American Campus Communities, Inc.
Q2 2015 Earnings Call Transcript

Published: 29 Jul 2015

[Operator:]

Good morning, and welcome to the American Campus Communities Second Quarter 2015 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ryan Dennison, Vice President Corporate Finance and Investor Relations. Please go ahead.

[Ryan Dennison:]

Thank you, Lora. Good morning and thank you for joining the American Campus Communities 2015 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 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 Web site, with the replay available for one month. Our supplemental analyst package and our 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 1995. 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’d now like to introduce the members of senior management joining us for the call. Bill Bayless our Chief Executive Officer, Jim Hopke our Chief Operating Officer, William Talbot our Chief Investment Officer, Jon Graf our Chief Financial Officer, Jamie Wilhelm our EVP of Public-Private Partnerships and Daniel Perry our EVP of Corporate Finance and Capital Markets. With that, I'll turn the call over to Bill for his opening remarks. Bill?

[Bill Bayless:]

Thank you, Ryan. Good morning and thank all of you for joining us to discuss our second quarter 2015 financial and operating results. As you saw on last night press release, it was an excellent quarter for the company one marked with strong core performance with our same-store NOI growth of 4.7% and also we continue our effective efforts in our capital recycling to improve the quality of our portfolio and to fund our development growth. Also we are very pleased in the quarter to announce yet another on-campus award at the University of Kansas where there are two additional projects that we will be working on. And also it's worth pointing out that in that arena, in the last 12 months we have announced nine on-campus P3 awards, six being ACE, three being third party, furthering our dominance in that sectors. With that, we’ll go ahead and jump right in and I’ll turn it over to Jim to discuss our operating results and our lease up.

[Jim Hopke:]

Thanks Bill. 2015 continues to be a strong year operationally, leasing velocity is on a place which is consistent with our longer term historical trends and our expense savings and asset management initiatives are delivering results. On page five of the supplemental package, you will see the second quarter same-store NOI increase by 4.7% over Q2 of 2014, the result of the 3.3% increase in revenue and a 1.8% increase in operating expenses. We are very pleased with the early impacts we are seeing from our asset management initiatives. Quarterly operating expense detail is highlighted in Page 6 and reflects similar trends to first quarter results, continued savings in marketing expenses with pay roll, G&A and property tax expenses in line with our guidance expectations. Some of the highlights of our expense results are as follows. With an 18.5% reduction in marketing expenses, the second quarter marks the sixth straight quarter of meaningful per bed marketing savings. The continued saving in marketing is the result of the strategic refinement of our marketing activities, part of our larger asset management initiatives. The increase in pay roll expense is in line with our expectations and annual guidance, but is expected to moderate for the remainder of the year. The 4.7% increase in quarterly property taxes includes increases for our 2013 acquisition and developments experiencing either their first full assessment post development or reassessment post acquisition. The increase in property tax expense was 2.8% excluding those properties. The increase in G&A expense was in line with our expectations given inflationary increases and cost incurred in the development of our NextGen system to enhance scalability and provide improved future of long term operating efficiencies. The insurance saving are reflective of improved premium pricing from our carriers. The lower pricing resulted from a combination of maximizing soft market conditions and the recognition by underwriters of our favorable risk profile. Page 8, update our June 30th same-store physical occupancy of 88.9%. 110 basis point above the same period for 2014. Our total wholly-owned properties were 88.2% occupied. As a reminder these rates of seasonally low due to the residence hall properties is being outside of their academic year occupancies. Our 2015-16 leasing status is updated on page nine, as of Friday July 14, our same-store wholly-owned portfolio was 94.6% leased compared to 94.6% leased for last year of leased up. This pace compares even more favorably with our long term historical leasing trends. Running 149 basis points at head of same-store portfolio from the past six leasing cycles which on average was 93.1% leased as of the date of the second quarter released. We remain pleased with our same-store leasing velocity and are well positioned to fall within our occupancy range of 97% to 99%. We are still projecting an overall rental rate increase of 2.9% for the same-store portfolio. We are also pleased with the initial leased up progress for our 12 new store assets. On Page 15 of the supplemental you will see that these properties are 83.8% pre-leased for the upcoming academic year with seven assets pre-leased to 98% and above. Excluding our re-development of University crossings at Drexel, which will not be fully stabilized for fall 2015, the new store portfolio is 88.3% pre-leased. As we noted on the last call, Philadelphia and Eugene are later leasing markets; they do not commence class for fall semester until September 22nd and 28th respectively and focused leasing activity is underway in these markets. In closing our corporate and on site employees have delivered excellent results to date in 2015. We have the strongest and deepest operations and leasing teams in the business and they have put us in position to continue to deliver. Solid results as we progress through the most important few months of our cycle, the final lease-up in turn in fully swing. With these thoughts we commend and thank our teams for their outstanding efforts. And now will turn the call over to the Jamie to discuss our ACE investments and on-campus activity.

