American Campus Communities, Inc.
Q3 2014 Earnings Call Transcript

Published: 22 Oct 2014

[Operator:]

Good morning, and welcome to the American Campus Communities Third Quarter 2014 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 of Investor Relations. Please go ahead, sir.

[Ryan Dennison:]

Thank you, Laura. Good morning, and thank you for joining the American Campus Communities 2014 Third 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 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 will 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 the webcast presentation are one and the same. Webcast 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 '95. Although the company believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, they are subject to economic risks and uncertainties. The company can provide no assurance that its expectations will be achieved and actual results may vary. Factors and risks that could cause actual results to differ materially from expectations are detailed in the press release, and from time to time in the company's periodic filings with the SEC. The company undertakes no obligation to advise or update any forward-looking statements to reflect events or circumstances after the date of this release. Having said that, I would now like to introduce the members of the senior management joining us for the call

[William C. Bayless:]

Thank you, Ryan. Good morning, and thank you, all, for joining us as we discuss our third quarter 2014 results. We'd like to start by discussing the meaningful tailwinds that are forming in the student housing sector. Just more than a year ago, many of you joined us here on Austin for our Investor Day. And the main subject that day was the market's concern that our slower leasing velocity in 2013 and the corresponding diminishment from our historical rental rating growth rate, was attributable to the diminishment macro environment in our sector, rather than being related to the complex integrations of our 2012 acquisitions. As many of you may recall, we provided meaningful facts and data that day, debunking the media's sensationalized reporting that had implied that the student housing sector was falling victim to

[James C. Hopke:]

Thanks, Bill. We've closed out the 2013-2014 academic year with a strong finish to lease-up and have commenced operations for the 2014, '15 academic year. If you turn to Page 5 of the supplemental package, you will see that our third quarter same-store NOI increased by 5.6% over Q3 of 2012. This was the result of a 4.9% increase in revenue, and an increase in operating expenses of 4.3%. The increase in revenue was slightly higher than projected, due to an increase in other revenue categories including fees, damage reimbursements and utility reimbursements income. Our guidance anticipated operational expenses being higher this quarter, however, expenses did slightly exceed our expectations due to

[James E. Wilhelm:]

Thank you, Jim. As you can see on Page 13 of the supplemental, we delivered 3 ACE projects for fall 2014 at Northern Arizona University, Texas A&M and Princeton University. These projects account for $86.8 million in development, totaling 1,122 beds of student housing and 127 units of faculty and staff housing. Our fall 2015 ACE deliveries remain on schedule and the 2016 ace pipeline continues to expand. During the quarter, Butler University and American Campus determined to pursue the proposed first phase of the university's 1,200 to 1,500 bed on-campus student housing initiative under our ACE structure. The proposed 632-bed modern residence hall will feature a mix of private and shared accommodations in 6 to 8 student pods, a 10,500 square-foot -- square feet of amenity and common space, and an approximate 5,000 square feet of multipurpose space designed to benefit the entire Butler University community. The project will be included in the university's 3-year on-campus housing requirement and will enable Butler to retire a similar number of beds within its functionally obsolete inventory. Construction is expected to commence in the spring of 2015, for fall 2016 delivery. Our on-campus projects at Drexel University, the University of Southern California Health Sciences, Butler University and our second phase of faculty and staff housing at Princeton, account for approximately $310 million of development, encompasses 2,408 beds of student housing and 198 additional units of faculty and staff housing. Construction commencement at USC is expected for the fourth quarter and remains contingent upon successfully completing all final pre-development activities, including receiving certain final approvals from the City of Los Angeles. The timing and commencement of construction for the second phase of faculty and staff housing at Princeton is expected during the first half of 2015, delivery of the Phase 2 site to ACC is expected to be concurrent with the completion in occupancy of our third-party Lakeside graduate student housing project. Turning now to our third-party developments. During the quarter, our project at West Virginia University was delivered on time and on budget. The 567-bed on-campus participating property commenced operations at 97.7% occupancy. The project is financed with a 100% project-based debt, and ACC and the University evenly split net annual cash flows. Likewise, Northern Arizona University successfully closed its financing and commenced construction on its proposed student and academic services building. With regard to the fall 2015 third-party deliveries, the 492-bed Honors Residence Hall at the University of Toledo and the 482-bed Texas A&M University-Corpus Christi apartment community are on schedule. We continue to experience strong demand for university public-private partnerships, and are optimistic we'll be able to grow our on-campus development pipeline. Colleges and universities, including both public and private institutions, continue to issue formal procurements. We are actively participating in 15 formal procurements and continue to track a substantial number of future on-campus opportunities. Having summarized our on-campus activities, I'd like to turn the presentation over to William to discuss our overall investment activity.

