American Campus Communities, Inc.
Q3 2012 Earnings Call Transcript

Published: 23 Oct 2012

[Operator:]

Good day and welcome to the American Campus Communities third quarter 2012 conference call and the webcast. (Operator Instructions) I would now like to turn the conference over to Ms. Gina Cowart, Vice President, Investor Relations.

[Gina Cowart:]

Good morning and thank you for joining the American Campus Communities 2012 third quarter conference call. The press release was furnished on Form 8-K to provide access to the widest possible audience. In the release the company has reconciled the non-GAAP financial measures to those directly comparable GAAP measures in accordance with Reg G requirements. If you don't have a copy of the release, it's available on our website at americancampus.com in the Investor Relations' section under Press Releases. Also posted on our website in the Investor Relations section you'll find a supplemental financial package. We are also hosting a live webcast for today's call, which you can access on the website with the replay available for one month (audio gap). Webcast slides 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 slides and 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 statement are based on reasonable assumptions, they are subject to economic risks and uncertainties. The company can provide no assurance that its expectations will be achieved and actual results may vary. Factors and risks that could cause the 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'd now like to turn the call over to Bill Bayless, Chief Executive Officer, for his opening remarks.

[William Bayless:]

Thank you, Gina. Good morning, and thank all of you for joining us as we discuss our Q3 2012 results. Let me address the format of our presentation. Greg Dowell will discuss our operational results; William Talbot will address our investment activities along with an on-campus development update, as Jamey is out of the office today; and Jon Graf will discuss our financial results and our updated guidance; Daniel Perry and I will then lead the Q&A. As we outlined in last night's release, it was an exceptional quarter on all fronts. We put $1.2 billion of core high-quality assets into service at extremely attractive yields, while also expanding our investment pipeline. We delivered solid internal value creation on our same-store portfolio and probably managed our lease-up to maximize revenue for the current academic year, setting a stage for continued revenue and NOI growth into 2013. With that, I'll turn it over to Greg for the details.

[Greg Dowell:]

Thanks, Bill. We closed out a great 2011-2012 academic year and delivered a strong start to the 2012-2013 academic year. If you turn to Page 5 of the supplemental package, you will see that our third quarter same-store NOI increased by 4.1% over Q3 of 2011. This was the result of a 2.8% increase in revenue and an increase in operating expenses of only 1.8%. You will also see that on a year-to-date basis our same-store NOI grew by 3.7%. For the eighth straight years as a public company, we set the stage for continued same-store revenue growth by properly managing the combination of occupancy and rental rate, so as to maximize core growth in 2013. As you can see on Page 8 of the supplemental, September 30, 2012, occupancy at our same-store wholly-owned properties was 97.4% compared to 98.2% for the same date in the prior year. This coupled with our increase in average rental rate of 3.4% should yield an increase in same-store rental revenue for the next four quarters of approximately 2.6%. As of September 30, occupancy for our total wholly-owned portfolio was 96.9%. Based up on the final fall occupancies and rental rates, we would anticipate same-store NOI growth of 2.5% to 5% for the reminder of the 2012-2013 academic year depended upon our ability to continue to create operational efficiencies and prudently control expenses. We have also completed our market analysis, competitive property assessments and the relevant product positioning of our own assets to determine our pricing strategies for the 2013-2014 leasing season. Once again on a property-by-property basis, we will be implementing a strategy to maximize revenue through rental rate growth on the fully occupied properties and rental rate growth coupled with occupancy gains on the reminder of the portfolio. Our goal is to achieve 3% to 4% revenue growth for the 2013-2014 academic year versus the 2.6% growth we achieved this year. The third quarter is the most operationally intense period in our business, and we would like to thank the hardworking and dedicated employees of ACC for the successful completion of leasing, sound implementation of our turn and move-in plans, and once again delivering exceptional results, while at the same time integrating the 28 assets we've brought into service in the third quarter. And now I will turn the call over to William to discuss our investment activity.

[William Bayless:]

