American Campus Communities, Inc.
Q3 2008 Earnings Call Transcript

Published: 29 Oct 2008

[Operator:]

Welcome to the 2008 third 2008 quarter American Inc. earning conference call, my name is Ann and I will be your coordinator for today’s call. If you need assistance at any time during the call, press star, followed by zero, and the operator will be very happy to assist you. As a reminder this conference is being recorded for replay purposes. At this time all participants are in listen-only mode. We will be facilitating a question and answer session, towards the end of the presentation. I would now like to turn the presentation over to Gina Cowart - Vice President of Investor Relations. Please proceed.

[Gina Cowart:]

Thank you Ann. Good morning and thank you for joining the American Campus Communities (ACC) third quarter 2008 conference call. The press release is furnished on form 8K to provide access to the widest possible audience. In a release the company has reconciled the non-GAAP financial measures to those directly comparable to that measures, in accordance with regG 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 least play available for at least one month. Our supplemental package and our webcast presentation are one and the same. Webcast 5 may be advanced by you to facilitate following along. Management will be making forward looking statements today. The references to the disclosure in the press release on the website with the SEC filing. Management would like to inform you that certain statements made during this conference call which are not historical fact may be deemed forward-looking statements within the meaning of section 27-A, the Securities Act of 1933 and section 21e of the Securities and Exchange Act of 1934 as amended by the Private Securities Litigational Form ACt of 1995. Although the company believes the expectation of any forward-looking statement is based on reasonable assumptions, they are subject to economic risk 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 a company’s periodic filings with the SEC. The company undertakes no obligation to advise or update forward-looking statements to effect 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 this today

[Bill Bayless:]

Thanks, Gina. Good morning and thank you all for joining us as we discuss our results for the third quarter of 2008. The state of our press release, costs associated with the GCT transactions, and integration significantly impacted our two three financial results. Brian and John will provide detailed information to assist investors and analysts for a better understanding the remainder of 2008 and run rates moving into 2009. Excluding the short-term impact of the GCT transaction, we are all on track in all other areas of our core business and continue to experience growth in occupancies, rental rates, and NOI, despite the current economic environment. Looking at our operating results for the quarter, we’re very pleased with the final results of our fall 2008 lease up and the performance of our core assets. If you turn to page 5 of the supplemental package, you’ll see we have third quarter, same store NOI increased by 1.3 percent over two three of 2007. When you adjust for one final cost associated with name storms from this year’s hurricane season, same store NOI was actually 4%, over two three of 2007. If you turn to page 7 of the supplemental, you’ll see that we have a strong finish to the fall 2008 lease up. Occupancy, at our same store wholly-owned properties as of September 30, was 96.3% compared to 95.5% for the same day prior year. The same store property grouping, sold a 3.4% increase in rental rates over the prior year. Occupancy at our total wholly-owned portfolio, including our non-GCT growth assets, is 96.5%. We believe a continued solid performance of our portfolio is a tribute to both asset quality and proximity to campus, coupled with the sophistication of our operating platform. As of September 30, the GCT portfolio had an occupancy of 87.5%. You’ll note that this is 30 basis points less than the 87.8% final leasing number reported in an AK September 23. While this drop was due to no shows of the GCT portfolio, we have been successful in leasing additional beds since that time, and are currently back to the 87.8% occupancy. That compares to 90.3% that was reported by GCT for the prior academic year. The average rental rate with the GCT portfolio remains flat, compared to the $437 dollar average rate we reported when we called with the transaction. We’re pleased to say that we’ve completed our strategic annual market assessments and have set our initial rental rates for the entire portfolio for the 2010 lease up. At our same story properties, we have set our initial rental rates at 3% over the current place rents. Given the current economic environment, we were somewhat conservative in setting rates at our highest priced properties, especially with regards to returning resident rates. If policing velocity proves favorable to the prior year, we’ll push the rental rates accordingly. We also believe the potential exists for occupancy gains of additional 50 to 100 basis points, providing the opportunity for 3.5 to 4.1% revenue gains in our core ACC assets for the 2009-2010 academic year. For the GCT portfolio, we have increased our rental rates approximately 1.6% over the current in-place rents. With this current pricing strategy, we are targeting a gain of 6-8% occupancy for the 2009-2010 academic year, which would translate into a 7.5 to 9.5 grow in overall rental revenue. Brian will discuss how the year one performance and the targeted growth translates into projected stabilized yields for the GCT transaction. While leasing for the 2009-2010 leasing season is just beginning in most of our properties, we’re off to a great start. We’re already the 25% applied for, that’s seven of our assets for the 2009-2010 academic year. As mentioned in our press releases, Vista Del Sol, our first Ace transaction at ASU, is already 77% applied for in 54% lease for next year at an average rental lease that is 4.6% above the current in-place rents. This is extremely impressive given the tempy is typically a market not leased in earnest until mid to late spring. As evidence in our own office property, the bill was on Apache. We believe that further demonstrates the competitive advantages that Ace assets have over the traditional off-campus properties related to pricing power, leasing velocity, and NIO growth potential. With that, I’d now like to turn it over to Brian to discuss the impacts of the GCT transaction on financial results that projected yields for the transaction and the overall investment activities of the organization.

