American Campus Communities, Inc.
Q4 2016 Earnings Call Transcript

Published: 22 Feb 2017

[Operator:]

Welcome to the American Campus Communities Incorporated 2016 Fourth Quarter Earnings Conference Call. [Operator Instructions] I would like to remind everyone that this conference is being recorded. I would now like to turn the conference over to Ryan Dennison, Senior Vice President of Capital Markets and Investor Relations for American Campus Communities. Please go ahead.

[Ryan Dennison:]

Thank you. Good morning and thank you for joining the American Campus Communities 2016 fourth quarter and year end conference call. The press release was furnished on Form 8-K to provide access to the widest possible audience. In the release the Company has reconciled the non-GAAP financial measures to those directly comparable GAAP measures in accordance with Reg G requirements. If you do not have a copy of the release, it's available on the Company's website at americancampus.com in the Investor Relations section under press releases. Also posted on the Company website in the Investor Relations section you will find a supplemental financial package. We're also hosting a live webcast for today's call which you can access on the website with the replay available for one month. Our supplemental analyst package and our webcast presentation are one and the same. Webcast slides may be advanced by you to facilitate following along. Management will be making forward-looking statements today as referenced in the disclosure and the press release, in the supplemental financial package and in SEC filings. Management would like to inform you that certain statements made during this conference call which are not historical fact 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, our Chief Executive Officer; Jim Hopke, President; William Talbot, Chief Investment Officer; Jon Graf, Chief Financial Officer; Jennifer Beese, Chief Operating Officer; Jamie Wilhelm, EVP of Public-Private Partnerships; Daniel Perry, EVP of Corporate Finance and Capital Markets and new CFO, effective April1 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 you all for joining us as we discuss our fourth quarter and full year 2016 financial and operational results. I'd like to start by thanking the American Campus team for their solid execution on many fronts throughout 2016 and continuing into early 2017. As you'll hear on the call today, we delivered meaningful same-store growth in 2016. Our Fall 2016 lease-up, along with the strong start to the Fall 2017 lease-up and our ongoing asset management initiatives are positioning us well for continuing and even accelerating internal NOI growth moving into 2017. We're also particularly pleased to be on the precipice of achieving our 55% margin goal in 2017 on the earlier side of the projected three to five-year timeline we laid out in 2014. The team also did an excellent job in creating capacity for our $1.1 billion highly accretive core development pipeline via our $740 million equity offering earlier in the year and completing the strategic disposition of nearly $600 million of older non-core assets. These disposition activities further refined our best-in-class portfolio, which now consists of almost exclusively core Class A assets located pedestrian and bicycle distance to Tier 1 Universities at rental rates affordable to the broad base of students attending the universities we serve. In addition to providing details on our development pipeline, William will provide an update on a vibrant student housing transaction market and compressing cap rates as institutional investors, domestically and globally, are recognizing the growth potential and resiliency of our industry. With that I'll turn it over to the Jim Hopke to get us started.

[Jim Hopke:]

Thank you, Bill. We're pleased to report solid internal growth again in both our fourth quarter and full year 2016 results marking the 12th straight year of same-store growth in rental rates, rental revenue and NOI since our IPO in 2004. Fourth quarter same-store property NOI increased by 2.1% over Q4 of 2015, a result of a 2.5% increase in revenue and an increase in operating expenses of 3%. For full year 2016 same-store NOI growth was 3.4% driven by a 3.1% increase in revenues and a 2.7% increase in expenses. Reviewing same-store operating expenses, our fourth quarter repairs and maintenance expenses were impacted by non-routine expenses at a few communities. Additionally, we advanced our marketing expenses related to the 2017-2018 lease up in the fourth quarter. These activities resulted in growth in these areas of 10.9% and 16.1%, respectively. For the full year, the fourth quarter marketing spend pushed our annual marketing expenses slightly ahead of expectations and insurance costs for the year were below our 2015 amounts due to favorable insurance market conditions. In total, our full year expense levels were in line with our expectations. Our total portfolio operating margin for 2016 was 54.9%, an expansion of 170 basis points over 2015. As Bill mentioned, we more formally structured our asset management function in 2014 and discussed efforts to improve our total portfolio operating margin to 55% in a three to five-year window. I am pleased to report that we expect to eclipse this goal in 2017. Turning now to leasing; Axiometrics reported 2016 final fall occupancy of 95.7% for the industry. With regard to the 2017 lease-up, they are currently tracking leasing velocity at 323,000 same-store beds nationally. As of January, that group was 38.7% pre-leased. They also track rental rate at a broader group of properties containing approximately 600,000 beds that are reporting 2.2% rental rate growth. Leasing for our portfolio for fall 2017 which represents our same-store grouping for 2018 operating results, as of Friday, February 17, we were 60% pre-leased, 70 basis points ahead of last year. We are currently projecting 2.9% rental rate growth for the 2018 same-store properties as detailed on Page 9 of the supplemental. Our fall 2017 development deliveries are currently 33.2% pre-leased for academic year 2017-2018. Our outlook for 2017 same-store NOI growth is 3.6% to 5.3% based on revenue growth of 2.6% to 3.4% and expense growth of just 1% to 1.5%. As always, the low and high ends of our revenue guidance reflect execution risk of our summer leasing initiatives, backfilling May ending leases and varied outcomes in our other income growth projections, as we had exceptional performance in this category in 2015 and 2016. Due to the benefits of a maturing asset management function, our expense growth expectations are moderate when compared to our recent portfolio averages. Notably our expense range incorporates expected efficiencies in several areas including utilities, staffing, and national purchasing agreements. These initiatives are expected to reduce expenses by approximately $1.6 million. Excluding these savings expense growth would have been in a range of 1.6% to 2.1%. Because these initiatives will be implemented throughout the year, we expect expense growth in the first two quarters to be more inflationary in nature with more moderate growth in the latter half of the year. We look forward to updating the market as we progress through 2017. With that I will turn the call over to William to discuss our overall investment activity.

