American Campus Communities, Inc.
Q2 2013 Earnings Call Transcript

Published: 24 Jul 2013

[Operator:]

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

[Ryan Dennison:]

Thanks, Sue. Good morning, and thank you for joining the American Campus Communities 2013 Second 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 the Reg G requirements. If you do not 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're 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 in 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 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 actual results to differ materially from expectations are detailed in the press release, and from time to time, in the company's periodic filings with the SEC. The company undertakes no obligation to advise or update any forward-looking statements to reflect events or circumstances after the date of this release. Having said all that, I would now like to 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 you for joining us as we discuss our Q2 2013 results. Let me address the format of our presentation. Greg Dowell will discuss our operational results and our pre-leasing activity for the upcoming academic year. William Talbot will then address our investment and disposition activity. Jon Graf will discuss our financial results and our revised 2013 guidance. Daniel Perry and I will then lead the Q&A. I'll then offer some closing statements. With that, I'll turn it over to Greg.

[Greg A. Dowell:]

Thanks, Bill. I'd like to begin by giving you an update on our leasing status for the upcoming 2013, '14 academic year. If you turn to Page 9 of the supplemental package, you can see our recent rental rate deductions from 1.7% to 1.1%, coupled with our aggressive summer marketing program that facilitated significant progress in closing the leasing gap and velocity from the prior year. As of Friday, July 19, our Q4 same-store wholly-owned portfolio actually moved 40 basis points ahead of last year with regards to application, as we are now 98.3% applied for, versus 97.9% in the prior year. We have also closed the gap in leases to just 100 basis points and are now 90.8% leased versus 91.8% in the prior year. While we are very pleased with our progress and the current trending, we remain focused and cautious as we need this trending to continue for the next 4 to 5 weeks. And as many new properties that will be completing the lease up, implementing the annual turn and make ready and administering our no-show and backfill process for the first time. Given all of the above, we are revising our fall same-store occupancy assumption to a range of 95.5% to 98.5% as compared to the final fall 2012 occupancy of 96.8%. In addition, we are pleased with the progress related to the initial lease-up of our growth property. You will see that our growth properties are 94.1% leased for the upcoming academic year, with our 2013 development deliveries, including our pre-sell property in Kentucky, all being readily accepted in their respected markets and are 98.4% pre-leased. I'd now like to turn back to Page 5 to address our operational results for the quarter. Our major gains in leasing were in large part due to the investment of resources in the form of marketing and leasing related cost, which did impact our quarterly expenses. You will see that same-store NOI decreased by 1.3% over Q2 of 2012 as a result of the 5.6% increase in operating expenses and a 1.8% increase in revenue. This increase in operating expenses was largely attributable to a $1.4 million increase in marketing and leasing costs at the same-store assets. Excluding these additional expenses, operating expenses for the same-store properties would have increased to 2.4% over the same quarter in the prior year and not -- net operating income for the same-store properties would have increased 1.4% over the prior year. In our new guidance, we have included an increase of $6.5 million for the year in our total portfolio annual marketing and leasing related expenses, as we expect this trend to continue to the third quarter. This increase includes an increase of $1.2 million to our fourth quarter marketing budget to facilitate a strong start to the 2014/2015 leasing season. We have also seen what we believe is mostly a one-time increase of approximately $2.5 million in repairs, maintenance and integration costs at our new store growth properties as we ensure that they are well positioned for long-term growth. While these costs have a short-term expense impact on our 2013 results and are included in our new guidance, we believe they are prudent investments at this time of integration and contribute to improving our 2014 rental revenue prospects dramatically while having the opportunity to normalize these expenses over time and drive future net asset value and earnings. And now, I'll turn the call over to William to discuss our investment activity.

[William W. Talbot:]

Thanks, Greg. We have made substantial progress on delivering excellent growth through our diversified investment platform, including acquisition, presales, and on and off-campus-owned development. For Fall 2013, owned development deliveries totaled 3,945 beds and $305 million in development costs and we continue to target a weighted average 7% stabilized nominal yield of all 7 2013 owned deliveries. In addition, we currently have over 3,100 beds of acquisitions under contract or letter of intent for an aggregate purchase price of $268 million expected to close near the third or fourth quarter of 2013. Between acquisitions and development, all these opportunities are pedestrian to major Tier 1 university markets, totaling more than 7,000 beds and $574 million in quality growth for 2013. In addition to acquisitions currently under control, we expect to see a heavy increase in available product through acquisition in the next 2 months as the Fall 2013 lease-up and deliveries are completed. From discussions with leading brokers in the sector, we estimate that an initial $1.5 billion to $2 billion of products will become available during the remainder of 2013, with a significant portion representing core pedestrian product. We will update the market as we continue to make progress on our acquisition pipeline. Within acquisitions under contract, we expect to close this week on 7th Street Station, a 309 bed, Class A asset over 2012, and pedestrian to Oregon State University in Corvallis. The boutique asset was secured off the market for an all cash purchase price of $26.5 million and is 100% occupied and 100% pre-leased for the upcoming academic year. We are targeting a 6% nominal and 5.8% economic cap rate for the first year with year 2 stabilized cap rate of 5.9% nominal and 5.6% economic after the projected property tax reassessment. We also expect to close during the third quarter on the presale acquisition of the 608 bed, $38.8 million Townhomes at Newtown Crossing, the 366 bed, $32.3 million second phase of Lodges of East Lansing. In addition to 2013, we made great progress on growth for 2014 and beyond. For the quarter, we started construction on 3 owned developments scheduled for Fall 2014 delivery

[Jonathan A. Graf:]

