American Campus Communities, Inc.
Q2 2008 Earnings Call Transcript

Published: 5 Aug 2008

[Operator:]

Good day, ladies and gentlemen and welcome to the American Campus Communities second quarter 2008 Earnings Call. My name is [Johieda] and I'll be coordinator for today. At this time, all participants are in a listen-only mode. And we'll be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I'll now like to turn the presentation over to your host for today's call, Ms. Gina Cowart with Investor Relations and Corporate Marketing. Please proceed.

[Gina Cowart:]

Thank you. Good morning and thank you for joining the American Campus Communities second 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 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'll 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 SEC filings. Management would like to inform you that certain statements made during this conference call, which are not historical facts, maybe 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 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, Bill Bayless, Chief Executive Officer; Mr. Brian Nickel, Chief Investment Officer; and Mr. Jon Graf, Chief Financial Officer. We also have Greg Dowell, Chief Operating Officer and Jim Hopke, Executive Vice President of Project Management with us today for Q&A. And now I'll turn the call over to Mr. Bayless for his opening remarks.

[Bill Bayless:]

Thanks, Gina. Good morning and thank you all for joining us, as we discuss our results for the second quarter of 2008. First we'll review our operational performance, leasing status for the upcoming academic year and provide an update on the GMH integration process. Brian will discuss our investment activities and provide a third-party services update and Jon will then review our financial results and discuss the outlook for the remainder of 2008. With that let's begin. We are very pleased with our core operational and financial results, as they did meet our internal expectations. If you turn to page 5 for supplemental package, you'll see that our second quarter same store NOI increased 5.8% over Q2 of '07. This was driven by a 4.2% increase in revenues, while operating expenses increased by 2.4%. If you'll turn to page 7 of the supplemental, you'll see that our occupancy at our same store wholly-owned properties as of 6/30 was $94.2 compared to $93.1 for the same date prior year. If you'll turn to pages 8 through 13, we'll review the leasing status for the upcoming 2008, 2009 academic year. With two to four weeks remaining prior to the commencement of fall classes at our subject universities, our leasing is progressing nicely. As of August 1st, our same store wholly-owned properties excluding our 2007 acquisitions are currently 97.8% applied for and 95.1% pre-leased compared to 98.2% and 95.7% respectively one year ago. Our rental rate increase for this property grouping stands at 3.8% consistent with the increase communicated on our last call. Leasing at our 2007 acquisition properties is running significantly ahead of last year. As we are currently 94.3% applied for and 90.1% leased compared to 80.5% and 77.4% respectively one year ago. While, the rental rate increase for the 2007 acquisitions averages just under 1%. The expected increase in occupancy will provide meaningful revenue growth. Overall, we expect a 3.4% rental rate increase for these two combined groupings, which will become our same store property grouping moving forward. We expect same store revenue growth for the '08, '09 academic year to range from 3.0% to 3.75% depending upon the final results of our lease-up. Our 2008 growth properties are leasing extremely well. Our two acquisitions are 94.3% applied for and 89.1% leased. Vista del Sol, our first ACE project at Arizona State University is a 100% leased and Villas at Chestnut Ridge in Amherst, New York is 99.3% leased. Our total owned portfolio excluding GMH is currently 98.5% applied for and 94.8% leased for the upcoming academic year. Bottom line, our core portfolio continues to provide strong NAV growth for our shareholders. In looking forward to the opportunity afforded to us by the GCT portfolio, we'd like to touch on the performance of our two most recent turnaround assets. The Village on Sixth at Marshall University and Pirate's Place at East Carolina University. As we communicated on prior calls, both of these assets were acquired at a mid-six nominal cap rate with a belief our operating platform and strategic property positioning would create significant value. For the upcoming 2008-2009 academic year, we have improved the Village on Sixth to a nominal 7.8% projected yield, and Pirate's Place to a 9% projected yield. Our acquisition pro forma assumed we would reach the stabilized yield on Pirate's Place in the 2011-2012 academic year. As with Raider's Pass in Lubbock, which we talked about extensively last year, we believe these turnarounds demonstrate our ability to execute and create substantial value in the GMH portfolio. Turning now to the GMH portfolio, our team has been working vigorously in the 45 days since closing to impact the current lease-up, prepare for turn, complete our in-depth market analysis and begin formulating our pricing and product positioning strategies to maximize value creation in the upcoming 2009-2010 academic year. As of June 30, the GMH portfolio was 86% occupied, as of August 1, the GMH portfolio is 84.2% applied for and 83.4% leased for the upcoming '08-'09 academic year, as compared to 87.2% leased one year ago. While the current leasing activity is slightly behind historical pace, we in no way believe this is an indication of poor asset characteristics or weakening market but rather we remained confident in our belief that the application of our operating platform and systems coupled with strategic pricing and product positioning, will enable us to meet and perhaps exceed our long-term value creation expectations. With that, I'd like to turn it over to Brian to discuss the GMH transaction and our other investment activities.

