American Campus Communities, Inc.
Q1 2013 Earnings Call Transcript

Published: 24 Apr 2013

[Operator:]

Good morning, and welcome to the American Campus Communities First Quarter 2013 Earnings Conference Call and Webcast. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Ryan Dennison, Vice President. Mr. Dennison, please go ahead.

[Ryan Dennison:]

Thank you, Annie. Good morning. Thank you for joining the American Campus Communities 2013 First Quarter Conference Call. The press release is 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 the company's website at americancampus.com, in the Investor Relations section under Press Releases. Also posted on the company website in the Investor Relations section, you'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 1 month. Our supplemental analyst package and our webcast presentation are one and the same. Webcasts slides may be advanced by you to facilitate following along. Management will be making forward-looking statements today, as referenced in the disclosure in the press release, in the supplemental financial package and SEC filings. Management would like to inform you that certain statements made during this conference call, which are not historical facts, may be deemed forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of '34, 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 that, I would now like to turn the call over to Bill Bayless, Chief Executive Officer, for his opening remarks. Bill?

[William C. Bayless:]

Thank you, Ryan. Good morning, and thank all of you for joining us as we discuss the first quarter 2013 results. We'd like to welcome Ryan Dennison, our new Vice President of Investor Relations, who many of you will meet at NAREIT in June. We also have Gina Cowart here with us today, who's now heading up our Marketing and Communications Department. I'd like to go ahead and review the format of today's call. Greg Dowell, our Chief Operating Officer, will review our operational results and update on our leasing status. Jamie Wilhelm, our EVP of Public-Private Partnerships, will discuss our on-campus activities related to ACE investment and third-party development. William Talbot, our Chief Investment Officer, will give an overview of our investment activity. And Jon Graf, our CFO, will review our financial results and discuss our guidance. We'll then open it up for Q&A, which Daniel Perry and I will lead. With that, I'll go ahead and turn it over to Greg to get started.

[Greg A. Dowell:]

Thanks, Bill. The integration of our 2012 growth assets contributed to record earnings for the quarter, with per share FFOM increasing 16.4% to $0.64 per share. In addition, with regard to same-store operations, it was another solid quarter. If you turn to Page 5 of the supplemental package, you will see that the first quarter same-store NOI increased by 3.2% over Q1 of 2012. This was the result of a 2.2% increase in revenue, while operating expenses increased by only 0.9%. As you can see on Page 8 of the supplemental, March 31, 2013, occupancy at our same-store wholly-owned properties was 97.6% compared to 97.8% for the same date in the prior year. As of March 31, occupancy for the total wholly-owned portfolio was 96.7%. If you turn to Page 9, we can review the leasing status for the 2013-2014 academic year. As you can see, we continue to narrow the gap related to our applications as compared to prior year. As of Friday, April 19, our same-store wholly-owned portfolio was 74.1% applied for and 67.9% leased. This compares to 79.1% applied for and 72.6% leased for the same date in the prior year. We are currently projecting an overall rental rate increase of 1.7% for the same-store portfolio. We have reduced rates from our initial 2.2% increase in an effort to maximize revenue through the proper combination of rate and occupancy. In addition, we are pleased with the progress related to the initial lease-up of our growth properties. If you turn to Page 15 of the supplemental, you will see that our growth properties are 72.3% preleased for the upcoming academic year. You can also see that our 2013 development deliveries, including our presale property in Kentucky, are 88% preleased, with 5 of those assets already over 97% leased. With that, I'll turn it over to Jamie to discuss our on-campus development activity.

[James E. Wilhelm:]

Thanks, Greg. During the quarter, we remained focused on predevelopment activities, on existing transactions, qualifying new on-campus investment opportunities via our ACE program and pursuing additional third-party fee development engagements. With regard to ACE developments, during the quarter, the company made significant progress on all of our fall 2013 deliveries. Our ACE developments at Drexel University, Arizona State and Prairie View A&M remain on time and on budget. As you can see, on Page 16 of the supplement, our fall 2014 and 2015 ACE delivery pipeline remains on schedule. Specifically, predevelopment activities relating to our $36.3 million 784-bed project at Texas A&M University in College Station are on schedule, and we expect to commence construction in early Q3 for fall 2014 delivery. Furthermore, predevelopment for our $77.7 million 326-unit Princeton University faculty and staff community is on schedule to commence construction during the second quarter for a phased 2014 and 2015 delivery. Additionally, during the quarter, American Campus executed an interim services agreement and initiated predevelopment activities relating to our second ACE development on the campus of Drexel University. The commencement of construction on the proposed $168 million 1,316-bed Lancaster Avenue mixed-use project is anticipated during the third quarter of 2013, with occupancy expected for fall 2015. Also at Drexel, we continued planning activities relating to the conversion of our existing 1,016-bed off-campus University Crossings asset into an ACE partnership. We expect this transaction to close during the third quarter of 2013, simultaneously with the closing of our Lancaster project. We continued with predevelopment activities relating to our proposed 460-bed $49 million ACE investment on the University of Southern California Health Sciences Campus. The commencement of the project construction and anticipated delivery will be determined later this year and are directly related to the cumbersome City of Los Angeles entitlement process. On April 22, the company acquired a note and subrogation rights from National Public Finance Guarantee Corporation for an aggregate of $52.8 million, which are secured by a lien on and the cash flows from 2 student housing properties in close proximity to the University of Central Florida and currently under a ground lease with the UCF Foundation. The instruments carry an interest rate of approximately 5.1%. This transaction provides an opportunity for the company to pursue the acquisition of 2 communities with the university and the UCF Foundation under the company's ACE program and to potentially convert its off-campus development, The Plaza on University, into an ACE investment. We believe this transaction provides the potential for an attractive ACE investment and also permits the company to use its expertise to create a win-win for all stakeholders. With regard to our third-party fee development pipeline, our fall 2013 and 2014 deliveries account for 1,871 beds and are proceeding in accordance with our expected delivery schedules. Our fall 2013 deliveries account for 1,156 beds on the campuses of the City University of New York, College of Staten Island and Southern Oregon University. The fall 2014 delivery is the 715-bed Graduate Residential Community on the campus of Princeton University. Also during the quarter, the company continued with predevelopment activities relating to our planned development at West Virginia University in Morgantown. The company and the university are finalizing our financing plan and will update the market after the transaction structure has been finalized. Having summarized our on-campus activities, I'd like to turn the presentation over to William.