Thanks, Greg. The third quarter of 2012 has been one of the most active for the company in terms of investment and placing assets into service. Starting with acquisitions, during the quarter we completed the purchase of 17 properties, containing 8,914 beds at a total purchase price of $844 million. In August, we acquired the block, a core Class A community located in the West Campus neighborhood adjacent to the University of Texas at Austin for $165 million. The community features a diverse mix of unit plans and pedestrian locations to cater to different subsets of the 51,000 students at UT and it's currently 98.6% occupied. The projected year-one cap rate is 5.9% nominal and 5.6% economic. In September, we completed the acquisition of the 15 property 6,579 bed campus acquisition to portfolio for a total of $627 million. The core portfolio primarily features Class A assets within walking distance to Tier 1 universities, in many cases offering the best asset in the best location to campus. The projected year-one cap rate is 5.9% nominal and 5.6% economic and the portfolio currently 93.9% occupied is poised for long-term revenue and NOI growth under ACC's operation, systems and management. Also in September, the company exercised its purchase option to acquire The Retreat, a cottage and townhome-style community located on 40 acres, approximately one-half mile from Texas State University and San Marcos for a purchase price of $52 million. The acquisition was part of the company's mezzanine financing program. The property was delivered in fall 2012 at 98.6% occupancy and features the most extensive amenity package in the market. For the first year, we are targeting a nominal cap rate of 7% and an economic cap rate of 6.6%. With regards to University Edge, a 608 bed property adjacent to the campus of Kent State University that also is part of our mezzanine financing program. The company will complete the acquisition of the property for $31.1 million by the end of October. The asset was delivered on time for fall 2012 and is currently 90% occupied. The year-one projected cap rate is 6.4% nominal and 6% economic. We chose not to exercise our purchase option on our last asset in the mezzanine financing program for 2012 Oxford and Miami Commons, as the property did not stabilize this fall and produce the revenue stream we anticipated. We were repaid our full mezzanine investment in March 2012, and neither the developer nor the company has any further obligations. Also during the third quarter, the company entered into a pre-sale agreement through our mezzanine investment program to acquire a 608 bed ACC designed townhome development serving student at the University of Kentucky. ACC will be responsible for the leasing, management and initial operation to the development, which is anticipated to open for fall 2013 with delivery personally guaranteed by key principals of the developer. Upon completion, the company will acquire the asset for $38.8 million at a targeted nominal yield of 7%. Moving on to owned development, the company successfully delivered a total of 11 owned assets during the quarter, totaling 6,703 beds and $381 million in development cost with an average distance to campus of one-tenth of a mile. The developments consist of 6 on-campus ACE projects and 5 off-campus projects. Based upon the final occupancy of 95.2%, the projects are expected to achieve an average 7.1% nominal year 1 yield. In total the company place 28 new assets into service during the third quarter, totaling 15,617 beds at a total price of $1.2 billion. These assets have an average distance to campus of two-tenths of a mile and an average age of 4.7 years, further strengthening our best-in-class portfolio and future NOI growth. We also continued to make progress on our fall 2013 owned developments. During the quarter, the company executed a ground lease agreement and commenced construction on a seventh-phase project at Prairie View A&M University in Texas. The $15.6 million on-campus ACE development will contain 336 beds and will be managed by American Campus. We are targeting a 7% going-in yield for the project development. The 2013 owned development pipeline offers the first mix of product with two urban high-rises located in major MSAs, two full-service freshmen residence hall, townhome product and traditional garden-style apartments with four off-campus and three on-campus owned developments. Our fall 2013 owned developments now total seven projects containing 3,945 beds and $303 million in total development cost. And we anticipate stabilized yield in the 7% range. We have also made great progress on our 2014 development pipeline. In addition to our previously announced development adjacent to University of Central Florida in Orlando, during the quarter the company purchased land for a 408 bed, $23.2 million second phase in Kennesaw, Georgia adjacent to our existing 99% occupied U Club on Frey. Subsequent to quarter end, the company executed an agreement to lease of Texas A&M University for 784 beds, $36.3 million apartment community in College Station, Texas. Predevelopment activities are ongoing for both projects and we expect to commence construction in 2013 for fall 2014 project delivery. Both projects are targeting a stabilized yield of 7%. Feasibility assessment and predevelopment activities for our proposed projects at West Virginia University and the University of Southern California Health Science Campus are ongoing, and we continue to make progress. We will update the market with more details as these transactions become more definitive. Turning to third-party development, we successfully delivered four third-party on-campus developments totaling 2,236 beds during the quarter. These projects are on the campuses of the University of Wyoming, Northern Illinois University, Illinois State University and the ASU West Dining Hall project. It is worth noting, as a testament to the company's development prowess, counting owned and third-party development, our project management team successfully delivered 15 projects this year, totaling 8,939 beds, 3.4 million square feet and $597 million in development cost on time and under budget. Our fall 2013 and fall 2014 third-party deliveries account for 1,871 beds and are proceeding in accordance with our expected delivery schedule, including these projects, our fall 2013 developments on the campuses of the City of New York, College of Staten Island and Southern Oregon University in Ashland, Oregon. The fall 2014 development is a 715 bed graduate residential community on the campus of Princeton University in New Jersey. We remain confident in our ability to identify and underwrite attractive ACE investment opportunities and secure additional third-party developments. Consistent with the increase in interest in public-private partnerships and higher education, we continue to have a steady stream of increase for both ACE and third-party development of modern on-campus student housing. Finally, with regards to disposition, we completed the sell of Brookstone Village and Campus Walk, two properties containing 528 beds, serving students of the University of North Carolina at Wilmington for $26.6 million. The assets had $10.8 million of debt, which was diffused at sale. The assets were 18 and 22 years old and we're not purpose-built student housing consisting primarily of one and two bedroom units. The sale represented a 16.6% nominal and 16.3% economic cap rate on trailing-12 financials, assuming $200 per bed in capital reserve. We are currently in the final stages of compiling our next package of disposition assets, and we'll update the market as we make progress in those potential sales. The company anticipates it will sell between $100 million and $200 million of product during the first half of 2013. With that, I'll now turn it over to Jon to discuss our financial results.