[William Talbot:]

Thanks, Jim. 2016 was another record year for investment in student housing. According to CBRE year-end 2016 report, transaction volume topped $9.8 billion during the year, an increase of 75% over 2015 and three times the volume of 2014. 2016 was driven by the large portfolio acquisitions of Campus Crest and University Housing Group totaling $3.3 billion, yet when excluding these two acquisitions transaction volume still eclipsed 2015 by 16%. Large institutional and foreign capital groups were large catalysts of the continued strength of the sector with funds and institutions accounting for 38% of all transaction volume and those two groups accounting for half of the ten largest transactions. 34% of total transaction dollar volume in the space were some first-time entrants to the sector, indicating the continued attractiveness of student housing stable returns, coupled with a continued growth opportunity with regard to the modernization of the industry. In conjunction with the increased transaction activity, cap rates have also continued to compress in the sector. The spread between student housing and multi-family cap rates equaled only 20 basis points in 2016. Poor production cap rates were reported to be low to sub 5% with numerous transaction from the low to mid 4% cap rate range for core assets located in major MSAs. For ACC, we continue to be selectively opportunistic as we evaluate core acquisition opportunities that mean our strict investment criteria and offer potential upside with regards to improved revenue and operations, management upside and/or efficiencies through existing market expansion. We have made significant progress with regards through our own development pipeline. We are under construction on all ten fall 2017 developments totaling 7,454 beds and $603 million in total development cost. For 2018, we announced that we have started construction on a new $44 million 528-bed off-campus development adjacent to the campus of all [indiscernible]. The town home sell project with market-leading amenities, will be one of the only communities to provide direct pedestrian access to the flagship university campus. In addition, we announced a new presale development agreement for the Edge, a 412-bed development located pedestrian to Florida State University. American Campus will be responsible for the leasing and operations of the project. The development is located in close proximity to our stadium center community, allowing the new project to immediately benefit from multi-asset efficiencies. During the quarter, we brought ground on our $99 million ACE project on the campus of the University of California Berkeley to house first year students. Subsequent to quarter end, we brought ground on our seventh ACE development on the campus of Arizona State University. The $70 million Greek Leadership Village will feature 957 beds and is intended to serve this housing for the Greek community and other student groups while also being available as part of the university's first year live-on policy. All forward projects are targeting a fall 2018 delivery, bringing our own total developments in pre-sales for 2018 to six communities consisting of 4,850 beds and $390 million in development cost. In addition, subsequent to quarter end, we begin construction on our own ACE development on the campus of Northeastern University in Boston, which will complete in 2019 for a total of 825 beds and $153 million in development cost. In total, our own development in presale pipeline of announced projects for 2017 through 2019, currently 17 projects, over 13,100 beds and excess of $1.1 billion of development cost consisting entirely of core class A communities that averaged 0.1 miles to campus. We are targeting between a 6.5% and a 7% collective stabilized nominal yield for this developments. With regard to our in-place third party developments, we completed construction on Oregon State cascades as scheduled during the fourth quarter and are under construction on two developments of Texas A&M Corpus Christi and Texas A&M and San Antonio for fall 2017 delivery. We intend to manage both communities upon completion. We continue to see strong interest from colleges and universities to utilize P3 structures to address their housing needs. We are currently tracking 40 potential P3 opportunities which include both third party and ACE equity potential transactions. Overall, our pipeline of P3 opportunities remained vibrant and we will update the market on our progress on proceeds on our next earnings call. Finally in 2016, we made great progress on our capital recycling efforts, which not only created capacity to fund our core developments, but also improved our overall portfolio quality. In November, we successfully closed from the sale of 19 non-core assets, totaling 12,083 beds for $508 million at a 6.1% economic cap rate on in-place revenue, escalated trailing 12 expenses and historical capital expenditures. In total, we sold 21 assets totaling $582 million during 2016, which improved our overall portfolio quality in terms of average age, distance to campus and operating margin. In addition, we are currently under contract and in the feasibility period to sell an additional asset in early second quarter. I'll now turn it over to Jon to discuss our financial results.

[Jon Graf:]