[Brian Nickel:]

Thanks, Bill. On June 11th, we successfully closed on the acquisition of GMH Communities student housing business. The total transaction value was $1.4 billion with a net a cost to ACC of approximately $1 billion after the formation of a new joint venture with Fidelity which included 15 GMH properties. As part of the consideration for the transaction, ACC assumes $643 million of fixed rate mortgage debt including our 10% share of the $343 million in debt, on the 21 totaled new and existing joint venture properties. We also issued 5.45 million shares and units to GMH equity holders and an exchange ratio of 0.07642. ACC did take three of the 10 disposition assets GMH had targeted for sale prior to closing. Two of the properties, the Courtyards and The Verge were already under contract to be sold at the closing of the merger, and are carried in discontinued operations on our income statement for the second quarter. We since closed on the disposition of the courtyards and expect to close on the sale of the verge this quarter. These two properties have mortgage balances totaling $48.3 million which will be eliminated from our balance sheet in the third quarter assuming the sale of The Verge closes this quarter. The third property University Place in Charlottesville Virginia is encumbered and we are assessing whether or not we believe it should be included in our disposition portfolio. Regarding our potential disposition plan, we continue to work to finalize the disposition package, and are targeting to bring to each market later this year. The final disposition portfolio is anticipated 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 14 of our supplemental to address our home development activity. Construction on Vista del Sol, the 1,866-bed owned on campus ACE development at ASU is 93% complete and on track to open for occupancy next month. We will hold a grand opening ceremony on September 30th, and analyst and investors are invited to attend. Barrett Honors College, the $126.5 million 1,720-bed second phase at ASU has a targeted completion of fall 2009 and is currently 20% complete. Combined, these two phases represent $216 million of the planned $370 million, three-phase student housing development where the company will own on-campus housing through its ACE program. In addition, we are in the feasibility analysis stage on ASU component three, and will evaluate our delivery timeline as we assess the strength of the market during bed pre-releasing. We continue to work with Boise State University to finalize the plans for the first phase of our potential 2000-bed multi-phase project that will consist of new modern well amenities student housing in an ACE structure. ACC was a worthiest project to a competitive qualifications process, and we are working with Boise State to finalize scope and timing with the desired delivery of fall 2010. We are targeting development yield similar to ASU and are excited about the opportunity to assist Boise State with meeting their growing housing demand utilizing our balance sheet. Regarding other developments in our ACE pipeline, we have actively discussed potential ACE projects with over 50 individual institutions and systems of higher education throughout the US this academic year. Excitement regarding the potential of this financing structure continues to grow. We currently believe that there are as many as six institutions either already in or preparing to begin the competitive procurement process for an ACE type development. As what's the case with our ASU project the timing of projects of this magnitude can be somewhat lengthy. But the pipeline and potential value continues to build. For the owned off-campus development pipeline, construction on Villas at Chestnut Ridge, which will serve students attending SUNY Buffalo, is currently 98% complete. The community will open for occupancy next month. We also continue to evaluate our approach to our Carbondale development. We have postponed the construction start in this project and now anticipate delivery in 2010. Given the successful lease of EDR Saluki Pointe project, we remain bullish on the market. But we want to remain cautious, as we are aware of 800 to 1000 new beds entering the market in 2009. In addition, we are now in the process of evaluating the option of including this and title development site in our sales package, as a means of maximizing potential value. I would now like to turn to pages 15 and 16 of the supplemental to address our third-party business. On the third party development front, we recognized $723,000 in fees during the second quarter. This was consistent with our expectations; as no new projects were scheduled to commence construction during the quarter. The point at which significant portions of the development fee are recognized. Last quarter, we stated that we anticipated Phase III of UCI would close and commence construction in the third or fourth quarter. We are pleased to announce that the $220 million [51C3] bond offering for the project was successfully closed on July 30th. This development represents the largest single phase of development in the company's history. We expect to see a significant portion of this development fee earned in the third quarter. As you'll notice in the supplemental, the total development fee is now $300,000 less than originally anticipated. This was due to a reduction in the total development budget related to decreased cost of construction, a potential positive sign indicating a more stable construction environment. We continue to make progress on the third-party CUNY development at Staten Island and hope to close the financing for this project and begin construction in late Q3 or Q4. With that, I'll turn it over to Jon to discuss our financial results, capital structure and our outlook for the remainder of 2008.

[Jon Graf:]