Thanks, William. For the second quarter of 2013, we reported total FFOM of $56.3 million, or $0.53 per fully diluted share, which includes $3.1 million or $0.03 and higher than budgeted marketing and leasing expenses incurred to stimulate leasing velocity for the 2013, 2014 academic year. This compares to FFOM of $37.2 million or $0.49 per fully diluted share for the comparable quarter in 2012. As compared to the second quarter of 2012, 2013 second quarter results benefited from our acquisition of 38 properties during the last 12 months and opening of 11 owned properties in the fall of 2012. This was slightly offset by the previously discussed decline in same-store wholly owned NOI and lower third-party development revenues at $3.3 million as we had 2 development starts last year during this quarter and none during the current period. Additionally, the weighted average share count reflects the impact of 32 million shares issued last year. Total third-party revenues were $2.5 million for the second quarter of 2013, which is $3 million lower than the second quarter of the prior year. This decrease was primarily due to the commencement and related fee recognition of the Southern Oregon University and Princeton University third-party development projects during the second quarter of 2012, while we do not commence any new project this quarter. Corporate G&A for the quarter was in line with both internal expectations and prior year at $4.6 million. Our expectations for total G&A for the year will be addressed in our guidance assumptions update. As a result of completing our inaugural bond offering this quarter of $400 million and 10-year unsecured notes at a 3.75% coupon, we increased our average term to maturity to 4.9 years from 4 years. Management believes the remaining capacity on our revolving credit facility, along with cash generated from operations and property dispositions, provide ample capital for our wholly owned development projects being delivered in 2013 and 2014. Total debt maturities for 2013 are $51 million or 2.2% of the company's total indebtedness. As of June 30, 2013, the company's debt to total asset value was 41.1%, and the net debt to run rate EBITDA was 7.2x, which we expect to normalize back below 7x once the Fall 2013 developments become operational next quarter. In addition, we had approximately $3.1 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 $18.2 million compared to $10.9 million in the second quarter of 2012, and the company's cash interest coverage ratio for the last 12 months was 3.2x. Interest expense for the current quarter includes $5.5 million related to debt assumed from 2012 acquisitions and $3.7 million from our recently issued unsecured notes. Additionally, interest expense is net of approximately $3.5 million in debt premium amortization and $3.3 million in capitalized interest related to owned projects in development. Primarily taking into consideration the timing of dispositions resulting in the loss of $5.5 million in anticipated NOI, additional annual marketing and leasing-related cost were approximately $6.5 million to stimulate leasing velocity, and a decrease in the projected rental rate increase from 2.1% to 1.1%. Management is updating our 2013 FFOM guidance range to $2.20 to $2.26 per fully diluted share. We are updating our previous guidance assumptions that have materially changed as follows

[William C. Bayless:]

Thank you, John. Let me close by saying that I, nor any member of this management team, take our quarterly results or more importantly the lowering of our full year annual guidance, lightly. We understand and we share your disappointment. I would, however, like to put these events in the proper context. In the full 35 quarters since we've been a public company, this is only the second time in our history that we reported negative same-store NOI growth. It's worth noting that the only other time that's occurred is in Q2 of 2009, which is in the same quarter, and the 12-month period following our GMH acquisition. The bottom line is the 12-month period following a major M&A acquisition is challenging. In reality, it caused a short-term blips that are not indicative of normalized operations, stabilized margins, or long-term value creation. When you look back to the long-term performance of over the last 4 years since we integrated GMH, we've continued to drive down our expenses, grow NOI and produced significant increases in NAV and earnings. For the last 90 days, we believe we've made prudent decisions that while negative to our short-term results in 2013, has set the stage for us to once again produce similar long-term results. The increased marketing expenses in Q2 resulted in closing our leasing velocity gap by 370 basis points in leases, and 530 basis points in applications. This represents approximately $22 million to $32 million in annual rental revenue that will carry in to 2014. As we believe the opportunity to exist not to duplicate the majority of these expenses in 2014 and beyond, we believe we've taken the most strategic approach to increasing net asset value, NOI growth and earnings for 2014 and beyond. In addition, please note a significant component of the guidance revision is related to the solid, timely execution of our disposition program. We've long communicated our desire to be a more accretive recycler of our own capital. If you've heard from William today, we're on the cusp of significant external growth opportunities. While the timing of recent dispositions and the corresponding decrease in FFO on a short-term basis that negatively impacts 2013, it does set the stage for accretive reinvestment in the significant growth opportunities that we've just discussed. Bottom line, we do believe that our long-term internal growth and significant external growth plan are fully intact. On that note, I would also like to mention that we will be hosting an Investor Day on September 19 in Austin, to provide an overview of the significant growth opportunities in our sector and also to provide a market case study and property tours demonstrating how our strategic investment strategy positions us to execute in the future as we always have. I'd also like to reference that even with our revised guidance, the midpoint still provides in excess of 10% earnings per share growth over last year. With that, we'll go ahead and open it up for Q&A.

[Operator:]

[Operator Instructions] And the first question comes from Karin Ford of KeyBanc Capital Markets.

[Karin A. Ford:]

First question, Bill, just goes to your comment in your closing statements there about not expecting a significant portion of the marketing and maintenance expenses that you included in 2013 to recur in 2014. Can you just elaborate a little more on your thoughts on that? And what gives you comfort that the increased marketing spend isn't sort of the new normal for what you guys need to do to get the portfolio leased from here?