[Jamie Wilhelm:]

Thank you Jim. Our ACE program and third-party on-campus development activities continue to maintain significant momentum. As Bill mentioned we’re very excited to announce that the company was awarded the right to negotiate the new on-campus project with the University of Campus, project remained subject to transaction structuring and feasibility analysis and we’ll inform the market about further details as they become available. Now moving on to our ACE development pipeline. During the quarter the company commenced construction on two previously announced developments including the $48.3 million Merwick Stanworth Phase II, faculty and staff community at Princeton University, and the $44.2 million 532 bed university point community on the campus of the University of Louisville. The Merwick Stanworth project is scheduled for final delivery in the fall of 2016. The University Pointe project commenced construction under our full reimbursement agreement with the university and after successful resolution of any remaining administrative matters the company anticipates completing the negotiation of final point to the ground lease with execution anticipated during the third quarter paving a way for our fall 2016 delivery. The University Pointe apartment community was located in the heart of the University of Louisville campus and will replace 324 beds and three resident halls that have already been demolished. Following up on our remaining previously announced new ACE project. Predevelopment activities relating to our project at Northern Arizona, two projects at Arizona State University, Second phase at Butler University and the village project at the University of Louisville are proceeding as expected for targeted deliveries in the fall of 2017 and 2018. Likewise construction activities for all of our fall 2015 and 2016 ACE communities at Drexel University, Butler University and the University of Southern California Health Sciences campus are progressing as planned. Turning now to our third party developments. During the quarter the company completed construction of the Lakeside Graduate Community on the campus for Princeton University. The 715 bed community is expected to produce stabilized management fees of approximately $180,000. Also the company completed contracted predevelopment services relating to the University of Vermont proposed 700 bed residence hall development. The company will earn approximately $117,000 in fees to be paid in the third quarter relating to the predevelopment services provided to the university. 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 remain on schedule. And finally during the quarter the company closed on financing and commence construction on a 440 bed on-campus project at Northeastern Illinois University in suburban Chicago. The project is scheduled for completion in the fall of 2016 and the company expects to earn approximately $2.1 million in development fees during the construction period. With regard to ongoing third party development activities the company continues to work with Oregon State University to develop final plans for residence hall community and dining facility on its new campus in Bend, Oregon. As was discussed last quarter various state and local approvals are necessary to commence project construction. Planning and approval activities are ongoing and we’ll update the market as to the timing of fee recognition related to the commencement of construction as details become more definitive. In addition to the activity outlined above we remain active with the robust procurement pipeline and several direct negotiations. We continue to track more than a dozen future on-campus opportunities and expect this level of activity to continue to into the future with a strong pipeline of potential ACE and third party awards. Having summarized our on-campus activities I would like now to turn the presentation over to William to discuss our overall investment activity.

