American Campus Communities, Inc.
Q4 2017 Earnings Call Transcript

Published: 22 Feb 2018

[Operator:]

Good morning, and welcome to the American Campus Communities 2017 Fourth Quarter Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. At this time, I'd 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 fourth quarter and year end conference call. The press release is furnished on Form 8-K to provide access to the widest possible audience. In the release, the Company has reconciled the non-GAAP financial measures to those directly comparable GAAP measures in accordance with Reg G requirements. Also posted on the Company website in the Investor Relations section you will find an earnings materials package which includes both, the press release and a supplemental financial package. We're hosting a live webcast for today's call which you can access on the website with the replay available for one month. Our supplemental analyst package and our webcast presentation are one and the same. Webcast slides may be advanced by you to facilitate following along. Management will be making forward-looking statements today as referenced in the disclosure in the press release, in the supplemental financial package, and in SEC filings. Management would like to inform you that certain statements made during this conference call, which are not historical facts may be deemed forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act of 1995. Although the Company believes the expectations reflected in any forward-looking statement are based on reasonable assumptions, they are subject to economic risks and uncertainties. The Company can provide no assurance that its expectations will be achieved and actual results may vary. Factors and risks that could cause actual results to differ materially from expectations are detailed in the press release and from time to time in the Company's periodic filings with the SEC. The Company undertakes no obligation to advise or update any forward-looking statements to reflect events or circumstances after the date of this release. Having said that, I'd now like to introduce the members of Senior Management joining us for the call. Bill Bayless, our Chief Executive Officer; Jim Hopke, President; William Talbot, Chief Investment Officer; Daniel Perry, Chief Financial Officer; Jennifer Beese, Chief Operating Officer; and Kim Voss, Chief Accounting Officer. With that, I'll turn the call over to Bill for his opening remarks. Bill?

[Bill Bayless:]

Thank you, Ryan. Good morning and thank you all for joining us as we discuss our fourth quarter and full year 2017 financial and operating results. As you saw in last night's release, we had a strong end to the year. As Jim will discuss, our Q4 property operating results slightly exceeded our expectations resulting in beating the streets current consensus by a $0.01 for both, the quarter and the full year. I'd like to thank the American Campus team for delivering our 13th consecutive year of growth in same-store rental rate, rental revenue and net operating income. A testament to the growth fundamentals and stability of cash flows offered by prudent student housing investment. As William will discuss, these strong fundamentals and stabilities of cash flow continue to foster interest from global institutional investors and continue to drive record transaction volume and increasing private market valuations. Cap rates continue to compress, particularly with regard to core assets located within walking distance to major Tier-1 universities, now trading in the mid 4% cap rate range. However, like most streets, the current public market valuation being applied to our stock is significantly dislocated from current private market valuations. Giving the significant valuation disconnect between the two we currently intend to selectively pursue only the highest risk-adjusted return opportunities funding them via our strategic capital recycling initiatives focused on harvesting value from our existing portfolio of core assets through joint ventures and/or dispositions, capitalizing on the aforementioned private market conditions. William will also provide an update on the strategic capital recycling activities. Daniel will then review our quarter-end and year-end financial results and discuss our 2018 guidance and the underlying assumptions. With that, I'll turn it over to Jim to get us started.

[Jim Hopke:]

Thanks, Bill. We're pleased to report internal growth again in both, our fourth quarter and full year 2017 results, now marking the 13th consecutive year of same-store growth and rental rates, rental revenue and NOI achieved every year since our IPO in 2004. As seen on Page S5 of the supplemental, quarterly same-store property NOI increased by 4.2% on a 1.7% increase in revenue, and a decrease in operating expenses of 1.8%. The operations team delivered solid expense control to finish out the year generating targeted reductions and controllable expenses of almost 4%, primarily in the G&A, payroll, and RnM [ph] categories. Additionally, while utilities are largely non-controllable, broad asset management initiatives help to reduce this category by 1.6%. For the full year 2017, same -store NOI increased 2.5% on a 2.3% increase in revenue and a 2.1% increase in expenses. Excluding expenses directly associated with hurricane repairs, our expense growth would have been only 1.4% and NOI growth would have been 3%. We are also pleased to report that our full year 2017 results achieved our stated goal of a portfolio level operating margin in excess of 55% coming in at 55.3% in year three of our initial 3 to 5 year range. This NOI margin expansion since 2013 is the equivalent to approximately $21 million NOI and approximately $450 million in value. We continue to pursue asset management initiatives that will create additional efficiencies and further drive operating leverage. Turning to new supply; we're projecting a reduction of over 10% versus 2017 for ACC's 68 owned markets. The 26,000 new beds represent approximately 1.2% of enrollment across our portfolio, slightly below the 1.3% long-term average. Overall, the new deliveries are well spread being located in 25 of our 68 markets. We continue to closely monitor three markets where we have a significant presence which have also experienced significant new supply in recent years; Austin, Tallahassee, and College Station specifically. Taking into account portfolio-wide leasing activity to-date, we are projecting same-store rental revenue growth of 2.9% to 4.4% for the 2018-19 lease up based on a combination of occupancy and rental rate growth. Turning to our full year 2018 outlook; we're projecting same-store NOI growth of 1.1% to 2.9% based on revenue growth of 2.1% to 2.7%, and expense growth of 2.5% to 3.3%. As always, the low ends of our revenue guidance reflect execution risk of our fall lease up, backfilling short-term leases, summer leasing initiatives, and very outcome in our other income growth projections. Consistent with other residential REITs, our same-store expense growth expectations for 2018 are negatively impacted by property taxes and insurance which are expected to increase at elevated levels due to aggressive assessment practices in several markets and insurers coming out of a high claim year in 2017. Growth in these two areas is projected at approximately 8% and 19% respectively However, our projections in payroll, RnM [ph], marketing and G&A categories reflect continued benefits of our asset management initiatives with expected overall growth of approximately 1%. NOI growth in the first two quarters of 2018 is projected to be relatively flat, largely a result of lower revenue growth coming off of last fall's lease up. We expect NOI growth to reaccelerate in Q3 reflecting our academic year 2018-19 lease up assumptions. We look forward to updating the market as we progress through the year. I will now turn the call over to William to discuss our investment activity.

