American Campus Communities, Inc.
Q1 2008 Earnings Call Transcript

Published: 6 May 2008

[Operator:]

Good day ladies and gentlemen and welcome to the first quarter 2008 American Campus Communities, Inc. earnings conference call. (Operator Instructions) I will now turn the call over to Gina Cowert, Vice President of Investor Relations. Please proceed ma’am.

[Gina Cowert:]

Good morning and thanks to all of you for joining the American Campus Communities first quarter 2008 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 is available on the company's website at www.studenthousing.com in the Investor Relations section under Press Releases. Also posted on the company website in the Investor Relations section under Supplemental Information, you will find a supplemental financial package. Additionally, we are 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 in the same. Webcast slides may be advanced by you to facilitate following along. Management will be making forward-looking statements today, the references to the disclosure and the press release on the website with the slides as well as the SEC filing. 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 these expectations reflected in any forward-looking statements 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 all that, I would now like to introduce the members of management with us today, Mr. Bill Bayless, Chief Executive Officer; Mr. Brian Nickel, Chief Investment Officer; and Mr. Jon Graf, Chief Financial Officer. And now I'll turn the call over to Mr. Bayless for his opening remarks.

[Bill Bayless:]

Thank you Gina, good morning and thank you all for joining us as we discuss our operating and financial results for the first quarter of 2008. In addition to Brian Nickel and Jon Graf, I also have Greg Dowell, our Chief Operating Officer with us today. With that, let’s begin. Our operational and financial results met our internal expectations. If you turn to page five of our supplemental package you’ll see that our first quarter NOI for our same-store wholly-owned properties increased 6.3% over Q1 of ’07. This increase was driven by a 3.9% increase in revenues while operating expenses increased by just eight-tenths of one percent. As you can see on pages seven and eight of our supplemental occupancy at our same-store wholly-owned properties as of 03/31 was 96.9% compared to 97% for the same period prior year. Our total owned property portfolio was 95.5% occupied at the end of the first quarter. If you’ll turn now to pages nine through 11 we’ll review the leasing status for the upcoming ’08-’09 academic year. With 17 to 18 weeks remaining prior to the commencement of fall classes at our subject universities our leasing velocity continues at a vibrant pace. As of April 25, our same-store wholly-owned properties are currently 87% applied for and 82% pre-leased compared to 89% and 84% respectively for the same period a year ago. At our 2007 acquisitions properties we are running significantly ahead of last year as we’re currently 73% applied for and 67% leased compared to 58% and 57% respectively for the period one year ago. Leasing is also well ahead of expectations at our own development projects opening in the fall of 2008. Vista Del Sol our first owned ACE project at ASU is 100% pre-leased with a significant wait-list. In addition the Villas at Chestnut Ridge in Amherst, New York is 90% pre-leased. Our combined total owned portfolio is currently 87% applied for and 81% pre-leased for the upcoming 2008-2009 academic year. Our current rental rate increase for the same-store property grouping stands at 3.8% through the current lease-up. However given softness in several markets especially Athens, Georgia and Fresno, California where we just recently lowered rents, we could see the final rental rate increase for the same-store property grouping in the area of 3.6%. Our rental rate increase for our 2007 acquisition properties remains at approximately 1% with an opportunity for significant revenue growth coming in the form of increased occupancy. Overall our total owned portfolio has a current rental rate increase of 3.5% and at this time we would expect the final rental rate increase for the total portfolio to range from between 3.2% to 3.5%. Turning now to the GCT transaction over the last several weeks Greg Dowell, seven members of our operational staff and I have had the opportunity to visit all of the GCT wholly-owned and joint venture assets. We toured each property, interviewed staff and residents and toured competitive properties. In sharing our initial impressions from those visits we believe there is significant opportunity for significant improvement in virtually every aspect of operations. We do believe that this year’s term will require approximately $150 to $175 per bed to bring the portfolio to our term standards and to fully impact resident retention and pricing power for the 2009 lease-up. Beyond improved operational performance we also believe there is a strategic opportunity to create additional significant NOI growth via the prudent investment of $30 million to $40 million in capital projects focused on changing the product position of many GCT assets. The 2008-2009 academic year will be a transition period with vast improvement expected in the ’09-’10 academic year. Bottom line, we’re more bullish then ever on the transaction and we believe that our strategies and operating platform will be affective in creating significant value for our shareholders. With that I’d now like to turn it over to Brian. Brian Nickel Thanks Bill. During the first quarter we closed on the acquisition of two properties totaling $19.5 million and consisting of 689 beds; Sunnyside Commons 