[William Talbot:]

Thanks Jaime. In reviewing our overall owned development pipeline we continue to make progress on our four fall 2015 on deliveries totaling 3,187 beds and 314 million in development cost. With regards to the fall 2016 pipeline pending the successful execution of the ground lease for University Pointe at the University Louisville that Jaime discussed our fall 2016 owned developments have grown to six projects consisting of 2,936 beds and 281 million in development cost. For 2017 our current firm pipeline stands at six projects totaling 4,800 beds and approximately 372 million in development cost. As we intend to begin construction in the first quarter of 2016 on a 560 bed, $51 million core pedestrian townhome development adjacent to our recently announced acquisition serving Binghamton University in New York with delivery expected in 2017. In addition, we continue to make progress on the $244 million shadow pipeline of owned development for potential delivery in 2017 or 2018. All these activities represents the progression of our $1.2 billion owned development pipeline totaling over 14,000 beds and there is still plenty of opportunity to add both additional ACE and off-campus development for fall of 2017 and 2018. All these developments are located either on-campus or immediately pedestrian to core campus and we continue to target nominal yield of 6.5% to 7%. Turning now to acquisitions. We completed the acquisition of two core pedestrian assets during the quarter totaling 1,053 beds at the campuses of the University of Texas at Austin and Binghamton University part of the State University of New York system. These two premier assets are pedestrians or respective campuses and are currently 96% occupied. During 2015 the sellers of the Binghamton asset invested approximately $4 million in the property including full unit upgrades and new amenity center. Also at Binghamton, due to management and transition issues suffered by the seller prior to closing and in conjunction with the recent capital upgrades that have caused disruption for current residents and prospective tours. The sellers have provided a revenue guarantee for academic year ’15 at our pro forma 97% occupancy the property affords strong future operational upside once capital improvements have been completed and ACC has implemented its proprietary leasing and management system. The purchase price for the two assets was 109 million and the Company intent has been 3.7 million in additional upfront capital improvement. The purchase price represents a year-one nominal and the economic cap rate concluding upfront capital expenditures by 5.5% and 5.3% receptively; however, due to the GAAP adjustments first year integration cost and acquisition timing the two assets are expected to contribute $2 million in NOI for calendar year 2015. The transaction market for student housing remains extremely active. According to CBRE's 2015 midyear student housing overview, through the second quarter approximately $2 billion of student products has transacted, positioning 2015 to significantly outpaced transaction volume for the sector from the past 10 years as a result in part to the continued influx of new capital to the space. Cap rates continued to remain strong with core pedestrian student housing achieving a high 4% to mid 5% cap rate according to CBRE. Overall they noted that they average cap rates for student housings have been lowered than conventional multifamily cap rates of three of the last four quarters. CBRE also detailed the pedestrian student assets identified as within a half-mile of campus come in at 53% premium on per bed pricing compared to assets located over half a mile. Switching now to capital recycling effort, the Company has now completed its disposition program for 2015. During the quarter, we completed the sale of seven assets totaling 5,096 beds for 173 million gross proceeds. Subsequent to quarter end, we completed the sale of three assets totaling 1,200 beds and $32.1 million. With these dispositions, the Company has executed on the sale of 20 assets during 2015 totaling $436.7 million at an average 6.3% economic cap rate based on in place revenue escalated trailing 12 expenses and portfolio average capital reserve. The sale assets that are averaged over 1.2 miles to campus and over 15 years of age and we’ll used the proceeds from the sales to fund our higher yielding development pipeline and select core acquisition which in total average under 0.2 miles to campus and two years of age and offer significantly higher long-term NOI growth profile. Total dispositions represent $32 million above the high end of disposition volume including the low end of our 2015 guidance and those proceeds will be used to fund additional growth opportunities. We're extremely pleased with our capital recycling efforts in 2015 as we have significantly improved portfolio quality self-funded much of the higher growth investment pipeline and taken advantage of a strong sales market. With that, I will now turn it over Jon to discuss our financial results.