[William Talbot:]

Thanks, Jim. Turning first to overall transaction market for student housing; the demand for investment in our sector continues to be strong and cap rates for Corporate assets continue to compress. According to CBRE student housing overview, 2017 experienced another vibrant year of transactions with over $8.2 billion of product traded during the year, representing the second highest annual level of transaction volume and the highest when excluding Harrison Streets recapitalization of CCG in 2016. For 2017, the overall cap rate for student housing compressed an additional 8 basis points to only an 18 point spread over multi-family. Cap rates for pedestrian assets have continued to compress, while non-pedestrian asset cap rates have remained relatively stable causing the spread between pedestrian and non-pedestrian assets to almost double to 62 basis points, the largest spreads in CBRE has been tracking pedestrian versus non-pedestrian cap rates. While pricing on core pedestrian assets have major power five universities achieving valuations in the mid 4% cap rate range. ACC's portfolio now consists almost entirely of core assets located either on campus or pedestrian at major university markets with a portfolio median distance to campus of 1/10 of a mile, assets that are consistently trading at cap rates below 5% in the private market. Buyer profile remain consistent from 2016 with international, institutional and fund investment consisting of over half of all transaction volume for the second year in a row. It is widely anticipated that the investment appetite for student housing will remain strong. According to CBRE's annual investor survey, almost 75% of participants desire to increase their exposure to student housing in 2018. Overall, investors continue to value the strong fundamentals and the stability of cash flows of student housing assets, and that continues to be reflected in private market valuations. The sector has a long runway in investor demand and that should continue to produce strong levels of investment in student housing facilitating the execution of our capital recycling activities. Turning to capital recycling; we are pleased to announce that we have made significant progress on the strategic initiatives we mentioned on last quarter's call to explore joint ventures and our core dispositions in order to fund our highly creative development pipeline. With regards to joint ventures; after a competitive process and numerous offers received by leading global investment groups, we are in the final stage of negotiation on a non-binding term sheet for minority JV interest in the portfolio of our existing assets. The valuation is in-line of our previously provided range with the economic cap rates expected in the mid 4% range and is consistent with cap rates achieved for similar high quality core pedestrian assets selling in the private market subject to negotiation of venture documents and due diligence, we expect the partnership to close in the second quarter of 2018, and we'll provide the market with an update at that time. Moving to our P3 activities; we're pleased to have been awarded an industry-leading 9 on-campus transactions in 2017 including having been selected by the University of California Riverside as part of the high profile University of California housing initiative to build and manage camp beds on their campus. This award is expected to be the nation's largest on-campus third-party housing project in history with anticipated development exceeding $1 billion and over 6,000 beds. The project will be completed in multiple phases over the next several years of construction on the 760-bed first phase expected to start in Q4 of this year. The second phase which is also currently in development is expected to break ground in early 2019 consists of approximately 1,500 beds. We expect to earn $4.7 million in fees on the first phase and additional $8 million in fees on the second phase. We will provide joint management services in conjunction with the university for both of these communities. In addition, we are pleased to announce we are awarded a new third-party development on the campus of Delaware State University. The project is expected to commence in the second quarter of 2018 and we'll deliver 620 beds for the fall of 2019. We anticipate earning a total of $2.5 million in fees on the project and we'll manage the community upon completion. The full scope, fees, feasibility and construction periods for both awards have not yet been finalized and are subject to change. Heading into 2018, the P3 opportunities remain robust as colleges and universities continue to identify the significant advantages related to public private partnerships for housing to help schools attain their goals in the most efficient manner possible. Turning now to own development; we continue to make progress in our development pipeline of core quality student housing assets located either on-campus or pedestrian to major Tier-1 universities. As discussed in previous calls, our current capital allocation strategy taking into consideration our current cost of equity capital is focused solely on owned and pre-sale development opportunities. We are under construction and making great progress on our 2018 pipeline which totals 10 projects, 6,986 beds, and $673 million in development costs. For 2019, we added an additional 340 bed phase to our stadiums inter project located two blocks out of the Florida State University. The $36.7 million pre-sale development will be constructed by the original developer stadium center for delivery in 2019 and primarily features the more affordable 4 and 5 bedroom unit configurations further diversifying the product and price point offerings of our communities' located pedestrian to the Florida State. With this addition, our 2019 owned and pre-sale developments now total 4 projects, 2,716 beds, and $334 million in cost; all developments are located either on-campus or pedestrian to the major Tier-1 universities are targeting development yields between 6% in a quarter and 7% and pre-sale development yields between 5.7% and 6.25%, appropriately reflecting the lower development risk of these transactions. I'll now turn it over to Daniel to discuss our financial results for the year.