Thanks, Brian. For the second quarter of 2008, we reported total FFOM of $10.6 million or $0.28 per fully diluted share as compared to FFOM of $8.1 million or $0.32 per fully diluted share for the comparable quarter in 2007. The quarterly 2008 results include the acquired GMH operations since June 11th of this quarter and the impact on the weighted average share count related to the $5.4 million shares issued to GMH shareholders and the $9.2 million shares issued in conjunction with April 23rd equity offering. Excluding GMH and any related acquisition financing the 2008 results from core operations were in line with internal expectations and are consistent with our original 2008 guidance projections, which excluded the GMH acquisition. Revenues for our total wholly-owned portfolio during the second quarter of 2008 increased 32.9% over the comparable 2007 quarter, while operating expenses increased 28.3%. As a result, the total wholly-owned portfolio realized NOI growth of 36.9% during the second quarter as compared to the same period in 2007. These increases were primarily due to the GMH acquisition, continued strong same store NOI growth and the growth properties. Regarding our on-campus participating properties, the total FFOM contribution in the second quarter from these properties was $550,000 in 2008 versus $668,000 in 2007. Year-to-date, our on-campus participating properties have contributed $1.2 million to FFOM, which is comparable to 2007. Total third-party revenues were $1.9 million for the second quarter of 2008 and were up $649,000 million for the quarter, when compared to the prior year. Total third-party revenues consisted of $720,000 million in development fees and $1.2 million in management fees, which included $241,000 million from GMH third-party management contracts and management fee income on the Fidelity joint ventures. Third-party revenues were in line with internal expectations for the quarter. Corporate G&A for the quarter was $3.2 million, up from $2.2 million incurred in the second quarter of 2007, which included a $298,000 impact from the Outperformance Bonus Plan. This increase was primarily driven by $413,000 million of direct merger expenses related to GMH and additional staffing benefits, rent and public company costs related to both the GMH acquisition and company growth. As of June 30th, our total market capitalization was approximately $2.4 billion consisting of $1.2 billion in equity market value and $1.2 billion in total debt, excluding our on-campus participating properties and our share of debt from our unconsolidated joint ventures with Fidelity. Variable rate debt represented approximately 16% of our total indebtedness at the end of the quarter. The company's outstanding debt is at a weighted average interest rate of 5.48%, down from 5.88% last quarter, and has an average remaining term to maturity of five years as compared to 4.1 years last quarter. As of June 30th, the company's debt-to-total market capitalization was 49.7%. Our total interest expense for the quarter excluding the on-campus participating properties was $7.2 million compared to $7.4 million in the second quarter of 2007, a $1.8 million increase. During the second quarter of 2008, we incurred $1.8 million in interest expense on approximately $600 million of debt assumed from the GMH acquisition, and $219,000 in interest expense under the $100 million senior secured term loan entered into to finance the GMH acquisition. The company's interest coverage ratio for the last 12 months increased to 2.71 times compared to 2.58 times as of one year ago. Interest expense is net of approximately $2 million in capitalized interest for the quarter related to owned projects and development. As of June 30th, we had reported $172.4 million in construction and progress related to the ongoing owned development projects. With regards to our capital structure, we were pleased to complete a successful equity offering in April 2008, issuing an additional 9.2 million shares at $28.75 per share resulting in net proceeds of approximately $252 million. A portion of the net proceeds were used to fund a portion of the cash consideration payable in the GMH transaction, and they pay-off the outstanding balance on our revolving credit facility. As of June 30th, we had approximately $50 million in remaining cash proceeds from the April equity offering that will be deployed into our wholly owned development projects, and capital improvements on the GMH assets. I'd now like to discuss the components of our 2008 guidance which do not include the impacts of the GMH transaction or the recent equity issuance. The results from the core operations from all business segment for the quarter, were in line with internal expectations and consistent with our original FFOM guidance range of $44.1 to $46.6 million. We are not updating our guidance at this time to reflect the impact of the GMH transaction as such results will be significantly impacted by the final lease-up of the GMH properties. Higher first time turn cost at these properties and the timing of other integration expenses related to the merger. At this time, we would like to review our original FFOM guidance assumptions which excluded GMH and discussed how our results from core operations are tracking compared to these assumptions. We previously communicated a range of $75.2 million to $76.1 million for total wholly-owned property NOI, which excluded the on-campus participating properties and GMH. This range was based on achieving same store NOI growth of approximately 5% and opening Vista del Sol, Villas at Chestnut Ridge on time and on budget. We are currently tracking to the mid-to-upper level of this NOI range having achieved same store NOI growth of 5.6% through June 30, 2008. And expecting Vista del Sol and Villas at Chestnut Ridge to meet or exceed our operating expectations as they are currently 99.8% pre-leased. For interest expense excluding the on-campus participating properties and debt related to the GMH acquisition, we previously communicated an estimate of $27 million. Excluding the interest savings associated with the equity offering, we expect interest expense to meet or be slightly lower in this estimate due to lower than expected LIBOR rates during the year. We previously communicated an estimate of $7.8 million in G&A for 2008. Excluding the expenses in G&A growth related to the merger, we believe we are on track to achieve this original estimate. We will continue to monitor the level of G&A related to the GMH integration, merger expenses, and additional public company costs, and we'll give more detail in the future as an appropriate run rate for the combined company. For the on-campus participating properties, we previously communicated a range of $1.8 million to $2.2 million in FFOM contribution. Through June 30, 2008 these properties have contributed $1.2 million in FFOM, and are still projected to be within this range for 2008. Third-party services excluding any impact from GMH were anticipated to generate $12.5 million to $13.4 million of revenue for 2008 and expenses of $7.1 million. This previously communicated guidance also assumes that University California, Irvine Phase III and CUNY Staten Island third-party developments projects would commence constructions during the third quarter of 2008. UCI Phase III construction commenced August 1st. The CUNY Staten Island development continues to be a significant contributor to anticipated third-party development revenues in 2008. If this project closes on time, we'll be on track to achieve our third-party revenue guidance range of $12.5 million to $13.4 million for the year. With that, I'll turn it back to Bill.

[Bill Bayless:]

Thanks, Jon. In closing, we are very pleased with the continued success in all areas of our business. We believe that our core performance this quarter coupled with our lease-up progress and rental rate growth for the upcoming academic year demonstrate the quality of our portfolio and our ability to execute on our business plan to create value for our shareholders. Moving forward, we remain confident in our strategies and abilities to create meaningful value in the GMH portfolio. With that, we'll open it up for Q&A.

[Operator:]

(Operator Instructions) your first question comes from the line of Alex Goldfarb with UBS. Please proceed.

[Alex Goldfarb:]

Hi, good morning.

[Bill Bayless:]

Good morning, Alex.

[Brian Nickel:]

How are you doing, Alex?

[Alex Goldfarb:]

Doing well, doing well. Just quickly on the Staten Island if that does not close in Q4 does it just simply get bumped to Q1 or is it something like calendar year related where they could postpone it further?

[Bill Bayless:]

Right now it is actually scheduled to close right at the end of Q3. So, it could be Q3 or Q4 given the delivery timeline on that. If it were to slide much fast at the beginning of Q4 and all probability it would slide the year.

[Alex Goldfarb:]

Okay. Second thing is just the timing of the CapEx the $30 million to $40 million that you are planning on GCT. When do you envision that you will be able to lay that out so we can get a handle on how that spend is going to be happen?

[Brian Nickel:]

By the end of the year Alex, we should have a much more definitive plan. We are actually starting that program in conjunction with the Q4 of this year and some of the re-leasing efforts related to furniture (inaudible) and club house redos, but by the end of the year, we should be able to give you a much more clearer picture of the final amount on that and the timing. Originally, as we communicate, we think it is something, we will be implementing overall over a 18 to 24 month period, but we are going to start sooner than later.