[William W. Talbot:]

Thanks, Jamie. On the heels of our 52 properties totaling $2.2 billion in investments that we added to the portfolio during 2012, we are making progress in our various investment platforms. Starting in acquisitions, we currently have an active pipeline in excess of $1 billion being underwritten. The pipeline consists of core in-fill student housing assets, all located in close proximity to Tier 1 universities that meet our investment criteria. We are pursuing these opportunities under the diverse investment options we offer, including acquisitions and presales under our mezzanine financing program and joint venture structures. We also continue to track a large amount of new construction within Tier 1 university markets and are maintaining contact with developers and equity responsible for delivering that product. We are currently identifying markets where we believe significant resupply could result in overbuilding in the near term, especially at properties targeting rental rates at a premium to market. We are earmarking those markets as targets for acquisitions 18 to 24 months down the road, when absorption and stabilization have taken place at appropriate rental rates. This is a dynamic that we analyze and were able to successfully capture of acquisitions in Austin, Texas, some markets in Gainesville, Florida, during the last cycle that overbuilding occurred. With regards to our mezzanine financing and presale purchase of U Club Townhomes at Newtown Crossing at the University of Kentucky, we anticipate closing on the acquisition in late third quarter 2013, shortly after completion. The asset has been well received as it is 100% preleased since February due to the unique townhome product and affordable price point in a pedestrian location. We are targeting a 7% nominal and 6.7% economic cap rate for the project. With regard to owned development, we continue to advance in our fall 2013 deliveries, totaling 3,945 beds and $304.5 million in development costs. We are targeting an average 7% stabilized nominal yield on all 7 2013 owned deliveries. We also are making great progress on our future pipeline of owned development projects, including both ACE and off-campus developments. In addition to the on-campus owned projects that Jamie mentioned, we plan to start construction during the quarter on our second phase off-campus development at Kennesaw State University, which is immediately adjacent to our highly successful U Club Townhomes on Frey project that opened last year at 100% occupancy and is already 100% preleased for this fall. Also for fall 2014 delivery, we continue to make progress on construction of the $112 million off-campus development adjacent to the main gate of University of Central Florida, The Plaza on University, including the previously announced second ACE development at Drexel and the second phase of our Princeton faculty housing, with total pipeline for 2014 and 2015 owned development deliveries that's currently 4,334 beds and $417 million in development costs. Turning now to dispositions, the company has 4 assets under contract for sale totaling 2,841 beds at a $137 million sales price, with a targeted late second quarter, early third quarter close, subject to a financing contingency. The properties currently have approximately $18.6 million in outstanding mortgage debt. We are also in various stages of negotiation related to the remaining 6 assets that have been marketed for sale and continue to target total dispositions for 2013 between $100 million and $250 million. We will update the market on our progress in these areas at the next earnings call. With that, I will now turn it over to Jon to discuss our financial results.

[Jonathan A. Graf:]

Thanks, William. For the first quarter of 2013, we reported total FFOM of $68.4 million or $0.64 per fully diluted share, which met our internal expectations and was within our 2013 guidance assumptions. This compares to FFOM of $41.4 million or $0.55 per fully diluted share for the comparable quarter in 2012. As compared to the first quarter of 2012, the 2013 first quarter results benefited from the previously discussed same-store wholly-owned NOI growth, the opening of 11 owned properties in the fall of 2012 and our acquisition of 39 properties during the last 12 months. Additionally, the weighted average share count reflects the impact of 32 million shares issued last year. As Jamie discussed, subsequent to the quarter, we purchased the $52.8 million note from National Public Finance Guarantee Corporation, with a stated interest rate of approximately 5.1%. In addition to facilitating a potential ACE transaction, this purchase aided in the settlement of outstanding litigation related to a GMH entity, resulting in a noncash charge of $2.8 million, which reflects the difference between the stated value of the note and the estimated fair value. Considering there was outstanding litigation associated with the underlying properties, GAAP required that we record this noncash charge as a settlement cost at the end of the first quarter, which was excluded from FFOM for the quarter. Total third-party revenues were $2.2 million for the first quarter of 2013, which was $1.7 million lower than the first quarter of the prior year. This decrease was primarily due to the commencement and related fee recognition for the CSI third-party development project during the first quarter of 2012, while we did not commence any projects this quarter. Corporate G&A for the quarter was in line with internal expectations at $3.8 million, and we continue to expect to be within the previously provided guidance of $16.6 million for 2013. G&A is anticipated to be slightly higher in future quarters due to the timing of restricted stock award amortization, Board compensation earned in connection with their reelection at the upcoming annual shareholder meeting and expenditures related to our 2012 growth. During the first quarter, we continued to improve the company's balance sheet, as we completed our inaugural bond offering, issuing $400 million in 10-year unsecured notes at a 3.75% coupon. A portion of the proceeds were used to repay the $321 million outstanding balance on our revolving credit facility, leaving us with approximately $75 million in excess cash proceeds and ample capacity for our current wholly-owned development projects being delivered in 2013 and 2014. Total debt maturities for 2013 are $74 million or 3.4% of the company's total indebtedness. As of March 31, 2013, the company's debt to total asset value was 39.5%, and the net debt to run rate EBITDA was 6.7x. In addition, we had approximately $3 billion in unencumbered asset value, which was about 53% of the company's total asset value. Our total interest expense for the quarter, excluding $1.4 million from the on-campus participating properties, was $16.3 million compared to $11.4 million in the first quarter of 2012. And the company's cash interest coverage ratio for the last 12 months was 3.6x. Interest expense for the current quarter includes $5.3 million related to debt assumed on 2012 acquisitions and is net of approximately $3.6 million in debt premium amortization and $2.2 million in capitalized interest related to owned projects in development. Turning now to 2013 guidance, we are maintaining our previously stated FFOM guidance range of $2.32 to $2.42 per fully diluted share. While achieving the high end of our range is still possible, based on the current projected rental rates and leasing trends, we believe that we are trending within the midpoint of this range. For the balance of the year, the most significant factors that currently may impact our FFOM guidance range are as follows. For property NOI, we previously communicated total owned property NOI of $352 million to $358.1 million, which includes the impact of NOI from properties classified in discontinued operations and net property acquisitions and disposition activity. Given the current projected level of rental rate increases for the 2013-2014 lease-up, we believe we are trending towards the mid- to the low end of this NOI range. The NOI ultimately produced for this year will also be contingent upon maintaining turn costs at anticipated levels, controlling property taxes and our net investment activity. With regard to net investment activity, the low end of the NOI range assumes $100 million of net property dispositions in excess of property acquisitions and at the high end, assumes $100 million of net property acquisitions in excess of dispositions. For interest expense, we've previously communicated a range of $76 million to $77.5 million net of $8.6 million in capitalized interest. Although this range was favorably impacted by the timing and pricing of our recent bond offering, and we believe that we are trending towards the lower end, interest expense could be impacted positively or negatively by the timing and amount of acquisitions and dispositions. Concerning third-party services revenue, we believe that we are positioned to achieve the mid to the high of our 2013 guidance projections. This will be dependent on the commencement of construction on the WVU project during 2013 and under a structure that would result in third-party fees. With that, I'll turn it back to Bill.