[William C. Bayless:]

Yes. And the one thing that I would refer back to is what we have been talking about consistently really for the last 3 quarter calls in NAREIT, in that we truly believe that the impact to our lease-up this year was not having the proper execution in Q4 when we were integrating the 2 assets initially, they caused us to get behind. When we look at our historical marketing cost run rate, in 2011, 2012, and now where we are in 2013. In 2011, our total marketing costs were about $153 a bed. In 2012, they were $165 a bed. This year, our initial budget may have been somewhat aggressive, it was back to the original -- to the $154 that we had in 2011, which we thought was a more normalized lease-up. And as it stands right now, with the increases that we talked about that not only relate to Q2 and to Q3, but also we are adding some dollars to Q4 because we want to stimulate a strong start next year or -- for next year's lease-up, which really gives us the chance to normalize those expenses again. The new budget is actually $211 a bed for the year. And so it is in the area of $50 to 60 higher than what has always been our traditional run rate. And so because we don't believe there's any dynamic market shift that is causing us to spend those dollars, but rather the fact that we got behind on that velocity, we believe that over time, hopefully as soon as 2014, we'll start to have the opportunity to get those expenditures back down to what has always been our historical traditional run rate. On the R&M question, and when you look at the -- drilling down on the R&M, and anytime and I think everyone does have an appreciation for this one, they really stop and think about. When you're doing the $2.2 billion in growth last year really equates more to M&A than normalized acquisitions. And when you're talking about taking on that level of that growth, when you look at the R&M component of that, in getting these assets up to our standards, there's 5 properties that make up for over $0.5 million of the costs associated with that R&M. Just kind of categorize them, 2 of them, were 2 of the oldest properties that we bought from some of the various folks that we were purchasing from. In candid, they were older assets that just hadn't been maintained from a day-to-day R&M perspective up to our standards. And so we had to go ahead and implement those program to get them into speed. We have 2 other properties that were all new development deliveries delivered by the group that we were buying from, with them doing the punch, their contractor. And the reality is, when we open the development property, we have a fine-tuned machine and coordination between ongoing work orders through the first year with the general contractor who did the work and the like, the reality is there's little bit of disjointedness in 2 of the assets that we bought that were in that development mode. And we've got to respond to students and work orders and fix them on the spot, and so we tend to have a little more operational expense related to that versus being able to go back for the relationship we have with our contractors. And then there was a 5th property in that category. There was an off-campus property that from our perspective, we would tell you was the most under-managed property in the entire portfolio that we bought last year, so we really had to come in from an R&M and get everything up to speed in the first 6 months of doing that. So we do believe it was related to some -- the unique characteristics of some of those assets we were integrating, that you wouldn't expect to continue moving forward.

[Karin A. Ford:]

Would you say that overall you've been disappointed in the pre-leasing performance of those acquisition portfolios? And is that really -- is it meeting your underwriting standards at this point?

[William C. Bayless:]

We're pleased. Listen, the one thing that I hate is the expense that -- what we believe is the short-term expense impact in 2013 is really clouding a pretty darn successful story here about what's happened in leasing velocity in the last 90 days. And so we feel very good about where we are from a leasing velocity, putting the revenue stream in place, and think that the investments that we've made -- I hate to use that word I'm talking about expenses, the investments that we've made in above and beyond budget in the short term. Really what's enabling us to preserve the revenue stream and up to the lower expense going into 2014 to preserve NAV. And so no, I can't -- we're disappointed in this quarter results and the impact it had in guidance, but in nowhere we're disappointed in terms of where the portfolio is positioned to move forward and create value.

[Karin A. Ford:]

And my last question is in light of your pointing out that the integration of the 2 portfolios is very similar to the experience you had with the GMH portfolio. Does that cause you to rethink your investment strategy and acquisition plan, especially given the fact that it looks like a lot of product is going to be out there in the next few months, sort of rethinking how much you want to digest at any 1 particular time?

[William C. Bayless:]

I would say not at all. And the reason I say that, and I would allude to my closing comments, let's look at what's occurred in the 4 years since we integrated GMH. I mean, folks we have created a ton of value post integration. And our intent is to do it again on these and everything else we incorporate. I hate to think that a very short-term integration impact is going to cloud what has been a company's 9-year track record going from $350 million to $7 billion in integrating and creating value. In no way shape or form do we think that this is an indication that we in any way, have lost or diminished those capabilities.

[Operator:]

The next question comes from Derek Bower of ISI Group.

[Derek Bower:]

If I look back on this call last year, I believe you stated that 2013 and 2014 will be the highest value creation periods in your history, and that really hasn't played out this year. So can you provide us with a better idea of the external growth opportunity for your portfolio as it stands today that's not already in the pipeline? And is it fair to say, just reading from your comments, that it sounds like it's going to be weighted more towards acquisitions over development over the next few years?

[William C. Bayless:]

Yes, you know, Derek, and as William went through in his comments, I think we talked roughly over about $600 million in transactions that are in contractor LOI that we have previously announced, just in terms of deals that are on the very near term, in hand. We then got into the numbers of the broker pipeline that is coming. Now when we look at long-term growth, year-to-year it's been fairly much of a balance between organic development being the area $300 million to $400 million coupled with one-off acquisitions being -- and the like. But we do always have opportunities of greater acquisition volume so that on the long-term, acquisitions do tend to outpace development. And so a lot of that is going to depend upon the quality of the offerings that come out on those acquisition packets, and we do believe a lot of those is going to meet our core criteria. And so I mean, certainly, if I had to think about the next 12 months where your 2014 pipeline is largely in place, I would say it is highly probable that acquisition, through fall of 2014, would outpace developments just given the amount of product -- good product that we expect to be coming into the marketplace.

[Derek Bower:]

And we should expect that those are more one-off assets? So any possibility of impacting your integration issues like you had this year with Kayne-Andreson basically not relevant for this quarter?

[William C. Bayless:]

Yes. And there's a lot of more one-off products that are out. I also want to point out, one of the things -- we're really excited about both, we have not, in any way shape or form, lost any of the enthusiasm that we have about the value creation in both CA and Kayne on a long-term basis and those stabilized yields that we're looking for. I would say, one of the unique integration challenges in hindsight on the Kayne portfolio, Kayne had 6 different third-party property managers managing the portfolio. And so typically, when you're integrating a major M&A, you're dealing with an integration off of 1 management platform onto yours. And in that particular one they had 6 different. So even within that context of that major acquisition, it wasn't a consistent transition process for the company, but rather with 6 different managers. So there were a lot of unique components. But then again, no way shape or form, look at the one-off transactions we did last year. The $400 million, look at the lease-up report, where are those are. There was no problem integrating those assets.