[Jonathan Graf:]

Thanks, William. For the third quarter of 2012, we reported total FFOM of $29.4 million or $0.32 per fully diluted share. Excluding $4.7 million of acquisition expenses, third quarter 2012 FFOM was $0.38 per fully diluted share, which met our internal expectations. This compares to FFOM of $24 million or $0.34 per fully diluted share for the comparable quarter in 2011. As compared to the third quarter of 2011, the 2012 third quarter results benefited from the previously discussed same-store wholly-owned NOI growth and the 34 growth properties place into service over the last 12 months. Additionally, the weighted average share count for this quarter reflects the impact of both 17.25 million shares issued in conjunction with the July 2012 equity offering and 3.7 million shares issued in late 2011 and early 2012 under our ATM program. This should be noted that the third quarter is historically seasonal in nature as compared with the other quarters. As we experience the impact of higher operating cost associated with the annual turn. Total third-party revenues were $3.2 million for the third quarter of 2012 as compared to $3.4 million for the third quarter of last year. Third-party revenues met internal expectations for the third quarter as we completed four third-party development projects during the quarter. We believe we are on track to achieve the high-end of our 2012 annual guidance range of $13.5 million to $14.8 million for third-party services revenue. Excluding $3.8 million of acquisition expenses related to the campus acquisitions transaction, corporate G&A for the quarter was in line with internal expectations at $3.8 million. It should be noted that for portfolio acquisitions, the company records acquisition expenses in G&A and for individual property acquisitions such costs are classified within wholly-owned property operating expense. As of September 30, 2012, the company's debt to gross asset value was 38.2% and the net debt to run rate EBITDA was 5.98 times. During the quarter, we paid our $46 million of maturing fixed rate debt and have only $16.3 million of remaining 2012 fixed rate debt maturities. Fixed rate debt maturities for 2013 are $79.1 million or 4.6% of the company's total indebtedness. We continue to improve and fortify the company's balance sheet as evidenced with the July 2012 stock offering of 17.25 million shares in which we raised approximately $732 million in net proceeds. These proceeds were to utilize to fund the Campus Acquisitions transaction, the acquisition of the block and to pay down the outstanding balance on our revolving credit facility. Management believes the remaining capacity on our credit facility along with cash generated from operations and property dispositions, and the ability to raise funds in the unsecured bond market, provide ample capital for our wholly-owned development projects being delivered in 2013 and 2014. As of September 30, we had approximately $2.5 billion in unencumbered asset value. Our total interest expense for the quarter, excluding the on-campus participating properties, was $12.4 million compared to $11.6 million in the third quarter of 2011. And the company's cash interest coverage ratio increased to 3.56 times. Third quarter 2012 interest expense includes $800,000 related to debt assumed on 2012 acquisition in construction loans on certain developments placed into service during this quarter. Interest expense is net of approximately $2 million and $1.7 million in capitalized interest, related to owned-projects in development during the quarters ended September 30th, 2012 and 2011 respectively. Taking into consideration, our final 2012 to 2013 lease-up, the recent equity offering and the completion of the Campus Acquisitions Portfolio for tightening and raising the midpoint of our 2012 FFOM guidance range to $1.99 to $2.03 per fully diluted share, which excludes the impact of $8.1 million of acquisition related expenses and debt issuance cost associated with property dispositions. The stasis, as some of the major guidance assumptions are as follows

[William Bayless:]

Thank you, John. In closing, I'd like to thank the entire American Campus team. There were so many accomplishments this quarter, we don't want any to be overlooked or taken for granted. It's just astounding. The project management team as William said delivered a record number of projects for the company. 15, nearly 3.4 million square feet in development, 11 of both were owned-assets, the marketing and leasing and operations team stabilized with 95% occupancy on accumulative basis. In addition, the complete integration of the Campus Acquisitions Portfolio, immediately after our moving at the turn of nearly a 100,000 residence, while, all the while completing an industry-leading lease up, and also creating same-store NOI, truly demonstrating the scalability of American Campuses operating platform, and the continued dedication and execution of the best team in the industry. With that, we'll open it up for Q&A.

[Operator:]

(Operator Instructions) The first question we have comes from Eric Wolfe of Citi.

[Eric Wolfe:]

I think you mentioned in your remarks that your goal is to achieve revenue growth of 3% to 4% for the 2013 to 2014 academic year. So first question on that is, what gives you the confidence you'll be able to achieve this when you're expecting 2.6% for this academic year? And secondly, just wondering whether that 3% to 4% revenue growth includes Campus Acquisition?

