. As we move into 2018, we are obviously not giving guidance yet in terms of expense growth. Jim did mention that we are continuing to see opportunities on the efficiency side to drive cost controls and help to minimize that expense growth obviously for the first eight to nine months of the year with the - the results of this lease-up, you know, at 2.3% and then any impacts on that to positive or negative whether we see better or lower than the 2.3 in terms of other income revenue growth will be the determining factor on whether or not we are able to drive good same-store NOI growth in those first nine months. And then beyond that and into the third and fourth quarter will largely depend on the lease-up.

[Alexander Goldfarb:]

But, we assume fair to say that when you guys budget for next year is going to some conservativeness, the expense is probably going to be higher than what we normally see given an element of conservativeness is that fair?

[Bill Bayless:]

Certainly it's fair, especially as you look at the last two quarter of this year with very low expense growth numbers, you know, third quarter as I said, was 1% excluding the hurricane cost. We've had good success implementing a lot of efficiency initiatives and so that’s a tough comp as we move into the second half of the year, maybe a little better comp in the first half of the year where as you saw we are running a little above 3% this year an expense rate.

[Alexander Goldfarb:]

And then, the second question is, on the funding side, you guys have about 400 to 450 of this growth targeted for funding and then there is sort of plug of about 350. So, can you just talk about how you think about the cost of those as far as cap rates or funding rates? And then, you know, given where your stock is obviously it's hard to adjust your development program, based on where the stock is trading in a real-time basis, but given the depressed level does it impact how you guys think about new investments just given that if you're selling stuff presumably it's going to be at cap rates that are probably wider than if you're issuing equity?

[Daniel Perry:]

Wider to what we would issue equity at?

[Alexander Goldfarb:]

Yes, I mean where you would normally issue equity presumably would be inside of where you'd be selling…

[Daniel Perry:]

Well, that's probably, yeah and that's why Bill in his capital allocation discussion talked about really turning towards looking at the core portfolio and joint venturing interest in those assets or actually outright selling those assets at the cap rates that we're seen available or in fact in this favorable market environment in the mid-fours and special picking assets where we feel like we've been able to drive good NOI growth over the last several years and maybe we may see a bit of slowing relative to what we can invested at. So when we look at the $400 million to $450 million, that's how we're thinking about that capital cost and that's what we want to go out and execute on first as we talked about the nice part of our capital allocation plan that we lay out in the supplemental is that of this $869 million of capital commitments, $656 million of it is going to be funded over a two-year period all the way through the fall of '19. And so we have plenty of time to assess what we want to do on that remaining $273 million to $323 million of capital that we reflect their and looking at what we think are the best sources of capital right now from heat map perspective, dispositions make the most sense. Obviously, you would put equity at the prices that we're trading at today pretty much off the chart and so we will continue to assess the portfolio, look at what assets we think make the most sense from a long-term cost of capital perspective taking into consideration the NOI growth profile of those assets and match fund as we move through that two-year period.

[Operator:]

Our next question will come from Austin Wurschmidt of KeyBanc Capital Markets. Please go ahead.

[Austin Wurschmidt:]

Touching a little bit more on the disposition side I was wondering if you could detail your assets sale criteria and how you guys would expect to achieve a sub five cap rates for assets that fall outside of those target criteria of a power five confidence or R1 university as you described in your prepared remarks.

[Bill Bayless:]

Yes, those are two comments in terms of our long-term target market desires and the core transaction that we're talking about in the imminent future are not necessarily directly related. And so as -- one of the things Daniel said is we look at where we have created significant value that may make the most harvesting, they may well, indeed be within some of those target markets that we do want to be in long-term but perhaps not with those particular assets. And so those -- the exit of non-power five and research one markets should not be taken in concert with this particular disposition and joint venture we're discussing.

[Austin Wurschmidt:]

No. That's helpful. And then can you just update us where you are in the process in terms of have you taken assets to market, what the expectations in term of timing. Can you just give us some color there?

[Bill Bayless:]

The process will commence prior to the end of this year and we hope to close in the first two quarters of next year.