Thanks, William. For the fourth quarter of 2016, we reported FFOM of $86.9 million or $0.65 per fully diluted share, as compared to FFOM of $79.1 million or $0.69 per fully diluted share for the comparable quarter in 2015. FFOM increased by $7.8 million, but per share amounts were impacted by 17% increase in the weighted average shares outstanding, primarily from the $17.9 million common share offering during February of 2016 to fund our development pipeline. As compared to the fourth quarter of 2015, the 2016 fourth quarter results benefited from the previously discussed same-store operating results and the nine gross properties placed into service since the fourth quarter of 2015, which was slightly offset by lost FFOM from the sale of 21 non-core properties during 2016, whose FFOM contribution was $4.9 million less this quarter as compared to 2015. Full year 2016 FFOM of $297.7 million or $2.27 per fully diluted share met the high end of our 2016 FFOM guidance range. Since the beginning of 2016, our cash proceeds of over $1.4 billion from our February 2016 equity offering, 2016 property dispositions and modest activity under our ATM have been more than adequate to fund our previously discussed growth opportunities, as well as the payoff of maturing fixed rate debt in term loans, allowing us to execute on our development pipeline while maintaining strong credit ratios and a healthy balance sheet. Fixed rate debt maturities within the next 12 months are only $28 million or 1.3% of a company's total indebtedness at year end. As of year-end, the company's debt to total asset value was 31.3% and the net debt to run rate EBITDA was 5.4x. These ratios are anticipated to remain within this range upon the completion of our development pipeline as shown on Page 16 of the Earnings Supplemental. As of the end of 2016, we had $22 million in cash available and $601 million available and our recently renewed sub-hundred million-dollar revolving credit facility. Additionally, we had approximately $5.5 billion in unencumbered asset value as of year-end which was almost 81% of the company's total asset value. Less than 5% of our total indebtedness as of year-end was floating rate debt. We are providing guidance for 2017 FFO in the range of $2.34 to $2.44 per fully diluted share. 2017 FFOM in the range of $2.32 to $2.42 per fully diluted share and 2017 per share net income in the range of $0.76 to $0.86 per fully diluted share. When considering the 2017 per share FFOM guidance; it should be noted that there is approximately $0.07 of per share dilution related to the increase in weighted average shares outstanding for 2017 versus 2016 as a result of the previously mentioned common share offering in February 2016 and recent ATM activity. In addition, dispositions in 2016 results in approximately $0.25 of earnings dilution from lost NOI offset by approximately $0.06 in interest savings from the elimination of mortgage debt outstanding on such properties. The proceeds from these capital events also allowed us to repay two term loans in 2016 and to fund our growth without taking on more debt resulting in about $0.06 to $0.09 in additional offsetting interest savings. We believe this impact to our 2017 FFOM per share was worth the value we are positioned to create and the overall improvement in our portfolio from the development pipeline we are set to execute on. Certain items to note in our 2017 guidance assumptions include; the 2017 FFOM guidance range includes 10% to 39% increase in third-party revenues as we are creating a strong pipeline of third-party opportunities with expectations to commence certain of these projects during 2017 as reflected within our guidance range. Projected G&A for 2017 includes the impact from the separation payment associated with the executive reorganization as announced in our January 2017 press release. Excluding this charge, G&A is only projected to increase between 1.7% to 3.4%. We eliminate this charge for purposes of calculating 2017 FFOM as we believe that this more accurately reflects the ongoing financial performance of the Company. It should be noted that the accelerated vesting of the RSA portion of this charge will be recognized over the first two quarters of 2017 and the cash portion will be recognized in the second quarter. Other than the issuance of shares under our ATM program as disclosed in the press release, no other equity issuance was assumed within our guidance range for 2017. Please refer to Page 17 and 18 of the earnings supplemental to get additional detail on each of the components of our 2017 guidance. With that I'll turn it back to Bill.

[Bill Bayless:]

Thanks, Jon. In closing, I'd like to again thank the ACC team for their hard work and dedication and the meaningful operational, financial and leasing results they continue to deliver. I'd also like to express specific gratitude to our outgoing CFO Jon Graf, as this will be his last earnings call. We want to thank him for his more than a decade of service and dedication to the Company and on behalf of myself, the senior management team, and all of the employees here at American Campus, we wish him well in his retirement. With that will open up the floor for Q&A.

[Operator:]

[Operator Instructions] The first question today will come from Jordan Sadler with KeyBanc Capital Markets. Please go ahead.

[Austin Wurschmidt:]

Hi, good morning, it's Austin Wurschmidt here. I was hoping you guys could provide a little more color on the P3 environment. It seems like you referenced 40 potential opportunities, which is an increase from last quarter, I think you said up to 30. I mean just curious, what's driving the uptick and then any additional color you can provide would be helpful?

[Bill Bayless:]

As we've been talking about really for the last six to eight quarters is we continue to see just more and more of the mainstreaming of colleges and universities looking at P3 structures whether they be equity or the third-party structures to more efficiently deliver those transactions. And so that positive trend continues and so we continue to see more added to the queue. Now when we talk about that 40, that is everything that we're tracking, direct negotiation, upcoming RFPs that we believe those are already in process and so it is a vibrant pipeline and we expect to feed the next several years 2017, 2018 and 2019 going forward in that regard.

[Austin Wurschmidt:]

Thanks, Bill. And then any sense on timing of when you could add any additional projects to the development backlog or ACE transactions? And then also could you touch a little bit on what you are seeing or your thoughts in terms of adding additional presale agreements to the 2018 backlog in order to narrow that gap between the reduction in development next year?

[Bill Bayless:]

Yes, and certainly you can look at -- there is still time obviously in 2018 as it relates to -- and I think new developments for 2018 will come from one of two categories or both. Presales as you mentioned, there are other transactions that developers are undertaking that are well down the road in final entitlement and can still break ground for 2018 deliveries that provide that opportunity as you heard us announce one this quarter. And then also where we have existing on-campus university relationships with existing partners, existing documents where there may be the potential for additional phases, those also still have some opportunity out there for 2018. As it relates to 2019 onwards, I mean at any point in time on an ongoing basis I think the opportunity exists for us and other companies for that matter to announce more activity that's taking place in terms of the on-campus awards. And we also certainly continue to work a vibrant shadow pipeline of future off-campus opportunities beyond 2018. And so we would expect ongoing new growth announcements as we continue throughout the year.

[Austin Wurschmidt:]

So is it fair to assume that you are in conversation with some of your existing relationships about adding additional on-campus opportunities for 2018?

[Bill Bayless:]

That is always a fair assessment. And we're always working with our existing clients to meet their needs.

[Operator:]

[Operator Instructions]

[Bill Bayless:]

Folks we apologize for the technical difficulty there. Our line was dropped. So Austin we were just answering your question as it relates, is it safe to assume that we're having ongoing discussions with our existing on campus partners. I don't know exactly when we got cut off, but we said yes absolutely, we continue to almost always be in conversations with our existing partners on meeting their need. Do you have another question, Austin?

[Austin Wurschmidt:]

Yes, is my line still open? Can you hear me okay?

[Bill Bayless:]

We sure can, and again our apologies.

[Austin Wurschmidt:]

No problem at all. My last question just was surrounding pre-leasing and I know that you've talked about some supply in some of your existing markets some of which is from the deliveries you guys have in 2017. And I was just curious across those 27 markets or so you've identified as getting new supply, how is pre-leasing trending? And then how is pre-leasing across your new communities trending relative to your expectations?