[Brian Nickel:]

Thanks Bill. Turning to page 5 of the supplemental, you will see that we reported approximately $25.6 million in revenue from the GMH portfolio in the third quarter. Revenue for this quarter was impacted negatively by an approximately $2.4 million due to the non-cash effective of moving from GMH’s revenue condition methodology to our own. After adjusting for this, the GMH revenue property for the quarter would have been $28 million. With the combination of reduced occupancy and a slightly lower rental rate increase than expected for the 2008-2009 academic year, we are currently projecting a $117.5 million GMH property revenue for the 2009 calendar year. If we assume we are able to obtain the 8% projected revenue increase for the fall 2009 lease up, we are projecting $124 million in revenue for the 2009-2010 academic year. Turning to expenses, on page 5 of the supplemental we reported $19.3 million at property operating expenses for the GMH portfolio in the third quarter. In order to assist investors with projecting quarterly expenses, we previously provided season trim tables which imply that approximately 32% of total operating expenses for the year occur during the third quarter. If you apply this ratio to the $19.3 million in expenses, it implies that expenses will be approximately $60.5 million on an annualized basis which we believe is a solid projection for 2009. As you may remember from our call announcing the GMH merger, we were projecting an implied going in nominal cap rate of 7.1% proforma for 2008. Based on the $850 million valued, attributed to the student housing real estate purchase from GMH which excludes closing costs and the fidelity joint-venture assets, this would translate to under NLI of $60 million. Given the $170 million, the $5 million in revenue, and the $60.5 million in expenses, we were currently projecting approximately $57 million in NLI in 2009 which equates to a nominal cap rate of 6.7%. As Bill mentioned, we remain very bullish on the prospects for 2009 and 2010. If we able to achieve the targeted separate results and maintain expense margins in line with our original estimates, we could see 2010 in a lie of $64 to $65 million. Taking this into account, this would bring in a year or two nominal cap rate up 7% in 2009 to approximately 7.6% for 2010. Turning down to our third party revenues, we have been able to achieve the levels we have expected year to date, excluding the impact of our CUNY-Staten Island project. As we stated on previous calls, our ability to secure financing and commence construction on this project will have a significant impact on our ability to meet the revenue levels expected from this business segment. Approximately $1.8 million of this fee was included in our 2008 guidance estimate. We are currently on-hold for the closing, and are looking to commence construction as soon as the bond market stabilizes. At this time, this is not likely to occur until 2009. We are also continuing to work on the closing of the Cleveland State University project which was not included in our 2008 guidance but it will likely be 2009 before this project can close for similar reasons. The Ace pipeline continues to be promise to be an area of external growth for the company. The current economic environment has been difficult on state budgets and university endowments and we believe that this will continue to enhance the attractiveness of the Ace program. In addition, the currently separate of Vista Del Sol causes us to be extremely bullish regarding investment opportunities in this business segment and the prospect of creating strong investment returns in a difficult financial environment. We believe that both our track record on solid operational performance and a very strong capital position versus our competitors gives us a significant competitive advantage. At this point in time, we are actively engaged in four consumer processes in transactions and we’ll update the market if and when these opportunities materialize. On the off-campus development fund, we have begun to see the impact of tightening credit standards on sight availability. We have received numerous calls from landowners who were previously unable to come to terms with a land evaluation asking us to take another look at their parcel. Our investment strategy remains the same and our desire to maintain our capital position causes us to remain even more selective. Regarding our potential disposition plan, we continued to monitor the market to gage the appropriate time to bring assets to market to maximize value. Buyers are not willing to override upside in the current credit environment, we are considering which assets might make sense to operate for another cycle until we can sell than at better valuations. We do anticipate marketing some of the assets for sale either later this year or in 2009. However, the size of the disposition portfolio that we bring to market in the near-term will likely be toward the lower end of the $150 to 300 million in assets that we ultimately anticipate selling. With that, I’d now like to turn it to John to discuss our financial results, our capital structure, and our outlook for the remainder of 2008.

[Jon Graf:]