[Austin Wurschmidt:]

That's helpful. Thanks Bill. And lastly, just want to talk a little bit so you guys have baked in rental rate growth of 2.3% for '17 and '18. You outlined targeted growth of 2.5% to 4%, which seems reasonable to think 2.8% revenue growth expectation for 2018. What other factors could impact that either up or down and how are you thinking about those as we move down here?

[Bill Bayless:]

If you look at the statement there in the release, the 2.5% to 4% relates to the '18, '19 lease up. And so that is the growth rate that we would anticipate that we can produce on the revenue side through the next lease up for the '18, '19 academic year. So that is not a calendar year '18 reference. So we're not going to give expense guidance on this call and so we'll give that in the -- on the February call in terms of the final expense projections and what that growth rate is for the first three quarters of '18.

[Austin Wurschmidt:]

Right, but I was just looking at the 2.3% that's baked in for '17, '18, which you have in the first half of next year coupled with kind that back half of the year. Revenue growth contribution from the '18, '19 year and kind of putting those two together and so just curious what other moving pieces as we saw this year right other income and some of the short-term leasing impacted revenue growth, how are you thinking about that next year?

[Daniel Perry:]

That is exactly the proper variables too considering and we will - again what they guidance on all those components when we get into giving the ’18 guidance. As we look at the number short-term leases in the portfolio is relatively on part with what we had last year and so we have comfort in that levels and so there is no extraordinary situations related to that.

[Operator:]

Our next question will come from Drew Babin with Robert W. Baird. Please go ahead.

[Drew Babin:]

I wanted to circle back on something that we said earlier about FFO growth for next year. I think Bill you said that the FFO growth should begin to be seen in 4Q ’18. I want to clarify whether you talking about FFO growth or NOI growth because certainly consensus estimate would paint a different picture for sort of the first three quarters of next year?

[Bill Bayless:]

Again we're not giving any guidance for any point in time next year but when we talk about where the improvement in the internal growth numbers that we believe will occur starting in Q4 of next year, overall what we are saying is that positively impacts all your numbers NOI and earnings per share provided to about those revenues are put in place or so. If you meant to apply any certain target.

[Daniel Perry:]

And I think what through the Bill was really speaking primarily to the NOI - with the 2.3% resulting revenue growth from this lease-up that provides obviously a more difficult revenue number when you start taking to expected expense growth in terms of NOI for the rest is '17, ‘18 academic year. With regards to FFO, the big - obviously the big drag as we’ve talked about is that, as you move from '13 to '14, '15 and '16 we had about $2.5 billion of capital activity between dispositions and equity. We had about $1.3 billion in terms of development and acquisition growth. I think Nick at the beginning referenced a larger number is taking into consideration '13 and '17 really looking at what changed between 2013 and 2017. And then when you take just '16 by itself alone compared to 2017 we've $600 million of dispositions at the end of 2016 which really is being deployed and we also had a large equity offering in 2016 which is being deployed into our growth portfolio in '17, '18 and '19 and so that there is a lag there that's really what's caused this low growth in FFO as we deploy that capital. You should start to see it take effect in '18, you would expect that. So we are just hesitant to start committing to any kind of levels of FFO growth before we give our guidance for '18. You’ve got to look at when you go through all the individual components of it as we go through the budget for this year - for '18 at the end of this year and in terms of what that will ultimately allow us to drive in terms of FFO growth. But you would expect as you move into - you should expect as you move into '18 and '19 and we're getting that capital deployed and we don't have the drag of the prior year comparison of lost NOI and increase in weighted average share account that you should see improvements in that FFO growth.

[Drew Babin:]

And secondly on Texas Tech a little bit for this past year, you talked about your positioning relative to the new supply, wanting to be inside of new supply. Was that the case largely in Lubbock and if you look at your supply markets for Austin, Tallahassee, College Station for '18 how do you feel about your positioning relative to supply?