[William W. Talbot:]

Thanks, Jamie. Let's turn first to development. For fall 2014 we delivered 6 owned on- and off-campus deliveries, including the presale asset in Knoxville. These assets totaled 3,573 beds and $259 million in total development cost, and are expected to deliver a 6.75% to 7% stabilized nominal yield. The developments are 98.1% occupied for their initial year of operation, positioning them for strong rent growth in the future. Currently we are projecting a weighted average rental rate increase next year of 3.8% for the 5 student housing developments delivered this year. We also continue to make progress on our fall 2015 owned ACE and off-campus developments, totaling 3,188 beds and $314 million in development. Our pipeline of owned and ACE development for fall 2015, 2016 and beyond remains robust. Including our announced development of approximately $503 million in development costs and our shadow pipeline, our owned development for 2015 to 2017 is currently over 7,800 beds and $735 million of core pedestrian product. We are targeting a 6.75% to 7% yield for these developments, which will create significant value upon delivery, given that current market cap rates for such product is 5% to 5.5%. Now let's turn to the transactional market for student housing acquisitions. As we discussed on the last call, the overall market remains strong for student housing product. On our recent call hosted by a leading sell-side analyst that featured HFF, one of the leading brokers in the sector, HFF indicated that there remains strong investor interest in the sector, and they are forecasting transaction volume to reach over $3 billion in 2014, consistent with last year's strong volume. Cap rates are expected to remain consistent through 2015, with core pedestrian assets trading between 5% and 5.5%, and drive properties further serving Tier I universities still trading between 6% and 6.5%. As Bill mentioned on the same call, Axiometrics detailed fall 2014 occupancy of 98 -- of 95.8% for the 410,000 same-store existing beds that they tracked, an increase of 190 basis points over last year, despite new supply of 65,000 beds being delivered last year in those markets. With new supply expected to be reduced by 24% to 32% overall for fall 2015, there should continue to be strong investor interest in the sector, as overall fundamentals remain strong. From a capital allocation standpoint, we continue to primarily focus on our core pedestrian development pipeline. However, we may selectively pursue one-off core pedestrian acquisitions. In this instance, we currently would intend to increase our disposition volume of non-core assets in order to match fund core acquisitions that offer strong rental revenue and NOI growth profiles and attractive returns drilled to the assets we would sell. With regards to strategic dispositions, we did complete the sale of a non-core asset, located 1 mile from Bowling Green State University for $6.3 million. The asset was part of the GMH merger and did not fit our long-term investment criteria. The asset was sold for a 5.6% economic cap rate on in-place revenue and trailing 12 income and expenses. In addition, we expect to execute on at least $100 million to $200 million of dispositions, and expect closings to occur during either year end 2014 or the first quarter of 2015. With that, I'll turn it over to John to discuss our financial results.

[Jonathan A. Graf:]

Thanks, William. For the third quarter of 2014, we reported total FFOM of $46.5 million or $0.44 per fully diluted share as compared FFOM of $41.5 million or $0.39 per fully diluted share for the comparable quarter in 2013. As compared to the third quarter of 2013, the 2014 third quarter results benefited from our previously discussed strong same-store operating results; the 20 growth properties placed into service since the second quarter of 2013; and the timing of payoffs of maturing property mortgage loans. This was partially offset by an increase in corporate level interest expense, primarily from the timing of various capital market activities, including our June 2014 $400 million bond offering and our December 2013 $250 million term loan. It should be noted that the third quarter is historically seasonal in nature as compared with the other quarters, as we experienced the impact of higher operating costs associated with the annual turn. Total third-party revenues were $3.6 million for the third quarter of 2014, which was $1.2 million greater than the third quarter of the prior year. This increase was primarily due to the commencement and related fee recognition of the Texas A&M Corpus Christi third-party development project during the third quarter of 2014. Additionally, we completed our Northern Arizona University third-party project during the third quarter, in which we earned a fee of $600,000. Corporate G&A for the quarter was in line with internal expectations at $4.8 million. As mentioned in previous calls, we anticipated G&A to increase over previous years, due to increased payroll and benefits expense, including cash incentive compensation and restricted stock award amortization; increases in healthcare costs, increased public company costs; and increased property taxes on our land held for future development. As of September 30, 2014, the company's debt to total asset value was 44.4%, and the net debt to run rate EBITDA was 7.6x. As of quarter end, we had approximately $4 billion in unencumbered asset value, which was 63% of the company's total asset value. During the quarter we paid off our maturing $87.8 million secured agency facility, and $40 million of maturing fixed rate mortgage loans. As of quarter end, we had $21 million of remaining 2014 debt maturities, which were paid off subsequent to quarter end. Management believes that between the remaining capacity on our revolving credit facility and cash generated from operations as well as the ability to match fund via our disposition program and opportunistic issuance under our ATM, that we have ample capital for our wholly-owned development projects being delivered in 2015. Our total interest expense for the quarter, excluding $1.1 million from the on-campus participating properties, was $22.7 million compared to $18.2 million in the third quarter of 2013. And the company's interest coverage ratio for the last 12 months was 3.3x. Interest expense for the current quarter includes a net increase of $4.2 million from our unsecured notes issued in June of 2014. Additionally, interest expense is net of approximately $3.3 million in debt premium amortization and $2 million in capitalized interest, related to owned projects and development. Taking into consideration our final 2014, 2015 lease-up and the financial results achieved through the third quarter of fiscal 2014, we believe that we are trending between the midpoint and the upper end of our current FFO and guidance range of 229 to 237 per fully diluted share. The status of some of the major guidance assumptions are as follows