[Alex Goldfarb:]

Okay. So far as you have been going through the portfolio, any surprises or it is been as expected on the integration?

[Brian Nickel:]

Really no surprises. We had a pretty good hand on what conditions were going into the portfolio and I think it is all been consistent. I mean, make no mistake. Integration is difficult and challenging and we are up to our years in it, but all consistent with what we expected.

[Alex Goldfarb:]

Okay. Final question is, as you talk to more and more schools, are you seeing any schools push you more to do like mix used deals, where there maybe retail on the bottom with student housing over top or else asking you do graduate housing as a component of the undergrads project?

[Bill Bayless:]

The retail really depends up on the make up and geographic location of the university and whether or not Atlantis ASU would have landed itself for the retail component because of the urban nature of Tempe in the area near the school. So, it is really dependent upon that. As related to the second portion, we are always and have been for the last 20 years asked by schools related to graduate housing and married housing. However, it is a very difficult market and the graduates and married students are much more sensitive to price and are more apt to live in further out lower priced housing based on just the economics. So, you will see that we have predominantly and we would expect this to continue done undergraduate housing. However, like you see a UCI Irvine and in other campuses, we have been able to do a smattering of graduate housing when candidly it is supported economically by the undergraduate component. I do not expect to see those trends change.

[Alex Goldfarb:]

Okay, thank you.

[Operator:]

Your next question comes from the line of Karin Ford with KeyBanc Capital Markets. Please proceed.

[Karin Ford:]

Hi. Good morning.

[Bill Bayless:]

Good morning, Karin.

[Brian Nickel:]

Good morning, Karin.

[Karin Ford:]

Question for you on a couple of your markets Florida and Michigan, one of your competitors have had some issues in those markets and I think we talked last quarter about some supply going on in Gainesville that you were seeing some impact as well. Yet, it seems like your lease-up was actually really good so far the summer. Can you just talk about whether or not those markets have turned around and what you have done to get the pre-leasing up there?

[Brian Nickel:]

Yes and we agree we talked on our last call through the Gainesville is one of the most challenging markets in the country this year from the supply perspective. There is 2000 to 3000 new beds coming on line. We are very pleased and again I think this goes back what we have been talking about over the years as far as investment strategy and proximity to campus and the three assets we have there, University Club, which is the Proctor acquisition is 98.7% leased and had a 6.8% rental rate increase. The Royal Gainesville property that was part of that acquisition is 98% occupied and we had 4.9% rental ate increase and the estate is 93% pre-leased with a 3.9% rental rate increase. So our Florida beds overall, our Gainesville beds were 96% at an average rental rate increase of 4.6% and that is a very challenging market. Again I think it speaks to the importance of proximity to campus in your lease-ups.

[Karin Ford:]

Great, thanks. Second question relates to New York it looks like you ended up you are pre-leasing there about 79% which if I remember correctly so roughly equal to where you were last year. Do you expect to see any improvement on New York or you are having any new concerns after the lease-up this year?

[Brian Nickel:]

Right now we continue to remain cautiously optimistic and that the spread the last year was about 160 beds ahead of where we were at this point in time and we have had some excellent success there. We have got another master lease executed last week with Steinhoff for 60 to 70 beds. We continue to see good demand, we see good trending, and our goal was to try to maintain as much of that spread between now moving in the beginning of classes as possible. One of the things you may recall from last year is the new work serves a variety of institutions and some of those start school after Labor Day, some as lays for third week of September, and so you have more opportunity there to continue to pick up. To answer your question on the other weak markets; we also continue to see softness geographically, in Ohio and Michigan as overall states, and we inherit some properties there within the GCT portfolio, we did not have any there ourselves. While we think those are soft markets, again, we think the assets that we are inheriting have good asset characteristics. For example, the one property we have in Central Michigan, we actually in 2005 were called-in to do a turn around on that asset. It was just under 80% occupied in one cycle, we increased it to 97% and it was actually sold to GCT. Now, it is lo and behold backed down into the 70s. While the market conditions are soft, we believe characteristically there is operational upside that we have demonstrated in the past on specific assets and that we can do again.

[Karin Ford:]

Great, thanks. Did you see any increase on that debt during the quarter, or delinquencies or anything that could be related to student lending?

[Bill Bayless:]

No, bad debt is right on track, actually a little better than last year and so we have not seen a negative impact.

[Karin Ford:]

Great. Are you expecting to give us guidance including GCT in the equity at some point in the future?

[Bill Bayless:]

We are going to evaluate that seeing where we go into next quarter or as we communicated at the time of the announcement of the transaction; it would probably be on our fourth quarter call during the first quarter. One of the things, we have given the components of guidance in where we are, we have given a pretty significant amount of information. Candidly 2008 is going to be a little bit messy with the impact of purchase accounting and the impact of the integration. We have given some information out there to help people get there arms around 2009 which is what we are going to focus on. So we are going to look at it for the next quarter call and then definitely will be giving guidance on the first quarter call of the latest.

[Karin Ford:]

Great. Thank you very much.

[Bill Bayless:]

Thank you.

[Operator:]

Your next question comes from the line of Michael Bilerman with Citi. Please proceed.

[David Toti:]

Hi, David Toti here with Michael.

[Bill Bayless:]

Hi, David and Michael.

[David Toti:]

Would you talk a little bit about how these types of assets performed in prior periods of economic weakness let say, the early 2000s or even going back to the early 90s?