161-bed community serving students attending West Virginia University was purchased for $8.1 million at a 6% going in cap rate with 150 to 200 basis points of upside potential through redevelopment. From a timing perspective we would not expect to implement our redevelopment plan until after fall 2009. Pirate’s Place a 528-bed community serving students attending East Carolina University was purchased for $11.4 million at an initial nominal cap rate of 6.5%. Through improved operations and strategic marketing we believe this transaction has the potential to increase to over an 8% nominal cap rate over the next two leasing cycles. As you know during the first quarter we entered into a definitive merger agreement to acquire GMH Communities student housing business for $1.4 billion including outstanding debt totaling approximately $963 million. Commensurate with the closing of the merger ACC will contribute 15 of GMH’s assets to a newly formed joint venture with Fidelity. In addition GMH has the right but not the obligation to sell 10 identified disposition assets above a minimum agreed upon price prior to the closing of the merger. Assuming both of these transactions are completed the net transaction value to ACC will be $1 billion including wholly-owned property debt and our 10% share of the debt on the joint venture properties totaling $606 million. As part of the transaction GMH’s military housing business is being sold to Balfour Beatty. As detailed in the amended S4 filed on April 23, Balfour Beatty has received the necessary Hart-Scott-Rodino and [sefious] approvals and the closing of the sale of the military housing business is expected to occur very soon. In addition ACC and GMH have received notice that the SEC has waived their right to review the S4 and have now set a date of June 10 for the GMH shareholder approval meeting. Pending shareholder approval we expect to close during the second week of June. On the disposition front we recently engaged Ryan Reid and his transaction team at CB Richard Ellis, and are working with them to develop a disposition package that we expect to take to market later this year. The final disposition portfolio is targeted to be $150 million to $300 million and will include a mix of GMH assets as well as several of our existing assets. I’d now like to turn to page 13 of our supplemental to address our owned development activities. Construction on Vista Del Sol, the 1,866-bed owned on-campus ACE development at ASU is 79% complete and on track to open for the 2008 fall term. Barrett Honors College, the $126.5 million 1,720-bed second phase at ASU has a targeted completion of fall 2009 and is currently 12% complete. Combined these two phases represent $260 million of the planned $370 million three-phase student housing development where the company will own on-campus housing through its ACE program. We are also pleased to report that Boise State University has selected American Campus to begin negotiations for the development of an ACE project. This new development opportunity has the potential to yield over 2,000 beds of new, modern, well-amentized student housing in multiple phases. ACC was awarded this project through a competitive qualifications process and will be working with Boise State to finalize scope and timing with the earliest delivery being no sooner than fall 2010. We are targeting development yields similar to ASU and are excited about the opportunity to assist Boise State with meeting their growing housing demand utilizing our balance sheet. This award reflects the significant interest colleges and universities across the nation are expressing regarding our ACE program which we believe can be directly attributed to the early success of Vista Del Sol and the favorable opinion ASU has received from the rating agencies regarding our ACE developments. For the owned off campus development pipeline, construction on Villas at Chestnut Ridge, which will serve students attending CUNY Buffalo, is currently 85% complete. The community is on track to open for occupancy in August, 2008. We also continue to make progress on the entitlement process for our development project at Southern Illinois University in Carbondale. We have closed on the purchase of the land and are in position to commence construction in Q3. I’d now like to turn to page 14 of the supplemental to address our third party business. On the third party development front during the first quarter we commenced construction on the Highlands, our 796-bed third party development at Edinboro University in Pennsylvania. Development fees are projected to be $2 million over the next 18 months. For our UCI development we are projecting the first of two additional phases to begin construction in late Q3 or Q4. Development fees for the first phase are projected at $7.9 million over a two-year construction timeline with ongoing incremental management fees of approximately $830,000 commencing in fall 2010. We also recently announced that we were awarded a third party development in management services contract for a new 550-bed community at Cleveland State University. Turning to page 15 of the supplemental you can see there was a significant amount of activity on our third party management pipeline this quarter as well. Since the beginning of the year we have added a total of six new potential projects bringing the total third party management pipeline to 11 new assignments. Commencement of these assignments range from 2008 to 2010 offering the potential for $2.8 million in recurring annual fees during the 2010-2011 academic year. With that I’ll turn it over to Jon to discuss our financial results, capital structure and outlook for the remainder of ’08.