[Jonathan A. Graf:]

If I can, also Derek, the thing I'd add to that, again, referencing something Bill said in his closing remarks in terms of the amount of growth we're going to see in FFO for this year, you talked about -- we expected this to be a big value creation year for the company going into '14, as well. Even with this reduction in guidance, if you normalize for the $5.5 million of dispositions that we had, you'd be looking at $2.28 of FFO versus $2.02 last year. That's 13% increase in FFO. In 2011, that was one of our best growth years versus 2010, and we grew 14%. So even with the reduction, we're looking at very comparable numbers to then. So we still feel like there's a lot of value being created from the deal and still good value creation in the core.

[Derek Bower:]

And can you just talk about the cap rates on those, call it $600 million bucket of assets, that you might have lined up? I mean, would it be fair to say that just given the cost of equity for your company now is a little bit higher that it's a little harder to pencil out deals, so should we expect those CapEx rates to be a little bit higher than what you historically acquired at?

[Jonathan A. Graf:]

The $600 million is a mix of development and acquisition, we're still targeting the high 6% to 7% of development. The acquisitions are still in line with guidance we've given core are going to be in that mid to low 5%. That's probably a bit further are going to be in that 6%, a little bit higher than to road drive properties, our tertiary markets are going to be closer to 7%. We have not seen an impact on cap rates, even with the interest rate stick it doesn't stay consistent over the near-term.

[William C. Bayless:]

And when William said the cap rate on developments, those would be presales and auctions in our mezzanine program where we're able to get those much more attractive cap rates.

[Derek Bower:]

And if I could just sneak one last question in. You're sitting at a $7 billion enterprise value today. How large you think the platform inevitably grows to over the next few years, just given the deal environment and what you expect to capture?

[William C. Bayless:]

And this is the 1 I don't want to be elusive, but I've been consistent every time, we've been asked this question since 2004 of our IPO. We always wanted to grow prudently. Now, again, we believe we are in a sector of real estate that has the greatest growth opportunities than any other sector and we're very fortunate to be a company that is in one of the least competitive environments in terms of who we compete with. And even with REIT and stock performance, we still have a significant weighted average cost to capital advantage over the people that we compete with that are largely smaller operators partnering up with outside equity. And so we will be as big as we can, growing prudently. And I would say, look historically as to what that growth has been as you look at what the potential is moving forward. Again, when we were $2 billion people said, how can you grow bigger? And all of a sudden we were $4 billion and people said how can you grow bigger? And all of a sudden, we're $7 billion, and people say how can you grow bigger? Because we're in an industry that is just absolutely ripe with opportunity. And that's really going to be the focus of our Investor Day on September 19, so that you all can get a first hand look at that. Operator, next question.

[Operator:]

The next question comes from Jeff Spector of Bank of America.

[Jeffrey Spector:]

So Bill, just wanted to confirm on the statements you mentioned on integration, acquisitions and you wouldn't pause in the future to do another large acquisition. I guess, could you pinpoint for us possibly 1, 2 or 3 things that you identified were issues with the prior integrations that you would change in the future, to get us more comfortable that you and your team can do that?

[William C. Bayless:]

Absolutely. And there are always lessons learned each and every step along the way. The thing that we talk about first -- one, let me back up to more of a longer term strategic. To give you a feel of an integration perspective

[Jeffrey Spector:]

Okay. I appreciate those comments. And then I just had 1 question on your comment. You talked about, in the fourth quarter, adding some of those additional marketing dollars to stimulate a strong start for 2014, does that not indicate that the leasing timeline has changed somewhat in the business? Or how do we tie those 2 thoughts together?

[William C. Bayless:]

Yes, and what we want to do and we've talked about this also for years, in that when you are able to stimulate an earlier leasing velocity and fill more of the beds earlier in the season, you do benefit from the fact that you don't have to spend as many marketing dollars later in the year and you also have less beds in the marketplace when you're more likely to have to give up some rental rates. And so there's really a long-term benefits in proportion to doing that. When we look at the spend rate again for bed, we think that we can get back to more of that spend rate of $1.65 a bed versus the $2.11 in this year's budget. In part by spending maybe a higher portion of those dollars in Q4, so you don't have to spend less later on in the leasing season. And so as we look at Q4, we are going to -- and we're not talking about -- we're talking about in the budgeting of probably spending between $50 and $54 per bed in Q4 versus where our traditional spend maybe more in the area of $48 a bed, $47, $48. So it's not monumental dollars, but it's dollars that we hope that by spending early we'll be able to save less, and then also hold rate more.

[Jonathan A. Graf:]

It's helpful just to add to that, Jeff that it's about $1.2 million is what we are looking at in terms of additional spend of original budget for the fourth quarter.

[Derek Bower:]

That's helpful. And then I guess just to conclude, again, in your comments, you mentioned the integration issues as a short-term hiccup. Just to confirm, you feel at this point that it's really in the past, any issues related to the integration is in the past and you guys are moving forward?

[William C. Bayless:]

With one caveat. I think Greg in his comments -- and when you look at the leasing trend, it's going great and as the applications have actually trended ahead and the leases is down to 100 beds. When you look at the low end of our occupancy guidance being at the 95.5%, which you will say, well that actually will meet your trend is moving backwards. We're cautious and that we have 4 weeks that we have to finish out. We need that trend to continue. We certainly hope it doesn't reverse. And also, we just talked about all the properties we've integrated, they're going through their first turn, their first finish out of leasing, no-show and backfill, and so you always have to finish that first cycle of integration before you say you had it completely behind you, but we feel that we're well underway on all those regards.

[Operator:]

The next question comes from Nick Joseph of Citigroup.

[Michael Bilerman:]

It's Michael Bilerman. Nick's here with me. Can we just focus a little bit on, sort of, capital. So you have $200 million left to spend on the projects under construction. You have about $300 million of the pipeline that's been identified behind that. And then you've announced $600 million of potential acquisitions and new developments on this call. So about $1 billion of identified spend, let alone all of the other transactions that are going to be coming to market, which you sound extraordinarily bullish about. You have $157 million of dispositions. Where is the $850 million plus going to come from?