[Jon Graf:]

Thanks William. For the second quarter of 2015, we reported total FFOM of 65.2 million or $0.57 per fully diluted share as compared to FFOM of 62.3 million or $0.58 per fully diluted share for the comparable quarter in 2014. As compared to the second quarter of 2014, the 2015 second quarter results benefited from the previously discussed strong same-store operating results, the 13 gross properties placed into service since the second quarter of 2014 and the timing of payoff of maturing property mortgage loans. This was partially offset by lost FFOM from the sale of 17 disposition properties during 2015, whose FFOM contribution was $5.4 million less this quarter as compared to 2014. Additionally, corporate level interest expense increased primarily as a result of the timing of our $400 million bond offering in June last year. As of June 30, 2015, the Company’s debt to total asset value was 40.9% and the net debt to run rate EBITDA was 7.3 times. As of quarter end, we had approximately 4.6 billion in unencumbered asset value, which was almost 70.5% of the Company's total asset value. During the quarter, we completed 173.6 million in property dispositions and paid of 83.6 million of maturing fixed rate debt. For the year, our cash proceeds of over 612 million from property dispositions in ATM usages have been more than adequate to fund our previously discussed 215 growth opportunities as well as the payoff of maturing fixed rate debt in construction loans allowing us to maintain strong credit ratios in capacity for our future growth pipeline. Fixed rate debt maturities within the next 12 months are approximately 59 million or 2.2% of the company's total indebtedness. Management believes that between the current capacity on our revolving credit facility, cash generated from operations and the ability to match fund via our disposition program that we have ample capital for our wholly-owned development projects being delivered in 2015 and in 2016. Our total interest expense for the quarter excluding 1.5 million from the on-campus participating properties was 19.1 million compared to 19.9 million in the second quarter of 2014. As we continue to benefit from the repayment of maturing fixed rate property mortgage loans. Company’s cash interest coverage ratio for the last 12 months was 3.7 times. Interest expense is net of approximately 2.8 million in debt premium amortization and 2.9 million in capitalized interest related to owned projects and development. Turning now to 2015 guidance, while we are pleased with our operational performance to date the acquisition and disposition activity completed thus far is in line with the transaction assumptions at the lower end our 2015 FFOM guidance range leading us to believe that we are currently trending around the midpoint of our FFOM of $2.30 per share to $2.42 per fully diluted share. We intend to update and narrow this range during our third quarter earnings call which will reflect the completion of our 2015, 2016 lease up. The most significant factors that will impact where we will be within this FFOM guidance range for the year are as follows. For property NOI we previously communicated total owned property NOI of 370.1 million to 389.1 million which includes the impact on NOI from property dispositions and acquisitions. The NOI ultimately produced for the year will be contingent upon the timing and amount of any additional investment activity. Final occupancy and rental rates obtaining for the 2015, 2016 lease-up managing no shows, maintaining operating expenses including turn cost at anticipated levels and final property tax assessments. With regard to dispositions excluding the 173.9 million completed in January of 2015. The low end of the NOI range assume 230.7 million in additional dispositions with reduced NOI of 11.1 million and at the high end assume 36.1 million in additional dispositions with reduced NOI of 2.2 million. To-date we have completed almost 263 million in dispositions exceeding the lower end of our guidance range. Acquisitions of 223.5 million were assumed at the low end of the NOI range and at the high end 418.5 million was assumed. To-date we have completed 274.4 million in acquisitions. For interest expense excluding the on campus participating properties we communicated the range of 81 million to 88.1 million net of capitalized interest with the high end assuming a $400 million mid-year bond offering. Primarily due to the amount of property dispositions we are trending from the mid to the low end of this range. The ultimate interest expense for 2015 will be dependent on the timing and size for any additional acquisitions and the timing and need of unsecured bond offering. Concerning third-party services revenue with the commencement of Northeastern Illinois University this quarter we are trending at or above the mid-point of our communicated guidance range of 11.4 million to 13.2 million. Movements at the high end of this range will primarily be dependent on the finalization of documents and commencement of construction on additional third-party development projects. With that I’ll turn it back to Bill.