[Daniel Perry:]

Thanks, William. For the fourth quarter of 2017 we reported total FFO win of $99.6 million or $0.72 per fully diluted share representing a 10.8% increase in earnings per share over the fourth quarter 2016. We also reported full year 2017 FFO win of $316.4 million or $2.31 per fully diluted share compared to $297.7 million or $2.27 per share for the full year of 2016. The final results for the year finished above the midpoint of our revised guidance expectations, primarily driven by outperformance in both, same-store and new store NOI as Jim discussed. Both revenue and operating expenses results were better than expected in the fourth quarter due to slight improvements in occupancy following the end of the leasing season, as well as higher than expected other income, and targeted reductions in controllable operating expenses. It's worth noting that the 1.8% decreases in same-store operating expenses in the fourth quarter as compared to the same quarter last year was not only better than the flat operating expense growth assumed in our revised guidance but also actually better than the 1.1% reduction in same-store operating expenses we targeted for the fourth quarter when giving our initial guidance at the beginning of 2017. We want to acknowledge that both, management and our Board of Directors are cognizant of our slow growth profile and FFO and per share over the last three years. However, we believe during this period we have significantly improved the quality of our portfolio, our operating platform, and our balance sheet. We have sold over 1 billion in non-core assets, invested significant financial and human capital into the ongoing development of our next-gen systems and business intelligence platform. And raised over $1.2 billion in equity at an average premium to NAV of approximately 3.5%, lowering our leverage from the mid-40% range to the mid-30% range and prompting an increase in our credit rating from both, Moody's and S&P. During these 3 years we've also developed and selectively acquired over $2 billion of high quality core pedestrian student housing property. While differences in the timing of dispositions and capital races and the deployment of that capital compound by a lease up that doubled our expectations in 2017 have delayed our earnings growth in the last few years, we believe that our strategic approach is positioning the Company to create and preserve long-term value for our shareholders, and will ultimately result in a return to earnings growth more consistent with the compounded annual growth rate in earnings per share we delivered from our IPO in 2004 through 2014 of 7.5%. Moving to capital structure, as of December 31, 2017 the Company's debt to enterprise value was 34.8%, debt to total asset value was 38% and the net debt to run rate EBITDA was 6.8x. With the joint venture transaction anticipated to close in the second quarter of 2018, we expected that time to be able to bring debt to asset value back down below 35% and net debt to EBITDA below 6x. Our floating rate debt which currently stands at 27% of total debt is also expected to be reduced to the mid-teens through the repayment of outstanding floating rate debt with the proceeds from the transaction. Finally, turning to our 2018 outlook; in our earnings release we provided our initial FFOM guidance range for 2018 of $2.33 to $2.43. You can turn to Pages S17 and S18 of the earnings supplemental to get complete details on each of the components of our 2018 guidance but the major assumptions are as follows; same-store property NOI is expected to increase 1.1% to 2.9% driven by 2.1% to 2.7% revenue growth and 2.5% to 3.8% operating expense growth. As Jim mentioned, much of our same-store operating expense growth is due to increases in property taxes as many municipalities continue to use lower cap rates in assessing values for student housing properties, as well as expected increases in property insurance expense, obviously due to the very difficult hurricane season in 2017. With the anticipated joint venture transaction in 2018 and the phase buyout joint venture structure on the core spaces portfolio from 2017, we have added a line to the guidance detail page that reflects those partner share of FFO which is estimated to be approximately $9.5 million to $12.8 million assuming a closing date on the new 2018 joint venture ranging from the beginning to the end of the second quarter. We currently assume there will be no leverage placed on this joint venture portfolio. Third-party fee income in the range of $16.5 million to $20.5 million is included in guidance representing a small decline from the $20.6 million recognized in 2017. The third-party fees earned in 2017 was a record year for us and into midpoint 2018 would represent our second best year on record as we continue to have a full pipeline of third-party development awards expected to close this year. And finally, our interest expense range assumes we use the proceeds from the anticipated joint venture transaction to pay-off the $300 million term loan used to fund the core spaces portfolio acquisition in 2017, and that we complete a $400 million bond offering in the fourth quarter to term out the balance of the revolver used to fund the ongoing development pipeline and secured mortgage loan maturities throughout the year. 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 comes from Nick Joseph with Citi.