[Daniel Perry:]

Michael, this is Daniel. First of all, the thing to keep in mind, of that $633 million of additional growth opportunities that we're talking that are unannounced part of this call, $200 million of it is more near-term acquisition opportunities. $433 million of it is development opportunities out in 2015 and '16. So you're still looking at a period of time before you start spending money on the larger portion of that additional growth. Currently, based on the development pipeline through the end of '14 that you talked about, debt repayments also that we have coming up, we've got about $633 million in needs through the end of 2014. We completed the acquisitions we're talking about, and that includes the $37 million here that are in the near-term, there's probably another $160 million that you could add on to that, if we are able to move forward on those. So $800 million over the next 16 months or so that we would need to fund. We've got $600 million of capacity on our balance sheet right now, just between availability on the revolver, funds from closings, closing of the disposition. And then we look to obviously bring additional dispositions to market this fall. As Bill talked about, we want to continue to be a recycler of capital and it's something we're very focused on and discuss with our board quite a bit. On top of that, we've got a $1 billion in capacity on our unencumbered properties in financing capacity. So we look at that as an option. We would certainly feel comfortable going out and doing another unsecured bond offering in terms of where that would take us to a leverage standpoint and funding additional acquisition and development growth. And so we feel like we are in a position that we have the capacity to execute on everything. And we also have some time before we have to fund the full build out of those development opportunities in the out years.

[Michael Bilerman:]

What size of a disposition program would you be targeting? Because all of the other sources are debt sources and with the balance sheet, you guys mentioned in your opening comments, higher than where you'd like it to be, adding debt with assets is really not helping that metric at all. So at some point you need equity. Equity is only going to come from 2 places, either selling assets or selling common stock, with given where the stock is and how it's performed, and you didn't issue anything. I assume you have 0 desire to issue stock at these levels, given how it's performed. So it has to be the point.

[Daniel Perry:]

If you look at funding all of the growth opportunities that we have already announced to this point, we would be in the mid-40s in terms of debt to gross asset value if we funded it with all debt. In terms of managing that leverage a little bit with dispositions, when we came out this year with our guidance, we said we wanted to sell approximately $100 million to $250 million in properties. I think that's a size range that we would look to as we move forward as well, somewhere in the $100 million to $250 million, $300 million range each year.

[Michael Bilerman:]

And Bill, I want to come back in your comments. You made a big point of saying this is basically a disappointment and it's only happened twice in your public history and both of them were tied to big acquisitions. I'm just curious, is -- the marketing spend was certainly a large number, $6.5 million more of spend to get that occupancy. How do you sort of view it from a communication standpoint? You met with investors and analysts in NAREIT in the beginning of June. We obviously had the earnings callback in May. At some point, to spend an extra $6.5 million, $50, $60 more a bed, is a lot of capital. And I guess, why hadn't you sort of given at least some indication that in order to meet those occupancy goals, we may have to spend capital. And this is the range of potential capital, so at least people would start to have their antennas. People are already skeptical of the same-store and the occupancy targets given how far behind you were. But why, I guess, is that a lesson that you're learning, in terms of communication and managing the Street expectations as well?

[Jonathan A. Graf:]

Michael, this is when we really feel that we have communicated openly with the Street every step of the way as everything has been timely becoming good information to us to be able to project. But when you look at -- and even going back to the last quarter call we talked about -- in conjunction with the rental rate reduction, we're going to ramp up a summer marketing effort program, and we actually, it was June 3rd of NAREIT when we first talk -- where we talked about it, was the Friday before NAREIT, only 4 days, where we've implemented the rental rate reductions and finalized the strategic marketing plans that we were then giving to the field to go out and implement. Now, couple of things

[Michael Bilerman:]

If I would push back a little bit. I mean, I think you can look at how the stocks performed, and clearly even on today's performance and how it's performed during the year, clearly that expectation wasn't there. So I would take a look at how the stock does rather than what you think people are hearing.

[William C. Bayless:]

Yes, but I think that when I look at the recent perform of the stock, my own perception, rightly or wrongly, is that people were looking solely at that velocity gap in pricing and have missed on occupancy. The other thing I just want to add one other comment on that also. The other that came to -- I think this is kind of getting lost. In terms of $0.055 related to the timing of dispositions, largely related versus the timing of acquisition. That's just crystallized. When you add the interest rate movement people were concerned about what's the impact on dispositions, that $0.055, $0.06 didn't come to clarity. You have the high end of the range, we're close to the original low end of the original guidance. So these things have just come to fruition in the last 30 to 60 days and what we don't want to do is communicate something to you when we think something might happen and be revising guidance 2x or 3x in a year.

[Daniel Perry:]

Operator, if you want to go on the next question.

[Operator:]

The next question comes from Ryan Meliker of MLB & Company.

[Ryan Meliker:]

Not to beat the dead bush, but just to get some more clarity on the increased marketing expenses. Can you give us any color, you did talk about $1.2 million budgeted for 4Q. How much of the 3Q has already been spent? I mean -- and given the fact that applications are now actually trending above where you were at this point in time last year, are you expecting that no incremental marketing spend or in the remainder of 3Q? Or do you still have more marketing spend -- incremental marketing spend budgeted for 3Q?

[William C. Bayless:]

We're going to have some incremental marketing spend. I would say it's probably going to be in the area of about $750,000, could be up over $1 million. And we want to finish strong. This is the one thing I don't want folks to lose sight of in my closing comments

[Ryan Meliker:]

That makes a lot of sense. And the second question I had was, can you -- and maybe I missed this earlier on the call, but can you kind walk through the types of things that you're doing with that incremental spend? Is this promotional spend where you're essentially reducing first month's rent, or is this much more along the lines of advertising and how you're going about attracting potential tenants?