[Bill Bayless:]

Thank you, John. Before we open it up to Q&A I’d like to echo the sentiment that Jim Hopke expressed first and foremost in thanking our staff. While we’re talking about results mid-way through our calendar year we are now nearing the end of our academic year as it relates to student housing operations for ‘14, ‘15 academic year and want to commend Jim, Jennifer Beese and all of our operations and staff for just an exceptional academic year. And also as you all know the next four to six weeks is the most intensive time in our business as we now move towards turn, completing our lease-up and managing the no-show process, so I want to thank the staff and wish them the best as they undertake our initiatives over the next four to six weeks. With that we go ahead and open it up for Q&A.

[Operator:]

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

[Unidentified Analyst:]

Thanks. This is John here for Nick. You mentioned on a vibrant transaction market, could you give some color on what you’re seeing in the market in terms of who are the buyers and sellers of the assets?

[Bill Bayless:]

Yes, William Talbot will address that.

[William Talbot:]

Yes, sure. You’ve seen a lot of inputs of new institutional capital covenant sector in 2015. We sold a six property portfolio to Starwood. You’ve also seen a lot of these funds raised from some fairly substantial amounts of platform money for new funds. And then you typically also seeing the usual private buyers, the SIONs [ph] have been very active as well.

[Unidentified Analyst:]

Okay. Thanks. And then you cleared a couple of assets in 2Q, so giving your capital needs required to complete the development pipeline in stocks’ current discount evaluation how do you guys view that is attractive doing acquisitions today given equities higher cost?

[Daniel Perry:]

On acquisitions right now we think that we can create value by going into markets that we have multi asset presence in, and we reduce cost through the efficiencies of operation. So we actually think the yield on those asset is better than what the cap rate would imply, also when you are in the process of disposing of assets you obviously have an infrastructure in place in terms of G&A and management of those properties that you don't have to replace. When you underwrite the assets you underwrite it like any other market acquisition and you include management cost in that. So there is probably 50 basis points of efficiencies that we’ll gain on those assets, so it's a much different picture than the cap rate might imply and we think that there is plenty of value alone in that and then with the improved NOI growth profile that we’re achieving by recycling out the older more flat NOI growth profile type assets and into these new acquisition properties.

[Bill Bayless:]

Also if you look at the summary of acquisitions for the year that six properties we bought four of them have been in the existing multiple property market as Daniel discussed in the case of Pointe being the last one we announced here at Austin, the Crest at Pearl where all of that existing operational marketing leasing structure is already in place and so that market cap rate that you see again we can drive NOI significantly by bringing those efficiencies of the multiple property market strategy that we've implemented to that. And the other thing that Daniel pointed out just want to drive home. The growth rate on these core pedestrian assets and William commented on evaluation to CBRE as saying those inside half mile are trading at a 53% premium and you now see cap rates in the fours and so those cap rates. So we’re able to drive, when we talk about the 3% to 6% same store NOI growth we’re selling properties we think that are flat, what we’re bringing in, are that 3% to 6% and when Daniel talked about, when we’re able to create those efficiencies in the multiple property market is part of that strategy how we’re driving that growth rate back for six versus the average of the 4.3 that you've seen over the last 10 years.

[Unidentified Analyst:]

Last question, the two new on-campus projects that in University of Kansas, do you have any idea on timing or size or what exactly I guess is expecting in terms of the process there?

[Daniel Perry:]

We’re in a predevelopment process with that. There is one more residence hall style asset, another is more apartment style asset as per the universities master plan. And so they have desire to have some beds delivered for 2017 but we’re really looking at the whole master plan for the central district and have all the infrastructure comes together. So at this point it's too early to predict when any assets will be delivered.

[Bill Bayless:]

And right now we would probably say our own inclination, one of the reason to school engage American Campus is because we can do all forms of transaction and all form of finance so when they pick us they have a full plethora, our inclination at this point is this is likely a third party transaction. They were looking to evaluate all, but we would expect Kansas to probably be a third party versus an equity.

[Operator:]

And the next question will come from Jordon Sadler of KeyBanc Capital Markets.