[Bill Bayless:]

Yes, the 2017 deliveries when you look at the 65 markets that we're in, 28 of those markets comprise the new supply that is being undertaken and as you did point out that we talked about previously, a lot of that uptick in new supply over 2016 where it's up from 20,000 is American Campus's owned deliveries where we're up 300% in our deliveries. The market excluding us is about nine. Pre-leasing continue to go well across the category of both new supply markets and markets where no new supply is coming in. But when we look at the markets that we have highlighted from a leasing perspective, that we're keeping eye on or maybe a little slow, Lubbock, which is one of our new delivery markets is one that we are monitoring closely and that over the last two years you've had close to 5,000 beds coming in, 3,300 this year as it relates to our new development there, which is actually 1,313 bed. We actually debated whether to phase the delivery of that or to go forward all at once with those beds knowing what was coming in and we actually conservatively performed that transaction at year-one at 70% which is what we reflected at the midpoint of our guidance. So that one we would expect to fully stabilize in the second year. The other markets that we're tracking closely from a leasing perspective, Louisville, which is where we had some new supply last year that we delivered and in that case where it's going very well for us. We're actually in some very good conversations with the University on potential master leases on two assets there given our on-campus partnership to alleviate any concern that we have in that market related to vacancies. And those conversations are not yet reflected in our leasing numbers, so that's something that we can actually have a positive impact on the spread that you are currently seeing. We also are paying attention in Buffalo, New York where leasing velocity is a little slower. There is not a lot of new supply coming in there, that's one where we're more aggressively pushing rate in that regard. The other market from a new store perspective that we're tracking closely is the Baylor University project in Waco; that and Lubbock out of the ten new deliveries that we have going in fall of 2017, those two are ones that we are conservative in our first year underwrites; the same thing with Baylor, closer to midpoint of guidance to a 70% than where all the others -- the other eight or 95% occupancy. And that's the market where they have tended to not immediately absorb new construction in the first year because of a couple misses over the last two to three years that took place. Other than that I would say there is no correlation that we're seeing directly in terms of the new supply number versus markets where there is not new supply and an interesting fact and we'll see how 2017 plays out. But when you look back at 2016, and how the dynamics played out on supply, in 2016 in the 65 markets we had 20,447 beds of new supply. Enrollment in the 65 markets increased 23,517. So we actually had enrollment outpaced new supply by 15%. Now that's an all 65 markets as a whole. When you dissect that and say what happened in the markets where there was actually new supply taking place in 2016 that was 33 markets. Enrollment outpaced new supply in 20 of the 33 there were only 13 markets where you actually had an increase in supply over enrollment and that was only net of 1758 beds. And so while we always talk about the new supply this year and historically -- historically averaged 1% to 2% or 1.2% to 1.3% of total enrollment which again we think the really story is, this is modernization of the first round of development. It's even further creating a positive environment and that enrollment continues to advance where the net increase and supply is only a fraction of that 1.2% to 1.3%; and that's why perhaps you don't see those direct correlations in terms of leasing and the new supply markets.

[Austin Wurschmidt:]

Very helpful. I appreciate the response.

[Operator:]

Thank you. Our next question will come from David Corak with FBR Capital Markets. Please go ahead.

[David Corak:]

Good morning, guys. Just looking at the NOI growth acceleration; a lot of it is expense driven. So I'm just wondering if you could walk us through kind of your expense growth assumptions for '17, maybe what kind of tax growth you're assuming and what kind of marketing spend are you getting for -- to get to those rent and occupancy numbers?

[Daniel Perry:]

David, this is Daniel. So as Jim mentioned in his prepared remarks, we've identified about $1.6 million of savings that -- you know, tangible savings that we've identified with our asset management initiatives that allowed us to get more aggressive with our expense growth expectations in the overall 1% to 1.5% same-store NOI growth that we included in guidance. When you look at the line item details and how that's being driven; in the areas of payroll, marketing, insurance property taxes, it's a more normal 2% to 4% growth here. Maintenance, utilities, property G&A, there is that you would expect we are driving some of these expense initiatives savings as where we're expecting flat to -- in some areas even negative growth in those line items. You spoke specifically about property taxes; our property tax growth expectation is 3.2%. It's around 3% for our existing assets from '16 but our development assets from '16 are much higher just given that this is the first full year assessment relative to the prior year. So certainly a little more growth there but averaging 3.2% as a whole.

[David Corak:]

Okay. Any seasonality or trend on the numbers over the course of the year?

[Daniel Perry:]

Yes, it's a good point. That's something when you're modeling for throughout the year by quarter; the first and second quarter we expect to see a little higher growth -- more in the 3% and 3.5% range, more inflationary in nature. And then with those expense initiatives savings taking effect in the second half of the year, much more moderate growth to bring the average down for the year to 1% to 1.5%.

[David Corak:]

Okay, thanks. And then just touching back on Austin's question about development; we haven't talked about Carbondale in a while so hoping if you could just update us what's going on in that project?

[Bill Bayless:]

Yes, and that's a piece of land that we continue to hold. The State of Illinois had some pretty significant funding issues in higher education several years back. Carbondale was one of the markets that we were not comfortable on pulling the trigger on at that point in time. It is an incredible site, it is across the street from the University's newest student housing that they developed about eight years ago. And they've got some new leadership there at the University. They are actually talking about adding some potential bets on campus. And so we continue to feel that out, that's something that we believe is a good development opportunity whether we undertake it or ultimately package it up and sell it to somebody else.

[David Corak:]

Okay, fair enough. Thanks guys.

[Operator:]

The next question will come from Nick Joseph of Citigroup. Please go ahead.

[Nick Joseph:]

Thanks. Just wondering if you could help reconciled the same-store revenue guidance of 3% at the midpoint to the final pre-lease here or the final leasing numbers for the fall 2016 which I think was 3.9% revenue growth. And then [indiscernible] final pre-leasing numbers for '17, '18 which I think the midpoint is around 3% to 4%?