[Bill Bayless:]

When you look at, and again, we have a smaller base of properties that have the experience going back that far. As a whole, in the turn of the century when multi-family was the softness point and student housing was negligibly impacted in some of the more metropolitan markets. NOI growth was largely flat, you did not see a lot of deterioration but you did see a slowdown in the growth. Since that time we have seen, and as you have seen in our portfolio, explained NOI growth on an annual basis averaging 4% to 6%. The one thing that we will say right now though, when you look at the characteristics of our portfolio, as booked at the numbers we talked about that we produced on the current growth assets and looking at GCT moving forward. Is that right now so much of the upside that we have for core internal growth moving forward relates to what has previously been under prior ownership, a lack of operational execution and strategic implementation. So market conditions being what they are and again, using Gainesville is a great example where you can not find a more challenging market from a supply perspective. When you look at the asset characteristics and again the wholly-owned aspects of the GCT portfolio we brought on the balance sheet being consistent with our proximity caps and investment criteria, we think that the operating systems you know will help us even in the challenging economic time to create core internal value.

[David Toti:]

Great, thanks. Then just along those lines, can you talk a little bit about the condition of the student given expense pressures, declining enrolments, the financing challenges that are trying to seep into the student loan markets. Can you just give us an update in terms of your ability to push prices and what there receptiveness is?

[Bill Bayless:]

Right now we have just not seen any direct negative impacts that we can point and say wow, it is really impacting us. I think when you look at our same store numbers, as far as revenue growth; you see that they are excellent. The one thing that we continue to see when you look at our properties that are inside of a mile and inside of a half mile which are our highest priced products, that is where we have the best operating results. Our properties inside of a mile, we average 542 a bed or inside a half mile averaged 542 and inside of a mile was a group average 524 but yet they are the first to lease this year. We reached 95% in that product category in the week of June 13th this year versus the cheaper products that are a little further out those over a mile; we are still approaching the 95%. When you look at the vacancies in the Village of Sweethome in Buffalo, the vacancies there were impacted by the fact that we brought the Villas on Chestnut line or Chestnut Ridge on line, and we had 206 students move over. The Villas is a premium priced product, and so students left for a more expensive product. We have just not seen the impact as of yet. Is it related to student loans? I think down the road where you will see impacts there, students are having to pay at times a higher interest rate to get those loans, when that is going to impact them is when they have to pay those back after school.

[David Toti:]

Great. Did you talk about margins on the third-party fees that you are anticipating?

[Bill Bayless:]

We do not necessarily look at it as on a margin basis because on a margin basis they are obviously very lucrative. The way that we have talked about it in the past is just targeting increasing revenue and then having modest increases in expenses. If you go back and look historically, you can get a better idea of how those margins moved.

[David Toti:]

Okay, great. Then just lastly, I understand you do not want to give specific guidance related to your expectations for the GMH asset. Would you take a little bit about those expectations on a casual basis relative to lease-up, ramp up costs, without getting into specifics?

[Jon Graf:]

Sure. Let me address the operational performance first of all. The one thing, we talked about, we have entered the portfolio slightly behind 3% to 5%, and we closed that gap a little bit. We are confident in our ability to really impact the leasing in 2009, 2010, which we are going to begin those efforts in Q4. As it relates, we have not put out there what we believe a stabilized yield is in terms of each of the academic years moving forward as we complete this lease-up, we will begin to formulate those thoughts and certainly as we move into early next year we can do that. Bottom line, when you look at the leasing status currently, it is really attributed to four areas; in many cases we just missed the leasing window in the early markets. They have aggressively raised rents last year, in many cases pushing themselves out of the market, missed absorption in key periods. Also GMH only used a leasing format where they went straight to leases, no application was taken, which made it difficult for a student to make a decision on the spot to make a $6,000 to $8,000 commitment and then just the lack of strategic administration implementation. With that situation we think that we have excellent opportunity to really impact revenue immediately in the '09-10 academic years. As it relates to the integration cost and one thing we cautioned on the last call, as you know, you only get one chance to make a first impression on the students, so turn cost, we expect to be abnormally high related to the GCT portfolio. On the last call, we said a 150 to 175 per bed, our operational folks telling us no, they do not think they will be that high but they should be higher than what we typically expect. Then we would look for full stabilization moving into 2010, 2011. I will let Bill to talk about the other cost.

[Bill Bayless:]

When you go into some of the more specific numbers if you go back to the original GCT presentation, we talked about a yield of 7.1% on just the real estate asset. Looking at the portfolio is being 5% behind, it is a little closer than that, but there has been a little bit of reduction in rental rates. So, we think 5% behind is a good target. The base revenue on that is right around a $120 million. If you look at 5% on the $120 million and make the assumption conservatively that would all fall to the bottom line, that would give you around I call it a 60 to 70 basis point reduction in the going in yield. We want to make sure though that when people look at that we do not believe if that is the stabilized yield. If you remember, we originally underwrote the portfolio off of a historical number and then looked at it in terms of how we thought we could impact it. Our impressions of where we should in the 2009, 2010 lease-up and moving forward have not changed. So, the gap that we have got right now was inherited, but we do not think it should change the long-term perspective on the portfolio in terms of what we think long-term returns could be. Just another point, with a lot of the noise from the transaction, some folks may have the question as to whether or not the overall transaction size has changed. Did we inherit any costs, where we impacted negatively from the closing? Everybody should be aware that we are right on track from a closing cost perspective and that what we inherited in the portfolio absent the one disposition asset that we believe we are going to end up with, everything was according to budget. So, right now we are right on track and that 5% is the only negative that is out there right now.

[David Toti:]

That 5% is more due to revenue but I think you talked also about expenses being higher?

[Bill Bayless:]

Those expenses are the integration expenses, which we would expect to, occur in 2008 once again, that is part of what we are looking at is being why we do not want to give guidance right now on 2008 that is not a stabilized number, that is what we are doing to impact the initial lease-up and creating impression on the kids. We believe our underwrite at the 7.1% is the right number to look at going forward once you get past the 2008, 2009 academic year.