[Jordon Sadler:]

First I just wanted to talk about the 2015, 2016 lease up, here we’re on the same store portfolio 94.6 flat year-over-year versus guidance I think implies 50 basis points better. So maybe Bill can you give us a little bit of insight into what to expect or what you expect over the next six weeks and maybe shed some light specifically on the assignment process [indiscernible] as well as what you expect to do differently this year in terms of managing the no show versus last year?

[Bill Bayless:]

And when you -- and what occurs over the next four weeks in every leasing cycle is certainly the most intense part of our business in closing out that final occupancy number. And so we always say, It isn’t over till it’s over and every year you have to work it diligently and so we absolutely have the opportunity to continue even though at this moment in time you are exactly at the exact same basis points that you were at last year's lease-up you have the opportunity through the variable you just said to outperform where you were last year. As it relates to the no show it is really in the same process and we do have that process very down to a science. However when you just think about the nature of no-shows it really -- what you are looking at obviously when you are filling a property that has a waitlist your no-show process and back going is easier to maintain and to manage versus a property where you are not fully yet oversubscribed in terms of the ability to backfill those no shows. And so each year we work the process in that regard and it is not a science, it is hard work and you just go through it and so the team is very focused on it, we feel very good about the process, but it is every day through move in that you are making every phone call, back filling, who paid, who didn’t pay, what’s your wait list, what’s your applicant list, buy unit type and so it is a tedious process that we are very well versed in, that we will continue that execution. As it related to the university assignment processes and it’s certainly ASU being the lion’s share on that on those assets, and as we’ve talked about throughout the process of lease-up on this call. The colleges and universities with all due respect don’t look at same-store leasing velocity reports. They are making assignments based upon there in many cases academic objectives and as they’re finalizing their enrollment within the various colleges, engineering, the honors program, the business school they are making those assignments and ASU particularly tries to match people based on their majors. So they’re working through that process. In our meetings with them they expect Barek and Mancy [ph] and the residence all products to be completely for their words. We do expect Casa de Oro to be down a little bit from last year but it’s just a small property, small of bids you may remember that from the Triad transaction whereas cross collateral loss with actually just the whole second-level apartments. But we don’t expect any surprises there. From September 30th we report that final occupancy number truly the -- where you end up, what your range of final occupancy is, whether it’s 50 basis points above or equal to last year, where it is, all comes down to executing through the very last day and we’re focused on doing just that to the very end.

[Jordon Sadler:]

Okay, that’s helpful. And then coming back to balance sheet and one of the comments regarding having the ample capital for ‘15 and ‘16 development through I think you sort of eluted to the revolver, liquidity and then some dispositions. I guess I’m curious what sort of in the plan or in the hopper for disposition as we think through sort of development funding through ‘16 and maybe just putting some brackets around what you considered to be non-core.

[Daniel Perry:]

Jordan, this is Daniel again. One thing that you look out which is an important piece of the puzzle in the list of sources of capital to fund the pipeline is cash flow from operations. We are starting to get to the size now where we’re producing $80 million - $85 million of free cash flow available for reinvestment and that’s going to continue to grow every year just improving this picture. So that’s an important piece to remember. As you think through ‘16 we got 266 million development left to fund. If between now and then we produced $75 million to $100 million of free cash flow, which is about what we think it will be to fund that 266 million. We got $61 million of capacity on hand if you just think about trying to maintain the revolver to 50% drawn we got the MTSU disposition post first quarter end for $32 million. That would leave about a $100 million of capital we will need to fund that development pipeline through ‘16. And we will look at all forms of capital whether it’s additional debt, dispositions, ATM activity what have you, whatever we think is most appropriate, most accretive to NAV while managing the balance sheet and also keep an eye on the impact of accretion dilution to earnings whatever we think is going to be the best for the overall picture is how we will approach it. Now to answer your question and this goes into the longer term picture of beyond 2016 and continuing the development portfolio of pipeline beyond that, how much of it could be funded from dispositions. We said that the assets that are outside of a mile in our portfolio kind of are good proxy for the more non-core portion of our portfolio. Certainly there is asset in there that we might want to hold on to, there is also asset inside of a mile that we might want to recycle. But as a proxy that’s about 9% of our NOI that’s outside of the mile and that would represent about $600 million of assets that we think overtime we can recycle into the development pipeline obviously accretivly even out of the gates on an earnings basis given that you’re talking kind of mid to low sixes on dispositions and high sixes on development. And obviously from the change in the quality asset and the NOI gross profile a very accretive enhancement to the portfolio.