[William Bayless:]

That was a same-store target, exclusive of the newly acquired assets. We as Greg mentioned have already gone through our annual process of market analysis and competitive assessment, and all of our product positioning. When you look at how the same-store portfolio currently brakes down, we have 67 assets that are currently 99% or 98% or greater occupancy, those 67 currently average 99.4%. Our initial rental rate assessment on those assets is 3.2% with the goal of maintaining occupancy or having minimal slippage. We then have 23 assets that are currently between 95% and 98% occupied. In that category, we have rental rate growth initially set for 2013-2014 of 2.2% and we're targeting 100 to 200 basis points of occupancy growth. We then have 14 assets that are currently below 95% and they average 87.5% occupancy. There we're holding rates relatively flat, three-tenth of 1%, but have the ability to pick up 500 to a 1,000 basis points of occupancy. And so when you roll all of that together, you're looking at 300 to 400 basis points of total revenue growth that are based up on those pricing strategies. And again, I think this year the theorem truly proved out. Value creation in student housing is the proper combination of rental rate growth and occupancy growth to maximize revenue growth. The two variables independently do not matter, it is the sum of the whole.

[Eric Wolfe:]

But I guess just to be clear there on Campus Acquisition, it is rolling into the same-store pool at the end of 2013 right in the fourth quarter and that should give you an additional pop as well or when is that rolling into the same-store pool?

[Daniel Perry:]

That will go into the same-store property grouping from an operational reporting perspective, Q4 of 2013, because we close it on the 15. Q4 of next year will be the first quarter that it rolls in, so additional upside there, absolutely.

[Eric Wolfe:]

And then just last question. I think you also mentioned that the expected same-store NOI growth for this year is 2.5% to 5%, and looking at the composition of that 2.6% of revenue growth, which would seem to imply that you're going to do pretty well on expenses like 2% or below. So what gives you the confidence that you'll be able to do that? And I guess, but if we think about the upper-end of that range at 5%, what would we need to see on the expense side to achieve that?

[William Bayless:]

The main thing is that we continue to benefit from that on the upside would need to be accomplished for that to occur. One, uncontrollables breaking in our favor; secondly is the continued efficiency. We have got as you all heard today, an extensive amount of growth. And what we have continued to benefit from over the last eight years, as you have seen our expense numbers continually come in at a lesser rates in our revenue growth is the efficiency of the operating platform being spread across a much larger space of properties, and so some of those efficiencies coupled with the uncontrollable expenses breaking somewhat in our favor at the higher end.

[Daniel Perry:]

The other thing I would add to that Eric is sometimes on the other income side of the equation, you can get a little bit of additional revenue growth that might allow us to exceed the 2.6% that we're currently projecting.

[Operator:]

And the next question we have comes from Alexander Goldfarb of Sandler O'Neill.

[Alexander Goldfarb:]

Coming back to Campus Acquisitions, if we think about their decision to sell their portfolio, we have Kayne Anderson out there marketing their portfolio. Is your sense that we're just going to continue to see more of the private players look to sell, whether it's to publics or to new entrance looking to get into the space or do you think that there are some teams who are willing to take the IPO discount, to take the full transparent disclosure, as you guys know being public of having all of us look at financials. Do you think other people are willing to do that or do you think we're going to see more Kayne Anderson's more Campus Acquisitions?

[William Bayless:]

And certainly as we answer this question, know that we certainly have a bias and how we'd like to see it go. For the private players that are out there, when you look at all the cost of an IPO and the risk of an IPO. And at one of the recent student housing conferences that many of you analysts attend, a lot of the Wall Street analysts were very prudent saying, you're not going to get an American Campus multiple going public, you have to earn that. So the opportunity in a lot of these portfolios being put together have institutional capital that are closed-end funds, they look at a certain point of time at recapitalization. So we think that they'll continue to be a vibrant pipeline of both one-off properties, smaller regional portfolios and some of the larger ones like the Campus Acquisitions that you've seen. Not to rule out, that there couldn't be several companies that do undertake the IPO around. I think the one thing that continues to prove out in this sector though, as you look at the historical performance of all the public companies is just how stringent of an operating platform that you have to have to be able to be successful year-in and year-out as an operating company. And many of those private companies are partnered with multiple sources of management companies. So I think the greatest hindrance in the decision to go public versus private sale is the lack of capability on the operating platform side in the industry as a whole.

[Alexander Goldfarb:]

And then on the transaction activity, you guys have been busy on both sides. Are you seeing consistency in pricing, you have a number of brokers out there via marketing different properties portfolios. Are you seeing consistency in pricing both in terms of proximity to campus and quality of the asset? One of the brokers we were recently speaking to who was same-store generically, it's about a 50 basis point drop for each of half mile away from campus. Just sort of curious what sort of consistency you're seeing or maybe there is just none, and therefore really isn't asset-by-asset and trying to find the right deal?