[Jon Graf:]

Thanks Brian. For the first quarter of 2008 we reported FFOM of $11.2 million or $0.38 per fully diluted share which was in line with internal expectations and consistent with our guidance projections. This compares to approximately break-even FFOM during the first quarter of 2007 which included a compensation charge of $9.6 million or $0.38 per fully diluted share related to the 2004 Outperformance Bonus Plan put into place at the time of our IPO. Revenues for our total wholly-owned portfolio during the first quarter of 2008 increased 16.9% over the comparable 2007 quarter while operating expenses increased 17.1%. As a result the total wholly-owned portfolio realized NOI growth of 16.7% during the first quarter as compared to the same period in 2007. Regarding our on-campus participating properties the total FFOM contribution in the first quarter from the on-campus participating properties was $667,000 in 2008 versus $585,000 in 2007. As mentioned during the last earnings call we are utilizing the same FFOM recognition methodology for our equity investment in the Hampton Roads Military Housing joint venture. For GAAP purposes this is accounted for as an unconsolidated joint venture in which our minority share of the loss during the first quarter was approximately $126,000. Management does not believe that our share of this income or loss from this project recognized for GAAP purposes accurately reflects our participation in the economics of the transaction as we are not required to make any additional capital contributions in excess of our initial $1.6 million investment and our cash return is capped at 8% annually. Therefore in the calculation of FFOM each quarter we will back out any income or loss recognized for GAAP purposes and will instead reflect cash distributions received. Third party revenues were up $1.5 million for the quarter when compared to the prior year and were in line with internal expectations at $2.6 million. Management believes we are on track to achieve our third party revenue guidance range of $12.5 million to $13.4 million for the year. It should be noted that we expect the University of California phase three and CUNY Staten Island developments to be significant contributors to third party development revenues commencing during the third quarter of 2008. Corporate G&A for the quarter was in line with internal expectations at $2.1 million and included $153,000 of expenses related to the GMH transaction. This is up slightly from the $1.7 million incurred in the first quarter of 2007 which excludes the impact of the previously mentioned Outperformance Bonus Plan expense. As of March 31, 2008 our total market capitalization was approximately $1.3 billion consisting of $799 million of equity market value and $512 million in total debt excluding our on-campus participating properties. Variable rate debt represented approximately 21% of our total indebtedness at the end of the quarter. The company’s outstanding debt is at a weighted average interest rate of 5.88% and has an average remaining term to maturity of 4.1 years. As of March 31, 2008 the company’s total debt to total market capitalization was 39.1%. Our total interest expense for the quarter excluding the on-campus participating properties was $5.4 million compared to $4.9 million in the first quarter of 2007, a relatively small increase despite our significant growth. The company’s interest coverage ratio for the last 12 months increased to 2.75x compared to 2.44x one year ago. Interest expense is net of approximately $1.7 million and capitalized interest for the quarter to owned projects in development. As of March 31, we had recorded $140 million in construction in progress related to the ongoing owned development projects. With regards to our capital structure we were pleased to complete a successful equity offering earlier this month issuing an additional 9.2 million shares at $28.75 per share resulting in net proceeds of approximately $252 million. The net proceeds will be used to fund a portion of the cash consideration payable in the GMH transaction to repay certain debt and to fund our current development pipeline. The pro forma impact of this offering is March 31, 2008 assuming the repayment of our revolving credit facility increases our total market capitalization to $1.5 billion from $1.3 billion. It reduces our variable rate debt to 15% from approximately 21% and it reduces the company’s debt to total market capitalization to 31.2% from 39.1%. Turning now to 2008 guidance the financial results for the quarter were in line with internal expectations and consistent with our original guidance projections. We continue to expect to achieve our FFOM guidance range of $1.51 to $1.59 per fully diluted share excluding any impacts related to the GMH transaction. For the balance of the year the most significant factors that will impact our FFOM guidance are as follows. Lease-up exposure