[Bill Bayless:]

First in Lubbock, in Lubbock we're in a - as we talked about consistently 3700 beds of new supply coming the Lubbock of which we were 1313. The good news in that market is, we are in premier locations in the pedestrian submarket and have a predominant position in that market. Also we have no new supply coming in next year and we have the largest freshman class at tech's 7,148 up 4.7% from the prior year. Their long-term enrollment goals have been 40,000 by 2020. They’ve gone from 28,000 to 37,000 along that trip and so we continue to remain bullish on the long-term investment that we have there. As it relates to Austin and Tallahassee, we had excellent asset locations and in each of those markets, we have premier pedestrian location two campus and that's why I mentioned Tallahassee where you've seen over 3,000 beds come on in the last three -- and again this is a great point of capital allocation. You go back to the NMHC conference that took place four years ago and everybody talked about Tallahassee being the scariest market over the three to four years that just passed. We utilized our business intelligence function and we went big in Tallahassee and while that growth came in, as I mentioned, we've had 16% growth in rental revenue over a three-year period. And so we attempt to always position ourselves well in those markets to sustain consistent long-term growth.

[Operator:]

Our next question will come from Jeff Powell with Goldman Sachs. Please go ahead.

[Jeffrey Powell:]

Thanks for all the color on the capital allocation and sources of funds. I just want to turn to scale for a moment and get your thoughts there. You have $400 million of NOI with $30 million in G&A and in apartments Essex has $40 million of G&A and $900 million of NOI. Just wondering if you can think you can scale your platform from here?

[Bill Bayless:]

And we certainly can scale the platform from here and part of the -- and that's part of the challenge also to talk about the deleveraging activities and major dispositions over the last year, is that as you look at the market and property count, we're largely in the same size as we were from an operational perspective five years ago. And so certainly when you look at the infrastructure for American campus and a little more complex than a multifamily company given our significant P3 business and the third-party business there and the transaction side of the on-campus transaction. But certainly we are incredibly scalable at this point and basically have the infrastructure in place operationally to grow another 25% to 40%.

[Jeffrey Powell:]

And then just turning to the third party development services revenue, you increased guidance this year to $11 million. Just for next year, just how is that looking for those deals and could that trend a little lower than this year to be flat.

[Daniel Perry:]

Jeff this is Daniel. Yes, this is obviously a big year, I mean if you look historically on the third-party side, we tended to run in the $10 million to $15 million range including both development and management services. This year we're approaching $20 million. We've had a really good year in terms of third-party development closings. We had three new construction starts and then we've got some advisory fees for transactions in addition to that. In a normal year you got to have those development starts where you’re recognizing that big piece of the development fee upfront as you commence construction, and so it all depends on how much we're able to backfill with new awards for next year. We do as William talked about continuing to have a great RFP pipeline which will inevitably include some third-party developments. So if we can be awarded those, certainly you know that's where we would see the backfilling but to see a year like we had this year, it shouldn't be expected I would expect it to be more in that $10 million to $15 million kind of range as opposed to the 20 million that we had this year unless we have another big award year like we did in 2017.

[Operator:]

Our next question will come from Vincent Chao with Deutsche Bank. Please go ahead.

[Vincent Chao:]

Most of my questions have been answered here already, but I would just maybe from a big picture perspective Bill, trying to tie in your comments about your competition and now basically using your development criteria and find that back to the historical 3% to 6% internal growth rate, I mean should that necessarily mean that we just drift down to that 2% overtime and some of the upside is eroded away by competition and then a similar question on the spreads that you are achieving in your development, should that necessarily come down as people sort of adopt your approach?

[Bill Bayless:]

Overall we are still early enough in the maturation of the space and again when you look at the pie charts that we show on our investor charts in the 68 markets that we’re operating in, when you look at core pedestrian student housing off-campus as a percent of enrollment is just over 10%. And so there is still so much runway in the space from a modernization and new supply perspective that we view the adoption of the appropriate fundamentals of the space for long-term success as a positive as it relates to the significant opportunities to grow nationally in the market that we desire to be in without driving down the opportunities for us in terms of achieving the type of NOI growth that we have seen historically. We also and while we think the folks have gotten a lot better in terms of their development prowess and how they think about what they can see, we still do benefit from typically anything any time that we buy anything bringing the efficiencies and effectiveness and superior management operations to create that upside. And so overall we still see the additional competition in terms of the adoption of our business plan as an overall net positive than impacting slowing growth rates.