[William Bayless:]

We absolutely see consistency based on our underwriting evaluation of properties. Every now and then I see cap rates published that don't make sense to our underwrite, when we actually look at our underwrite of assets and what's trading, we consistently see Core Pedestrian right next to campus in major Tier 1 markets being to 5, to 5.5, as you get further out from campus, drive properties on those Tier 1 markets to 6. In between there to 5.5 to 6 properties, that are may be a half mile to three quarter where it is a bike ride or potential a drive you see between that. And then when you get into the tertiary market situations, you see, I would typically say 7 and above. You may see some of that creeping into the upper 6 as right now, with some of the interest in that. But we see and have seen for the last 12 to 18 months consistency in those cap rates.

[Operator:]

The next question have comes from Derek Bower of UBS.

[Derek Bower:]

Can you give us a sense or may be help to match your expectations for how you see next year's lease up rate trend compared to this year? And would it be wrong to expect to see somewhat of a gap on the initial leasing update next quarter, just given you have the 7,000 new development debts entering the same-store pool. I believe, which were mostly leased by February this year?

[William Bayless:]

Yes. And that's a great point, because actually this year people saw in the lease up velocity when we had four new developments coming on to cog those construction developments typically lease up on the quicker velocity, it created a bit of a velocity gap. In this year with 11 new development properties rolling in, you very well could see the same type of thing. Last year, I think there was great deal of scrutiny given, perhaps without complete foundation in terms of looking at velocity at any given point in time is an absolute indicator of where you're going to end up, which you'll see in our own portfolio, that returned did not really materialized. As we talked about today, as we set our rates through strategically four each individual asset, we don't just think about rental rate and we don't just think velocity and we do go asset-by-asset to maximize revenue. And so on an individual property basis, we're going to have individual assets where our goal will be to increase velocity and get out of the market earlier. And we're going to have others where we're going to be more aggressive. Now, we know approaching 150 property portfolio, that overall velocity for the entire portfolio just doesn't have the significance that it does in breaking it down asset-by-asset or as we just did when we discussed our rates with you, by grouping the property based on where you're actually targeting rental rate growth, those where we actually targeting occupancy and those the mix in between. And so over the next 12 months, as we talked about next year's lease up, as we're having our earning calls with you, we're probably going to talk about it more in those categories than just the general portfolio population in the general characteristics.

[Derek Bower:]

But from a headline same-store number, your expectation would be you'd probably see a gap next quarter than that would slowly close similar to what it did last year just from where we're sitting today, would be your initial expectations?

[William Bayless:]

Well, again even within those property types, you're going to have them broken out. Even the 11 new developments made following to the categories we discussed of above 98%, 95% to 98% and below. And so you're going to see velocity decisions. And not trying to be evasive in answering the questions at this point in time when you breaking into those categories I can't speak of general velocity trend as whole. You could see it's a little behind just based on the fact that you saw or that you mentioned of the 11 new development properties.

[Derek Bower:]

And not sure, if I missed this, but can you discuss what drove that decrease in leasing at Casa de Oro. I believe it went from 80% down to 57% for the school here?

[William Bayless:]

Yes. And Casa de Oro is the freshmen residence hall at ASU West, which is part of the universities overall freshmen population housing which they do their assignments and then actual placements. And in that case, as you all recall, it is part of what we refer to as the triad transaction, which that transaction is cross-collateralized with The Villas at Vista del Sol, along with, coming online next year Manzanita Hall. And so that transaction was actually pro formaed at 50% for this year, so the 56% that actually after the university completed, all their formal assignment process and move-in, met expectation. The actual yields on those alternatives are though the Villas came in at over a 12 yield, and the combined yield on those transactions in year one, came in at 8.1%. So Casa de Oro with Villas is actually over performing the targeted 7.5% in year one.

[Derek Bower:]

And then just lastly, the multi-family permits, obviously continue to climb higher, but it's a bit tougher to gage what the true impact maybe on student housing. So can you just help us how we should think about the potential timing impact from new supply on your demand? And to what extent do you think supply of new apartment buildings, is this much of a threat as purpose built new supply?

[William Bayless:]

In student housing, it's a little harder to categorize, and that many municipalities permits our pooled as multi-family and not a special designation as student housing. We track that closely in all of our markets. There is more supply coming in this year than in past years, given the pickup in the economy. We have approximately 10 markets where we see development in the range of 1,500 plus beds that are coming online. And so we monitor those closely. As we have always said the supply side of the equation is what you have to watch, it's not the enrollment side. However, we feel when you look at the characteristics of our assets, we are typically located inside of all of that new supply and are comfortable with our ability to continue to grow.

[Operator:]

And next is Karin Ford of KeyBanc Capital.

[Karin Ford:]

Many student housing portfolio seem to have ended up with lower occupancy this year than last year, including a lot of your private competitors. Do you think this as a broad sort of operating choice or were is there any unexpected bigger picture issue, say higher than expected new supply that you think cause the occupancy to be generally lower across the industry this year?