[William C. Bayless:]

Thank you, John. We're very pleased with our operational and financial results for the quarter, especially pleased with the earnings per share growth with FFOM increasing 16.4% per share, speaking to the value creation of the $2.2 billion in growth assets that we're now assimilating into the organization. We continue to be focused on our preleasing for next year and also the continued integration of those growth assets and seeking new opportunities that meet our investment criteria. With that, we'll go ahead and open it up for Q&A.

[Operator:]

[Operator Instructions] Our first question is from Karin Ford with KeyBanc Capital Markets.

[Karin A. Ford:]

I wanted to ask you a question first about the preleasing. Can you talk about the change in pricing strategy that you guys did recently? When did you start making the rent cuts, and what type of trends did you see, either on the leasing side or the application side, as a result of that?

[William C. Bayless:]

Sure. Karin, and the one thing that I would speak to is there is never a broad, global change in pricing strategy. But rather, if you look at the supplemental disclosure and you see each and every property there, you see the column of additional rental rate increase and the current rental increase. And in each case, this is literally done on a unit-type-by-unit-type, property-by-property decision, based upon the specific factors related to our absorption, our pricing position in the marketplace and how our competitor peers are doing. And so it's not a situation where 3, 5, 4 weeks ago we made the decision of all of a sudden a different pricing strategy. But rather, the pricing that you see today, about 1.7%, down from the 2.1% on the last call, the initial 2.2% when we started in the fall, is based upon implementing that strategy on an ongoing basis and properly reacting to the market conditions. And so how I would couch that in terms of looking at the general statistic of where we are at this point in time based on implementing that, is that in order to maintain the velocity to hit the targeted occupancies and maximize revenue that we are targeting for the fall, those rates reductions were necessary in those given markets and by unit types to properly maintain and hopefully accelerate greater velocity moving through the leasing season. I think the biggest testament to that is that, since the last call, we're up about 25% on applications and leasings in terms of what we've been able to assimilate in. And so we'll never speak to it as a broad pricing strategy, but rather, that's the result of implementing the myopic, unit-by-unit, property-by-property product positioning and pricing.

[Karin A. Ford:]

And did you see application -- the application pace pick up when you were going property by property and changing rents to the [indiscernible]?

[William C. Bayless:]

Yes. Definitely. That's one of the things. And just on the last call, when we were a little further behind in applications and leases, were actually better than the other day, we focused on the applications. And the applications are the lead-in to your trending go-forward, and then the lease process is the conversion. And so we have seen that basis cut in. If you really drill down and if someone actually took the time -- I would never expect you or the investor to do this, but if you actually went through property by property and looked at the trending, when you look at the variance, where the last call it was 4,079, this call was 3,464, and you broke that down in categories of the properties where you are behind and the properties that you're ahead in that velocity. When you look at it in that perspective, we've actually cut the gap at properties where we were behind by 897 beds. And then where you look at the properties that we're ahead, and the approach that we take there -- on the last call, we were 2,711 beds ahead, this call, we're 2,429 beds ahead, at the property grouping that is ahead. What you really got to drill down on there is, at the properties that you're ahead, those properties fall under 1 of 2 categories

[Karin A. Ford:]

Thanks for the color. But my follow-up is a bigger picture question. There's been a lot of concern about ramping new supply in the apartment space. Can you provide your perspective on new supply trends in relation to student housing and your portfolio, specifically, and how you'd compare that with the apartment space?

[William C. Bayless:]

Sure. And we've commented, I believe on the last call, in our same-store markets, we have about 34,000 new beds of supply. We made the comment and we continue to make the comment that any decrease in velocity that we see to our leasing, for the most part, we attribute to the existing direct competitive set of properties that we compete with versus the new supply. When you look at the 40 markets that we are behind, we've got about 24,000 beds of new supply coming in, in that regard, and those assets are only 51.8% applied for, where in those markets, we're 72.2%. And so we don't see the new supply having impact on us. In part, I will say -- and this, William alluded to this in his script. In part, because so many of those new products are all targeting the highest-end socioeconomic. And so in some cases, they actually make our price point because our assets are all well located, new. ACC-designed, many of them. They make our products look like the value play. And so we find ourselves being more responsive to existing assets that didn't fill last year that are reducing prices, putting pressure on the marketplace. And so the new supply, other than a couple rare exceptions, we have not seen as a major impact to our own numbers.