[David Toti:]

Where are you booking those integration costs as in to G&A or you are actually booking them at the…?

[Bill Bayless:]

It is going to hit in all different places. We are going to spending capital dollars, which will impact the balance sheet. The turn cost should be are going be extraordinarily high for the GCT portfolio, which we talked about, which did not impact the P&L in terms of student housing operating expenses. The G&A costs just going to that Jon gave a little bit of detail on where we are. This year there is going to be extraordinary cost at the integration and purchase accounting, but moving forward we have given some pretty good clarity on what we expect. We had said originally that GTC, we thought we could achieve $6 million to $8 million in G&A savings. If you go back to the numbers, there are $21 million in G&A, when you eliminated the military housing that took it back to $14 million to $15 million, $6 million to $8 million in savings takes you down to $6 million to $8 million in G&A cost that would come to us. When you look at what would be attributed to the student housing business that takes you down to approximately $3 million to $4 million that would remain and what we would consider to be corporate G&A increases. If you look at our 2008 numbers, we projected $7.8 million. If you add that back $3 million to $4 million what we basically said is moving forward on a stabilized basis 2009, 2010, we would expect somewhere around $11 million to $12 million in G&A.

[David Toti:]

That is very helpful. I just want to make sure I am clear on something, when you are taking about the going in at 71 and being 5% off, that is more to do with the lease-up and the rate side. It does not include the higher current cost or any other spend that you are doing.

[Bill Bayless:]

Correct.

[David Toti:]

To get that lease-up. If you were to throw everything together the first year stabilized yield, probably would be a lot lower?

[Bill Bayless:]

Well everybody's got a different impression of what a lot is. I think if we said, if we moved into and look at it just on 2009, which would include a portion of the 2008-2009 academic year, and then the lease-up for 2009-2010. Just, when you look at absent the turn cost, we think did that stabilized 71 as a good one when we moved to 2009-2010 or perhaps a little better if we can have a real positive impact on the 2009-2010 lease-up.

[David Toti:]

Okay. You are viewing this is a onetime boost to get these up to your standards? Then as you move into 2009, it will turned-off that level?

[Bill Bayless:]

Correct. There is two pieces to that. One is the onetime shot just to bring it up to our standards, the other is from a systems perspective moving into the turn, and it is very difficult in a period of a couple months to have a real positive impact on the systems. So that is a little bit of negative. We would expect for the 2009-2010 academic year, and the turn in 2009 everything would be on our systems and be more consistent with our historical costs.

[David Toti:]

If you would have budget for that in your 71 initial yield, in terms of all these added costs you would because at onetime you view it as more of a purchase price rather than capital like spending?

[Bill Bayless:]

If you go back to what we said originally, we did not project a year one going in yield the way that we talk about, it was on a stabilized basis. If you remember, we underwrote the historical. That has been one of the problems in looking at the GCT portfolio as it was very difficult to get any type of projection. So the thought process for the transaction was that we would take it down based on a historical cap rate. That is what we used moving forward. The year-one lease-up is, we consider it to be, hate to use the one or the word onetime but not a recurring impact. So if you said $6 million on a $1.4 billion acquisition, we do not really think that that short-term impact is really meaningful from a long-term return perspective. We are aware that it is creating a little bit of headache for people trying to get their arms around in the short run 2008 and 2009 projections but it is a reality of what we are dealing with. We look at on a long-term basis if we can go into a portfolio with somewhere around a seven cap and have the impact that we have done. Just take Pirate's Place and Village on Sixth, we have had an immediate, enormous impact on those yields if we can get anywhere closed to that in the long-term returns on the GHM acquisition, it would be pretty significant.

[David Toti:]

Thank you for the additional color.

[Operator:]

You have a question from the line of Paula Poskon with Robert W. Baird. Please proceed.

[Paula Poskon:]

Thank you, good morning.

[Bill Bayless:]

Good morning, Paula.

[Brian Nickel:]

Hi, Paula.

[Paula Poskon:]

We have talked in the last couple of months about some of the challenges that you are anticipating in the integration of GCT, one of the things we chatted about was the staffing levels and the talent full there, and what you were dong to plan for expected attrition including things like expanding your internal floater program. Can you just share a little bit of color on how you feel the staffing levels or attrition or tracking relative to your expectations and anything else that you are doing to boost that efficiency?

[Bill Bayless:]

Absolutely. In expanding that floater program which we now call operational specialist, we would not like the term floaters we were out there recruiting. That is going quite well. We have 18 to 20 new physicians that came on board in conjunction with the closing of GCT. GCT did have some vacancies in the field, and so we were immediately able to plug those people into where we had vacant General Manager, vacant AGM, and also where there were troubled properties. Those folks have all been deployed, since closing and are out there, and I think a big part of making that difference in terms of us narrowing that gap a little bit. We also appropriately, Brain alluded to the corporate G&A level going up appropriately with this transaction. The marketing and leasing staffs were one of the areas where that increase took place. There are not lot of folks here in Austin, Texas these days but a lot of folks are rather out in the field on the road traveling where do have an impact. We also have been very pleased with the integration of the GMH regional and above staff and immediate upon closing, we had the opportunity to bring all of those folks into Austin, due some immediate training in terms of how we were going to finish out this academic year. We also plan on bringing all of those folks in again at the end of the September to kickoff the strategy and implementation as it relates to rental rate increases and the marketing plans and leasing strategies for the next '09-'10 academic year. So, the staffing side of this has gone very well, and we plan for it prudently and thus far it is paying off for us.

[Paula Poskon:]

Great, thanks. We also talked about, I think you had mentioned that you were as part of the LAMS program, launching at Dashboard System in the fall, what is that status of that?