[Daniel Perry:]

Nick, this is Daniel again. Yes, if you're just looking at the rental rate growth and the final occupancy from increase from fall '17 or fall '16, you would have expected to see that a little higher. Couple of things way that down; one is other income. Again, as Jim mentioned in his prepared remarks we had two great growth years in other income in 2015 and 2016; and so we're just trying to be prudent in our projections for other income and make sure that we don't over assume the growth that we continue to achieve there in retail and apps and fees. So we'll see how that plays out but certainly in area that has had a lot of growth in the last couple of years, so just want to be prudent how we continue to expect the growth there. The other area that brings that down a little bit is our short-term leases or semester ending leases; you know, each semester we have some loss of students that just don't come back to school. And so as you move from fall to spring and spring to summer, you will see some drop-off in occupancies in the 40 bip range; you've seen historically that can bring that overall average down a little bit. We do make assumptions on backfilling those leases and then we also have to make assumptions on what rate we're able to back fill those app that at times can be below the overall rate growth that we had achieved for the fall lease out. So those are all impacting that number bringing it down a little bit from what you might see just based on the rate growth that we report for the fall lease-ups.

[Nick Joseph:]

Thanks. Were there more short-term leases this academic year than they were the year before?

[Daniel Perry:]

No, very much in line. We are seeing -- as we talked about last quarter, you may remember with the prevalence of our ACE program we're seeing a few more nine-month lease programs, more resident sols on campus, so certainly you see that drop-off in the summer months when you move from spring to summer just with the drop-off of those nine-month lease properties that are in full [ph]. In terms of our twelve-month lease properties and the amount of short-term leases we grant to students, that's very much in line with what we've done historically.

[Nick Joseph:]

Okay, thanks for that. And then just in terms of the NOI margin, you mentioned achieving your goal at 55%. So I'm wondering if there is a new goal or further opportunity for margin expansion?

[Bill Bayless:]

We have not yet set that new goal but Jim Hopke is smiling from ear to ear [ph] as you've reminded us that we should set that for him going forward. We obviously will continue to mature the asset management function and we're very pleased with what we have brought in year-to-date or over the last several years. I do think there is probably going to be a continued opportunity to improve that based on two factors. One is that because we have gone through the recycling of the older further from campus assets in the portfolio; one, the assets we're bringing online are mostly through new development, new constructions built on American Campus specifications which tend to have better operational and for that matter free cash flow CapEx results. And also the fact that you have seen over the last three to five years; the emergence of more on-campus development that in many states are exempt from real estate taxes and when you are building a first-year residence hall; in many cases you have marketing savings related to the fact there is assignment costs. So I think in addition to good asset management, you're also going to see some what I'll call transactional engineering of the type of assets that we are developing and bringing online that could further improve that.

[Nick Joseph:]

Thanks.

[Operator:]

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

[Alexander Goldfarb:]

Good morning. I just want to go back to the G&A comment. I think you said sort of 1.7% to 4.3% increase apart from the transition expense but if we look sort of apples-to-apples; you guys in '16 had $22.5 million of G&A and the guidance Page is $27.4 million. So two things; one, what is -- is the bonus part -- not the bonus; is the transition expense part of that? And if not, what's driving that increase?

[Daniel Perry:]

Alex, this is Daniel. So the separation charge for John's retirement is in the $27.4 million to $27.8 million G&A guidance we've given. We disclose the charge at the bottom right portion of our guidance page in the supplemental. If you take that charge out, you'd be at a range of $22.850 million to $23.250 million which is a 1.7% to 3.4% growth over '16 G&A.

[Alexander Goldfarb:]

Okay. So Daniel, so that's -- so in your guidance, the FFOM -- it does include the separation charge, correct?

[Daniel Perry:]

No. In the calculation of FFOM as you will see on Page 17 of our supplemental, we reflect the add-back of that separation charges. Obviously, it's a one-time payment and not reflective of the ongoing operating performance of the company. So for FFOM, we thought it was appropriate to add it back.

[Alexander Goldfarb:]

But I mean -- I'm just thinking about like -- you guys add back the debt charges and in fairness, I mean bonuses are part of annual operating expenses. This is an accelerated one, retirements are sort of part of corporate life; why -- I mean other companies don't adjust for that. Why should we think that this is not part of just the normal part of the succession planning that any company would have?

[Bill Bayless:]

I would say -- Alex, this is Bill jumping in. When you look at the transition of the executive team that we have put in place and you look at this type of particular charge this is the first charge of this type that we have taken in the 12 years of being public. And so it is unique in that regard in terms of the -- it was part of a broader reorganization of the entire executive team that was a major future succession planning agenda.

[Daniel Perry:]

And just to clarify, you called it a bonus; it's not a bonus, it's charge is laid out in our proxy, half of it which is $2.1 million as we 8-K when we released the announcement. And the remainder is acceleration of RSAs that had been awarded and would have vested over the next five years but happen to be accelerated with John's departure.

[Alexander Goldfarb:]

Okay. And then the second question is, Bill on the last call when you're asked about sort of long-term NOI growth of 4% to 6% and you guys, and you said you were comfortable towards the high-end. The range of 3.6% to 5.3% is certainly a healthy range but did something change as you guys put together the plan for the '17 budget that didn't allow it to be up towards the 6% range? Or it's just a matter of sort of general comments and listen 3.6% to 5.3% is still very respectable NOI?

[Bill Bayless:]

Yes, I mean -- we would say the 3.6% to 5.3% is in the higher half of the range of 3.6%. And so it's very much in line with the expectations of where we expect to be. As always it will be based upon the completion of a lease-up and Jim and Jennifer's ability to deliver on the expense side in terms of what half of the upper half we're going to be in. So I don't think there was anything of material change in terms of our thoughts and putting that out there.