[William C. Bayless:]

Thanks, Jon. In closing, I'd first like to thank the American Campus team for all of their hard work and execution over the last 4 quarters. We're very pleased with those results and, also, more importantly, the fundamental of value creation that they have put in place for the upcoming academic year. As an organization, from top to bottom, we are now focused on continuing internal value creation and margin improvement. And we are also very pleased that the macro concerns with the sector have now been disproven, and that we are in a sector that is ripe with opportunity that we are well positioned to execute. With that, we'll open it up for Q&A.

[Operator:]

[Operator Instructions] Our first question will come from the Nick Joseph of Citigroup.

[Nicholas Gregory Joseph:]

You mentioned the Axiometrics data projecting the 25% decrease in supply for next year, what's the projected change in supply in just your markets?

[William C. Bayless:]

In our markets, Nick, it is actually 26%. When you look at the 78 university markets that we're located in leasing up for next year, the supply that came into those markets this fall, in 2014, were a total of 45,000 and 55 -- I'm sorry, 46,944 beds. This year we're projecting 35,403. So consistent with the Axiometrics data.

[Nicholas Gregory Joseph:]

Okay, and then, what do you think is actually driving that decrease in supply? And do you think this is more of a fundamental shift or is it a 1 year anomaly?

[William C. Bayless:]

None. And, Nick, without a doubt, what our belief is, we've talked about over the last 2 to 5 years, the maturation of the industry, and to where people have become focused on core pedestrian development. And as we have always discussed, the reason that those infill sites are so beneficial to long-term value creation, is because of the natural barriers to entry that exists close to many colleges and universities. And so the fact is, there is just less and less sites available, that is only in the future going to continue to exacerbate the shortage of modern student housing. There's just -- our own growth, when you look at our development pipeline, we've talked for years why is it in the area of $300 to $400 million. We'd love it to be higher. The reality is, those sites are few and far between and difficult to take through the entitlement process.

[Nicholas Gregory Joseph:]

Thanks. And then, you talked about driving the margin expansion, and that already have been saved on marketing, maintenance and integration expenses, where are the opportunities to actually do that going forward?

[William C. Bayless:]

Yes, first is the macro level. And as I mentioned, the entire organization is focused on margin improvement. A couple of the very high-level strategic plans that will have a longer lead time in terms of several years of implementation, not that it won't have an impact immediately, but we think bigger picture. First is the next generation of systems development for American Campus. We're really focused right now moving into Q4 -- you actually may see a little bit of uptick in some of our corporate G&A over the next 2 years as we're focused on the next generation of lands. The development of our own proprietary and specialized resident management system feeding off of lands, that can really bring a paradigm shift in terms of field operations in efficiency and really drive down your overhead on a long-term basis. What we're also continuing to focus on, as we talked about a little bit in the past, with building the scale that we have in many of the markets, Austin being a great example, the multiple property markets, and being able to look, and this goes hand-in-hand with corporate branding and the branding of American Campus, where we bring together what may be 5 or 6 separate assets and business units, and operating them under 1 leasing initiative, under 1 marketing and branding program, and also, gain the benefits and efficiency of the staffing models of that. We also philosophically are making sure -- we're actually changing all of our corporate operations and general manager bonus programs, to make sure that we are all completely aligned and focused on margin improvement versus meeting budgets or targets or things of that nature, that may not drive the most entrepreneurial efficiency at each and every unit. We're then -- asset management, the old fashioned way going line by line and determining what's the most efficient and effective means that we can operate in every area. Small example, Jim and his team looked at just the alternative of leasing or buying your copiers and fax machines, and equipment of that nature, and it has potential savings, just that small area of $275,000 a year. And so the core of the organization in every aspect of what we do day-to-day, is focused on improving those margins.

[Operator:]

The next question comes from Karin Ford of KeyBanc Capital Markets.

[Karin A. Ford:]

I just wanted to get a sense for your confidence level with the 2.8% rental rate growth target for next year. How many times in the past have you been able to grow rental rate growth above 2.5%? And how often in the situations where you started out at the higher end of your range have you had to lower, in years past?