[William C. Bayless:]

Anything that we do from a rental rate reduction, or for example, let's say you give away a $200 gift card, we don't do that as a marketing expense. That's reflected in the decrease of 1.1% rental rate. We amortize anything we give across the gift card as a reduction in rent. And so that 1.1% captures anything that we're doing of that nature. These are true marketing expenses. I don't want to get into detail of what those are, because in all candor, we consider ourselves having a pretty significant competitive advantage in terms of how we dissect those programs and go about doing it, but it is very much in terms of marketing and public relations of generating significant traffic and ability to close.

[Ryan Meliker:]

So it's more traditional sales and marketing and not necessarily promotional, correct?

[William C. Bayless:]

Well some. I mean, I don't consider a gift card promo -- I consider a gift card a reduction in rent. Make no mistake, there's promotions.

[Ryan Meliker:]

I understand. That's helpful, and then 1 last question I had for you guys was, if you can help -- I guess I was a little confused in terms of how the guidance changed. You talked in the press release about the $157 million impact of dispositions this quarter impacting guidance -- FFO guidance by a few pennies, but you also talk when you gave guidance as only lowering your net acquisitions or net acquisition disposition number by $30 million at the low end. Is the $157 million that you talked about in your 2013 outlook from asset sales, is that entirely -- is that full amount being flown through the incremental guidance change? Or is only a portion of that because you're expecting acquisitions to offset it?

[Daniel Perry:]

No. All of it is across-the-board from the high end to the low end of the range. We have the $157 million. What John was referencing is the additional $30 million of acquisitions that we assumed -- or dispositions that we assumed on top of that $157 million at the low end of the range. So at the low end of the range, we have a total of $187 million in dispositions.

[Ryan Meliker:]

So at the low end, you now have $187 million in dispositions in net acquisitions, is that a net number?

[Daniel Perry:]

No. In addition -- or separate of that disposition amount, we have the $37 million in acquisitions that William talked about in his prepared remarks. The contribution though from that $37 million to calendar year 2013 is going to be minimal because you've got the acquisition cost that you have to run through FFOM. And so that -- or FFO I should say, and so that will result in very little incremental NOI this year.

[Ryan Meliker:]

I guess to put it another way, you were at -- your guidance prior, was down with net acquisitions of negative $100 million to plus $100 million, where are you now for the year?

[Daniel Perry:]

In the original guidance, we had assumed 0, or net 0 at the midpoint, net $100 million dispositions at the low end and net $100 million in acquisitions at the high end. But the difference is the timing of the dispositions in the original guidance was much later in the year and so much smaller impact. Really, we're looking only about $100 million impact at the low end of guidance. Where given the dispositions, especially related to timing of the acquisitions, now that we're looking at is much earlier in the year, it's creating...

[Jonathan A. Graf:]

As opposed to being later.

[Daniel Perry:]

A larger, larger impact to guidance.

[Operator:]

The next question comes from Alex Goldfarb of Sandler O'Neill.

[Alexander David Goldfarb:]

Just quickly on the pre-leasing. So overall, I mean it sounds like one of the key takeaways is that in the future, if you guys are behind, we on the Street should just start marking up the marketing expense in our estimates. That seems to be a key takeaway. But you guys talk about having higher spend going into third and fourth quarter this year. Presumably on January 1, you're not going to cut it back to the old $155, $160 a bed. So it sounds like we should be thinking about elevated spend in the first quarter at least, is that a fair assessment?

[William C. Bayless:]

I would say, Alex, it's going to depend on where we are at the end of the year. And again, you will balance your marketing expenses based on the progress you're making in each and every quarter. And so if an increase in Q4 of this year yielded excellent results, no, you can see the Q1 run rate for us is typically between $45 and $50 a bed. And that's based off our historical number. So again, it all depends on how Q4 goes as to how aggressive or conservative you are in the implementation of expenses going forward.

[Daniel Perry:]

The idea, Alex, spending money, getting off to a good leasing pace and good leasing velocity put you in a more powerful position that allows you to save some of those marketing dollars as we move through the rest of the year. So, we really just have to see how it starts out. The other comment that you made there Alex that I want to go back to is, that you guys should assume additional marketing dollars if we get behind in leasing. Well, it really depends on the situation. And this year, we saw that we were going to need to do that. We talked about that at NARIET with folks as we met with them. But last year, we were trailing in the prior year and it was a different situation, different dynamics, and we didn't have to have the same kind of increase. So we will try to communicate to you guys what we think. We -- even -- like we did this time, if we see it coming, we may not be able to give you a full dollar amount, but certainly, whether or not you should expect some kind of increase.

[Alexander David Goldfarb:]

Okay. And can you just give some more color -- you mentioned no-shows -- can you just give more color as like what percent of leased beds don't show up for school in the fall?

[William C. Bayless:]

Yes, it really varies from year to year, Alex. And this is something -- because the no-show process always takes place between the time we have this call and then when we report our final numbers to you all in September, which was actually part of our earnings days presentation, you all see where we are on this call and then you always know where we end up, and what you all don't usually see is that there is an overcapacity above where we -- or not overcapacity, but a number larger than what we always have ended up reporting to you in that fall average of 97.9% where that backs off. We have seen that number be as low as 4/10 of a percent as high as 1.2%. And so there's -- the range of variation there. Now, and one of the reasons we're cautious just in terms of the occupancy range that we put in place, as we said, is we got a lot of properties that are going through for the first time. And also, to the extent you have larger waitlist, the easier to just backfill. And so that is a very -- we actually started tracking our no-show process 2 months ago. In terms of how we -- and again, I don't want to get too much into how we do it. I've often talked about when -- and not speaking of any of the public in this space, but just when you hear the general private companies that you invite to some of the conferences you have, and you talk about bureaucracies always being always being 94% to 96%. We impart things because they don't have aggressive no-show management programs. So we'll work through that, we'll let you know where it is at the end of the day, but that's something that again, it takes implementation and prudent watching and monitoring every step of the way. Where you really try to focus here, where you are oversubscribed, and where you are full is making sure you don't have diminishment. That's where you have the greatest opportunity, versus a property that isn't yet full with a waitlist has less opportunity to backfill in identifying those no-shows. This also gets down to -- I'll give you the intimacy of it -- it comes into you may have waitlist in the certain unit type by gender, a male unit or a female unit. So it's an in-depth process we go through to manage.