[Vincent Chao:]

And then just another question, earlier you had mentioned where you'd allocate capital and acquisitions had a caveat as needing some presale upside on top of the initial acquisition, and I was just curious how you factor in sort of the time it takes to generate that presale upside, I mean if you look at the core space stabilization a few years out, a lot of things can happen between now and then, so I guess how do you factor in the time it takes you to reach that stabilization.

[Daniel Perry:]

The presale cap rates that we are quoting are year one cap rates, and they are higher because you're getting that higher cap rate given that’s you're taking the lease up risk from the developer, they are still taking the construction risk which is why it's elevated above a typical or below a typical development yield but you get the - you're taking or we as the presale purchaser taking the lease up and stabilization risk during construction, so you're getting above an acquisition cap rates, that’s what you get the blend between a typical development yield and a - just stabilize asset, existing asset cap rate. So it’s a year one cap rate that we’re quoting for those presale developments.

[Vincent Chao:]

Right, but I guess in this case some of those don’t deliver for a while, so that lease-up risk is spread out over a number of years and so obviously conditions can change, things like that. So just curious how you factor that in?

[Daniel Perry:]

Yes, I mean it’s just like, it’s a same as any, if you're thinking about they are all 2018 developments, right. And so you're talking about, you know the same lease up environment risk that we would be taking with our own development portfolio for 2018. The reason we talked about 2019 is that's when we are fully buying out all of the core spaces joint venture interest holdings in those properties in fall of 2019. So, we are really talking about once we bought 100% of their interest and we're getting full contribution from all the presale developments in terms of ownership relative to the existing assets we bought in 2017, and that's when you're seeing the first full year of 100% ownership interest in a full blend of the NOIs and yields of those assets. [Operator Instructions] Our next question is a follow up from Nick Joseph of Citi. Please go ahead.

[Michael Bilerman:]

Hi, it's Michael Bilerman here. Bill, I am just curious - I am just curious have you thought about potentially raising capital alongside doing this acquisition and I say that just from the perspective of while you may have a lot of confidence in the ability to execute and raise $750 million of capital to fund this transaction. The market never likes uncertainties because there is a certain amount of uncertainty over the period of time, both in terms of looking at from the disposition market, what could happen to the operations of student housing assets and you're also taking risk in terms of lease up. So did you consider doing a joint venture on this acquisition to bring in foreign capital or other capital you think is so strong in the sector and then continue to sell or do other assets that would just be incremental to furthering your strategy?

[Bill Bayless:]

Yes, we did Michael. We went through all of that also certainly had those discussions also with the Board level. Certainly in these transactions while it's been announced and closed here recently, obviously these discussions started much, much earlier toward the beginning of the year in terms of the process, in terms of getting to the finish line. And throughout that process, we looked at all the various forms available of raising capital certainly the stock at various times was at much different level than it is today and in terms of looking at raising equity. Also when looking at the joint venturing opportunities and this ties back into and while there is certainly execution risk that you talked about there in terms of the market moving away. The decision and discussion between joint venturing directly on this opportunity versus joint venturing or disposal on the existing core really had to do with the evaluation of growth rates and return that we look at with regard to this portfolio versus what we may transact upon. And so those decisions were driven and going through all of that analysis and looking at what we believe would be the most accretive and weighing that against the risk and then making that decision and so all of those variables that we're discussed and again not just internally at the Board level in terms of making the funding decisions in terms of how we go forward.

[Michael Bilerman:]

Right, but the spread is if you're talking about a forecast 4.5% cap on in-place right, you still have growth in '18 and '19, '19 and '20, arguably those assets that you really met the portfolio average that almost gets you to 5% which obviously in the 5% and 5.4% to put the pressure on your balance sheet is almost three quarters of a billion dollars of capital raise an impact your stock price. Does it seem like a really good trade for this period and I would think that being able to announce the transaction or you're bringing in a new joint venture partner and by the way it's always easier to bring in a joint venture partner on an acquisition versus selling existing assets off your balance sheet because you never know who is getting better end of that deal. I'm struggling with trying to understand why you wouldn't have brought in joint venture capital and still executed other joint ventures and other sales along with your strategy?