[Bill Bayless:]

Thank you Jon. In closing we’re very pleased with the continued success in every area of our business. Our core operations remain solid, and continue to positively impact net asset value. We have established the creditability of our ACE program as the optimal alternative for universities seeking to meet their housing demand while preserving their credit capacity. Our third party business segment is poised to reach levels not seen before in our company’s history and with the pending GTC transaction we have positioned the company with the opportunity to create significant value for our shareholders. Lastly we’d like to thank all of you our investors for the overwhelming demand that we saw during our recent equity offering. You have enabled us to position the company to fully execute our business plan and take American Campus to the next level. With that we’ll open it up for Q&A.

[Operator:]

(Operator Instructions) Your first question comes from the line of Karin Ford – KeyBanc Capital Markets

[Karin Ford:]

Question for you on the rental rate increase for the ’08-’09 school year, am I doing my math right that with 82% leased today at 3.8% increase that the balance you’re only expecting at 2.5% rental increase on?

[Bill Bayless:]

Where we’re at right now to take you through the math exactly, we’re currently at 3.8%. We have three assets that we had to lower rates at and that was University Village at Fresno where we decreased rates just recently 6.9%; at River Club in Athens, Georgia where we came down to where the overall decrease there is still an increase of 0.3% but lower than we had raised rents; and then River Walk where we’re still a 1% run rate increase but again lower. So those three properties are dragging down when you project those rental rates forward through the rest of the lease-up with the remaining of the rents holding constant. That would take us from 3.8% to 3.6%. Now when you eliminate those three properties the rest of the portfolio average a 4.1% rental rate increase with a range of 1.6% to 6.7%.

[Karin Ford:]

Can you talk about what’s going on at Fresno, it seems like that’s the biggest issue?

[Bill Bayless:]

In this case it’s not really just a soft market, but as you all recall we had a shooting at the property, probably about 18 months ago and unfortunately the criminal trial associated with that shooting took place earlier in the year, right in the height of our leasing season. And it just kicked up all the negative press associated with having a shooting at your property and our leasing trend just stopped dead in the tracks and so that’s why. And typically while that has been a softer market over the last two to three years, our asset quality and location have enabled us to always overcome and perform and have positive NOI growth but in this case its just needing that event to pass, that trial to be over and move by us.

[Karin Ford:]

Just on leasing at GCT how is that progressing and what are expectations with regard to your underwriting?

[Bill Bayless:]

They are currently, and our underwriting as you know was based on historical, we did not budget for any improvement in terms of their leasing status and revenue and NOI growth. Right now they are running about 4.5% to 5% behind; they’re at 59.2% versus 64%. And so we’re watching that closely, we’re working hand in hand with them. It’s not out of the realm of expectation of where we expect them to end up though.

[Karin Ford:]

What interest rate assumption, what short-term interest rate assumption do you have baked into your guidance; you mentioned that’s a swing factor for you in ’08?

[Brian Nickel:]

You’re talking about post GCT transactions?

[Karin Ford:]

Yes.