[William C. Bayless:]

Yes, Karen, we're actually going to dig up each one of the year's data, while we're talking here, so we can provide that. The -- we feel really good about the 2.8% as we kick off this season. For all of the reasons that we mentioned, and it wasn't just a great year for American Campus in terms of our own lease-up, but as you've seen in EdR and as Axiomatic data has pointed out, you really had strong lease-ups throughout the entire sector, and that was echoed significantly at the National Multi Housing Conference -- Student Housing Conference in Chicago a couple of weeks ago. And so for the most part, everybody's full, everybody has the opportunity to be aggressive with rate, and we're in a situation where our own product position puts us in a product perspective to where we really do have good pricing power. It's very early in this leasing season. There's probably a dozen properties that are in the full swing, and initial -- it's too small of a basis to draw a larger conclusion, but where we have started, we're already running ahead. And so all indicators are very good. The ability to hold on to rate, typically, you'll see us be able to manage that very well. Last year, I believe, we came out at 2.0, we ended up 2.1. We actually picked up 10 bps. And certainly, the tailwinds in last year weren't as strong as they are right now. And so with the data that we have to date, we are confident in that 2.8%. In terms of the number of years that we have been priced above the 2.5%, that is 2%. So I think, one of the -- when you look at the long-term value creation this company has produced from 2004, when we went public, the fundamentals of where we are in our occupancy, and our rental rate growth going forward into 2015 and beyond is very consistent and not diminishing

[Karin A. Ford:]

And what are you hearing from schools, in terms of their enrollment growth targets for next year and how much they're going to raise room and board costs?

[William C. Bayless:]

The raising of room and board costs is too early for universities in their cycle, where, we in the private sector think about that the day after move in occurs, the universities typically handle that task actually at their spring Board of Regent meetings that take place in March and April. And so that's something that happens later in the year. When you look at enrollment in our 78 markets -- and as of yesterday, we had a total of 54 universities that have formally reported their occupancy. At those 54 universities, this fall, there was an uptick in occupancy -- I'm sorry, of enrollment of 26,000 beds -- 26,000 students, rather. When you look at the 54 of the university -- when you look at the 54 universities, 43 of them had growth. That average growth was 705 students. 11 of them had declining enrollment, the average was 388. And so as we have seen every year in our portfolio, the gainers far outproduce the decliners. And, again, the decline is minimal. A university -- we always like -- take University of Texas, so that's 50,000 students. Every other year it's up and down, up and down, up and down. It's not an indication of any weakening whatsoever. It is just great stabilization in the Tier 1 schools that we focus on.

[Karin A. Ford:]

And then, just turning to development, I think you said on the last call that you're hoping to add 3 to 4 more projects to the 2016 pipeline. You added Butler this quarter, are you still hopeful that you'll be able to hit those goals?

[William C. Bayless:]

Yes. On the 2016 transactions, there is still a little bit of time, probably, the best opportunity to add to the owned development pipeline is through our mezzanine program. And that's this time of year where we have seen the most opportunistic way to expand it, as you get closer to what it takes to get through the entitlement development process.

[Karin A. Ford:]

And how many mezz projects do you have in the shadow pipeline?

[William C. Bayless:]

Will, why don't you talk about just the overall development shadow pipeline, you talked about that in your script, kind of highlight those numbers again.

[William W. Talbot:]

Yes, absolutely. Overall, we're looking at a shadow pipeline of about $735 million. We look between what’s delivered in 2015, what we've announced in '16 and then beyond. Within that, we are looking at a couple of mezz deals, typically, this is the time when, for 2016, a lot of the mezz opportunities will actually come up, because developers have put the deals together and looking at it, and now are searching equity as they start to look to Q1, Q2 starting developments. So we've got a number of those tracking and we'll see how we do.

[Karin A. Ford:]

And then just last question is on Butler. How many phases do you think Butler might end up doing to cover their campus? And will that, sort of be a 1 phase per year type of a deal? And are they -- have they elected do them all ACE? Or will they be sort of third-party or ACE as each year as they do different phases?

[James E. Wilhelm:]

This is Jamie. We could see 2 or 3 different phases with Butler. The reality is they have 1,000 to 1,200 of obsolete beds, good old fashioned residence halls from the 1960s. And so they're looking to upgrade their stock of housing. This is the first bite at the apple, where they will create some additional space as well as be able to retire some existing beds. Then you have to plan the next project, which will be on the site of one of their existing residence halls, and then there is a third opportunity. So depending upon the size of the second one could lead to a third, you could also see, just simply, just 2 phases, too early to tell at this time.

[Karin A. Ford:]

Okay. And they're likely to be ACE or is it still undetermined?

[James E. Wilhelm:]

I think, at this time, yes, they would be most likely to be ACE.

[Operator:]

And our next question will come from Alex Goldfarb of Sandler O'Neill.

[Alexander David Goldfarb:]

A few quick questions here. First, just on Karin's question, on the 2.8% rent increase. You guys, if you look back over the past few years, you guys have always played rate versus occupancy. Right now, I think you closed out this year like 97.5%, your peak is like 98.5%. So do you feel -- I guess, how should we think -- because these numbers are going to change, right? So as you spoke about tailwinds, but obviously, you're going to fine-tune it depending if you think -- how you can maximize NOI. So when do think that we should expect a better sense of your ability to maintain the 2.8% versus saying, hey, we can get a few -- an extra point of occupancy, maybe let rates slip a little, but end up with more NOI. How should we think about that? And when do you think you'll have a better sense of how you'll ultimately play out?