[William Bayless:]

Karen, I think if you attended the folks that National Multi-housing Student Housing Conference in Scottsdale that heard the lot of the companies talk about this. In our perspective, it truly speaks of a lack of sophisticated systems in the industry. If you go back to last year when we ended the 2011-2012 lease-up, we commented that in most of our markets we and our competitors all finished the leasing season strong. And where we go about a very sophisticated approach of how we set rental rates, many of our competitors that have more rudimentary operating systems or multi-family systems that are not designed for student housing go off of more of a gut feel, and so they were very aggressive in there rental rate assessments for moving forward. You're seeing in Campus Acquisitions that we bought. They were 98.60% year before, now they're just over 93%. And as folks pushed their rates very aggressively, we saw many of our competitors going from 4% to 6% which we knew were not sustainable to maintain the velocity they had achieved the prior year. Many of them without the sophisticated systems just kept thinking that the rush will come, the rush will come, the rush will come, when with that pricing level they were never going to get to capture throughout the process to do it. And so we think it was more a lack of operational systems and sophistication in terms of others balancing, the rental rate, velocity metrics, and just being over aggressive on rate.

[Karin Ford:]

Just following up on Derek's question, appreciate that you see 10 markets with the 1,500 beds or more coming. How many markets last year did you have that had 1,500 beds and more?

[William Bayless:]

We had five or six. Interestingly, as an example one of the market this year that had significant amount of beds coming in were into our College Station Texas. And if you look at College Station where we currently have four assets with all of that development coming in, we're fooling every one of them. And so in that particular, case it speaks again to our investment criteria of proximity to campus, differentiated product, sub-market with barriers to entry. Orlando is another market where we saw new supply coming in. Our competitive analysis shows that our direct competitive set of properties are between 92% to 93% occupied, we're at 97.5%. And so again, you will see supply in our business on a frequent basis. And again when you have new supply coming in there is always a little bit of a first year absorption hit, the follow-up year is typically never as bad because those all the new beds aren't being filled to have a level of retention. And so the key to that on the long term basis is staying through the investment criteria which allows you to weather the new supply is coming in.

[Karin Ford:]

Just last question, just on deal activity. Now that leasing is done for this year, are you seeing any change in the volume of attractive opportunities for acquisition in the last few weeks?

[William Bayless:]

No, it's consistent. We assumed that other companies as William mentioned in his script, we right now are in the process of putting together our disposition package for next year. Other companies having the completed the lease-up are doing the same. And so this is typically the time in year, you see consistent activity in what's out there. But you would expect before Q4 for more product to be coming to the market as folks completed those lease ups.

[Operator:]

Next we have Jeffery Spector of Bank of America.

[Jeffery Spector:]

Bill, I guess I just want try to tie out some of the comments made about your competitors. I assume you would benefit from that from there using less sophisticated systems and expecting the rush that didn't come, but let's say, you guys dropped rents a little bit more as you said to find that balance between occupancy and the rent. I guess, can you talk about that a little bit more and what you think about this?

[William Bayless:]

And you don't always benefit, because what typically happens at the very end of the day, take Orlando as the example into where people were much more aggressive in their initial placing, but then when the velocity didn't come in the later part of the leasing season everybody had to drop rents. And so we then found ourselves, our rental rents increase in that market going from 3.6% to 3.1%. And so it doesn't always create a benefit. Some times the lack of sophistication can cause market dynamics that you'll have to respond to on a product pricing basis. And that's where managing the velocity comes into play, trying to anticipate what those competitive actions are going to be prior to them taking place. And so as a whole, we greatly benefit from the sophistication of lands but we also have to pay great attention to the actions of our direct competitive set in each market that don't have those systems, because ultimately we're going to be pricing against the actions they take at various points in time. For example, this year with many folks not filling up, I would expect this isn't blanket statement for the entire industry, but certainly in many markets the situation will be that we will see our competitors be less aggressive on rental rate this year, as they attempt to build more occupancy. And so all of that's comes in to play in our market research and the pricing strategies that we talked about earlier moving to 2013 and 2014 and how we set our rates. We anticipate where the competitors will price, if they act prudently in setting their initial rates.

[Jeffery Spector:]

And then we just wanted to see if you can provide an update on enrollment declines?

[William Bayless:]

We saw very little enrollment activity, from a decline perspective and I cannot give you a single individual case where occupancy decrease in our perspective was related to enrollment declines. Enrollments were relatively flat in growing, decreases were minimal, and again where you will see impact of anywhere that occupancy was locked, typically it is related to the supply side of equation with new beds being absorbed in the market in a year that cost typically a short term blip belief in occupancy. And so from our perspective there was nothing monumental on the enrollment side. And you will always hear us say, the supply side of our equation in the sector is what causes significant variations in occupancy and ability to grow rent.

[Jeffery Spector:]

And then we just had one question on the Campus Acquisition, it seems like it was pretty much in line with your expectations. Is that a fair statement or where there some surprises, whether positive or negative?