[Brian Nickel:]

I don’t think we want to give that level of detail but obviously interest rates have moved down since the time we announced the transaction so it is helpful with the equity offering we should see significantly less impact from the interest rate changes though.

[Karin Ford:]

And when do you expect to update guidance for GCT?

[Brian Nickel:]

We need to get through the lease-up, through August, September and get our arms around the portfolio and then we’ll probably be giving it on the first quarter call.

[Operator:]

Your next question comes from the line of Joseph Dazio – JP Morgan

[Joseph Dazio:]

Two quick guidance questions to start off, number one, following up again on the interest expense, is the number you gave last quarter I think $27 million still accurate, because you mentioned short-term rates having an impact but it already went down quite a bit, I’m not sure what was baked into that $27?

[Brian Nickel:]

I think the way that we’ll answer that question is that guidance was without the GCT transaction and without the equity offering and post equity offering we think that the basically it has very little impact on our guidance so if you take into account cash on the balance sheet for the short period of time and what we would do with the cash we think that the guidance is still good. Assuming you’re trying to get to whether or not its accretive or dilutive and it just obviously it depends on that interest rate assumption and then the pricing in the offering, the way that we’re looking at it mid-point is $1.55 and we’re still comfortable with that absent the GCT transaction.

[Joseph Dazio:]

Okay so basically rates are down but the, with the equity deal its kind of a wash.

[Brian Nickel:]

Right.

[Joseph Dazio:]

Okay and then have you seen any enrollment issues at some of your universities related to student loan problems at all? Historically when universities that you own assets at have missed their enrollment how have your assets performed?

[Bill Bayless:]

We have, we may have mentioned on the last call, Jamie Wilhelm who is heading our ACE program and was the FA for many of these VPs of Finance for years has reached out to the VPs of Finance of many of the markets that we’re in and we have been told that there are no impacts to enrollment. The one thing I would say stabilized or downturns in enrollment are never the biggest risk to the company, it seems to always be on the supply side and the barriers to entry. And so we’re more concerned when we look at various markets related to new supply coming in then any impacts of the student loan and enrollment.

[Joseph Dazio:]

And then on development, the past few years you’ve talked about the number of institutional investors and developers looking at the space, ramping up, where are those guys now are they still looking at the space given the capital constrained environment?

[Bill Bayless:]

Absolutely, if any and I think some of the analysts and some of the shareholders attended a RealShare Conference in Dallas about a month ago, and interest is still at a significant peek and there is still a ton of institutional capital looking to get in. Again the biggest constraint is qualified operators with whom to partner.

[Joseph Dazio:]

Okay and then in terms of development yields are they being upped at the margin as you underwrite new deals?

[Brian Nickel:]

Right now that hasn’t changed since our last call, we’re targeting that 7 ¼ to 7 ½ as a going in yield. Once again we’re still seeing lots of developers coming in and bidding up on land pricing. So we don’t think the environment has changed much over the last six months despite the credit crunch.

[Operator:]

Your next question comes from the line of Craig Melcher – Citigroup Equity Research

[Craig Melcher:]

How much cash do you have on hand today post the deal and repayment of the line of credit I would assume?

[Brian Nickel:]

We took in $250 million in the transaction so after the repayment of the revolver, we’re about $220 million in cash.

[Craig Melcher:]

And what rate do you assume can you get on that cash today before the GMH deal closes?

[Brian Nickel:]

Two to three percent.

[Craig Melcher:]

And in the guidance does it assume some higher rate than that since the guidance doesn’t include the GMH, because I would think if you’re only earning 2% or 3% on that cash the full year FFO would be lower but maybe you’re not assuming that the cash earn is that rate?