[William C. Bayless:]

Yes. And, Alex, of course, it evolves at every properly -- property differently. I mean, we already have a couple of properties and portfolios that are above 80% leased for last year, where we've already been pushing rate. And so throughout the cycle, typically, by the time we get to the next call that we have with you all, which is, I guess, usually, in February, we're far enough along in the process at that point in time. We are over 50% pre-lease. We've got all the renewals in place, that, it's that first indication that you can see what the opportunity is, in terms of whether it's to build more growth through pushing rate, through drop in a little bit to build occupancy. And again, as always, it is a property by property implementation that we roll up. When you look at the 2.8%, as I mentioned in the prior question, we feel pretty darned good about that, given the current market conditions in the initial kickoff to leasing. Historically, if you look at our 10-year occupancy average, it's been 97 sub. So we're currently only 20 bps behind that. If we can hit that level, then you're looking at that 3.0% rental revenue growth that coupled with good prudent asset management expense control. We always talk about long-term student housing same-store NOI growth being in that 3% to 6% range. It's starting to get that revenue of 3% north, then you really have the opportunity to start to get closer to the 4%, 5%, 6% versus the 3%. And so this lease-up gives us the opportunity to, perhaps, return those 2016 and beyond in some of those higher growth years that you saw.

[Alexander David Goldfarb:]

Okay, okay. And then on the expense, you spoke about improving the margins doing, presumably, what every company does, which is try to go through all the coverage and make sure people are spending appropriately. But if -- you got more marketing savings, but your same-store expenses were still up, I think 4.3% in the third quarter. So what else is going on? It sounds like there are other expenses, apart from marketing and last year's legacy cost that were in there. What were those? And it sounds like your implied expense growth for next year, if you do the math like under 2.6%, that it's more onetime-ish, but what are they? And is there a chance that they resurface next year as well?

[Daniel B. Perry:]

Alex, this is Daniel. So as Jim was going through in his prepared remarks, the primary areas that we had overages that led to expense growth being a tad higher than what we have projected. We did project it to be a slightly higher expense growth, right -- an overall higher expense growth quarter, just, given, on the payroll side, as we talked about the property -- the lease-up from last year not being as good. You didn't have as much in incentive comp. This year we had a good lease-ups. You had more incentive comp that led to higher growth in payroll, something we budgeted for and caused us to expect higher growth in the third quarter. Same on the property tax side. Your assessments all start coming in during the third quarter. And so that's where we were really expecting to see the higher property taxes. Now what actually occurred is, we had some better assessments than we originally expected, which led to lower property tax increases than we had budgeted for, but the flip side of that is where we saw the higher-than-expected expenses. The nice thing about them is that they are more specific to the quarter, and not something that we expect to roll into next year. Specific to the property taxes, in achieving those better-than-expected assessments and bringing those down, we had paid -- or award fees to the property tax consultants, those all hit in -- during the third quarter, but you have benefited that throughout the year and even into '15 and beyond. You mentioned on the bad debt side, associated with the lease-up that we had last year, where we did give some more concessions, you tend to get a little lower quality tenant base off of the lease-up like that. And so we had a slight tick-up in bad debt this quarter when those tenants became non-current and we upped the reserve. That goes away going forward. So -- especially, we expected to, given that we had a very high-quality lease-up this year. So the good thing is, in those areas that caused the expenses to be a tad over our expectations, they seem very specific to the quarter, and certainly, something that we can -- we don't expect to occur next year.

[Alexander David Goldfarb:]

And just to confirm, none of this was comp accrual, correct?

[Daniel B. Perry:]

No, not above our expectations. As far as comp accruals, it's within the guidance range.

[Alexander David Goldfarb:]

Okay. And then just final question, on the funding side. You guys returned to the equity markets with a little bit of ATM issuance. On our numbers, there is about $250 million of development spend next year, the 170 left on the 15 deliveries and then about 80 or 90-or-so of starts. You spoke about dispositions to fund -- to match fund acquisitions, but can you just talk about development funding, should we expect -- what's the ATM expectation for the balance of this year? Should we be expecting more ATM next year? Should we expect a return to you guys to tap the equity markets? How are you thinking about this?

[Daniel B. Perry:]

Yes. When we talk about funding and capital plans with our board every quarter, we go through that in detail. When you look into -- really, even through our 2016 development pipeline and our debt maturities, you've got about $470 million of debt, we would certainly expect to refinance that with our own unsecured bond program. And then you've got about $325 million to $375 million in expected spend on the developments, and that includes through the deliveries in '16. We believe that we would match fund that with the disposition program, in addition to any one-off core acquisitions that we might look at. The dispositions are not specific to the acquisitions. We are also planning on using that to fund the development program. When we look at the ATM that's something that we can be opportunistic with, to start to lower our leverage over time, but not something that we have to do right away.

[Operator:]

The next question comes from Paula Poskon of D.A. Davidson.