[Nick Joseph:]

I recognize your store negotiations, but just looking for any additional color on the JV that you can provide, particularly how many assets are expected to be included if there will be an ACE deal included, and then what will ACC's ownership be in the JV?

[William Talbot:]

We're looking at about six assets existing portfolio off campus not ACE [ph]. We are currently in negotiations so don't necessarily want to get into details but it would be a minority position under 50%.

[Bill Bayless:]

The joint venture partner would be minority, we'll maintain control of 55%.

[Nick Joseph:]

And then, just in terms of the operating portfolio; it looks like the NOI margin on the trailing 12 months is a little over 55%. Do you expect that to continue from here? Is there a further expansion opportunity?

[Bill Bayless:]

As I look across the table, Jim Hopke who leads that asset management initiative, I'm going to say there is more opportunity. Obviously, we're very pleased in hitting that target a little early Nick, also I think that the opportunity does exist in part, in the fact that we do see going forward more H-transactions, for example, typically in many cases are exempt from real estate taxes, so you pick up inherently in the transaction structures a little bit as used in that regard. But also we believe the overall initiatives that we have going in terms of natural purchasing are also other consumer or utilities in the like have additional upside for us. Of course what we're battling is the increases you heard him Jim talk about in terms of taxes in this year insurance which this year will make that a little bit hard to improve given the dynamics of the increases he talked about there.

[Nick Joseph:]

Finally, you mentioned a lower same-store growth in the first half of the year based on the lease up. What's the impact of December on these leases on the first quarter and second quarter expected same-store revenue?

[Daniel Perry:]

It's about 30 bps which is what we've seen over the last couple years, typically in that range of 30 to 50 bps. And some of that is the December ending leases that all of the properties but the majority of it is driven by -- with the bigger portion of the portfolio now being in these on-campus residence hall, and as you move from the fall semester to the spring semester with a lot of the residents being freshman, that is where you tend to have more fall-off. Also in being in-line with the University's approach to the what they do with regards to student leases when the kids leave for co-ops or which are basically modern day internships, we let them out of their leases for that and try to backfill as much as possible from students coming back from a co-op to previous semester. But all in all, that's been a pretty consistent move from this fall to spring semester in that 30 to 50 bps range.

[Operator:]

Our next question comes from Juan Sanabria with Bank of America Merrill Lynch.

[Juan Sanabria:]

Just with regards to your development pipeline for the 2018-19 school year, does guidance assume any haircut to the traditional kind of 97-plus occupancy given your experience last year or are you kind of not assuming that repeats itself going forward? And if you could just talk about initial yield because I think your deliveries last year kind of missed your initial targets and what you expect going in for those new projects.

[Bill Bayless:]

With regard to the 10 new development assets coming in the service in fall of 2018 that William mentioned which include 5 ACE projects on campus; 4 pre-sales, 3 in the core, and then 1 off-campus development, we are projecting that those assets will collectively stabilize at 95% or above. And so we expect to meet our minimum target of deals on those 6 in the quarter.

[Juan Sanabria:]

And I saw you bumped your total revenue expectations for the upcoming next school year; what is that you're seeing I guess in that data drove that? And can you give us any update on some of the pre-leasing statistics that you used to provide?

[Bill Bayless:]

Yes, and of course, we're not going to give you a velocity update other than as you accurately reflected. If you look at our guidance we do look at rental revenue growth associated with the 2018-19 lease up of 2.9% to 4.4%, that is a ground-up analysis done property by property through the Lambs [ph] process, the renewal season is largely behind us now, we're getting the first indications of the new leasing activity to properties; I will comment is that already we talked about the 10 new development starts going well which of course are not in that same-store growth but then -- when you look last year at the components that we have, we're running ahead in the three markets that we were behind last year in terms of Lubbock, Champaign and RIIT [ph]. Also, when you look at the new store portfolio from last year which only got to 83%, we see excellent trending there also and in places where we are watching closely and feeling that we need to carefully mitigate and monitor, we're looking at those and feeling comfortable. So from the ground-up, you see our perspective represented in that 2.9% to 4.4% rental revenue growth from the combination of rate and occupancy.