[Alexander Goldfarb:]

Okay, cool. Listen, thank you.

[Operator:]

The next question is from Ryan Burke with Green Street Advisors.

[Ryan Burke:]

Thank you. Bill, I wanted to quickly clarify on the new supply numbers that you're quoting relative to enrollment and you have been quoting. Is that on and off campus new supply or is that just off-campus new supply?

[Bill Bayless:]

That is off-campus. We do draft new supply also on-campus Ryan and we categorize it into two categories; and that is on-campus supply that is directly competitive with off-campus properties. And so for example, we do not view the development of on-campus residence halls as being a competitive product; candidly, we like that. Given that our number one market that we thrive off of each year is students migrating from campus, we look at a stronger on-campus supply program, that's something that actually in the long-term benefits us. We do track the apartment, the only one that I would note of the 65 markets that we're in this year, that there is a material contributor to that is Texas A&M and college station. And within that market the University is undertaking about 3,000 beds of apartment-style products on-campus as part of their overall housing program. Now A&M has been over the last two years and if they continue to meet their projections this will continue. They have been one of the highest growth in enrollment schools that we serve and have a plan to take enrollment up more in the area of 70,000 by 2020 than where they historically were five or ten years ago which in the low 50s. And so they are starting to emulate what I would consider more in the gameplan of an Arizona State University in terms of their size and mission but we do track those competitive bids on-campus; that's the only material one that we would look at this year.

[Ryan Burke:]

Okay. And what broadly -- what percentage of your residents are freshmen?

[Bill Bayless:]

Yes, and we break it down into tracking it into three categories. And that obviously with our ACE program and the fact that we are now building many of the resident's halls that the universities themselves are housing those first-year students. When you look at the portfolio, 6,752 of our beds are designed on-campus to house freshmen. And so those beds don't create any risk associated in the future with universities changing the policies, they actually thrive off of it. When you then look at our apartment-style products, we continue to break it into two categories; on-campus apartments built under ACE that are not designed to house freshman, typically for freshman again to migrate to. And those 9,170 beds in that bucket -- we only have 414 freshmen or 4.5% of the resident base. When you then look at the off-campus apartments, again, that we typically house of the freshmen that are turning into sophomores that they come-off campus, that's of course our largest bucket; 64,167 beds. And there we have 4,937 freshmen or roughly 7%. The third category and then the one that you track -- we track most closely in terms of university policies and the like where we make these decisions are the private off-campus residence hall products where we also target first year students. And in that regard we only have three assets which are Callaway House, Austin; Callaway House, College Station and the Castilian [ph] here in Austin and those beds are a total of 1,940 design beds and we have 1,252 freshmen or 64%. And that is something -- the other thing while we target first year students in those beds, we also actually -- and Callaway House, Austin has been amazing; that's actually about 50-50 freshmen and upperclassman. But we're always looking at making sure that we're able to position those properties too -- the upperclassman market if the university has any change in policy. Let me give one fact there; most universities when you look at their on-campus housing stock they do reserve the large majority of it typically 85% to 90% for the first year students. They then however do also offer beds to upperclassman that are wanting to live on-campus as they complete their first year. If the university is changing a housing policy and our markets are basically split right down the middle; out of the 65 markets that we're in, 33 have on-campus housing requirements, 32 do not. But in almost all cases, the university successfully capture the large majority of freshmen in those markets. But if the university is changing those policies; typically they can only do it in conjunction with adding more beds to their campus of the residence hall product or they have to fore-sell the upperclassman living in residence halls off which then becomes a backup market for us. And so when you look at the two markets where we have built these type of products being in our Home State of Texas, The University of Texas A&M; in both of those cases, the universities have significantly larger first-year student acceptance then they do residence hall beds available to them. The other thing that is unique in both of those markets is that you have very large shadow markets in Austin Community College and Glenn [ph] Junior College where because those students can't get accepted out of high school to those two flagship institutions; they go to those junior colleges in their first year, many of them live at Callaway House [indiscernible] 28% in our property, live on-site and then migrate into the university's transfer students in their second year. So in our case the market research, the university policies; you know, we have total comfort with any risk that exists in those assets at this time.

[Ryan Burke:]

Thanks. And how much lead time is the university usually going to give you if they are going to go from either no on-campus or live on-campus requirements to live on-campus requirement?

[Bill Bayless:]

It usually doesn't happen overnight; and that is something that is -- you know, long discussions, political. Again most universities campus they just don't have enough beds and they have to add more. The most recent one that we saw what happened was the University of Georgia which now probably happened seven/eight years ago; and it was about a four year process from the time that they had started talking about it. So you have plenty of time to react and figure out what's going on.

[Ryan Burke:]

Okay. And just one more question in regards to on-campus; there is a trend across the country towards the implementation of P3 enabling legislation at the state level. It's something that's aimed at more broader infrastructure projects but how should we be thinking about that in regards of on-campus development? Is it something that's going to open the flood-gates further or has it already or is it not a big deal?

[Bill Bayless:]

It's certainly can be an enhancer. You know, I think colleges and universities have really pioneered and lead this initiatives in many ways; just in that -- they were one of the first public institutions over the last two decades to see a significant diminishment of state funding as part of their operating budgets. And so you know, they have had to lead the way in that regard and have been doing so. It certainly could be an enhancer but in certain states legislation is a two-way sword. And you know, it all depends on what's included in that legislation. I'll give you an example, I mean in many cases we can do transactions with all the benefits and economics available to the private sector. If all of a sudden that -- and we haven't seen this but I'm giving a hypothetical in your answers to not get too excited about it; as long as that legislation does not put limitations and requirements in terms of labor, product -- those type of things into the legislation to advance P3 then it can be a very positive thing. So it all depends on how the legislation is written, is to whether or not it's a positive or negative in that regard but we don't see that as a game changer in either direction at this point.