[Operator:]

Our next question is from Nick Joseph with Citi.

[Nicholas Joseph:]

So last quarter, you mentioned that your target revenue growth for the next academic year was going to be 2.3% to 4%. And now that you've dropped your projected rate increase to 1.7%, do you still expect to be in that range? And what kind of final occupancy are you targeting to get there?

[William C. Bayless:]

Yes, Nick, and this is where John alluded to. Based on the current pricing and where we are, we're trending from below to the mid in the property NOI section. If you look at the current 1.7% rental rate increase, you got to pick up 60 bps to get -- that'd be roughly 97.5% of occupancy to hit the low end, 2.3% of growth, 1.7% plus so 60. To get to the 4%, the high end of what we'd talked about, you'd have to pick up 230 additional bps in occupancy from that 96.9%, which would be over 99%, so that is much more challenging, especially given the current velocity today. And so that's where John's comment that in the property NOI, we're trending toward the lower to mid of that guidance expectation.

[Nicholas Joseph:]

But you expect to actually achieve occupancy above what you've finished this past year?

[William C. Bayless:]

Well, what we have done is we have set the pricing in order to achieve those targets. The goal in this is -- you've heard us talk about this just for years and years. The nature of our business in each and every year is to maximize revenue through the combination of rate and occupancy, and we have set those rates at the level that we need to target those occupancies. Now the variable moving forward -- this I alluded to in the question that Karin asked. We don't operate in a vacuum. We are always in a dynamic marketplace where we're competing with others and have to be proactive and also reactionary to the steps that they're taking. And so everything we discuss is where we stand in our strategy at this moment in time. We certainly would like to hold on to that rate as much as we possibly can. But in part, that's going to be dictated by actions that others take in the competitive set of properties with which we compete.

[Nicholas Joseph:]

Okay. And then you mentioned, in your numbers, that the spread to last year in terms of applications and leases keeps coming down, but the spread to actual leases signed keeps increasing, at least through the last 3 data points you've given us. So is there anything that you're doing differently in terms of the application process? Are you -- have you changed anything within that framework?

[William C. Bayless:]

No, the application conversion process continues to be consistent with the practices that we've implemented year in and year out. Just on the last call, when that number was only 300, we focused on the applications because that is your telltale sign on trending, and you will see almost always that the leasing conversion trends follow the application over the long term. And so when we look at our application aging reports, we're not concerned. There's a couple of big chunks in that. For example, the Barrett Honors College, again, it's part of the university's on-campus application process, and it takes longer to convert to a lease. And so when you look at our aging report, you have 319 leases that are over 60 days, which is something that would give you concern, except they're in that administrative process. And so we -- at this point in time, that does not cause us overconcern. We're more focused on driving the application number, which will result ultimately, at the end of the day, in that leasing number coming forward.

[Operator:]

Our next question is from Matt Rand with Goldman Sachs.

[Matthew Rand:]

The question is on your external growth pipelines. So right now, you have $305 million of developments in progress that will complete in 2013. And it looks like you have about $200 million in progress, or soon to start, that will complete in 2014. Are you looking at any potential deals that might start soon and drive that number higher?

[William C. Bayless:]

Matt, you still have time. When you look at the 2014 development cycle, and the way that we always talk about it, and it really varies by geography within the country and where we're working. When you talk about the Southwest and the Southeast Texas, the -- and somewhat of the Southwest, you got a 12-month construction timeline, and so you really can put a shovel in the ground as late as August, September and still have 2014 to leverage. Last year, you saw some come through at the late time. And so the 2014 pipeline is not yet closed out. Typically, from the next call forward, as we start to get toward fall, you'll hear us formally say the window has passed. So there's certainly still some opportunity. Also, especially, the other area where we see opportunity in that regard relates to the mezz program, where folks are already well along in the entitlement process and going forward, have deals teed up for 2014 deliveries, and you can step in very quickly and build pipeline delivery through that. But we're not closed up by any means yet for the '14 growth.

[Matthew Rand:]

Got it. And then a quick one on the potential University of Central Florida acquisitions. So those 2 Pegasus assets, it seems like it would be in the $175 million or more range just based on the documents that are out there. Is there anything you can say about the potential timing or the status of your discussions with the university or with the Capital Projects Finance Authority?

[William C. Bayless:]

It is very, very early on. We actually just got the -- purchased the debt earlier this week and got out with step 1 and getting that closed to put us into position to have meaningful discussions with the university. We really like this opportunity, and we're going to pursue. We certainly hope something will come of it. There's a couple -- and while this is good debt, and -- but we're not in the market just to buy debt. For us, this is a strategic opportunity from a couple perspectives. One, the assets that are subject to this debt are very well located and have just gone through an extensive refurbishment. And when you look at their product position in the market, in candor, for the most part, other than the new development that we are bringing online, they're somewhat superior to the 3,000-plus beds we already own in the market. And so from our perspective, it's an opportunity to improve your product position. Obviously, if this did get traction, we'd look at some disposition, recycling capital within our existing assets. The other unique opportunity here -- many of you that have followed the on-campus story and listened to Jamie and I talk over the last couple of years, we're constantly talking with colleges and universities about the difference between the 501(c)3 project-based financing and an equity investment privatized transaction. This really gives us the opportunity to kind of showcase the equity. And then here, you have a 501(c)3 project-based transaction that has a university foundation, a governmental issuer and a bond insurer, all approved, had a tough go-around, and learned that in a 501(c)3 transaction, there's really not anyone standing behind it outside of the parties that put the deal together. And so to be able to come in and offer an ACE alternative for serious consideration and discussion really highlights the benefit of equity versus a 501(c)3 transaction. And so, this also really gives us the opportunity to demonstrate to colleges and universities across America, what benefit that it can be to look at the equity alternative. Also, it demonstrates if American Campus is your partner, the flexibility that we give you in dealing with things when they don't go as planned. So for us, this is a great opportunity. It's, again, it's very, very early on. We just bought the debt this week. And we're excited to pursue it. We'll keep the market updated as we, hopefully, catch traction on it.