[Bill Bayless:]

That is on track. We expect it to be operational for us in Q4 as we begin that lease-up. To simplify the meaning, LAMS is a very sophisticated tool for us, that not only has all of the current lease information but all of our historical data. We will have ongoing analysis done by LAMS on the server every evening comparing those trends and sending alerts and emails to all of the appropriate people involved in various aspects property management, as those indicators hit levels that we should be cautious about. So leasing velocity, absorption, closing ratio and things of that nature and so, it is the fourth version of LAMS, it is taking us to a level of sophistication that is far beyond anything we had several years ago.

[Paula Poskon:]

How are the GCT assets data being incorporated into that?

[Brian Nickel:]

I will tell you what and one of the things we originally told everybody that we did not intent to roll anyone on to any of our systems until we began the next cycle. I will tell you within a week of closing, we were dissatisfied with the level and concerns of accuracy of the leasing information we had based on GTC systems and we sucked it up, we sent everyone out into the field of small army and we got everyone on LAMS in a matter of two weeks. All the leasing data that you are getting right now from us is out of the LAMS system on GCT. Now, it has not been fully rolled out in terms of all of the strategic attributes it brings in managing the lease-up system and that were at the end. However, we immediately now have complete integrity on the rental rates, the projections, the leasing velocity and things of that nature. It is something that it has given us an immediate competitive leg up over where we would have been and not rolling them on immediately.

[Paula Poskon:]

That is very helpful. Thank you. Quick question on the Irvine project, are you going to go for the LEED Silver Certification, is that an expertise that you would say as part of your core competencies there or do you feel like you need to go out and hire that expertise in?

[Bill Bayless:]

No, absolutely. That is something that internally as an organization that we have been committed to. While Hawaii was our first LEED certified project, where the university actually went out and paid for the LEED certification. We have been involved in five to seven other projects, where the university have chosen not to spend the money to go for the LEED certification where, we have designed and built to LEED certify. A matter of fact in [Jim Hockey Shop] all of our project management team is actually going through the process right now to become certified in the LEED role two have already achieved that designation and that is something and it for us is a significant competitive in the on-campus third-party and the ACE programs and its distance of higher education are committed to it.

[Paula Poskon:]

That is very helpful. Thank you.

[Operator:]

You have another question from the line of Andy McCulloch with Green Street Advisors. Please proceed.

[Andrew McCulloch:]

Hey good morning.

[Bill Bayless:]

Good morning, Andy. Andrew McCulloch - Green Street Advisors Just get back to the GMH lease-up for the '08, '09 academic year for a second. If revenue growth for the GCT asset is going to be of 5% and occupancy is of 4% is that mean rental rates are down 1%?

[Bill Bayless:]

Yes. Rental rates right now are down approximately 1% and we look at that 5% cumulatively, occupancy and rental rate. Andrew McCulloch - Green Street Advisors Okay. Then I know that you only provide revenue expense in NOI for the GCT assets for only part of June, but it looks like the operating margins are running about 65% that seems high, what do you expect the stabilized margins for GCT going forward?

[Bill Bayless:]

As it relates to that stub period please do not use it to make any conclusions and it is a 21 day period. It is an awkward period that you do have expenses that are related to taking it over immediately and so that not in anyway a good run rate. I think, when you look historically the thing that we have been able to do with our own operating margin is consistently drive it down to where our expense ratios on our portfolio have ranged from 45% to 50% and you see us driving that down continually. With GCT and the biggest problem right now that you have Andy is that the average rental rate is so different and that the biggest key for us in driving down that operating expense margin is getting the appropriate valuation on the product, the rental rates and increasing that. So, initially, you may see that margin more 55% to 60% based on their current levels of pricing. However, we should be able to drive down consistent with our operational performance on a long-term basis.

[Jon Graf:]

Andy just as a data point they were 51% and we went through the GCT presentation historically compared to our, I think it was right around 48% and that was one of the things. Remember we caution that the closing of that margin was not going to come from a reduction in expenses, but rather a pickup in revenue. Any of the margins, of which Bill is referring, have to do with that integration in the first year lease-up. We think that something in the 50% and moving to the 48% moving forward over the period the next several cycles or something that is a bit appropriate to model. Andrew McCulloch - Green Street Advisors Okay, great. On the GMH as third-party development management fee, sorry if I missed this you give guidance for '08 for just the GMH portion?

[Jon Graf:]

Say that again. Andrew McCulloch - Green Street Advisors What is there expected revenue fees from just GMH as third-party development and management contract?

[Jon Graf:]

We have not given a lot of clarity on that in terms of what is there. We inherited some existing contracts and have a significant number of contracts that have been added. When we give guidance for 2008, I believe we said we thought that we would take the combined amount of revenue from third-party up to approximately $5 million. We think that still a good number given the number of contracts; we inherited from them and some of the new contracts that we have achieved. We are going to be giving some clarity on that next quarter or in the first quarter, when we give guidance on what we expect for 2009. Andrew McCulloch - Green Street Advisors Great. What competition are you seeing on the ACE front from other operators trying to replicate that program?

[Bill Bayless:]

There are a lot of folks that would like to get into that arena. I think that all of your standards certainly EDR, as a public company is one of our prime competitors, however also your smaller companies Capstone Development, Ambling and others all pursue those types of transactions. The difficulty Andy and this is again, what we love most about this segment is there is real barriers to entry and that it is very important to the school that you have your own equity. The other companies that have student housing expertise are not well capitalized and have to bring someone else's money to the table to where the school is then dealing with social issues, what is an 85-year transaction. It is a segment that does have good barriers to entry and that is one of the reasons we are most excited about it. Andrew McCulloch - Green Street Advisors Great, that is helpful. Thank you.