Thanks Brian. For the third quarter of 2008 we reported total of FFOM of $6.4 million or 15 cents for poorly diluted share as compared to FFOM of 5.9 million, or 23 cents for poorly diluted share for the comparable quarter in 2007. As compared to the previous year, the quarterly 2008 results include the GMH operations acquired on June 11 of this year and the impact on the way weighted average share count related to the $4 million shares issued to GMH shareholders and the $9.2 million shares issued in conjunction with the April 23 equity offering. It should be noted that the third quarter is historically seasonal nature as compared with the other quarters as we experience the impact of higher operating costs associated with annual turn in the impact inn revenues from properties that do not have twelve-month leases, excluding GMH in any related acquisition financing, the 2008 results for operations were in line with internal expectations and were within our original 2008 guidance projections which excluded the GMH acquisition.. Whole third party revenues were $6.6 million for the third quarter 2008 and were up $4.6 million for the quarter when compared to the prior year. Whole third party revenues consisted of $4.5 million in development fees, and $2.1 million in management fees, which included $1 million from GMH third party management contract in management fee income on the Joint-Fidelity ventures. During the third quarter of 2008 we commence construction on University of California, Irvine, and phase three, which contributed $3.9 million in development fees during the quarter. Third party revenues were in line with internal expectations for the quarter. Corporate G&A for the quarter was $3.2 million, up from $3 million incurred in the third quarter of 2007. G&A was significantly impacted this quarter by anticipated GMH transition and integration related expenses, and was approximately $1.3 million ahead of levels originally budgeted for, at ACC on a stand-alone basis. This increase was primarily driven by 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 September 30th, our total market capitalization was approximately $2.7 billion, consisting of $1.5 billion of equity market value and $1.2 billion in total debt, excluding our on-campus participating properties and our share of debt from unconsolidated joint ventures with Fidelity. Variable rate debt represented approximately 18 % of our total indebtedness at the end of the quarter. The company’s outstanding debt is at a weighted average interest rate of 5.58% and has an average remaining term to maturity of 4.7 years. As of September 30th, the company’s debt to total market capitalization was 44.1%. Our total interest expense for the quarter, excluding the on-campus participating properties, was 15.5 million. Compared to 6 million in the third quarter of 2007, a $9.5 million increase. During the third quarter of 2008, we incurred 8.1 million in interest expense, on approximately 600 million of debt assumed from GMH, and 1.1 million in interest expense under the $100 million senior-secured term loan entered into to finance the GMH acquisition. Due to the GMH acquisition the company’s interest-coverage ratio for the last 12 months decreased to 2.2 times, compared to 2.64 times, as of one year ago. Interest expenses met of approximately 1 million in capitalized interest for the quarter, related to own projects and development. As of September 30th we had recorded 40.9 million in construction progress related to the ongoing development projects. As of September 30th we had approximately 12 million in remaining cash proceeds from the April 2008 equity offerings. These funds, along with our $160 million revolving credit facility will be utilized for our wholly owned development projects, capital improvements on the GMH assets, and other cash needs. I’d now like to discuss components of our 2008 guidance, our anticipated results, for 2008, considering GMH, and preliminary expectations for 2009. A previously-announced 2008 guidance did not include the impacts of the GMH transaction or the 2008 equity issuant. The results from the cooperation from all business segments for the quarter were in line with internal expectations and consistent with our original SFOM guidance assumption. Let’s start with our original SFOM guidance assumptions, which excluded GMH, and discuss how our results from cooperation are tracking compared to these assumptions. Previously communicated arrangements 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 upon a achieving same sort NOI growth of approximately 5%, and opening Vista del Sol and villas at Chestnut Ridge on time and on budget. During the third quarter of 2008 we experienced approximately 400,000 of unanticipated charges from the recent hurricane season. Considering this, we are currently tracking to the lower end of this NOI range. At this time we anticipate that the wholly-owned, GMH properties will contribute NOI of approximately 21 to 22 million in 2008. It should be noted that we expect the GMH property operating expenses in the fourth quarter may be higher than the run rate levels that Brian discussed for 2009, as we have budgeted approximately 2.2 million in transition and integration costs at the GMH property level, to bring these properties up to our operational standards. This would imply an expense margin for the GMH properties of approximately 57% in the 2008 fourth quarter. 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 than this estimate, due to lower than expected libor rates during the year. When considering the debt-related to the GMH acquisition, the previously mentioned 2008 third quarter interest rate expense of 8.1 million on the debt assumed from GMH, and the 1.1 million under the $100 million senior secured term loan, are approximate run rates going forward. We previously communicated that 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 would have been slightly below this original estimate. As a result of the acquisition, and G&A related to the GMH integration, merger expenses, and additional public company costs, 2008 G&A is expected to be between $11.5 million to $12 million. Although a significant portion of the costs impacts from 2008 are potentially non-reoccurring, we also will be impacted in 2009 by the annualization of certain expenses that only partially impacted in 2008. Therefore we are projecting in 2009 in total G&A to be approximately $12 to $13 million. For the on-campus participating properties, we previously communicated a range of $1.8 million to 2.2 million in SFOM contribution. From September 30th, 2008, these properties have contributed $1.8 million in SFOM 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 to 13.4 million of revenue for 2008 in expenses of 7.1 million. This previously communicated guidance also assumed that the University of California Irvine phase three and CSI third party development projects would commence construction during the third quarter of 2008. UCI phase three construction commenced August 1st. The CSI development continues to be a significant contributor to anticipated third party development revenues in 2008, and its commencement is dependent upon the availability of project financing, which is affected by current capital market conditions. If this project were to close in 2008, we would be on track to achieve the lower end of our $12.5 to $13.4 million third party revenue guidance. However, as Brian mentioned, at this point we currently anticipate that it will not likely close until 2009. As previously mentioned the company recognized $1 million from GMH third party management contracts and management fee income on the Fidelity joint ventures during the third quarter of 2008. With a similar amount anticipated for the fourth quarter, 2008. Third party expenses during the third quarter increased by 949,000 as compared to the previous quarter, as we have grown the infrastructure of this business segment to be able to integrate the additional third party management contracts inherited from GMH in the management of the 21 properties carried and the two joint ventures with Fidelity. In addition, third party expenses will be impacted by the increase in activities related to our Ace efforts, as well as our non GMH related third party management contracts obtained during 2008. As a result, we anticipate third party expenses to be approximately 11.1 million for 2008. Based on previous discussions of cooperations and the impact of the GMH transaction, and associated financing and integration costs, we anticipate full year 2008 SFOM of $1.08 to $1.15 for fully dilluted share. With the CSI third party development, and the timing of GMH integration expenditures, being the primary drivers to this range. While we are still completing the budgeting process for 2009, and are therefore not yet in a position to give guidance for 2009, management has reviewed the consensus SFOM estimate for 2009. $1.65 for fully deluded share. We are currently comfortable with this consensus estimate, and we’ll give detailed 2009 earnings guidance during the fourth quarter earnings call in early 2009. With that, I’ll turn it back to Bill.