[Brian Nickel:]

A couple of things, in the guidance for the full year, remember the guidance we’ve given is without GCT so if you assume GCT didn’t close then what we would probably end up doing is paying off some of the construction loans which we have that are out there so the incremental impact from that cash would not be 2% to 3% and our interest rate assumption was a little bit higher and so but once again with the cash coming in and the pricing on the offering we basically believe that it has no impact on the previous range of $1.51 to $1.59. Just to point out though, we’re moving quickly to closing and GCT Balfour Beatty closing on that transaction is eminent so it’s kind of irrelevant, we gave that as a guidepost to analysts who were out there and we’ll be updating guidance with GCT included when we give it on the first quarter call.

[Craig Melcher:]

On the assets sales that you’re looking to market how are you figuring out the types of assets you want to sell or is this generally older assets or are they mixed new assets or what’s the thought process?

[Bill Bayless:]

It is a very involved in depth process based not only on assets quality but individual market analysis, [barriers] entry, supply, things of that nature. Also we look at strategic dispositions based on the number of beds we have in a market and where we think we may be a little overexposed, joint portfolios, things of that nature. So very in depth.

[Craig Melcher:]

Do you think there will be more GMH assets in this or ACC assets?

[Bill Bayless:]

At this point in time we are in the full formulation of that and wouldn’t comment either way.

[Craig Melcher:]

And the yield on the Boise State deal, if you could just remind us what your expectations are there relative to ASU but with the ASU…

[Brian Nickel:]

I’m going to caveat this statement which we are very preliminary. We’ve just been selected through a competitive process and done some preliminary feasibility analysis and discussions with the university. But we believe the possibility, we had a targeted 7.5% going in yield on ASU so that 7 ¼ - 7 ½ we believe is possible in Boise. That’s the process that has to unfold and we’ve got to get in and go through the full development process with Boise State.

[Craig Melcher:]

When you’re looking at these sales at the end of the year, what sort of pricing are you thinking about relative to …?

[Bill Bayless:]

We can’t comment on that right now. There’s the possibility that we may think even if the cap rate is not terribly attractive on an asset if we think the long-term growth profile is a negative, we may be willing to dispose of the asset because it would improve our going-forward growth profile. We also that there’s going to be some assets in there that we think will get very attractive pricing. As far as where we end up on a blended cap rate, we’ll have to update you once we finalize that portfolio on what we expect.

[Craig Melcher:]

And what are you targeting as use of proceeds?

[Bill Bayless:]

At this point its going to depend on the timing when we close the GCT transaction we’ll look at at using that cash, some of those transactions on the GCT side are highly leveraged so there wouldn’t be a lot of proceeds coming out of them it would just be a reduction in debt and then if we had cash on hand we’d obviously first take that to pay down the revolver and then evaluate what the next best use of proceeds would be after that.

[Craig Melcher:]

Would you be targeting JVs on these assets or these are really would you say non-core, you just want to get rid of them.

[Bill Bayless:]

We’re going to evaluate every and all option. We’ve engaged as we said Ryan Reid at CB and they’ve got a tremendous amount of experience not only selling but structuring joint ventures as well as our experience that we recently had with Fidelity so we’re going to be looking at all of the available options.

[Operator:]

Your next question comes from the line of Christeen Kim – Deutsche Bank

[Christeen Kim:]

In terms of leasing pace, GCT, what do you think is causing them to be so behind last year? Is it the transaction, are you seeing any turnover on the property level, could you give a little more color on that front?

[Bill Bayless:]

At the property level, we’re not seeing a lot of turnover since the transaction was announced. However there are some vacant positions that are in place that we’re working with GCT to fill on an ongoing basis. And again I think one of the things we have talked about frequently in these, the transaction calls related to GCT is the functional upside in operations and the leasing systems that we have in place and that we can bring the portfolio in ’09, we think that we can have much more success in terms of the strategic development of property, marketing plans, product positioning and implementation. And so at this point we are not concerned as it relates to a general change in market conditions in those markets but rather it does revolve around pricing policies, marketing practices and operational implementation.

[Christeen Kim:]

Okay so the pace of leasing then I guess was somewhat within your expectations then?

[Bill Bayless:]

Yes and again we did not expect to improve it at all. Being in a range of 5% of where they were is not something that we view as detrimental to the overall transaction.