[Operator:]

Your next question comes from the line of Anthony Paolone with J.P. Morgan. Please proceed.

[Anthony Paolone:]

Thanks, good morning.

[Bill Bayless:]

Hi, Tony.

[Brian Nickel:]

Hi, Tony.

[Anthony Paolone:]

Hi. With respect to the ACE program, can you talk about just where the dealers are looking at, the yields are penciling out? How that compares with off-campus development yields? How you think about the relative attractiveness there, especially if just in the market, generally of cap rates likely rising a bit?

[Bill Bayless:]

Well, first of all what we have said is we believe that 7 to 7.50 is an appropriate yield for those types of developments, same with the off-campus. On the last call when we discussed cap rates, we did say that we thought that cap rates were rising, but we thought they were rising back to the level that we had been originally, we were a little bit out of the market for a while when they dropped sub-6. Then those coming back to that 6 in a quarter, 6.5, we think is appropriate, and that spread to development remains the same. If we were to move on cap rate significantly above that, we would just have to evaluate it on a case-by-case basis.

[Anthony Paolone:]

So, you do not see a real big difference with the yields we are looking at for the ACE product versus like off-campus developments that you might be underwriting?

[Bill Bayless:]

We do not see a lot of dips in the yield but Tony the one thing we would continue to point to and all to be approve out, we are going to get our first look at what they issued moving forward this year is that the growth profile from an NOI perspective, we think is significantly better on ACE transactions given the on-campus location you just saw again, close proximity and gains over the difference that made, but think it out now begin on-campus, marketing assistance from the institution, and also the savings, that you do not payout the loan taxes, which is typically one of your main drivers in cost. So while those yields are comparable, the NOI prospects that ACE gives us are in our perspective significant.

[Anthony Paolone:]

Okay. Concerning the third-party management expenses; if I look at your first half, I think it is something like $4.5 million, and I think you mentioned something in the sevens for the full year. Did I catch that right?

[Bill Bayless:]

On third-party management?

[Anthony Paolone:]

Yes, in terms of expenses.

[Bill Bayless:]

Yes, that is correct.

[Anthony Paolone:]

That was not math that was the whole business segment, third-party together, development and management.

[Anthony Paolone:]

Right. I am just wondering like what the drop, it seems like you were drop-off in the second half. What happens to those expenses and where do they go?

[Bill Bayless:]

I believe Jon's discussion there was for the entire year when he was going through the components of guidance, and looking at those sectors combined, just a couple of things. It was around 3.5 for the first portion of the year. With the total of 7, we are looking at the same numbers. Are you in our supplement on page 3?

[Anthony Paolone:]

Yes, I thought it was basically the line and where you had...

[Bill Bayless:]

Yes, we are at $4.4 million. Something to consider is that those expenses are not necessarily steady, there is pursue cost on certain deals, and that is going to depend on when those deals occur. So that is part of why we have given the guidance, its given idea what we expect for the total year. So yes, based on that, we would expect them to drop in the second half, but there is not necessarily a rhyme or reason that would cause that other than the timing of transactions.

[Anthony Paolone:]

Okay. Great, thanks.

[Operator:]

Your next question comes from the line of Steve Swett with KBW. Please proceed.

[Steve Swett:]

Hey, good morning. Just a couple of clarifications. Bill, when you look at the rent growth that dropped-off since your last quarter and I know you did not repeat that up. Is that more due to the specific properties that were still to lease over the last three months it is opposed to getting more aggressive in rents?

[Bill Bayless:]

Steve, it actually one of the things that occurred this quarter is that the same store grouping changed, because the 2007 acquisition properties became same quarter, this quarter. So when you actually look at the components, and the way we talked about in the script, the same store properties excluding the '07 growth properties actually did not slide. It was 3.8% we communicated last quarter compared to 3.8% this quarter. As 2007, growth properties had approximately 1% the same as last year. Combined, our 3.4, so the issue is last quarter we reported the same store property grouping that was the 3.8 but still 3.8 when you add in the '07 then it changes to 3.4, so it was not a drop-off.

[Steve Swett:]

Thank you. That is helpful. Brian on the expenses on the GCT properties in the third quarter just to clarify those are all expensed as opposed to capitalized turn cost?

[Brian Nickel:]

The ones that are expensed or expensed and the ones they are capitalized or capitalized. There is going to be a portion of the turn, so when we talk about the $175 a bed...

[Steve Swett:]

Right.

[Brian Nickel:]

That is would go to the expenses.

[Steve Swett:]

That is your expense portion.

[Brian Nickel:]

Right and then when we have talked about the $30 million in capital that is going to be invested over the course of the academic year that is obviously going to go to the balance sheet.

[Steve Swett:]

Okay, got it. Then just finally the $150 million to $300 million in sales that is over an above the ten assets, or rather nine now, which you laid out originally from the GCT portfolio?

[Brian Nickel:]

Yes. We think that the capacity right now is around $400 million. If we can accomplish a $150 million for the dispositions towards the end of the year or first quarter that puts us in a position of about $0.5 billion for the capacity.

[Steve Swett:]

Okay, great. Thanks.

[Operator:]

We do not have any more questions in queue and I would like to turn the presentation back to management for closing remarks.

[Bill Bayless:]

Thank you. We would like to thank all of you for joining us. Couple of closing thoughts again, we are very pleased with our core business. The other thing we would like to reiterate is that while we inherited the GCT's portfolio about 5% down from its prior lease-up in no way do we think that impacts the yields, where we are looking at in '09, '10 and moving forward. If anything the operational upside that we encountered only gives us greater expectation. We thank you and we look forward to talking with you next quarter to report on how integration and lease-up has finalized. Thank you.

[Operator:]

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.