[Juan Sanabria:]

Just one follow-up to Nick's question about the slip post-December. So you finished the final 2017-18, I think about 2.3% revenue growth; are you saying that that kind of slips to 2% with a 30 basis point dip in occupancy relative to that 30 to 50 typical slippage?

[Bill Bayless:]

Yes, that's correct.

[William Talbot:]

I want to drill down, let me drill down a little bit on when Daniel was talking about the explanation related to on-campus residence halls and address that this is something we've talked about before and I think it's important. When you look at the on-campus ACE transactions which we all love, you all love because it's the greatest stability of cash flows and also represents the lowest risk-adjusted investments that we can make. The one positive surprise of those transactions over the years, since we evolved the equity program in '07 is that most of that housing has largely been replacements housing for the 1950s and 1960s residence halls; and those products traditionally house as Daniel said, first-time incoming freshman and that particular group entering a university does have the highest level of attrition from fall to spring, it's part of the model of how you underwrite those transactions and it's how they operate from day one. And so that ended up itself as a no-way shape perform, any negativity in terms of the performance of an asset which is the reality of how first-year residence hall type housing operates. There is also an escalating variance in that based on whether you're on-campus or off-campus and what the scale of those assets are. So for example, when you look at Callaway House which is our premier 700-bed residence hall off-campus at University of Texas, we have no attrition, it's -- this year it was 99.4% in the fall, it's 99.4% right now, and it's a small number of beds, it's in high demand, it's very easy for us to backfill. Also, when you look on-campus we also look at residence halls by traditional population residence hall housing and honors colleges; and so for -- we love Barrett honors college, the NAU honors college, the one we're doing in the University of Arizona, in that honors colleges because those students are the most well prepared for entering the institutions academically and designated in that program, you see very little fall-off on that area; for example, this year Barrett had no fall-off from fall to spring. But when you get into a traditional residence halls, take ASU like Manzi and Toker House [ph], you typically do see consistently 200 to 300 basis points of occupancy from fall to spring, that's how you look at those deals, that's how you underwrite those deals and that's how they behave and you have a normal life cycle. So, that's not necessarily something that is a negative, it is just a characteristic of how those cash flow. We also do a couple of things in those ground leases to protect ourselves; for example, the U.C. Berkeley deal that we announced, that is a first-year wrestle [ph]; the University wanted to control all of the aspects of the assignment process through Rezlight [ph] themselves, so we got them to guarantee a floor of 95% in all those periods. When you look at Arizona State where they do a lot of the administering of that program we have a master lease agreement but we have performance hurdles in it that if they don't hit that we can step-in and take them over. And so, it's a normal and ordinary part of the operating system and it's not necessarily again a negative, it's just the way the cash flows flow in that type of product.

[Operator:]

Our next question comes from David Corak with B.Riley FBR.

[David Corak:]

I appreciate the commentary and supply, it looks like it's down in the middle of the range of bed you gave previously, maybe a little bit lower as a percentage of enrollment but wanted to kind of approach it slightly differently. Can you share with us the three-year aggregate supply growth is for your portfolio for the 2018-19 school year; '16 actual delivery, '17 actual and '18 expected deliveries? And how does that compare to maybe last year?

[Bill Bayless:]

When we look at that data from the 68 markets that we're currently operating and so let's take each one of those years to talk about '16, 17 and they're projecting forward to '18. If you look at '16 to '17, first by year; in 2016 we had 23,800 beds which was 1.16% of enrollment. Now if you look at the enrollment growth across the portfolio in that same year, it was 32,518, actually exceeded the number of beds coming in. If you look at '17, it was 28,700, 1.4%, 1.38% and enrollment was -- growth was 25,535 or 1.2%. So when you roll the last two years together, you actually had demand of enrollment growth looking back that entered in those falls which those numbers usually delayed getting in because it takes the university a couple of months to assemble them, you actually had an increase in demand a 5,500. When you look at '18 going forward, we're projecting the 25,721 beds of supply which is 1.2%, 1.24%; so right in-line with the past years. Now, the one thing we always like to point out though, this has never been a story and we don't believe it is for the next decade of the supply demand equation, and that the modernization of housing is what is taking place when we talk about total off-campus supply still only being 23% and pedestrian beds now of new supply in the last 20 years next to campus only being 11% and that's where the real story is. And so, when you look at -- and again, we like to always talk about Austin because there has been no enrollment growth in Austin for 25 to 30 years, the enrollment cap has been in place, the entire time as you've seen tens of thousands of beds come on which really speaks to that modernization and so we continue to see a consistent trend of that 1.2% to 1.3% a year up supply as a percent of enrollment over the last 13 years. We have seen that offset by enrollment growth of about 1%, so it's been nominal but even in the markets where you have not had enrollment growth, we see that modernization theme continuing. And so we continue to see good barriers to entry, we see those numbers continue to moderate even though you have the significant interest in the space and investment coming in, you haven't seen those new supply numbers pick up, and it's not because those groups are interested in new supply but it's because the natural barriers to entry that exist in these college towns or the ultimate limiter on that new supply being able to come in.