[William Bayless:]

It's pretty much in line. The occupancy was a little better than we had talked about when we announced the transaction. But in getting to that occupancy, they had done a higher percentage of short term leases, and a few more concessions. And so the economic underwrite is pretty much right on part with where we were. However, we continue to see the same upside in that portfolio that we discussed previously and we announce the transaction. And again, kudos for the team, it is already been fully integrated in all of the analysis there to move it forward, has already taken place.

[Operator:]

The next question we have comes from Ryan Meliker of MLV & Company.

[Ryan Meliker:]

Just a couple of questions, most of my have been answered, fortunately. But I guess just not trying to be the dead horse, but as we look at the 3% to 4% target revenue growth for the 2013-2014 school year and as was discussed I guess a little bit already on the call. So many of your public and private competitors coming in with occupancies below where they were, or where they wanted to be for this school year. Is your alarm system giving you any indication where your competitors are coming in, in terms of rental growth for next year versus where they were this time at year ago?

[William Bayless:]

So at this point in time and whenever, we're typically one of the first to set rates in each of the market that we're in. And that we don't slow down the implementation of our velocity and wait until everybody takes action. Part of the initial rental rate adjustments that take place in each and every leasing season is looking then at how each one of the competitors enter the market and dissecting, which one are direct competitive sets that may influence your velocity. But again, when we utilize, when we set our existing rents going forward, we take into consideration where their occupancies are, where their pricings structures were throughout the leasing season, and formulate theorems and hypotheses based on what their actions should be, and factor that into our decision making.

[Ryan Meliker:]

And is it safe to say based on what we all know about this past leasing season, that your assumptions assume that most of your competitors are going to be less aggressive on rent growth for the 2013-2014 fiscal year?

[William Bayless:]

And again, you can't make that on a rollup basis. I would say that is a safe assumption, but it's not that easy. I mean, I mentioned we have 63 assets that are over 98% at 99.4% occupancy. How that particular grouping of property can compete and perform in that individual market, have very little to do with the blanket statement.

[Ryan Meliker:]

And then just one last quick question for you, with regards to occupancy level, do you have any idea as you reported same-store wholly-owned occupancy of 97.4% this quarter. Do you know what that occupancy level would have been if all the beds available in your system would have been occupied, are we talking 102%, 105%? Just trying to understand what the upside to occupancy really is from here?

[William Bayless:]

I believe the upside of our guidance maximum we had was 99%, and so we think of it in that regard.

[Ryan Meliker:]

What I mean, but in terms of just helping us understand where the rent growth is, obviously if you got enough beds in your denominator to get to 110% occupancy, then your pricing power obviously wouldn't be as strong as if you have enough bed, only to get to 101% occupancy. Just trying to understand what the real opportunity is?

[William Bayless:]

It'd be probably just under a 100%, when you take into consideration of model units, you wouldn't take offline, things of that nature that are in your desired bed count. I would call it 90%, 95%.

[Operator:]

Next is Carol Kemple of Hilliard Lyons.

[Carol Kemple:]

Earlier you all talked about dispositions for next year at least the first half, can you give any thoughts on acquisitions for the 2013 year?

[William Bayless:]

Right now we continue to see the acquisition environment being certainly more favorable than it was in the prior two years, and see good pipeline of product coming to market. The feedback we're getting from brokers as you know that lot of folks are going through the assessments. And so we would see 2013 from offerings that are out in the marketplace. Certainly, at what level we execute is going to be depended upon our underwrites and what other people do. So we can't control those external actions that could impact what we actually end up buying. But from an amount of product out there in the market right now, it's probably $1 billion to $1.5 billion that is being actively underwritten in the industry. And we would expect to continue to see that level going into 2013.

[Carol Kemple:]

And then it looks like your first cottage property is doing really well. What are your thoughts on doing either joint ventures with Landmark or cottage properties on your own going forward?

[William Bayless:]

Go to our investment criteria that we always talk about in terms of proximity to campus, product differentiations in sub-market with barriers to entry. The cottage product as a physical product type, it's probably been most desirable with students. It is just a fantastic product in terms of the independent with upper class and desire, the amount of space that you get. It feels more like a home. And so it is a highly, highly desirable product. We then always take into consideration the other two metrics in terms of proximity to campus and also the submarket's barriers to entry, the quality of the product and whether or not it can be emulated. And so rather than again making a blanket statement on the individual product side, I would say that we love the college product, when you can get it in the right location, in the right market at the right price.

[Carol Kemple:]

So are you seeing any cottage products on the market?

[William Talbot:]

Well, you have seen a number of them come out this year and I think you'll continue to see that as you see good pricing for them. The developers are going to continue to put their stable out there for sale.

[William Bayless:]

And on a price per bed, we have probably seen the cottages trade at some of the highest premiums of anything in the sector.

[Operator:]

(Operator Instructions) The next question we have comes from Paula Poskon of Robert W. Baird.