[Paula Poskon:]

Bill, there's a lot of talk at the recent NMHC Student Housing Conference about, not just the new supply in quantity that was delivered, but that it was too much of one type of product. Do you think that will be an overhang on the sector? Or how are you guys thinking about that?

[William C. Bayless:]

No. And this is consistent with what we did talk about at Investor Day last year and also in the spring, when I spoke at the Student Housing Business Conference here in Austin in April. We did talk about the common mistake that you always continue to see, when new supply is coming in, is too many folks do target the uber high-end price point. Those that have always historically been, Paula, what creates some of the greatest value creation opportunities for us in our one-off acquisition program. And so it's a common mistake that we see made, those beds are fully absorbed, but it's got to be at the right price point.

[Paula Poskon:]

And then, just to follow up on the final leasing and rate figures. Can you talk a little bit about the markets that you saw, just a divergence within -- among your properties or your competitors within that market, like Philadelphia, University Crossings was at the very high occupancy and the top of the list of rental rate improvement, and yet, University Village -- you still had a nice rate increase, but occupancy was way down. So what are the dynamics that create that, because they're not very far from each other?

[William C. Bayless:]

Not very far from each other, but worlds apart, and that even though you're in the same city, the Temple University market is completely independent and isolated from the University City market, which is largely Drexel and Penn. And so they do operate very autonomously. Temple is a market where we did see a great deal of supply come in over the last 2 years. The university also has ongoing programs there, where they're upgrading their own on-campus housing stock, and you tend to see, each year, we have a little bit of a see-sawing effect, based on what's going on-line and coming off, versus the University City Drexel, Penn market, which is just rock solid. And an incredible amount of pent-up demand, a great lack of purpose-built student housing, and really, does operate a little bit autonomously from the 2, not a little bit, completely, actually.

[Paula Poskon:]

And then just a final cushion on the RFPs, that you guys are active in the '15, I think that Jamie mentioned. Can you characterize what the universities are looking for? Are they kind of all the same of just come in, and over time redo all the housing? Or are they looking for outsourcing the management of the existing facilities first, with the potential of developing new housing? Just kind of characterize what they are -- these are like.

[William C. Bayless:]

It's typically -- and as we've always talked about, when we first come out with an RFQ or an RFP, in many cases, they're not really sure which financial structure is best for them. They may think they want equity, they may think they want 501(c)3, but they're really starting to process to find out what the alternatives are. Typically we find that those RFP start with a single development project, that then can lead into multiple development projects and/or additional management on the campus and redevelopment of other assets. And so we see most of them occurring in that fashion.

[Operator:]

The next question will come from Ryan Meliker of MLV.

[Ryan Meliker:]

I just had a couple of quick ones leftover. The first one I had was, last quarter you had mentioned that you were expecting kind of run rate NOI growth to be in the 3% to 6% range across your portfolio on a same-store basis. And then this quarter you indicated in excess of 3%. Do you look at those 2 things as the same thing? Or are you -- when you highlight the 3% side, are you kind of trending towards the bottom half of that for 2015?

[William C. Bayless:]

In the 3% to 6% that we always talk about, is what we have said for the last 10 years, is a good historic run rate for stabilized student housing. Obviously, with last year's slower lease-up and very modest rental rate growth, getting well above that 3% is very difficult. Certainly it was not in the game for the 2014 numbers. As you look forward to 2015, and having the 2.8% growth, your ability to get north of that 3% is based on good prudent expense management asset -- asset management initiatives. And then when you look at the '15, '16 lease-up, where now you're seeing 80 bps of additional rental rate pricing power. Then you'll first start to realize in Q4 of 2015, and moving into '16, is when you see the opportunity to know how far above that 3% you get, will be determined by the completion of next year's lease-up, and driving down that margins we talked about. But the 3% to 6% is the long-term historical range. Certainly, this year, we were little under that with what we inherited in last year's lease-up, but moving into next year we have the opportunity to get above that 3%.

[Ryan Meliker:]

Okay. And then the second question I had was, kind of, I guess, piggybacking off what Alex was talking about earlier, with regards to it sounds like dispositions that are going to fund a lot of your developments going forward. What about the deleveraging process. I think last quarter you had mentioned that you're still targeting a low 6 net debt-to-EBITDA level, you're still around 7.6, I think you reported on this quarter, with dispositions funding development, that's not necessarily going to drive that number that much lower. What is the timeline to try to get back to the target leverage number?

[Daniel B. Perry:]

Ryan, this is Daniel. It's something that we really can be patient with. I mean, you do see a little bit of natural deleveraging if you're funding your disposition -- or your development pipeline with dispositions, because we do create free cash flow that we can fund a portion of that with as well. And so you naturally see the leverage tick down when you model out funding the development pipeline with dispositions. As far as our goals on overall leverage and debt-to-EBITDA, the levels that they're at right now are not necessarily out of whack with the industry. It's a level that we think we're comfortable with, operating at that level for the time being, and we can be patient with. We do want to address it over time, but we will be opportunistic about it. And so we're not necessarily marrying ourselves to a specific timeframe for it. Rather, at this point, our goal is to evidence the value creation to the market, which, I think, will better position us to do that in the future.