[Ryan Burke:]

Okay, got it. Thanks, Bill.

[Operator:]

The next question will come from Tom Lesnick of Capital One.

[Tom Lesnick:]

Good morning. First for me looking at your '17, '18 pre-leasing; you know, it's still early obviously and you guys are trending well but looking across the various buckets by prior year occupancy, I guess I would have expected to see occupancy perhaps a little softer on the highest occupancy properties as you guys push rate and vice versa on the lower occupancy properties but looking at the 98% bucket, it looks like you guys are actually ahead a little bit year-over-year. So I guess what's the dynamic that's going on there? And what's the opportunity to push rent harder on that highest occupancy bucket?

[Bill Bayless:]

Tom, certainly a good question. The one thing we always caution is, you know, when you role such a broad diverse portfolio up into these categories, it really at the highest level creates some perceptions that really when you look at -- you know, for us as we've always talked about -- it's market by market, asset by asset, accommodation type by accommodation type. And indeed the pricing and velocity and the sophistication of lambs to measure that velocity versus market share that is left and the ability to maximize the combination of those two is something that is highly sophisticated that we trust the data and the indication it gives us to do. When you look at that and we talk about a projection of 2.9%; the 98% bucket is at this point in time priced more than 4% over last year. And so we certainly are pushing rate as appropriate in the unit types, it actually started the year at 3.6% and we've increased in that area. When you get into the other two categories of 95% and 98%, both of those -- and 95% and below, both of those categories are under 2%. But again, you are weighing the opportunity in the 95% to 98% to have as much is 200 to 300 bips of occupancy gain, and getting that number as high as it can be. And so the breakdown by category is something that again -- the lambs approach that we have taken does indeed create variation between those categories and how much we're pushing rate versus driving future occupancy. But again, I'd caution it also goes down property by property, market by market, accommodation by accommodation type. And so make no mistake we always ask ourselves throughout every lease up and at the end of every lease up; where if anywhere did we leave money on the table? And we go back and analyze that data in retrospect, certainly it's not perfect and there is always opportunities to tweak and to learn but we believe we do a pretty efficient job in terms of maximization of those two.

[Tom Lesnick:]

That's very helpful. Turning to supply; obviously hearing a lot of industry talk about tightening lending standards, especially on the construction side. As you look out to 2018 and 2019, what are you seeing in terms of activity among the private players? And I know it's a little early but what are you guys thinking about supply growth in your markets?

[Bill Bayless:]

Yes, making a general statement and again, because it is early, a little too early to really give a clear perspective on '18 and '19 -- but it appears that the level that we're seeing right now is kind of in a steady state at this point where I won't expect to see huge fluctuations up. And the potential for it to go down is really driven by the maturity of the sector in terms of the folks that are coming in and a large portion of development that is now taking place is focused on the development of core pedestrian and bicycle assets to campus. And these college towns typically do have very good barriers to entry and is much tougher to target that inner ring. And so we believe a lot of the slowdown that you have seen is the fact that -- this year the 2017 deliveries, our national tracking is that 70% of those are all pedestrian assets. And so the natural barriers to entry we believe is what has slowed the supply coming in; and it only will continue to get harder as there are fewer development sites left in each of the markets.

[Tom Lesnick:]

Got it, I appreciate that. And then final one for me; you guys are obviously forecasting a $400 million bond offering in 4Q. Giving that that's still a few quarters away and we're in the prospect of a rising rate environment, do you guys plan on perhaps trying to lock in that rate on a forward basis or how are you guys thinking about mitigating some of that interest rate risk exposure?

[Daniel Perry:]

Tom, this is Daniel. We do look at that. As you can imagine over the last six years, seven years; it's not been a winning venture, to do hedges, but obviously we want to always be prudent and thinking about it to mitigate that risk. In our guidance we have assumed some rate increase; right now we're looking at pricing for a 10-year deal in 3.7/8 [ph] range and we've done -- we've assumed just under a 4.5% rate on that offering; so we have allowed for some increase in treasury. I think the market also believes that some of that increase in treasuries could be offset by some level of decrease in spreads but -- so all in all, we've allowed for it in our guidance and we will continue to discuss whether or not it would be advisors whether or not it would be appropriate to look at rate locking the treasury portion of that throughout this year.

[Tom Lesnick:]

Alright, thanks guys. I really appreciate it. That's it for me.

[Operator:]

[Operator Instructions] The next question will come from Vincent Chow of Deutsche Bank. Please go ahead.

[Vincent Chow:]

Just maybe another comment similar to Tom's first question there. In terms of the 2.9% rate growth for the '17, '18 school year; just given the positive commentary we heard throughout out the call in terms of the supply situation; just curious why that wouldn't be little higher in generally. I know it's a roll up of individual markets but it does seem like you did 3.5% last year and conditions are getting a little better that the 2.9% could be a bit higher?

[Bill Bayless:]

And again you really do have to break it down by category and so certainly looking at the 98% and higher being at 4% and 4% plus, you are pushing beyond 3% inflationary number and in places that you can't. I'd also point out last year we were very successful in achieving that 3.5% as you recall initially earlier in the year we're talking about 3% to 3.2% and the reality is when you do push as high as 3.5%, I think the Axiometrics data -- William correct me, if I misspeak [ph]; the last year I want to say Axiometrics last year was about 2.6%, the national average was 2.7% and we were 3.5%. So we outpaced the market last year by 80 bips on pricing; and so when you're pricing for this year, you are in competitive situations where the price offering that you're putting forth is competitive to your competitors and so that overachievement of 80 bips last year -- you do have to be sensitive to in terms of your spreads of the marketplace and so if the entire industry last year had produced 3% to 5%, I would say your comment is right on the mark. The fact that we outperformed the industry so significantly last year is why you see perhaps a tempering of that spread in the next year's pricing.