[Bill Bayless:]

Thanks, John. Again, while the noise related to the GCT transaction clouded our results, our core business remained strong. The final results of our 2008 lease up and meaningful runaway growth, coupled with our strong starts to 2009 lease ups, causes us to be optimistic that we’ll continue to be more resilient in the general real estate sector in these troubled economic times. We also believe that we lead a unique internal growth opportunity with the significant upside afforded to us by the GCT portfolio. In addition, as Brian discussed, the recent downward trends in the market have put additional pressure on university endowments and capital budgets, making our Ace program an even more viable option. Given our strong balance sheet, we’re strategically positioned to capitalize on opportunities in the sector at a time when others are not. With that, we’ll open it up for Q and A.

[Operator:]

Ladies and gentlemen, if you wish to ask a question, please press star followed by 1 on your touch tone telephone. If your question has been answered, or if you wish to withdraw your question, please press star followed by 2. Questions will be taken in the order received. And the first question comes from the line of Karen Ford. Please proceed.

[Karen Ford:]

Hi, good morning guys.

[Bill Bayless:]

Good morning, Karen.

[Karen Ford:]

First question, just a clarification, you said the differential between the previous ‘08 guidance of $1.51 or $1.59, and $1.08 - $1.15, obviously including now the equity and the GCT bill is the CSI. The main reason for the lower number is a CSI fee, and the first party expense line item?

[Bill Bayless:]

Well, there are three things. You could call it four things. What we said is that where we are on the $1.51-$1.59 is that we, excluding GCT and its impacts, would probably be missing on the low end of that due to the CSI transaction. In order to get all the way to get down to the $1.08-$1.09, you then have to load up all the impacts of GCT, higher G and A, and everything else that we discussed.

[Karen Ford:]

OK, fair enough. Next question. On the 2009-2010 rent growth, you said you were not pushing your higher price point assets as much as some other do do, just what you’re seeing in the economy. How much of your portfolio would you say falls into that category, and how do you sort of view affordability on the higher price point stuff, verses alternatives for students in this environment?

[Bill Bayless:]

Sure, Karen, if we look back first to the prior year, last year our range in rental rates was from a sixth tenth of one percent to 6.8 of 1% increase. And we had approximately a dozen properties that we increased greater than 4%. Where by comparison, this year, our rental rate increase is four tenths of 1% to 4.7%, and we have only pushed four properties over the 4%. And the reason we’ve done that, and while statistically, and again the positive thing for us when we look at any of our operational metrics, occupancy, runaway growth, collections, all of those things, we have nothing to indicate that the economic downturn is affecting our business. However, just with everything going on in the environment and candidly what everyone is seeing day in and day out, we think it would be imprudent to be too aggressive at those higher price assets. Especially related to building velocity we have been a tad bit more conservative in our pricing, especially for returning residents at those higher end properties, which is what brought that down a little bit. We will, however, and as we said, off to a great start, with some of the assets over 25%, and so we will continue to push that. I think one of the reasons we have ended up where we are today is that the sophistication of the lands process has enabled us to be very flexible and agile on an ongoing basis throughout this lease to have the proper combination of rental wait increase and occupancy growth. And so, just being just a tad bit more conservative, as we start, is to make sure we don’t create a mutual velocity hiccup in the higher price markets. Now, interestingly enough, when we had a lot of talk about Gainesville being one of the softer markets on the last call, and how we performed there, our highest rental wait increase is in Gainesville. One of the assets there is 4.7%. And again, what we think this speaks to when you’re looking at rental rate growth, is that it is asset-quality and proximity to campus that drive rental rates even in troubled markets.

[Karen Ford:]

Great. In light of that, the 600 to 800 basis point occupancy improvement you’re expecting, and the GMH portfolio, you know, how would you rate your level of confidence. It seems like a lot of growth to get in one year. Have you achieved that on turnaround assets that you’ve done before?

[Bill Bayless:]

Yeah, let’s talk about the opportunity and why we’re bullish on that type of growth. Sixteen of the 40 GCT assets are under 90% occupied. Ten of those 16 assets are under 80% occupancy. We coexist in three of those 16 markets currently where our currency legacy assets average 15 percentage points in occupancy greater than the GCT. As we talked about from the start, we inherited this portfolio with absolutely no real ability to impact '08-'09, and with all the strategic market analysis that we have done and the pricing strategy that we've put in place we're very foolish giving the incredible discrepancy that exists in those under performing in the markets that we'll be able to make significant inroads in this first cycle for 09/10.

[Karen Ford:]

Last question. Can you just talk about what your plans are for the $80 million or so that you have in your '09 maturity schedule?

[Bill Bayless:]

Right now the $80 million comes up towards the end of the year. It's for assets I believe that are there. And one thing that you should know is that they're at a very low LTV. So in terms of options just off the cuff, obviously have the ability to refinance through Fanny and Freddy and definitely could get enough cash out of those refinancings to be able to repay those maturities. From a strategy perspective, revolve is also coming up in 2009. It has an extension between those four assets which have a couple hundred million dollars worth of value and then the six assets on the revolver. We may look at doing a larger facility and then using that facility to repay the $80 million. There's also Fanny and Freddy who have a credit agency facility which we've been looking at. Right now we think we're in a very good position in regards to specifically that $80 million.

[Karen Ford:]

And just a question on the V part of that LTV. What do you see as far as cap rates?