[Operator:]

Our next question is from Paula Poskon with Robert W. Baird.

[Paula J. Poskon:]

Would you give us a little color, Bill, on just what some of the operational challenges are of the integration of the 2 large portfolios you bought last year?

[William C. Bayless:]

Sure. You know, the largest challenge of integration is always the human resource side of it. With 51 total new assets in, and with that, I include the growth properties that we brought on, but it is 51 new staffs. Now our inside-track program is incredibly valuable to us and we plugged a lot of ACC folks into that system. But for the most part, you are inheriting the majority of the folks that we have in the field. This is their first year in the American Campus cycle. And so getting them up to speed on our systems, our training and the ACC way is always, with the level of integration we're undertaking, the greatest challenge that you have. The other area of integration that goes beyond human resource, when you do have entry into new markets which, through the growth that we have, we do have over a dozen new markets that we're in this year, you don't have the historical data related to the lands and the lease-up. That's also the fact for a new development like with Portland State last year where you don't have that historical data. And so I would say that those 2 variables are really the greatest challenge as you get through that first year of human resource training and implementation. And then also, the historical knowledge and data that we rely upon in LAMS for all future decisions.

[Paula J. Poskon:]

That's helpful. And just a question on the new ATM program. Do you have a specific strategy around using that? Is it going to be designated solely for acquisitions or solely for development funding? How will we think about having any visibility into that?

[Daniel Perry:]

Yes, Paula, this is Daniel. We like to use it to the extent we need the capital on a leverage-neutral basis to fund the development pipeline or acquisitions as well. With the disposition pipeline out there and to the extent we're able to successfully close those transactions, we would use those funds first and then look to the ATM, if we were to have enough external growth opportunities that we needed the additional capital in order to maintain leverage, or manage leverage.

[Operator:]

Our next question is from Jeff Spector with Bank of America Merrill Lynch.

[Jana Galan:]

This is Jana for Jeff Spector. I wanted to follow up on the 2013 guidance. John, but I was wondering if -- should we think of the same-store NOI growth also at the low to mid of the 3.9% to 5% range you gave? And is there any additional share issuance in that guidance?

[Daniel Perry:]

Jana, this is Daniel. I'll take that question. On the revenue growth, I guess, first, could you explain when you said the 3.9% to 3.5%?

[Jana Galan:]

I'm sorry, the same-store NOI growth of 3.9% to 5%?

[Daniel Perry:]

Okay. Well, we really look at it purely from the impact of -- the impact to revenue growth in terms of the lease-up. At this point in time, as Bill talked about, we think we've made the adjustments necessary to rental rate growth to achieve a successful lease-up, which our original occupancy assumptions were that we would be in the 97% to 99% range of occupancy. At 1.7% rental rate growth and 97% occupancy, you'd achieve a 1.8% increase in same-store revenue. That would put us, in terms of NOI, at the lower end, the $352 million that we had given for NOI guidance. At the upper end, we're 98.5%, 99% occupancy and 1.7% rental rate growth, you'd be in the range of 3.3% to 3.8%, total rental revenue growth, which would put you at the midpoint of our original NOI guidance range of $354 million -- or $354.5 million. So that's why we say we feel like we're trending towards the mid to lower end of the NOI guidance range we originally gave. But given the other areas of FFO that John spoke to, third-party services, interest expense, obviously the interest income off of the note that we're buying on the UCF deal, those areas we're trending towards the higher end of the FFO range. And so all in all, we feel like the full range of guidance is still possible.

[Jana Galan:]

And then I was just curious if maybe you could provide some university market color around Lubbock, Texas and San Marcos, Texas?

[William C. Bayless:]

Sure. San Marcos, Texas, actually has the highest degree, to our knowledge, of new supply coming into the market, over 3,000 beds. Just a quite a bit of a -- certainly for a single-year entry. We do have a little bit of impact. We have an excellent long-term asset there, Sanctuary Lofts, that is a 2-block walk to campus. There is a direct competitor coming into that pedestrian submarket that's eating slightly into our market share there. We still feel good about where we are and certainly have no long-term concerns. You do have a lot of dry product coming into play, still in that market, and it is difficult to get close to campus. And so, from a long-term perspective, we feel like all of our assets are very well-positioned there to do well. But that is one market where you may see a little bit of absorption blip this year, based on about -- the enrollment there is over 30,000. 3,000 beds coming in, nearly 10%, on the supply side. Lubbock, you don't have as much supply coming in, that is we're actually building the second phase there of our property. So where you see our own property running a little bit behind, that's because we have a second phase that is leasing up simultaneously as 1. And so you see that combined absorption. Lubbock is a school that we feel good about on the long-term basis. They're still projecting through 2020 another 5,000 to 7,000 increase in enrollment, They historically have been an institution that has met their projections. We have some product there related to the Royal transaction we did and GMH. As we continue to look at the new supply in that market, we will look at some of the properties we have there as disposition candidates just based on a market-exposure perspective. Now both of those are good long-term markets with growth prospects there with decent barriers to entry. And so, long term, we're high on both.

[Operator:]

Our next question is from Ryan Meliker with MLV company.

[Ryan Meliker:]

Most of my questions have been answered. I was just hoping you could give us a little bit more color. And obviously, you guys, when it comes to pre-leasing and absolute occupancy, you guys are pretty high. But you've set a really high bar for yourself in recent years. So we're looking at, obviously, the slowing pace relative to last year and years prior. Can you give us just some color across your portfolio? And I know it's a market-by-market and property-by-property specific answer. But on a broad-based dynamic, when it is that you start to get concerned about not being able to hit your occupancy hurdles and which could result in material reductions in asking rents?