[Paula Poskon:]

Again, just sort of sort of beating the dead horse here, but maybe to ask a little bit differently, did you see as it became apparent in the marketplace that the late traffic that people expected was it going to materialize? Did you see any of your competitors panic or do a lot more concessions late in the cycle or related to that or you worried that there will be less disciplined with rate through the coming leasing season?

[William Bayless:]

Certainly we did see people react. I would say it was a little later than typical, because they were hoping the last surge would come and then when they did have to react, in certain market you had, the last 2,000 beds fighting for the last 500 kids. And so at that point in time people were doing what they had to, to build the revenue. I think that the industry has matured a great deal to where people aren't looking at the price of the last bed leased, when they set their rates. Even if they had to give a 25% discount on the last 10 beds to get 10 more beds of revenue, rather than looking at where do we fill the 95% of the beds that we did fill at what average rate and looking at that as the basis from which to make a determination, at least that's the approach that they should be taking and certainly that we do. And so I don't think that the year end pricing in any individual product will lead to a massive strategy change in how they set rates. But I think they will certainly be smarter in terms of analyzing their velocity in that context, and perhaps being a little more conservative on the front end than they were last year.

[Paula Poskon:]

And then just a question on that mezz program, are you still seeing opportunities that fit that? I mean, clearly you've exercised your options on some, not on others. Are you still seeing a good opportunity set there? Would you characterize that more as a one-time opportunity set that's played itself out?

[William Talbot:]

We absolutely are still seeing opportunities very desirable for developers to leverage on our lower cost to capital, and that's our lower cost of mezz. So we continue to see a number of opportunities. Now you're looking at fall of 2014 and beyond deliveries, but it's still very attractive to developer. And I think that the prospect of ACC taking amount whether an option or pre-sale also drives a lot of that demand for the program.

[Paula Poskon:]

And then just finally, are there any perhaps a little bit older assets in your portfolio that you would think about expanding or repositioning in some significant way?

[William Bayless:]

Paula, that is definitely an opportunity that we have yet to capitalize on. We've had so much opportunity with new developments that the one thing that we have now really dug into is just what you said some of the older properties, 15 years and plus, in good locations. One that we did a three, four years ago was Commons on Apache at ASU which we then ended up turnaround the selling after we had reposition. We also successfully did that with Hawks Landing, one GMH properties in a handful. But as a longer term strategic value creation, our project management division looks at that as a strategic opportunity for them to help us enhance value. And so certainly something for the future that creates upside for us.

[Operator:]

And next we have a follow-up from Karin Ford of KeyBanc Capital.

[Karin Ford:]

I wanted to ask about the third-party development pipeline. It looks like the number of projects is declining, at least where we stand today this year. Should we expect in 2013 that third-party development and development revenues, I guess, will be a lower potentially than they were in 2012?

[William Bayless:]

It could. It absolutely could Karin. Right now, the ACE program and the equity investment transactions that you see from the pipeline are very popular. However, we still have the one thing with the third-party transactions, anything you would break ground on the 2013 contributes revenue for all the pre-development and development work you do. And so we still do have probably another four to six months of potential additions to that pipeline that could actually be 2013 deals. But we would say as a general trend in overall, the on-campus privatized movement continues to be consistent activity and interest. But there seems to be a change in our perception that more folks are talking about equities and third-party. And so it could lead at some point time whether it's 2013 or 2014 to a downturn in the third-party development revenue. But that would really only be a positive, because ultimately it's going to create more net asset value in terms of owned assets.

[Karin Ford:]

And following up on that, we had seen some press reports that University of Southern California was perhaps considering a large maybe billion dollar-sized ACE development project on their campus. Have you guys been involved in that, and is that something that ACC would potentially try to bid on?

[William Bayless:]

We have certainly been tracking that transaction. It has been out there and they've openly working through the city process and the neighborhood process for the last two to three years. Certainly, we and everybody else in the industry will follow that transaction. Our initial feeling is that it's probably more likely to go the route of a third-party development on-campus. And again as we approach that type of transaction with every university, we approach it from the perspective you can do ACE, you can do third-party, here are your alternatives, we can bring the expertise in each of those areas, choose what's best for you. But certainly one that is out there, that again though we were thinking it's probably leaning into a third-party model and what we know of the transaction.

[Operator:]

It appears that we have no further questions at this time. I will go ahead and conclude our question-and-answer session. I would now like to turn the conference back over to Mr. Bayless and management for any closing remarks.

[William Bayless:]

Again, we'd like to thank you all. It was a fabulous quarter here at American Campus. We continue to believe in our story of significant external growth, internal value creation and the defensive nature of the industry. With that, we look forward to talking to you, when we discussed our Q4 results.

[Operator:]

We thank you, sir, for your time. The conference call has now concluded. We thank you all for attending today's presentation. At this time, you may disconnect your lines. Thank you and have a good day.