[Bill Bayless:]

Right now, and some of the national brokers that we've talked to, the latest transaction we have closing is one in late September. It was at a major land grant institution, public institution about two miles from campus, class A product, that closed at an economic cap rate of 6.8% after contribution of management fee and CapEx. Now the thing that we've been hearing consistently in the market for the last year is the further out assets tier 2, and this would be a tier 2 location two miles out. But typically there had been a spread of minimum 50 to 75 basis points as it relates to tier 1 location class A close proximity to campus. And so that's encouraging seeing that type of cap rate. But one thing that we would expect to see in this environment, especially when you look at the numbers that were posted on NOI and things of that nature, is that if anything should happen moving forward is there should be a widening of the spread between the tier 2 location further out from campus and the core assets in close proximity campus. And so from a valuation perspective our portfolio we think that the current environment is put in place more value in an appropriate premium on asset quality.

[Karen Ford:]

Ok. That was helpful, thanks.

[Bill Bayless:]

One clarification. That valuation that we're using for those assets is we're looking at that as to what the potential value would be rolling it into the revolver. That's not at a market value.

[Karen Ford:]

Ok. More conservative.

[Bill Bayless:]

Bye

[Karen Ford:]

Thanks.

[Operator:]

And the next question comes from the Line of Anthony Paolone from JP Morgan. Please proceed.

[Anthony Paolone:]

Good morning, Joe Dansing here with Tony. I know it's pretty early on, but are there any adversities where you see potentially some flat or declining enrollment and or maybe some supply issues on the horizon within your portfolio that you currently earn assets?

[Bill Bayless:]

You know Joe, from an enrollment perspective all of the projections continue to be fully stable and if anything, you know, people talk about during troubled economic times, people go back to school. There is truly a positive impact if you can find a bright spot in this economic downturn related to the supply side. One thing that we have always talked about and we have seen in our markets over the last two to three years is that the greatest threat to our sector is over supply in market places. And the one thing that has occurred in this economic downturn is that many developments have been put on hold. And so we are more encouraged going in to this leasing season than any of the past two to three. That new entries into the market are going to be limited compared to the past. That is actually one of the bright spots.

[Joe Paolone:]

As you think about your capital plans for the next 12 months, if the asset sales don't close, do you think you would need an equity infusion somewhere along the way or do you have enough capacity otherwise to take care of development spending and refinancing need, that sort of thing?

[Brian Nickel:]

One thing is capacity and the other liquidity. From a liquidity perspective with no new deals started, we've got plenty of liquidity under the revolver to be able to finish everything we've got underway and then have some room above that. If you look at it from a capacity perspective right now we've got an expansion on a revolver that's out there that we could potentially be able to look at. And then once again, we've got $200 million of asset value coming from those four assets in 2009 that creates some additional liquidity that we could go to. You know, we've got to take a look at where we're going and obviously the credit markets are significantly in flux right now. So when we go to look at re upping the revolver in 2009, things could change. But just from a peer capacity perspective and I'm looking at how conservative the cap rates are, they are used on a credit facility, we don’t really think that we've had a capacity impact which we've said is approximately four to five hundred million without the asset sales.

[Anthony Paolone:]

Ok. Question on development. It looks like the Carbondale (sp) and Boysie (sp) states stage one were pushed off. Anything specific there we should know about?

[Brian Nickel:]

Related to Carbondale, right now we're just looking at that market closely. There's new supply coming in with TDR's second phase and there's an additional developer that is underway that is very good on a pedestrian location to the campus. So we are monitoring this year to see how the market goes before we finalize exactly what our product plans are there and our structure with it moving forward. Now I'll let Brian talk about Boise.

[Brian Nickel:]

On the Boise state front negotiations and relationship continue to go very well as was the case with ASU. This is a very large decision that involves a lot of different parties. The initial push for 2010 came from the institution in terms of meeting the excess demand that they have. When we got into the middle of the discussion and the number of detailed points and parties that are involved, and ultimately their board of regents who are involved in that approval, it just didn’t make sense to push that hard in order to reach 2010. So the move to 2011 is nothing other than working on these on campus projects and ace projects and how long they have to come to fruition. It's not anything in particular on the deal that's gone wrong.

[Anthony Paolone:]

Ok. Then last question. Brian, I think you mentioned that JCT revenues in third quarter were a little bit light due to some non cash revenue adjustments that you had to make when you converted to your system. Can you just go into a little more detail as to what that is?

[Brian Nickel:]

Sure. You want me to walk through how we get from 3Q $25 million and to the projection of $117 million for 2009. That $25 million is first of all the lowest quarter from a revenue perspective because of the nine month leases from GCT and also the lower occupancy that we had in terms of inheriting their lease up. If you take that $25 million and you ad the $2.4 million which is once again, it's an accounting impact, we're moving from their revenue recognition methodology to our own. It’s a non cash impact and its something that wouldn't occur unless we did another transaction like this. But if you go to the $28 million, that's the lowest quarter from a revenue perspective. If you bump that up to 28 and a half to 30 million as a run rate moving forward, that gets you the revenue for an annual basis for the 2008 - 2009 lease up. You'd include that revenue for the first eight and a half months of 2009 and then if we are able to obtain the 8.5% bump on that in the fourth quarter of 2009, the combination of those is how you get to the $117 million.

[Anthony Paolone:]

So the 117 is for calendar year '09 not for the fall of '08 - '09. Ok. Right. Thank you very much.

[Brian Nickel:]

And it's just a number right now based on the numbers that John gave we're looking at approximately $31 million in the fourth quarter of 2009.

[Anthony Paolone:]

Ok. Thank you.

[Operator:]

And the next question comes from the line Michael Belmand from City Group. Please proceed.