[William C. Bayless:]

In going through the leasing cycle, there are -- and I don't want to get into too much details because part of it is strategic in terms of how we do it and I wouldn't want to telegraph to competitors. But there are various targeted student groups throughout the lease-up period, starting in the fall, moving all the way through the summer, that are making decisions at that point in time. And in each one of those targeted student groups, we have a specific, detailed marketing plan, marketing message and mediums to reach them. Now when we talked about the impact of integration hurting the leasing, what we were talking about is what occurred in the fourth quarter and very early in the first quarter in that the students who were making the decision at that point in time is where we lost market share. And that's where we -- you saw that initial blip where we got behind. Now what that causes us to have to do is to focus more on the later target markets through the end of the school year and through the summer, and to capture a disproportionate share of market share to what we have historically done with those particular groups that we'll be targeting. When you start to really get concerned is in implementing those aggressive marketing plans toward those groups if you don't have that disproportionate share of capture. And so, they're certainly going -- there's a greater focus and strategy around those later targeted markets that are in the process of being implemented throughout the coming months. So that is the first thing that we will continue to monitor. The second area is what is taking place in our direct competitive set of properties and how it is impacting our ability to maintain rate and to maintain velocity. And so, the comments that I made in terms of our current pricing, we feel, based on today's market conditions, that we have positioned ourselves well. Now when you drill down into that -- I never want to imply that our performance relative to our peers in and of itself defines success, because it doesn't. Meeting our own internal expectations and your expectations is what defines success. But when you drill down into that, in the 40 markets where we are currently behind last year, our direct competitive properties that we compete with are currently 60% pre-leased. We're 72.2%. So I mean, we're 12% ahead of competitors in the markets that we're behind. Now when you really look at where we monitored the closest and where we've had the impact, there's only 13 of those markets where we are actually behind the velocity of the direct competitive set. And when you look at that particular group in the 13 markets, we originally -- we're currently at 60%; the competitive basis is 66%. Now we originally had runaway growth there of 1.6% and we've had to cut that down to 0.3%. Now our competitors started and they're still at negative 1% rental rate growth. And so those are the trends that we monitor in making those adjustments to make sure that the velocity adjustments can be made. And so, we'll continue to focus on the targeted market groups that are available to us going forward and focus on capturing what's a little bit of disproportionate share to our historical because of somewhat being affected on the integration in the early market, and then also continuing to track the direct competitive set of properties to make sure we're always properly positioned to maximize the velocity in the occupancy target.

[Ryan Meliker:]

That's helpful. I appreciate it. My next question and -- just with regards to the Kayne Anderson portfolio, you guys had come into the year with a slight bump in occu -- in rate expected. And now, you're looking at a slight reduction in rental rates. Does that have any material impact on your outlook for your IRR on that portfolio from what you underwrote when you acquired the property?

[William C. Bayless:]

No, no, not at all. And again, this is the fine-tuning of that, again, the combination of rate and occupancy to maximize revenue. And so you had the potential of nearly 400 to 600 bps of occupancy potential pickup in that portfolio. And so we'll gladly give up 50 to 70 basis points of rate to give us the best opportunity to achieve that. So by no means do we think it is a departure from the economic expectations we have ongoing and our long-term yield.

[Ryan Meliker:]

And you are still expecting to 400 to 600 bps in occupancy improvement?

[William C. Bayless:]

Well, that -- the pricing, again, those pricing reductions you are alluding to are to make sure that we are currently positioned to be able to maximize that velocity. And so, again, pending the discussions we had on the target markets going forward and the competitive set in those markets, we feel that we're well priced to achieve our targets.

[Operator:]

Our next question is from Ross Nussbaum with UBS.

[Ross T. Nussbaum:]

Most of my questions have been answered. I just wanted to drill down on just a theoretical question. So if I'm a student, and I'm looking to pay $600 a month per bed. And I was looking at one of your properties and all of a sudden, I find out that you reduced the rent for next year by 1%. So now, it's $594 a month. Is that enough of an inducement for -- I guess, you really need to pick up the velocity here. And I guess I'm questioning that the reduction in rent growth is -- sort of seems like a rounding error to some extent to me? How does that truly change sentiment, which then changes the velocity that's walking in your door?

[William C. Bayless:]

Well, that is actually a great question. And it is -- it varies to such a degree, market-by-market, you would just be astounded. Now the rounding error, there are cases where we're maybe dropping rates $20, $25. There's others where it's $5. And so it's that -- when you roll it up to the global portfolio, taking into consideration we're also increasing rates at other properties, it diminishes what may be the individual decisions being made to where it's really not $4 to $5 at every property where you're doing it. But that's the roll up of the average including the gains you're making elsewhere. One of my favorite look-back stories that we used to talk about, and this was in the, I want to say, was the 2007 lease-up. Alafaya Club at the University of Central Florida, that we had owned already for 4 to 5 years at that point in time, and we found ourselves significantly behind the curve. And we looked at our LAMS data, and we figured out that we indeed had a closing issue, and went down and completely relooked at our housing cost analysis, our product position. We made a $5 adjustment to rental rate and we saw our closing ratio go from less than 20% to nearly 50%. And so, you would be amazed at times what an increment does, especially if you're changing from $504 to $499, and where you're compared to your peers. And so, sometimes you'd be surprised. Now, in many cases, you're exactly percent right. It takes more than that to move the dial. And so make no mistake, there's markets where, on an individual property basis, we have had those $10 to $20 swings that are more meaningful. But when you roll it up on the global portfolio and then put in place the rent growth where we've raised it others, it gives the appearance it's not as great as it is.

[Ross T. Nussbaum:]

In your career, even before the company was public, have you been in a situation before where you've had this much of an occupancy delta? And if so, what happened in those situations?

[William C. Bayless:]

Not before we were public. Again, the most common -- the parallel to this is actually in the year after our 2009 lease-up, after we bought GMH. And at that point in time, we were actually -- I want to say we were 600 bps behind on the Q4 call, and it actually increased to over 700 bps behind. Or was it 680 bps?