[David Corak:]

And then turning to enrollment groups, specifically as it relates to international students; last time we were together there was such a small sample sized enrollment data but I assume you've gotten some more data from [indiscernible]. Do you still share kind of the same pieces that the international student enrollment that did not drive kind of the last 4 or 6 weeks of the lease up last year?

[Bill Bayless:]

No, it did not. We have firm numbers of the international enrollment in 62 of our 68 markets and it is up 0.5%. And so it was not an indicator and again when we look at our system and when we talk, we can't track by country of origin or nationality, it's not something when you buy Fair Housing. The one thing we do look at is residence in the system that do not have a Social Security number which is an indicator of an international student and that continues to be only about 3% of our resident base and it was consistent from this year to last; so we don't think that was a driver of the shortfall in the three markets Levick, Champaign and RIIT [ph] which is really where the issues were, not across the portfolio.

[Operator:]

Our next question comes from Austin Wurschmidt with KeyBanc Capital Markets.

[Austin Wurschmidt:]

I was wondering if you could just talk a little bit about the competition for on-campus awards; how that stacks up versus the last several years? And then, just give us an update on what the backlog looks like for on-campus deals?

[Bill Bayless:]

It's still pretty consistent, we were very pleased, we won 9 awards last year, 3 of them being A, 6 of them being third-party; EDR you heard yesterday had a really good year also with their 7 and so you continue to see the two public companies do very well given the transparency that we provide and the long-term stability as partners that the public provide. We do continue to see a strong pipeline of transactions, 30 deals plus in the hopper that are being tracked in work. The only real new entrant that you've seen in the on-campus that we would mention is, Harrison Street has had success in some transactions that they have partnered up with Capstone, and Capstone for a long time has been our number one rival in the on-campus arena and who we've battled with over the last two decades. And so HarStreet [ph] partnered up with them is benefiting from the credibility of that developer operator, that's been in the game for a long time and so we continue to see significant barriers to entry and that for the colleges and universities that are picking these long-term partners and looking for truly specialized expertise, even though there is more capital that would love to get into that space the entry into that capital was the credibility of the operator developers that have the decades of experience which is a very small number and pretty much continues to be the same cast of characters.

[Austin Wurschmidt:]

So in those deals where you're seeing kind of the increased temp attrition [ph], is that it at assets and universities that you would be looking to go to? And what is it you think that won them -- I guess that mandate in particular?

[Bill Bayless:]

We're very selective in terms of where we invest our equity on-campus and we go through the same type of analysis in an ACE deal as we do an off-campus investment. And most of the time the deals that we lose in many cases -- we lost a couple this year where we did not propose equity, and the folks that won that won because they were willing to invest their equity and we were only willing to do it as a third-party deal based on our investment criteria. We also hold true to the terms that we have to have in terms of length of ground lease, buyout provisions, all the things that make you valued as real estate; and so in that regard we have a model that works for us that other people at times may be willing to do other things. Now I think that what you've seen when you're seeing all the awards that we've announced in the last 12 months ACE; the Carl Berkeley's, the University of Arizona's, the continuous -- that Arizona State Princeton, the folks that want to work with the best-in-class company, that are best-in-class universities, we tend to do very well; and so we -- I think Randy yesterday appropriately said EDR feels like they win their fair share, we certainly feel like we do too and I think the two companies are both well positioned to continue to do well in that arena.

[Austin Wurschmidt:]

And then along the same lines, can you just give us an update on what other mandates from the U.C. system are outstanding today? And is ACC in the running I guess for any future third-party or potentially ACE deals with the U.C. system?

[Jamie Wilhelm:]

Yes, we continue to track very closely the U.C. system, there are several different procurements that are pending, nothing that we're prepared to give a lot of details on today but we certainly believe that we're positioned well at both, the U.C. system, as well as the Cal State system, both of them are looking to look at -- to the P3 market and the private development sector to assist them with their housing needs.

[Austin Wurschmidt:]

Any sense what the soonest announcement would be for any future mandates at either of those?

[Jamie Wilhelm:]

We continue to compete, I don't know that we have any pending -- we can really comment on a specific schedule; universities take their time through their very deliberate and comprehensive qualifications process, and to really predict on that is putting a degree of certainty on there that we really don't have.

[Operator:]

Next question comes from Drew Babin with Robert W. Baird.