[Ryan Meliker:]

Okay, that's helpful. And then, real quickly, just lastly. I think, if I heard correctly, maybe I misunderstood, but you had said that you're looking at $100 million to $200 million of incremental dispositions over the next couple of quarters. Are you expecting that full year 2014 to stay within that 117 to 217 range that you had initially guided to? Or do you think some of those dispositions are going to split more into the 1Q '15?

[Daniel B. Perry:]

Well, that -- we are still on track with our guidance at the 117 to 217. Whether we get those closed here in the fourth quarter or right after year end, is just depending on how quick it goes to the process. You always end up moving through it after the lease-up is done. That's when you really get fully baked offers from the street, once they can see what the property's actual lease-up was. And then we work through that process with the group of offers we come in and award it. It depends on what kind of financing the buyer wants to put on it and how long it takes them to get that closed. So that's still our goal. Whether it happens during later Q4 or early '15 is just a matter of small window of timing.

[Operator:]

The next question will come from Jeffrey Pehl of Goldman Sachs.

[Jeffrey Pehl:]

Just a quick question on your development and management services business. It's expected to be breakeven in 2014 versus roughly 2% of FO in 2012. It looks like the large variable has been development management services. Just wondering if this can trend up again going forward.

[William C. Bayless:]

Yes, and you've seen this year, we've had good progress, both at the University of Toledo, Corpus Christi, A&M is also started. So we've got good income coming in. As we mentioned, we've got a very vibrant pipeline and many of those transactions will turn into third-party fee income. In addition, this is the one thing we always remind folks of, that third-party business development team, Jamie and his staff that are out there, getting those third-party transactions, that is also -- they originate all of the ACE deals and the ACE investments. So while you look at that and say it's a breakeven business, you really have taken into consideration 2 variables. One, that it is also the group that produces that pipeline of owned assets under ACE; and also, that is the arena in which we have a national brand and are a known entity and respected by colleges and universities across the country, which ties into the broader American Campus branding we're talking about, which falls back into this asset management multiple market strategy. And so that's really a very strategic business sector. But while it looks like, "Oh, that breaks even, I wonder why they keep focusing on that business," it's all the intangibles that it brings to us.

[Daniel B. Perry:]

And, Jeff. This is Daniel. If I can add one small thing to that, what we've also explained to people, the little bit of dropoff that you've seen in that development fee income, as Bill was talking about, that those transactions, those on-campus public-private partnership transactions, all come in through the same RFP process. And really, the drop-off is more of an indication of all of those deals going to ACE, as opposed to a third-party finance deal, which is a good thing. We prefer to own real estate at the schools that we like those deals at. And so we'd like to see that transition.

[Operator:]

Our next question comes from Jana Galan of Bank of America Merrill Lynch.

[Jana Galan:]

Just a quick question on acquisitions. You mentioned increased transaction activity in the industry this year, but currently don't have any acquisitions in your guidance. So just curious if you're seeing less pedestrian in campus product? Or has the pricing become significantly more aggressive than last year?

[Jonathan A. Graf:]

Most of the product that is out there is core pedestrian, so there is a lot of product offering that is out there. As William mentioned in his script, we absolutely will look at those one-off opportunities and where we can match fund with disposition and trade non-core pedestrian real estate for core pedestrian real estate with a better growth profile. We certainly look at that much match funding aspect, but not as sure as your product by any means.

[Operator:]

And up next, we have a question from Nick Yulico of UBS.

[Nicholas Yulico:]

I just want to go back to the 2.8% rate -- growth target for year from now school season. I think you said it's a small base of what you're looking at right now. I mean, realistically, how much of your portfolio are you even seeing sort of a pricing for next year's school season at this point, whether it's renewals, or trying to do new deals?

[William C. Bayless:]

Nick, first, when we talk about the small base, that's not a reference to we're basing our projection of the 2.8% off of a small base. The 2.8% is looking at every portfolio in the property, we're dispositioned in all of our pricing strategies for the entire portfolio. When I talk about the ability to maintain that, obviously, it's a smaller base of properties that are far along in the leasing season. We ticked it off virtually everywhere, as it relates to the resident retention. And then we've got over a dozen markers that are really in the full swing leasing season, where you've got properties now already achieving 40%-plus because those are your earlier markets, Virginia, Michigan, places like that. And so I did not mean to comment of having a small base that are far along in leasing to reference that, that was in any way to holding onto the 2.8%.

[Nicholas Yulico:]

Okay. But I guess I'm wondering, I mean, just ballpark, how much of your portfolio you think you really have a visibility into the lease rates for a year from now, today, when you get to that 2.8%?