[Daniel Perry:]

On lease [ph].

[William C. Bayless:]

680 at this time. And so we were in this situation about 3 years ago. We ended up dropping rate all the way down to about 1%. Now that was -- 1.5%. That was exaggerated because GMH, we'd all really held flat as a strategy, and we did get to our targeted occupancy that year. Now everything -- and again, it gives us comfort in knowing we've been here before and we have gotten there. But I would also caution, "Hey, completely different portfolio. It's nearly doubled in size again." So you can't draw the exact parallels. But we have seen it before and we have overcome it.

[Operator:]

Our next question is from Carol Kemple with Hilliard Lyons.

[Carol L. Kemple:]

Earlier in the call, you all talked about dispositions and you said that you expect 4 of them to close in the second quarter. And then you mentioned 6 other properties that were marketed. How's it going there? Are those under contract? Or when do you expect those to close?

[William W. Talbot:]

Hey, Carol, this is William. We're in various stages on those 6. We've selected a buyer on 1 of them. And on the remaining 5, we're either close to selecting a buyer or going through the final pricing bids we received within the last week. So various stages on those 6.

[Carol L. Kemple:]

Would you assume those would be evenly spread between third and fourth quarter closings then?

[William W. Talbot:]

Those would mostly be probably third to early fourth.

[Carol L. Kemple:]

Okay. And then on the acquisition front, are you seeing any large portfolios out there? Or is it basically just one-off transactions?

[William W. Talbot:]

It's mostly one-off. You've seen a couple, 2 to 3 property combination. There's always rumors of large portfolios, but we have not seen them to date.

[Operator:]

Our next question is from Alexander Goldfarb with Sandler O'Neill.

[Alexander David Goldfarb:]

Sorry, I got cut off at the early part, so if anything I repeat, just let me know and I'll ask -- I'll follow up after. Just wanted to follow up there a few questions ago, where you guys talked about sort of missing the fourth quarter/first quarter leasing markets, where there are markets where there's a lot of activity there, you guys, for whatever reason, missed it and are now focusing on the later market -- later markets to catch up on the -- to overcome that. How much of that is just market-specific stuff versus the attention of the company on integrating the acquisitions from last year?

[William C. Bayless:]

And I never want to overgeneralize, but I think it was -- and again, when you look at the, what I'll call the Q4 decision-makers and early Q1 decision-makers, without getting into -- I don't want to give away strategy in terms of what those groups are. But certainly, one is your renewals and your resident retention, and then the other is the group of students who are making a decision at that point in time. Integrating all of the growth assets in Q4, I think -- make no mistake, I mean, we were marketing and implementing. But it was, I believe, and just look at where we were at the end of the first quarter call with that 500-plus bps in application deficiency, it was more related to the integration than a market-by-market issue at that point in time. About 170 bps of that is in actually resident retention and in renewals. Today, we've got about 27.8% renewal, where we were 29.5% at this point in time last year. And that's really a carryover from that period of time. Now we did end up at 32.8% last year, so we had another 330 bps in that area. And so make no mistake, that's another area we want to try to overperform in terms of improving that 330 bps. Now what we will do though, and you may have dropped off when we talked about this, we have a very aggressive strategic marketing program to go after, harder than ever, the people who make decisions in the months of May and through the summer months in those target markets. And so that's where we hope to create market share that we lost in Q4 and Q1.

[Alexander David Goldfarb:]

Okay. But the -- if we follow that, when we look at the adjustment to the rate increases or decreases, the biggest adjustment is from the legacy portfolio which -- and not from the acquisitions. So it sounds like it's not -- it doesn't sound like it's as much integration or the new properties as it is the legacy properties. Is that fair?

[William C. Bayless:]

No. When we say impacted by integration, we're not speaking of the properties that we are integrating. What we're talking, that the focus on the properties that we're integrating is what caused somewhat of a not fulfilling the full execution we would've liked to on the legacy. People who have been over the legacy for years were spending an appropriate portion of their time on the integration. And so, the full support on the legacy was not there to fully execute to the level we would've liked to. And so the outcome affects the legacy related to the integration of the new.

[Alexander David Goldfarb:]

So does that mean, going forward, because you guys are clearly an acquisition vehicle, does that mean that we should expect more -- an increase in G&A to grow the scalability of the company?

[William C. Bayless:]

Yes, and I think John actually alluded to in his comments on G&A, that even -- we wouldn't take this quarter as the run rate, but rather expect a little bit of a tick up as we continue, to have brought online the staff necessary for this integration. Now I do you think when you look at the percent increase in our G&A as compared to the percent increase in our database, the one thing that we have proven over the years, and certainly this year, is the scalability of the organization. Now you can't bring in the type of growth that we did and improve your asset base by nearly 20% without growing any G&A. That's just obviously not possible. But I think that we still have an incredibly efficient, scalable platform.

[Alexander David Goldfarb:]

But it sounds like, if you were to do this again, you may not mind having an extra body or 2 to help out.

[William C. Bayless:]

Oh, no. And make no mistake, we planned on that extra body or 2 at this point in time. I mean, the -- when I speak about the challenge of integration somewhat impacting our leasing, it was in no way, shape or form due to a shortage of staff. But rather, it's due to the strategic focus of all the people who were involved in overseeing the functional aspects of marketing, leasing and operations, having to allocate a disproportionate amount of their time to the newer, greener staffs. And so, you always have a little bit. Now, let me say this. And we -- when you look at GMH, I think we demonstrated there the ability to completely integrate and execute. Now as we talked about earlier, you may have dropped off, we were in this exact situation on this call on leasing velocity after GMH. And we did indeed meet our goals and objectives. So I don't want to -- to us, it's just always prudent to talk about, there are impacts of integration, strategically you have to plan for when you're taking down assets, and you have to monitor when you're implementing. To say what would we do differently in this regard, I don't think that we would change the human resource staff and plan that we put in place. Maybe we'd do a little bit -- one of the things when we sat down and really dissected, how do we do this? One of the things we may have done a little differently is the combination of regional assignments in various properties to have the most mature staff components, whether it's from the field or from the regional perspective. And we'll always look back and fine-tune. But we don't see any just strategic variations to what we've always done.