[Drew Babin:]

Question on third-party fees; obviously with the awards I'm expecting at end of '18 and end of '19 will be pretty good times as far as development fees go. Should we model an increase and the corresponding cost to that business or should we think of that expense as sort of a flattish number or maybe just inflationary growth for the next couple of years?

[Daniel Perry:]

The reality is a lot of that third-party fee business or a lot of the third-party expenses related to that third-party fee business are driven by the corporate infrastructure here that pursues both, those transactions as well as our ACE business; they are obviously one and the same and get awarded to us either as third-party fee deals or as ACE deals. And so you should see that grow relatively in-line with our overall G&A which tends to just -- as we're adding to -- like we talked about in the prepared remarks, spending money on our next-gen systems, spending money on our business intelligence platform, continuing to do things to make this company scalable long-term, you see a little bit more than inflationary growth right now in that line item and that's been in the third-party expense business as well as our expense line as well but I would just expect it to follow the overall G&A growth.

[Drew Babin:]

As you look out to what ultimately become the 2019 same-store pool. I guess looking at your pre-leasing guidance for this year to 2.9% to 4.4%, other than maybe some kind of natural turnover that might occur in January 19, it is ranging from '17 acquisitions development, things that entering the same-store pool that might cause us to model something in either direction different from the pre-leasing guidance based on the same-store?

[Bill Bayless:]

When you look at the new store properties that roll into that 2019 grouping and again that was the portfolio that was 83.3%, there were significant upside there and I did mention in my comments on leasing that that is going well there. And so in that regard they should only provide a further positive and not a negative.

[Drew Babin:]

Then one last one, you mentioned Bill the Callaway home already being pretty much pre-leased at this point for the next academic year; I guess how many assets across your portfolio are sort of in that similar bout [ph] where things are pretty much just good to go already when from a pre-leasing standpoint, especially in markets like Austin, Tallahassee, and College Station where there is a decent amount of new supply?

[Bill Bayless:]

My first answer to that question would be in concert with why we don't give leasing updates anymore is that we don't want every property in the portfolio to be forward this time because it means we left a lot of money on the table with regard to rate. And so we don't measure success as a whole as to properties being full earlier but you're very appropriate in your comment and that we do want to strategically fill earlier and as early as we can in markets where we think diminishment is coming because of things like new supply. And so that is the decisions we make market-by-market asset-by-assets, and so -- sorry, I can't give you an exact answer in that regard but that is part of the strategic use of our systems to maximize revenue and to make a decision asset-by-asset market-by-market when we would like to feel that based on the combination of rating occupancy.

[Operator:]

[Operator Instructions] Our next question comes from Alexander Goldfarb with Sandler O'Neill.

[Alexander Goldfarb:]

First, on the JV, is there a row [ph] or some sort of exclusivity that this JV partner will have over future dispositions or JV's?

[Bill Bayless:]

As William said, we are in the beginnings of that negotiation and formal documents and so we won't comment on any of the final provisions but certainly will make the market aware when the transaction is done.

[Alexander Goldfarb:]

Bill, you mentioned that you're assuming -- you guys still underwrite for day one of your developments that everything is -- basically, I think you said 95% or 96% plus, 6.5 yield. There is also comments and you've heard from some of the other players, some in the private soaps [ph] that the students are more hesitant to do leasing and developments just because of some of the delays that have been experienced. So how do you guys balance or overcome challenges of students who may be hesitant to lease in the new development because of some of the issues that have occurred over the years so that you're still confident that day one -- your projects are going to be delivered, basically 100% up and running, no issues?

[Bill Bayless:]

My comments were specifically to the group of 10 properties that we're leasing this year that collectively we do believe will stabilize that 95% and above. Let me answer that question bringing it down into categories. One, one of the benefits of on-campus development in ACE, especially when we're building the first year residence hall such as we are is that those students who are leasing are still in high school, not in the market and are being assigned by the University. And so that -- you virtually have zero risk in the on-campus ACE residence hall products which again make up 5 of the 10 this year. Of a perception issue because of how the leasing and assignment of those transactions work, and so that mitigates a lot of the risk on the broader portfolio right there. As it relates to the other assets Alex, you really have to go market-by-market and you have to say, has there been a reputational issue. Last year we mentioned Baylor [ph] was the one market where there had been some bad misses, the market felt really burnt, and even though we had no construction risk and we -- in that case we weren't able to overcome it. I'll say that assets going gangbusters in the second year to demonstrating that that was the issue, it was not a product or market exception. Now what we do and how we attempt to mitigate it is a couple of things. The first thing that we do and it depends on construction type also; so you take Oxford for example in Mississippi, we're building that community and sequencing construction so that the front of that community is absolutely -- you can tell it it's going to be done and ready, we're opening the model, we have a leasing center in town and they are near the community to have a full model but we're actually getting the model center in the clubhouse open in the next two weeks and everything completely done so the students can actually get on the property, touch it, feel it and see it and completely overcome any concerns if they have in that regard. It's a little harder to do in a high rise where you typically can't get the CEO for an individual space, and so in that regard you have to be a little more strategic in terms of what you're showing in your model center; one thing that we mentioned last year that we did -- if we have to do it, Clemson, where we had one of our new openings where there was concern that a competitor was not going to make it, we offered $1,000 construction guarantee because we knew we had no chance whatsoever of missing the opening, and we knew that that was a marketing to demonstrate our confidence that we'd never have to pay that. And so those are the type of things that we look at and the type of things that we implement; it's another reason why you all should love ACE even more than you do is the elimination of that risk completely in the on-campus environment and there are times that we will look at a deal that it may take a year or two to stabilize but if we believe that we're going to underwrite it that way we're going to look -- typically, if you look at what's the impact of a transaction stabilizing in year two versus year one, it's about 90 bps on IRR over a 5-year hold. And so you know, your 10 may become a 9, your 9.5 may become a 8.5. But if you know what's going to happen, underwrite it that way and making investment decision that way, and so that's how we think about.