[Alexander David Goldfarb:]

Okay. And just a final question, Daniel, taking the opposite side of Michael's question, can you just talk about your 2014 debt maturities. So you spoke to us about equity, but if you can speak to us about how you're thinking about next year's maturities, especially because it's across several different types of debt structures?

[Daniel Perry:]

Sure. Well, I mean, in the dollar amounts that I was giving, the $633 million in capital needs through the end of 2014, we were including all of the debt maturities that we have in 2014. Much of that, we will refinance into the unsecured platform that we're using. We do have a little bit that we have the opportunity to roll, $32 million you'll see in our debt maturity schedule on Page 7, it's that top orange portion. That's some of the debt that we now disclose on the on-campus participating properties, their debt maturities. And that will roll into a longer-term financing. So it'll be a little bit of a mix of some refinancings into the unsecured market. And some just rolling.

[Operator:]

The next question comes from Dave Bragg of Green Street.

[David Bragg:]

Thank you for that disclosure on marketing cost per bed, we're looking for that. And maybe you can educate us on this. And 1 comparison would be to traditional multi-family. Looking at Equity Residential, they spend $110 per unit for marketing costs, and that would be significantly lower than you, as a percentage of revenue. And I understand that their turnover being at 58% is nicely below yours. But just structurally, what are the other key differences that we need to be mindful of that would cause it to be significantly higher for you than traditional multi-family?

[Daniel Perry:]

One of the thing, David, and we hope to benefit from this over time. I think one of the main reasons is we have a lot of geographic dispersion. One of the opportunities for us to drive that marketing -- if you're marketing in a mark -- individual college market, if you have 1 asset in that market, you're still paying the same amount for a student newspaper ad, the mailing list and the like. As we gain scale in various marketplaces, we have the ability to drive that down much more on a per bed basis. Well, I think, so many of your multifamily apartment complexes -- I think about the folks that have a presence here in the city of Austin, in the Apartment God ad, they've got 10 properties that are listed as their Austin location. In student housing, because of the geographic diversity, that's part of what drives -- that tends to drive that up. We'll see benefits as we continue to expand in the markets that we are located. The other thing, and I think you certainly are correct in terms of the 58% retention rate versus student housing, 30% to 35%. And also it's the nature of the annual cycle. And that we do have to, each year, market to specific segments of the university or incoming students that are on an ongoing repetitive basis. So there's probably a few more segmentations of target market that you have to pursue. Now with that said, let me say this, there's also opportunities as we turn more and more social media, and more and more to electronic mediums. And so where there are cost -- one of the things related to the later in the year mailings or later in the year marketing is, in some cases, we tend to do more of the old-fashioned mailings, with postage expense, and things of that nature. To the extent that you're able to do more things electronically -- and be it social media -- we also have another area of opportunity to drive down those costs. Now one other thing that I'd say, this is multifamily on a per unit basis -- and this is something I don't know folks realize -- I was actually at a meeting with an investor I am like, wow I never really realized that, a bed is a rental unit for American campus. In our own portfolio, it's close to 100,000 rental units. Client third-party 125,000 rental units. And so putting that rental unit into place is consistent with putting a apartment rental unit into place. It's just ours is on a bed base, as theirs is on a more physical apartment unit basis.

[Operator:]

The next question comes from Paula Poskon of Robert W. Baird.

[Paula J. Poskon:]

I want to just ask 1 final question about the growth and then I'd like to do something noble I want to actually talk about fundamentals today. You've -- given the pace of growth of the company, Bill, it appears at least from the outside looking in that you have -- you've been able to accomplish that without really having to add to the bandwidth of the management or the executive team. How much more can you grow without another substantial investment in infrastructure?

[William C. Bayless:]

And when it comes to the -- what I'll call the upper hierarchy of the organization, it continues to be highly, highly scalable. When you look at the growth that we're undertaking in terms of adding properties to the portfolio, it is really at our functional mid-level management positions is where that growth comes. In the operations field increasing the number of regionals, after so many increase in regionals, increasing the number of regional vice presidents. In the Marketing and Leasing department, one of the critical positions we refer to is the LMD, the leasing marketing director. So it is that middle level functional management is where you see the hierarchy -- the organization continue to grow horizontally. As it relates to the vertical aspects of the organization, we tend to have great stability in our vice president, SVP and above ranks, and really continue to be highly scalable in that area.

[Paula J. Poskon:]

And then just turning to fundamentals. First of all, your competitors in the markets where you adjusted rate or started to give gift cards et cetera, are you stealing share essentially from your competitors in those markets? Or are they following suit and sort of looking to you as the price setter?

[William C. Bayless:]

It varies from market to market. And dependent upon what our exact -- our actual product position is in the marketplace. The one thing that we are very pleased with is we do, from the knowledge that we have, continue to significantly outpace the market. I'll give you an example

[Paula J. Poskon:]

And then just a final question. Among the markets where you are still significantly behind year-over-year on leasing, which of those were impacted by new supply?