[Michael Belmand:]

Hi. It's David Toti here with Michael. Good morning. Could you just walk us through a little bit more detail on the accounting adjustment at the revenue line that brought you to the 2.4 and if we should have any expectations for adjustments like that going forward?

[Brian Nickel:]

First of all, we don't have any expectations for adjustments going forward. What this is is that their accounting methodology which we understand is consistent with several of our competitors. They recognize revenue over the term of the contract we recognize revenue over he term that it's on, what we earn over a 12 month period. So what that creates is at the end of their contract period, there's a couple of weeks before we start what we use as the period that we earned the revenue. So that's a non cash gap that is a one time adjustment of 2.4 million. And then that's not seen again specifically to those assets.

[Michael Belmand:]

Ok, thank you. And now just moving over to the dividend. It appears a bit underfunded. Do you have any thoughts about that going forward in terms of closing that gap, potentially rethinking the dividend size?

[Brian Nickel:]

Well, first of all, it's underfunded if you look at specifically the third quarter. But you've got to remember this in an extremely abnormal quarter with a combination of the GCT, the ramp up and very abnormal GNA as we accrue for a full year's expenses on some of the line items. The run rate GNA is very high for the end of the year. So if you take all of that, you can't really look at that from a dividend pay off perspective. When we move into 2009 we're projecting $1.65 as being reasonable looking at what we're saying about the GCTS that's in our same store assets. Once again, that $1.65 is something we haven't given guidance. We haven't gone through a full budgeting process but we believe it's reasonable. $1.65 on a $1.35 dividend doesn’t appear to be out of line. Then looking at just theoretically where we're going, a lot of discussion in the reduction of dividend has to do with the impact of the economy and what that could potentially do. To date, we have just not seen any significant impact on assets that are located within our investment criteria. So there's nothing that causes us to believe that we'll be in a position that we wouldn't be able to fund that. The other reason would be liquidity, and from a liquidity perspective we are sitting very well as we discussed earlier. So if those factors continue to remain the same then we wouldn't see any reason to specifically address lowering the dividend.

[Michael Belmand:]

Great. And then the last question is, I was wondering if you could provide some detail on the bond financing at the phase three of the University of California Irvine?

[Brian Nickel:]

The detail financing in terms of the specific terms?

[Michael Belmand:]

Terms, LTV, that sort of thing.

[Brian Nickel:]

Well it's 100% LTV. It's 501 C3 financing. It's the same transaction structure that we used on the two other phases. From a cost perspective at the time the transaction was done, that was just right in advance. We were fortunate and our transaction team did a very good job in terms of getting that transaction closed when they did. We were just beginning to see the signs of some creaks in the bond financing market. The tax adjustment market just turned upside down and what were hearing right now both on bond finances and bank finances for tax exempt deals is it's impossible to even get a term sheet. Something to remember is that specific to the third part transactions. We're not seeing that same thing as it relates to our own assets, or own refinancings. What we would expect moving forward in 2009 is that the market begins to stabilize, investors get an idea where costs should be on the tax exempt side, we should see that start to come back. If we didn't, just a note of caution as it relates to 2009, if that tax exempt market does not come back in 2009 that could have a significant negative impact on third party revenues. Something to remember, though, is that that would be a very significant positive as it relates to the AISH program as institutions have to address their housing needs moving forward.

[Michael Belmand:]

Ok. Thank you.

[Operator:]

And the next question comes from the line of David Brad from Meryl Lynch. Please proceed.

[David Brad:]

Hi. Good morning. Just a couple of questions. You discussed average rent rate on the GMH portfolio, you mentioned a figure? 437? Can you provide this for the ACC the same store portfolio?

[Brian Nickel:]

Yeah, we sure can. Well, when you look at our same store category, which now includes the properties from last year, and if you may recall, the last time we gave this information is when we did the GCT investor call where we gave our same store properties on slide 15. And at that time our ACC growth property was at 489. Those two groups have now become the new same store of 516 and 49 and we are now at 513 50, 514 let's round it up, it's 51 cents.

[David Brad:]

514?

[Brian Nickel:]

Yes. And the five store around 537.

[David Brad:]

Got it, thank you? And then on operating expenses, actually in the third quarter you had a roller expense per bed figure at GMH as it compares to ACC. You talked a little bit about margins going forward. Can you talk about expense levels and what we could expect over the course of 2009 for the two portfolios?

[Bill Bayless:]

Yes, a couple things too. And a couple of analysts in looking at the numbers costs and expectation of cost per bed they are a little erroneous in that when you look at the legacy ACC assets in the listing of properties we have the Barret honors club which is 1720 beds. And a lot of people are using when they divide. And so we're looking at the expense per bed, you have to back up those 1720 beds by barrack. So the number you should be dividing that 19.4 by is 23,087. And so the expense per bed for the legacy ACC properties would be 843 where on the GCT front the 19 million 3 you should be dividing by 23485 it’s 823 per bed, and so the ACC core portfolio actually had $20 per bed more operating expense than GCT. And I’ll let Brian Nickel talk about the ratios moving forward.