[Alexander Goldfarb:]

Daniel, I think in your comments you mentioned that the board and the management is aware of the slow growth in FFO over the past 3 years; it sounded like that's going to shift and we should think about acceleration. So maybe if you could just provide a bit more perspective. And then, especially just given where the stock trades; does this mean that you would dial back to future development, so that way you don't have to sell as many assets that dilute gross or how are you thinking about accelerating given where the current stock is?

[Bill Bayless:]

Alex, let me take the first part of that and give a little bit of historical context because certainly, we do want to be reflective in terms of those statements. If you look at 2012 earnings, we're $1.91, in 2013 they went up 16% to $2.22, in 2014 they grew another 7%, and that was really that glorious run we had for the first 10-years as a public company where we averaged at 7.5%. We then hit -- then the last 3 years we made some decisions with our Board of Directors that were very strategic in positioning this company for a long-term future growth, and when you look at '15, '16 and '17 where you saw that earnings per share go dormant. It was very much given strategic initiatives to refine the portfolio, to continue to improve the operating platform and invest in next-gen and the go-forward business intelligence component which we think is critical to be in competitive real estate company, well into the next couple of decades; and also into delevering from where we typically believe in operating more in those low 40s to mid-40s down into the 35s and so -- those 3 years were very strategic in terms of the dilution that we knew we were taking through the aggressive dispose, the raising of capital as needed, and as Daniel said the disconnect in the most of that growth was in development; and that the timing mismatch in terms of when those assets in the revenue generation was coming on play. Well certainly that revenue -- I'm sorry, that portfolio refinement is now taking place, and we look at is now is more of an ordinary, recycling of our capital and we do want to strategically return, we think we've done a great job in creating NAV but it certainly has been at the expense of earnings per share at the moment. As we look at the long-term going forward, we want to make sure that the market understands that we're aware of that lack of earnings growth and that we need to be sensitive to it in the decisions that we're making for the long-term; we will continue, the cycles are going to come and go, the market's going to come and go, we're very pleased -- and shame on me and shame on us, I wish we'd done had these JV formats in place earlier, we've talked about it for years, we're really pleased to have that where it is in the roadmap to have that arrow in our quiver. But first and foremost, we want to continue to be prudent capital allocators that can drive both NAV and earnings per share, and we hope that the market will look back 5 years from now and look at the strategic decisions we made in '15, '16 and '17 to position the company to do just what I said.

[Alexander Goldfarb:]

But Bill, does that mean that you're going to slow development so you don't have to sell as much? I'm just about where the stock is now and your cost of capital.

[Bill Bayless:]

Well, if we can do development at 6 in the quarter and private market valuations continue to be in the mid-4s, the answer is not to not do development, the answer is to recycle your capital, take that yield and put it into development. And so we'll look at what all market conditions are at the various points in time, look at what the ways are to raise capital, and if we find ourselves truly capital constrain and don't have an alternative, then yes, you would slow down development. But right now the private market conditions put us in an advantageous position to be able to harvest value that's being created and put it into assets where we can do it again.

[Operator:]

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

[Bill Bayless:]

Thank you very much. Again, I'd like to end by thanking the American Campus team for their efforts in producing excellent Q4 results and finishing up the year on a positive note. Also 2018 is American Campus's 25th Anniversary, and so we're very pleased and proud of what the team here has created. And in my comments to the team, I'm doing a little video on that anniversary, what we ask them to do is not look at what we've done but yet use -- let's use this year as laying a new foundation that can hopefully serve as a launch to take the company to new heights. And so we hope to do that, we hope that you will be along with us for that ride in the future. And we look forward to talking with you at some of the upcoming investor conferences and also on our next call in April. Thank you.

[Operator:]

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