[Bill Bayless:]

Yes, and in that regard, one, this in and of itself with core is somewhat of a joint venture in terms of the structured buyout over time that is taking place. And so a little more difficult in terms of the ability to bring in joint venture capital at the outset of the transaction versus perhaps prior to -- you still have the opportunity in terms of the delivery of all these assets to look at other forms of capitalizing the transaction. At the end of the day those decisions do come down to and the analysis to the future growth rate and looking and certainly when we underwrite transactions, we do a conservative -- if you look at all the assets we bought in Austin in 2011, it was based on a pro forma three, three where the rental rate growth over the last three years those assets have been 25% and so as we look at the long-term potential of the core port -- the core spaces portfolio that we are acquiring and again looking at the growth rate value creation opportunity, we would prefer to own that outright into joint venture or dispose off the assets that we're going to in terms of the tradeoff for that risk. The thing that and again and I understand that on the -- in terms of the economic quotations you went through their your comments, but at the same time we go through a much more in-depth analysis internally and at the Board level and looking at that and making those decisions.

[Daniel Perry:]

One thing I'll add to that too is that when we've looked at and consider whether we would joint venture, any transaction or whether we would enter into any joint venture partnerships and add that as a source of capital to our quiver, the way we think about it is, okay, do we want a joint venture existing assets or do we want a joint venture the new growth as you're talking about, we could have done with core. And we always feel like the joint venture - the private joint venture market has a lower cost of capital what we're seeing from buyers of student housing especially the international funds that are coming, sovereign wealth type funds are coming in as they're looking for coupon flipping type investments, I mean at the end of the day what we hear from advisors is, they are not even that concerned about the NOI growth. They buy at cap rate as that and the NOI growth is all gravy to them. And so whatever piece of - in a joint venture partnership whatever piece we are deploying into that joint venture we look at as the public markets capital which has a higher cost of capital than the private market. And we can generate a better IRR on those new developments - on those new growth properties than what we feel like we're monetizing in our existing portfolio. And so, we want to use as much of the capital we are going to deploy on that new growth stuff where we can generate a higher IRR and use where we believe there is a lower IRR to sell to the private market that use that as a sufficient return.

[Michael Bilerman:]

Just last question in terms of timing, you know, arguably by closing at least the initial phase of core phases acquisition and continue to fund development, your leverage levels are likely to materially increase prior to selling. And so, I am just trying to understand sort of how we should be thinking about where leverage goes, call it 4Q, 1Q, 2Q and at what point do you expect to start having some sales to bring that leverage down to this 58, 66 pro forma that you have in the supplemental?

[Daniel Perry:]

Yes, as of quarter end we said our debt to asset value was sitting right around 35%, you know, it's not - it's much to be deployed in the immediate coming quarters and it's the ongoing funding of our development pipeline, the bigger commitments on the core portfolio are until fall of '18 and fall of '19. So, you know, based on our projections we see the debt to asset value ratio creeping up to 2 percentage to 3 percentage points until we execute on those dispositions and then coming back down towards the mid-30s. Obviously, if we funded the rest of the capital needs that we show on the capital allocation page there all with debt, we would get up back up around that 38% pro forma debt-to-asset ratio that we show there by fall of '19. The intent would be to access or use additional disposition as a portion of funding that remain in capital need of 273 million to 323 million to make sure we'll start to bring that ratio back down towards the 35% goal that we're talking about over the long-term.

[Operator:]

Ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Bill Bayless for any closing remarks.

[Bill Bayless:]

We certainly want to thank you for taking the time to visit with us on the third quarter results. We hope the broad discussion today in terms of business strategy and capital allocation strategy was helpful to you all. And we look forward to visiting with you all at NAREIT here, next month.

[Operator:]

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