[Brian Nickel:]

As far as using that number of 19.3 million on GCT to project moving forward, we talked about the seasonality tables. First of all, in terms of those expenses, we’re getting a lot o questions about what portion of that is GCT ramp up, what portion of it isn’t, how do I look at that? There’s a reality to that number, that there is ramp up expense in the number, but just, in the spirit of full disclosure, we haven’t completed, we’re moving into the seasons where marketing expense is hit, and there are other items that are going to come into effect as those ramp up expenses begin to tale off. What we’re saying is the19 million, if you just look at it in general, is a good projection as 32% of the year’s expenses, which is why we gave the $60.5 million number in 2009. And just a note of caution, the expenses for the GCT portfolio in the fourth quarter, in the corresponding margin, as John talked about in his script, aren’t going to make a lot of sense because we still have some pretty significant ramp up expenses in those numbers as well.

[David Brad:]

If we think of it in terms of an expense per bed going forward over the course of a full year, are you indicating that they’d be pretty even?

[Bill Bayless:]

In terms of how they fall?

[David Brad:]

Yes, ACC versus GMH

[Bill Bayless:]

Yes, we would expect them to be fairly even.

[David Brad:]

Okay, and then, just back to the pre-leasing, we talked about your approach on price points. Are you taking a different approach in terms of timing, would you say that you are accepting leases, accepting applications, and signing leases ahead of last years pace?

[Bill Bayless:]

In certain markets yes, one of the things we’re doing is we are driving velocity strategically wherever we can. I’ll give you an example. Three of the assets that are currently above 25% are the three Harrisonberg assets that we bought from GCT, and in that market there was already development underway. There’s as many as 3000 new beds coming in this fall, and so we have driven that marketing program extremely early, we’ve got about 2.5% rental rate growth, we’re running about 30% ahead of last year, but that’s very strategic to get the heck out of that market before there could be any depreciation in rent. And so we are starting our returning resident’s process a little earlier this year. Again, we are set our rental rates at all of our own assets, which is very early. We’ve already began our marketing calls because again, if any softness occurs, it’s typically in later years, and so we’re pushing velocity as much as we can.

[Brian Nickel:]

I hate to interrupt you, but I just want to follow up real quick on your question regarding expense per bed, if you remember, at the time that we announced the transaction, they historically have had a lower expense per bed than we had. And we believed that the creation of value, and the improvement in margins was not going to come from a reduction in expenses, an what’s happening in 2009 is we’ve got the ramp up in additional staffing, we believe they were slightly understaffed, the ramp up in staffing and the ramp up in marketing expense, but we haven’t had the full impact of our operating system in terms of driving down margins, so that’s why we’re giving the $57 million target number and the 60.5 million. When we get to moving forward, what we hope is through 2010, 2011, we will begin to see some of the efficiencies come into place. As far as how that relates to our initial proforma, it’s slightly off of for the first year, our initial proforma in terms of total expenses, and we’ve given you what we believe to be the difference between the total NOI. One point is that we never projected, or thought we would be able to project something even close to an 8% revenue increase moving into 2009 and ’10. Now, we would expect in the 2010 calendar year, and really when you move into 2011, ’12, if everything stays on track we should be well ahead of proforma from a total revenue and NOI perspective by that point in time.

[David Brad:]

Okay, that’s helpful, I’m all set. Thanks.

[Bill Bayless:]

Thank you, David.

[Brian Nickel:]

Thanks David.

[Operator:]

The next question comes from the line of Michelle Ko from UBS, please proceed.

[Michelle Ko:]

Hi, I was just wondering, have you heard, or are you worried about the fact that it could be more difficult for students to obtain private loans, during this time, in this kind of environment are becoming more difficult for students to obtain loans from the government in terms of the impact on your business?

[Bill Bayless:]

Certainly there’s an economic reality that's tough times for everyone, students and parents as it relates to discretionary buying. Again, at this point in time we have not seen any impact in any of our properties related to pricing and occupancy. Again, the properties that are leasing up the earliest, if you look at our ACC legacy assets we talked about a 3% rental rate increase overall. At the ACC properties that are currently over 25%, the average rental increase is 4.2, so we have not yet seen any price sensitivity. The other thing that we look to is that in these troubled economic times, in many cases the student or parents are making the decision that they can no longer afford the expense of private education. And so you see a move to the public land grant institutions that represent a much greater value, or at least the cost, perhaps that’s maybe an opinion, but a lower cost and that helps drive enrollment at the public land grant institutions where our portfolio exists.

[Michelle Ko:]

Okay, and just in terms, you were talking about refinancing through Fannie and Freddie Mac, do you think that their accessibility has changed in any way? Have you had discussions with them recently?

[Bill Bayless:]

Yes, we have had discussions, first of all, that is one of our options. We are evaluating all of our options in terms of what we’re going to do from a capital allocation perspective, but in terms of where Fannie and Freddie are now, they specifically have come out in our marketing that they have locked $500 million worth of loans very recently, so they are actively pursuing new loans in our market. Assuming that that doesn’t change significantly, and it is consistent with where they were, we wouldn’t expect for that to go away from us.

[Michelle Ko:]

You talked about one of your other options, in terms of liquidity, was increasing your line of credit. I was just wondering if that would require more encumbered assets and how many unencumbered assets you have right now?

[Bill Bayless:]

Remember that of the 80 million in debt that’s coming due in 2009, that’s got on a conservative basis $200 million worth of asset value, so if you value it in a similar fashion to how our credit facility is valued, there’s some significant excess capacity on that, so those assets obviously, once those loans are paid off, if you created a facility and then repaid those loans that’s how you’re creating your unencumbered assets. There are six unencumbered assets that are currently part of our borrowing base on the credit facility, those would make four more assets that we could put in that, so it would be ten total in unencumbered assets.

[Michelle Ko:]

Okay great, thanks so much.