[Christeen Kim:]

And you mentioned some repositioning opportunities at some of the GMH assets; could you give a little bit more color in terms of scope, maybe timing and potential dollars invested?

[Bill Bayless:]

If you all go back to the original GCT Investor Presentation and we had in there the case study on Raiders Pass, which was the Royal property we bought in Lubbock, Texas where we spent about $600,000 to $700,000 in capital and had a $1 million increase in revenue in NOI and we commented at the time that we thought those type of opportunities may run rampant through the GCT portfolio. After getting out there and seeing that there is really an opportunity, I’ll give one example, furniture. In some cases many of these assets are a little older, they were merchant-developed. And so the quality of furnishings that were put in were not geared toward long-term ownership and where that property may be approaching 10 years old with this original furniture, at times they have a very small amount of units, five to 10 where they brought in new furniture and they’re getting a $60 premium on that unit. Well in those cases there’s an incredible opportunity to refurnish with new furniture, get that rental premium that’s already proven in the market and have a very accretive IRR compared to our base assumptions going in. Also from an amenity perspective you’ve got a lot of good assets that have very basic amenities where you have an okay fitness center, an okay computer center, an okay rec room where you can come in and do some conversions and expansions and have an immediate wow factor that takes you to a complete different pricing level as it relates to marketing and appeal. And so we’re looking at those on an asset by asset basis and formulating those strategies. We’ve said that we would expect that to be $30 million to $40 million in potential. In the accretion dilution numbers we gave, we had always anticipated we’d probably spend around $30 million but we would be doing those based on the what we believe would be the impact of generating significant NOI above and beyond what operational improvements could be made that justified those investments.

[Christeen Kim:]

And then on the management contracts, is there something with timing within the year as to when these are awarded as to why there are so many in Q1 or are you doing anything differently or are there just more opportunities?

[Bill Bayless:]

Something we have always said in a third party business people beat down our door all the time and we still are very selective in terms of what transactions we take. Right now that when you look at the six that have been added and the names on that list, these are good, they’re university, university foundations, there’s banks who we want a relationship with where we’re doing turnarounds on and so we’re not accepting everything that comes to us by any means but rather these are good transactions, good deals and I think when we speak about the operational troubles that others are having in the sector, those failures are driving good properties with good owners that need quality management that are turning to ACC and so we’re taking those on a select basis, on a strategic basis and in no way want to over extend in that area to where it impacts our core operations or integration of GCT.

[Operator:]

Your next question comes from the line of Steve Swett – RKP

[Steve Swett:]

Let me just make sure that I’m clear and I understand these incremental opportunities that you’re referencing at GCT. When you laid out the upside potential from the GCT transaction you referred to a certain amount of accretion, these are additional opportunities above and beyond what you had thought you could get from the operational improvements and efficiencies?

[Jon Graf:]

Yes they are but remember the only accretion dilution numbers we’ve given today are the $0.10 to $0.20 in 2009 and we’ve said we’ve assumed basically no upside moving into the ’08 ’09 academic year. So these are obviously above and beyond that. The big thing that we see is the real opportunity to drive long-term NOI growth that we believe could be in excess of our existing portfolio and so the obvious return on that would be significant.

[Steve Swett:]

Just a follow-up question on the leasing status for ’08 and ’09, you referenced the three properties where you’ve changed the pricing, it seems to me looking at the number of properties that you have that are running behind last year that there are several other properties that are struggling a little bit, is this related to your comments in the past about maybe pushing rents a little bit and being willing to take a little bit slower lease-up at some of these other places or is just a random thing?