[William C. Bayless:]

I'm so glad you asked that question. This is -- you've heard us say consistently -- I know folks in the industry are worried about, is there a paradigm shift in supply? And is that really a driver of some of our velocity versus where we talked about integration? And again, we're going to get into that in Investor Day. I really hope many of you will come. When you look at the 33 rate-adjusted markets, in 17 of those markets, there is new supply coming into the marketplace. In that subset of 17 markets of the 33 that have new supply, we're actually 91.1% leased versus overall that broader grouping is 88%. And where the broader grouping is 300 bps behind, we're only 2.3%. We're actually doing better in a rate-adjusted properties when there's new supply. In the 16 where there is no new supply, we're currently at 84.7% versus 88% last year. That's the wider spread, the 410 bps; where we've always said, where we lost our market share was to the existing direct competitive set early in that. And so the data we're tracking today continues to speak more to what we have said, and we're not seeing -- that's not say -- we do have a handful of properties. And I can name all 4 or 5 properties where this a good, competitive asset built pedestrian in the submarket, and it is going to cause 1 year slowdown in velocity to absorb; absolutely that happens. But we do not see any fundamental impact from the overall new supply.

[Operator:]

The next question comes from Carol Kemple of Hilliard Lyons.

[Carol L. Kemple:]

Earlier in the call, you all talked about 3,100 beds that you have under contract. And you mentioned 3 of those that you expect to close in the near term. Is it safe to assume the remainder of those will close in the fourth quarter?

[William C. Bayless:]

Correct. And one of the things, Carol, we talked about, the timing of acquisition closings that could occur in the year, coupled with acquisition cost that you have to book would really mitigate no meaningful contribution to FFO as why you did see the disparity in the guidance between the dispos being offset by those acquisitions.

[Carol L. Kemple:]

Okay. And then the $2.5 million of additional maintenance and asset integration, should we expect that to be pretty evenly split between the third and fourth quarter?

[Daniel Perry:]

Actually, Carol, there's 2 points -- this is Daniel -- the $2.5 million, we already incurred close to $2 million of that, maybe $1.75 million and then we've got another $750,000 that is more heavily weighted towards the third quarter, a little less in the fourth quarter.

[Operator:]

[Operator Instructions] Our next question comes from Jeremy Metz of Deutsche Bank.

[Jeremy Metz:]

Hopefully keep this pretty quick. Just 1, you talked about the acquisitions and a lot product coming to market. William said earlier there is no impact yet from -- on cap rates and the rising rates. But given the increasing rates, have you seen that impact the size of the buyer pool at all? Or has -- are the higher rates trying to help push more of that product to market right now? Or what's driving the increase you're seeing?

[William C. Bayless:]

Well, one thing is I think people want to finish up the fall 2013 delivery and lease-up. That's fairly normal since student housing and the cycle when you see dispositions are typically right in September or in January after year end. On the interest rate impact, I think people -- the tick-up in interest rates did scare some sellers and they're saying now is the time when to capitalize before interest rates go further. Obviously the uncertainty of interest rates our position as we target those because that does affect us as it does a lot of buyers that are in the spectrum. And we've heard good feedback from those sellers and brokers that, that's been realized of late. But again, there is a lot of non -- or all cash buyers out there and we have not seen an impact on cap rates to date on the things that are being marketed in transacting and what we expect going forward.

[Jeremy Metz:]

And the last one, if you could give just a little more color, just on the dynamics here between increasing the marketing cost versus lowering rates more in terms of thinking about the next year. I'm talking about just trying sort of little higher, marketing cost to kind start that off on the right foot, and just thinking about that compared to just lowering the initial rates more. And then also as -- has any of the lease-up gap, has it just been largely conversion rates? Or is there any difference in the pipeline of applicants you're seeing?

[William C. Bayless:]

As it relates to the setting of next year's rates and we will -- but again I can't speak to now because it is truly a property by property, by market by market exhaustive process. In great part, not determined only by where we end up, but also where that direct competitive set ends up, so that we can look at our product position going to the marketplace. And that really doesn't start to crystallize until, at the earliest, mid or end of September, in some markets when it all grows together. So we're going to price where our data tells us as we should price, not being ultraconservative, not being ultra-aggressive, we're going to try to balance that. As it relates to when you get into situation where you are leasing later in the year, you do tend to have a higher number of applications that you have left to convert at the end than when you typically do because you're doing a bulk of your leasing late in the season. Typically you have a 2-week period to convert those out. So as you start to wind down you're leasing season at the very end, you tend to have a higher degree of conversions you need to undertake. Right now, you see about 140 basis point spread between where we're heading at and 100 bps behind on the leases, so that's something you have -- finish through until the end.

[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:]

Folks, and thank you, so much, and again, I want to close with just a couple of points. And one, we do truly take to heart and are disappointed in terms of this quarter's results and the lowering of guidance. I hope that what you have heard today clear reinforces and instills in you though, this is not a fundamental or systemic change in what this company is capable of producing that we believe we will produce. We have a 9-year track -- part of -- we're sitting here with the company, today, you look at is perhaps what maybe the second misstep in our history. And when you look at the outcome of that misstep, while it is disappointing, even with that misstep, we are poised to produce in excess of 10% earnings per share in 2013 after those added costs, and still have accretion from that opportunity that we brought in place. And have a 9-year track record of showing that we can continue to drive down those costs, improve those margins and to deliver long-term value and I would say that internal value creation story is only second to what is a phenomenal growth opportunity in a sector that is ripe with growth consolidation. It has a very lower competitive landscape than most other sectors of real estate that we are uniquely positioned to execute. And so we feel that the story is fully intact. The other thing that I post the most important thing to us has always been our credibility and the trust that you have given us management team in this organization. And we have always attempted to be completely transparent in all of the information that we have provided to you and put forth and hope that you feel that, that all has taken place in the last 3 earnings calls that we've talked about where we are today. We ask you all to come to the September 19 Investor Day here in Austin. We're going to start with a dinner on the evening of September 18. Again, we're going to focus on the industry opportunity, the great growth opportunities, but then, really drill down and let you see a live market case study here in Austin and our products, and how our investment strategy is poised to capitalize on the growth opportunities that we have to this point, and we will in the future. With that, we look forward to talking -- and also lastly, American Campus employees, thank you for all of your had work, that time of the year we're going to go turn those units, finish up the lease-up and move those students in. Thank you for the tireless efforts we know you put forth.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.