[Bill Bayless:]

Thank you all.

[Operator:]

Again, ladies and gentleman, to ask a question please press * followed by 1. And the next question comes from the line of Andrew McCullock from Green Street Advisors. Please proceed.

[Andrew McCullock:]

Brian, you touched a little on this with your comments on capacities, but how much new ace volume would you feel comfortable taking on with your current leverage levels, kind of both before and after asset sales?

[Brian Nickel:]

We’re going to have to evaluate that moving forward. Our credits, the issue becomes more liquidity than capacity, and so under our current liquidity position with the Boise State transaction, if we were to go much beyond that specific transaction we could potentially get, without financing that on a construction loan or obtaining some other facility, we could potentially out ourselves into a negative liquidity position. As a company, we’ve never operated that way, and obviously before we took on any additional transactions we would want to address our liquidity position. From a capacity perspective, just looking at what’s happening in cap rates as bill talked about, assuming that there’s no dynamic change in valuation beyond what’s occurred already, we would expect for our capacity to continue to be at the levels that it’s at.

[Andrew McCullock:]

What do you feel comfortable taking your leverage up to as far as debt to total asset value?

[Brian Nickel:]

In the 500 million in capacity that was assumed to be a debt in the low 50s, from a total debt to asset value. Obviously if there’s a significant change in cap rates, and right now what we’re seeing is a tightening of spreads to multi-family, and we’re seeing some significant impact on assets that are outside of our investment criteria, but we’re not seeing a real impact on asset values, granted there are not many transactions to look at, but we’re not seeing a significant impact today. So that’s 400 to 500 million without even going through the asset sales, of additional capacity. If that were to drop, obviously our leverage towers wouldn’t change.

[Andrew McCullock:]

Just one more housekeeping item, can you share what the NOI was for Vista and SUNY Buffalo for the third quarter?

[Brian Nickel:]

I don’t think that we want to get down to that level at this point in time.

[Andrew McCullock:]

Okay. Thank you.

[Operator:]

Your next question comes from the line of Paula Poskon from Robert W. Baird, please proceed.

[Paula Poskon:]

Thank you, good morning. Couple of other housekeeping questions, a lot of my questions have been answered already. When we were in Tempe at the Vista Del Sol grand opening, you had mentioned just that morning, Bill, you had received two new requests for proposals. Are you seeing any change in the pave of incoming RFPs, either on the upside or the downside?

[Bill Bayless:]

I’ll let Brian answer that.

[Brian Nickel:]

We’re in four active procurement process right now, compared to none on the last call that were active, so yes, reality is those are processes that have been, we’ve been working on for quite a but of time. What we are seeing, we held an ACE symposium after our grand opening, there were a tremendous number of institutions that were very interested there, and once again as institutions face the reality of budget cuts, and one of the first items to go on budget cuts is new facilities, their student housing demand and the need for new facilities is not increasing while the finds available are and that’s what’s causing them to take a serious look at the equity structure, and specifically the ACE program as an option. So we are seeing an increase in velocity, but we’re not seeing institutions make decisions any faster than they have historically, and that is going to remain a reality to that business segment, it is just going to take some time to bring them all the way to the bottom line. But we are seeing an uptick in the number of institutions that are actively interested in what we’re talking about.

[Paula Poskon:]

Thanks, that’s helpful. In your third party development contracts do you include a provision for any sort of shared cost savings for bringing a project in under budget?

[Brian Nickel:]

Yes we do, and we typically, on most transactions, on owned developments it is usually a 50-50 share of the general contract with a lot of them properly aligned, and on our third party transactions it is usually between the university, the third general contractor, and ourselves to align all parties.

[Paula Poskon:]

And do you, have you realized a significant benefit from that in, let’s say, year to date?

[Brian Nickel:]

Well, there’s typically on almost all jobs, something comes in. The range of that is usually modest. If you price a job out and you have 10% savings obviously you didn’t do too good of a job pricing it out. And so we go through a very detailed process with contractors on the front end of these things apprise, and then go through a proper buy-out exercised throughout, and so it is usually not a wind fall, but rather something that provides a little juice at the end of everybody.

[Paula Poskon:]

Okay great, and then lastly, what kind of review, if any, are you taking in terms of evaluating the house of your counter swap party?

[Brian Nickel:]

The health of our swap counter part, the only swap that we’ve got that is outstanding right now is on the odd campus participating property that we have at Cullen Oaks, and today we’ve had no issues in terms of that bank’s liquidity position so right now we haven’t seen anything of note. Some of our third party clients have experienced some significant impact of their counter parties on some of the variable rate lower floaters being called, and that has, once again, caused institutions to look at other options in terms of refunding those loans.

[Paula Poskon:]

Got it, thank you very much.

[Operator:]

Again, ladies and gentlemen, to ask a question please press *1. And there are no further questions at this time; I will now turn the conference over to Bill Bayless for the closing remarks.

[Bill Bayless:]

Once again, we’d like to thank you all for joining us to talk about the quarter, again, while we have a lot of noise from the GCT transaction we are very pleased with the progress of the core portfolio and the continued performance there. Again the opportunity afforded to us by the upside in the GCT transaction and what the downturn in economic environment provides us an opportunity for ace. We look forward to talking with you early next year, in updating you on our leasing, and also guidance at that time. And also, again we’ll see many of you at (inaudible 04

[Operator:]

Ladies and Gentlemen, thank you for your participation in today’s conference, this concludes the presentation and you may now disconnect. Have a good day.