[Bill Bayless:]

No, actually our comment on supply, let’s look at the two in our report that are really when you look at, you say oh my God, look how far behind they are and that would be The Estates in Gainesville, Florida, at the University of Florida, in that case you’ve got nearly 2,000 beds of development coming into the market. And so velocity has slowed however when you look at our performance there, we have two assets that are already 100% leased in that market. One had a rental rate increase of 6.7%, the other 4.8%. The Estates which is currently running about 200 beds behind, we have a rental rate increase of 3.7%. We have held that. We have no concerns about lowering it. We’re tracking at 23 leases a week. We need 10 a week to fill and so it’s merely the absorption coming, it has been slowed down by those new entries into the market but there we have no concerns. When you look at the large one, the Village of Sweethome, there we have a 4.4% rental rate increase. We caused the absorption velocity slowdown with the bringing online of our Villa at Chestnut Ridge product where a lot of our, what would have been retention at Sweethome, our existing students there got the first crack at leasing at the newer product and so there, when you look at our 4.4% rental rate increase right now we are closing 55% of the tours through the door so we have no pricing issues. There we’re just focused on making sure we continue the marketing effort throughout the year to drive velocity. We’re averaging 21 apps a week there where you need 20 to fill. And so in both cases it’s not an issue so much of demand but as velocity of absorption driven by new supply.

[Operator:]

Your next question is a follow-up from the line of Karin Ford – KeyBanc Capital Markets

[Karin Ford:]

Do you expect any additional merger costs in G&A from GCT?

[Brian Nickel:]

Above and beyond what we talked about previously?

[Karin Ford:]

Yes.

[Brian Nickel:]

No, nothing beyond what we’ve talked about previously. We think the transaction costs like this quarter could be significant moving through the end of the year just because some of them go up against equity but the rest are going to get expensed through the P&L. That should stop moving into 2009. As far as merger costs, if you’re referring to G&A or incremental G&A, we’re still comfortable with our assumptions.

[Karin Ford:]

But the $153,000 that you booked this quarter, did you give us guidance as to what that could be additionally in 2Q?

[Brian Nickel:]

No and we’re not able to do that, that’s part of the reason why we’re not giving additional update on guidance. There’s just a lot of things happening as we move through the end of the year so we’ll just have to see how that shakes out. But right now as far as total transaction costs, and where we’re heading, we’re in line with what we originally thought.

[Karin Ford:]

But we should expect that you are going to incur more expenses like that $153,000 this quarter.

[Brian Nickel:]

Yes, we would expect that they would be incurred through the remainder of the year.

[Karin Ford:]

The status of the GCT assets sales, can you tell us where that stands?

[Brian Nickel:]

Right now they have made significant progress. It’s still possible that all 10 of the disposition assets could sell. If we were going to end up with any of them, it would be a very low basis and a small amount in terms of what it looks like right now. I don’t want to comment as to a probability on it just because we won’t know here for another two or three weeks.

[Karin Ford:]

Is it an all or nothing?

[Brian Nickel:]

No its not, they’ve got, they’re working individual contracts and individual transactions on each one of them and they’re all still in a position to be able to sell. Some of them are going to be closing very soon so we should start to see that and then obviously is we end up with them, or end up with any of those contracts then we would look to immediately turn those and sell them.

[Operator:]

Your final question comes from the line of Andrew McCulloch – Green Street Advisors

[Andrew McCulloch:]

Did you give rental rate increases for the GMH assets?

[Bill Bayless:]

No we did not; right now they’re running about, as we talked about from the occupancy perspective, 4.5% to 5% behind their lease-up. Rental rates for the most part remain consistent although we do not have an audited average to convey to you.

[Andrew McCulloch:]

On the Carbondale development has the shovel gone into the ground on that yet?

[Bill Bayless:]

It has not. We have all the necessary approvals. We broke ground on the land and we’re in the final GC pricing exercise right now.

[Brian Nickel:]

Clarification we’ve closed on the land, we have not broken ground on the land.

[Operator:]

There are no more questions at this time; I will turn the call back over to Bill Bayless for closing remarks.

[Bill Bayless:]

With that we’d like to thank all of you for joining us today and we look forward to talking with you in the next quarter to let you know how things are progressing with the GCT transaction and our final lease-up. Thank you very much.