[Vincent Chow:]

Got it. That helps, it makes sense. And just another bigger picture question since we -- I don't think have spoken about the policy changes that are being considered yet. Just curious, I mean I know it's probably too far down the road but are any of your conversations with administrators -- I mean is there any concern about sort of the international student population and how enrollment might be impacted given just overall policy considerations and just generally -- I guess, the sentiment towards the U.S. these days?

[Bill Bayless:]

Yes, I think when you look at international students or something of a resident-based that does play a role in our mix of residents. While nation of origin is not something by FHA that we can track because it's a protected class type thing. We do estimate that we have about 3% to 3.5% of international students in our portfolio and there is actually a great broad collection of information regarding two international students done by the Institute of International Education, the IIE. And they have produced something since 1959 called the open doors report which really tracks international student's population in higher education across the board. Interestingly, and where nationally and their data is much better in terms of what we're able to track because of FHA requirements. Across the country they estimate that international students are 5.2% of the population and about half of that is undergrad, half is graduate. So when you focus on the undergrad market which is predominantly what we serve, it's only 2.5% of the enrollment-base and there really is a bit of an overpopulation of international popular students in the metropolitan areas, the New York City, the Boston that probably takes a little bit more of a disproportionate of that. Half of the international student market today is coming from China and India. And so when there seems to be good stability in the flow of students from those two countries; and so when you back those out the amount of international students undergraduate coming from the rest the world is really a very small number. We don't look at changes in policy as a risk to our business. Certainly right after 9/11 in '01 and '02 there was a bit of a decrease in international students for a small period of time, that never had a blip on the radar for us in terms of occupancy. The other thing that we point to anecdotally; colleges and universities by nature of their mission of higher education want to have as diverse of a population and experience for its students in terms of exposure to world cultures and belief systems as possible; and so international students play a strategic role and it's something we view as very good. However, when you look at just pure supply and demand, and take again our Home State of Texas; certainly the University of Texas has probably the national average about 5% international students. In-state students graduating from high school, you have to be in the top 6% to 7% of your class to get into UT and A&M. If God forbid, there did ever become a situation where the international seats were vacated for whatever reason, the domestic demand for those seats is significant. And so for us from an occupancy perspective, it's really not a high risk area as it relates to policies that may or may not take place. Now for colleges and universities, they love the international market also because it's a much higher paying student as it relates to tuitions and fees. So there may be a little bit of a more of a macro impact at college and universities which could cause some budget tightening. But not something we view as a direct threat to occupancy in numbers but something we monitor and look at because it is important to our industry.

[Vincent Chow:]

That's very helpful. Thank you.

[Operator:]

The next question will come from Gwen Clark with Evercore. Please go ahead.

[Gwen Clark:]

Can you give an update on how you're thinking about the multi-asset strategy and the progress you have made in markets outside of Austin?

[Bill Bayless:]

Yes, we continue to be excited about it. In Austin, now we've gone through a full cycle as with any implementation of a program, there are things you learn that work well and don't work well. I think we are certainly seeing benefits in the area of the marketing and leasing and the shared resources that we have seen there. We also from administrative type works such as book-keeping and things of that nature, we see the ability, the place that we saw the weakest potential downside that we focused on is roaming maintenance crews. And the dedication to curb appeal and things of that nature where it is that we don't want to have any follow-up in service of the implementation of that; and so we did modify a little bit how we're approaching that in terms of how much centralize that comes into play. And so we feel that we are deriving benefit from what is rolled out in Austin; we're now looking at College Station at the Florida State, and some of the next major markets; Texas Tech [ph], and where we saw direct benefit we're rolling those things out on a broader scale. And we continue to look at it and monitor and to tweak it as we go; and so something we're still very excited about, and we underwrite -- I'm going to tell you where we really see it paying dividends, pun intended, is when we're looking at acquisitions and expanding in the markets we already have our presence. We're seeing from the one-off owners numbers and how everybody is underwriting to our own, typically as much as a 60 to 80 basis points swing in yield when we overlay the operational efficiencies. Now when we're looking at a IRR, we underwrite the value of what the owner has in place. We then look at that on a five-year whole perspective realizing those benefits in our operations. But whenever we do a reversionary calculation for a terminal event, we always add that back in because we're not going to be able to sell an asset at our efficiencies. And so the benefit you get is operational during the whole period versus a long-term NAV perspective. But many class made up owning these things forever anyway, so it's beyond that.

[Gwen Clark:]

Okay. So I guess is it safe to say that in two years or so we will probably see the strategy in at least one or two other markets?

[Bill Bayless:]

Absolutely. I'd say ultimately the ten markets where we have major scale, you will see us undertake this. And we hope to have much better data over the next five years as we really roll this out in terms of making a difference.

[Gwen Clark:]

Okay, and then just one quick more. As you think about your acquisition strategy, it seems like that probably has a pretty big weight on it -- is that a fair assumption?

[Bill Bayless:]

Yes, it really does. And you know, in the markets that you're already operating, there is so much more data that you have in terms of the historical performance and the strengths and weaknesses of assets. And so anytime we're buying an asset in an existing market versus a new, I'd say there is absolutely competitive advantage not just in the operational aspects I discussed but also in the level of due diligence and knowledge of your undertaking in terms of knowing the market and the assets history.

[Gwen Clark:]

Okay, got it. Thank you.

[Operator:]

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

[Bill Bayless:]

We'd like to thank you all for joining us as we talked about the year-end results for 2016. I want to thank the team again for the great start in 2017, we are focused on the lease-up and the delivery of our assets and are very excited about the tailwinds the industry continues to have and a transaction [indiscernible] environment and cap rate compression that William discussed coupled with a significant growth prospects that we have before us in our $1.1 billion development pipeline. We look forward to seeing you at the upcoming spring investor conferences and chatting with you on the next call. Thank you.

[Operator:]

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