[Operator:]

[Operator Instructions] Our next question comes from Dave Bragg with Green Street Advisors.

[David Bragg:]

The question is, as you focus more on actively recycling your own capital, can you just walk us through your process for identifying disposition candidates within the portfolio?

[William C. Bayless:]

Absolutely. And this is something, as you've heard us talk about for years, and our Board has certainly been focused on, we want to be a more active recycler of our own capital. Especially with the amount of growth that we've undertaken through acquisition of some of the broader portfolios, we always end up with a portion of product that does not meet our own long-term investment criteria. There's opportunity for us to create some value on a short term stabilization and improvement and then flip. And so, we look at our investment criteria each and every year. When we buy assets, we do go through a process on whether or not we think this is a 2-year, 5-year or long-term hold. And so we come in with an initial perception of what the plan is for that. We then monitor each asset each and every year, looking towards performance and position within the marketplace, and we reevaluate that. And make those decisions. Another thing, now that -- we're celebrating our 20th year. Another thing that we're looking at is just the age of the portfolio in some cases and recycling our capital in older properties into newer assets, in a given marketplace. One of the strategies -- you just heard us talking about the potential, if we're able to put together a deal at UCF and do those acquisitions, that it would include recycling of assets we already have in that market. And so we are looking at dispositions and reentry in markets we're already doing business. And so, for us, it's always about improving product positioning and NOI growth asset characteristics anywhere that we can.

[David Bragg:]

That's helpful. And would you be willing to place a dollar amount on the potential identified dispositions beyond the assets that you've talked about that are under contract and will potentially be sold this year?

[William C. Bayless:]

Philosophically, we've always said that you should be looking at what you consider the bottom 5% of your portfolio. Now I wouldn't say we have a hard, set range, that it's going to be 5%. It would be -- I think, that's a good means of looking at what you have the opportunity to accretively recycle. Some years, that may be exact; some, it may be less because of market conditions or upside, whatever the case may be. But I think, philosophically, when you've hit the size that we are, have the growth opportunities that we do, that's probably a good target of assessment each year.

[David Bragg:]

Okay. And the other question is, within the portfolio, what is the opportunity set for other ACE conversions like you're doing at Drexel?

[William C. Bayless:]

This is an emerging opportunity. The Drexel opportunity certainly makes sense. We talked about if we're able to put something together at the University of Central Florida. We know that our university plaza development was a piece of dirt that they were earnestly interested in themselves when that came to the market. Because of the close proximity of our assets to many colleges and universities, we have a better opportunity to do that than perhaps others do. Now the one thing that I think that you'll see, you'll note that in each one of these cases, we're talking about an existing asset in the context of transactions the universities already have related to on-campus housing. And so it's very easy to add them in incrementally. When you look at Arizona State University, the 2 assets that we owned there off-campus, just weren't quite close enough when we interacted and designed our ACE program at ASU to incorporate. Now however, we bought the property across the street. The view, as part of the Campus Acquisitions program, we would love to ultimately roll that in to all our transactions at Arizona State. And we certainly have made overtures and will continue to. And so the opportunity exists and it's segment that we'll focus on incrementally when we can.

[Operator:]

Our next question is a follow-up from Paula Poskon with Robert W. Baird.

[Paula J. Poskon:]

Bill, you mentioned earlier that in some of the markets where you're seeing new supply that it's not actually affecting -- not only not affecting you negatively, but in fact, might be positioning your properties as more of a value play because of the targeting of -- over-targeting of the high-end students. Are you actually seeing that manifest in terms of how your inventory of product type is moving? Is it -- are different product types leasing differently than you've seen in years past?

[William C. Bayless:]

You know, Paula, on a unit-type perspective, we really haven't been able to draw any major conclusions. Our range by unit type, our 4 bedrooms are 69% leased. That's almost 59% of our portfolio is 4 bedrooms. Our 2 bedrooms are 77%, but it's only 20% of the mix. Our 1 bedrooms are 74%, it's only 4.2%. And so when you look at the weighting of product that you have available, we have not seen by unit type any significant drivers. Now I do think that we have seen some of the newer products that we have developed -- we really like our townhome products that are pedestrian to campus. We continue to see them do quite well. When I make that comment about our products gaining momentum from new entries, College Station, Texas, is probably the one that comes to mind the most for me. And you've got some high-rise urban development taking place in a rural college market that are targeting rents $200 more than our brand new university Marion Pugh townhomes. And so all of a sudden, you tour our spacious townhome, pedestrian to campus, you walk into a high-rise-type product that wants $250 more a bed with a smaller, you're like, why would I do that? And so there's cases where it does help us in our product position. I think one of the most outstanding facts for us as we got already for this call, when we looked at the pre-leasing of the new developments in the markets we're behind, our data shows them to be 52% occupied. Where when you look at our new developments, everything that is off-campus apartments, take out Manzanita, the freshman residents hall, and even take out Callaway House, our student apartments are leasing through the roof. Now our entry price points on those new products range from $579 to $659. And so, they're all built for the masses, not the classes. And so I would explain the success of our new development based upon that trying to build affordable product that meets the entire socioeconomic price point of the enrollment base versus targeting that upper socioeconomic.

[Operator:]

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

[William C. Bayless:]

Yes. We want to thank you all for your participation. With many of your questions being about leasing, make no mistake, the company is focused. This is our greatest opportunity and challenge at the moment, to make sure that we finish that out strong. We continue -- we'll continue to make the adjustments that we make to, and our goal is to maximize revenue and occupancy and to hit the targeted occupancy that we put forth today. We look forward to seeing you all June in NAREIT and we'll give you an update at that time. Thanks so much.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. Please disconnect your lines.