[William C. Bayless:]

And again, each market is on its own unique velocity cycle, it is only October, so the largest focus right now is on your returning resident, except for about a dozen markets that really do kick off earlier. And so -- however, when you say how purview in, this is the purview we look at, in terms of having comfort with that pricing. We look at what is the occupancy of the competitive properties and what we refer to as the direct competitive set that we'll be competing with. When you look at their occupancy and where they finish, which we referenced, for example in the Axiometrics reports are strong across the entire nation, we expect them to be aggressive in their own pricing. Now we utilize that as we're typically always the first in the market to release our pricing. And so where everybody is, the very few beds that are vacant in the marketplace, coupled with new supply being down, we then look at how quickly we leased-up last year in each unit type, and then measure how much we can push the rates in each one of those unit types based on that velocity. And so the data that we have is to the current market conditions, whether leasing has started in full earnest across the country or not, leads us to have the high level of confidence in the ability to project that 2.8%.

[Nicholas Yulico:]

Okay. And I guess, just one follow-up to that, I mean, what -- if we look at what you guys have actually reported in the last year, and you haven't changed your projected year-over-year rate growth for this 2014, 2015 school year fees in over the last 5 quarters. So it seems like there would have been some sort of pickup in that, to sort of show that maybe rate growth was picking up. And then, I guess, the other thing I'm wondering is, if I look at Page 9 of your supplemental, you have the portfolio that's 98% or above occupancy is, where you're getting the 2.8% rate growth, and yet the other buckets you're not. So how do we sort of look at what you guys are reporting? And sort of get a little bit more visibility into this idea that you can actually push rates 2.8%, when you're only doing it at 99%?

[William C. Bayless:]

And Nick, when you -- let's go ahead and turn to Page 9 of the supplemental there that you're referencing, we'll kind of give an indication to you. And this is the organization of properties by those categories, based on how they were leasing through the last season and through this year. When you look at last year, that we had a total of 87 properties of that 98% and above. Well, when you look at those final occupancies and how that grouping will be reconfigured and displayed in the next supplemental, when we're reporting leasing progress, you will actually have a 109 properties in that category. So you have an increase of 22, so almost 25%. And so we obviously have more pricing power in that area. When you look on Page 10, the category between 95 and 98, that 31 is down to 23. And when you look at Page 11, the properties below 95%, you'll see that there are 23 in that category. And so we did have a shifting in terms of how those buckets lay out with more properties having pricing power in their respective markets.

[Operator:]

And our next question is from Ryan Burke of Green Street Advisors. Please go ahead, Mr. Burke.

[Ryan Burke:]

As you continue to sell out of the GMH assets, and you begin to ramp up on the sales of non-GMH assets, is there any color that you can provide on, either achieved or expected IRRs?

[William W. Talbot:]

Sure. This is William. We went back and looked at everything we sold since 2012 and currently, what we have currently under agreement. And when you look at those, we're averaging double-digit unlevered IRRs across that selection of 12 assets we've sold since then. And we actually looked -- when we looked at the ones that are outside of GMH, we're achieving even higher unlevered IRRs. So we've been pretty pleased with our returns and think that should continue as we continue that process.

[Ryan Burke:]

And Daniel, thanks for the color on funding the development pipeline, just curious how you view JV equity as a potential source of funds for both on-campus and off it, on-campus development. And does that view change between the 2 on- versus off-campus?

[Daniel B. Perry:]

And certainly, we're always open to all the alternatives that may give us the strongest balance sheet moving forward and the ability to execute opportunistic. And so JVs are something that we'll always be open to considering. There definitely is a difference between on-campus and owned off-campus. One of our greatest competitive strengths, and I believe Randy would probably tell you the same thing, is that a university wants to be dealing with 1 partner in control of all aspects of the transaction

[Ryan Burke:]

And then one last quick one, I believe, noticed the third-party contract up in Canada, I believe that's a first, is this in any way indicative of interest in entering Canada via acquisitions or development at some point down the road?

[Daniel B. Perry:]

That is actually, I believe, our fifth or sixth third-party engagement in Canada since about 2007. We actually have an entity called Canadian Campus Communities. And our good friends in Canada says nothing tells us you're from America more than ending at Canadian Campus Communities. It's a dead giveaway. But no, that's a market where we have found the opportunity for our third-party group to add value. It's a very different climate up there. A very different market. It's not something that we have looked at as owned investment and development, but is a good way to supplement the infrastructure of that third-party fee business in both a little bit of development consulting and third-party management.

[Operator:]

[Operator Instructions] I'm showing no further questions. I would like to turn the conference back over to Bill Bayless for any closing remarks.

[William C. Bayless:]

Yes, thank you, all, for joining us. We hope the one takeaway from this call will be that the headwinds that the institutional markets and the capital market concerns that may have existed over what we believe was a misperception created by sensationalized media articles, that there is now enough historical data that you have seen, that the fundamentals in this sector are strong, and that the opportunities before us are significant, and from our perspective, better than any other sector of real estate. And so with that, we're going to go back to work, focus on margin improvement and growing the organization prudently and accretively when the opportunities present themselves. Thank you much.

[Operator:]

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