[Jordon Sadler:]

Okay. Thanks for that. And then just last clarification just on Louisville, can you shade any light on the reimbursement for work and how that works right now I’m just not familiar I don’t know that I have seen that before how is it currently structured?

[Bill Bayless:]

Yes, and what we do their Jordon this is when a university desires to have an accelerated time delivery, but there are unforeseen and in this case there is an administrative process for some of the land is coming from the city and there is some season takes place on that, so there is administrative things that have to be done, but all parties are working in good faith and expect to be there but there is a process. What we will do, is we’ll offer the university that we will undertake the commencement of constructions signing an agreement that if for whatever unforeseen circumstances occur that the development does not move forward they reimburse us 100% for all of the cost that we look forth. So we’re in a no risk position. And then once those administrative approvals come through which we expect to in this case the ground lease is executed and we have already began construction. So we haven’t jeopardized schedule and we do that versus waiting, getting all of those approvals and then putting ourselves in a box, to where greater potential on missing the lease up or having escalated labor cost. So it’s just a good smart way to do it where the -- nothing is a greater indication of how much a university desires to do the deal is when they're willing to go at risk on those frontend dollars. And so it's actually something common that we have done on numerous transactions and this one giving the announcement of the construction taking place you’re seeing.

[Jordon Sadler:]

And is there a profit margin built in there for the developer at least?

[Bill Bayless:]

No, however, all of our deals also have a breakup opportunity so let's say the deal went away and then university wanted to do the transaction without us on one of the plan, then yes we would be compensated.

[Operator:]

And our next question will come from Dave Bragg of Green Street Advisors.

[Dave Bragg:]

I just going back to development spending plans, I think you just cited 266 million needs to be spent on development projects that will deliver in '15 and '16. Can you please reconcile that with the $1.2 billion pipeline that William, mentioned earlier. What are the commitments that you've made for deliveries in '17 and '18 that need to be funded?

[Daniel Perry:]

So right now, the development pipeline for '17 is 375 million. William showed that. So beyond that, we've got about 244 million and what we call shadow pipeline, deals that we're working for '17, '18 that aren't as defined yet, or we obviously haven't announced yet. If you take the 313 million from fall ’15 and the 277 million that we're now expecting to deliver for fall ’16 assuming Louisville obviously is delivered for ‘16 that would be the 1.2 billion. Obviously as you're talking about these deals down ‘17 and ‘18 and beyond on that $1.2 billion development pipeline. Yes, that's the long ways away. There's a lot that has to be flushed out on those deals. So when we talked about that, we're trying to give an idea, the people of the opportunity set in front of us. But it's still a ways away and how you address that, from a capital funding standpoint. What we think is most appropriate for NAV and earnings, obviously, we'll play out as the environment develops or the capital environment develops.

[Dave Bragg:]

Okay thanks for that. The first caller asked question about your acquisitions that have taken place although the stock is trading at a discount NAV and clearly your answer explains how you're able to create value through operations, but could you address the second part of that question which is just how you think about your cost-to-capital and at what point would you stop acquiring depended on where the stock is trading?

[Jon Graf:]

So the important thing there is cost of capital, and the way that we look at dispositions obviously with the stock trading where it is, the dispositions being primary alternative to us to funding acquisition opportunities as they come alone. We look at -- when you look at cost capital you look at your IRR on transaction, you unlevered IRR and what that looks like. When we look at this dispositions and the NOI what we can sell them for and then the NOI growth profile that we believe that asset has from going forward is that IRR is below what we can go out and buy assets on the market at today and drive IRR above that, than that's an appropriate capital allocation decision because it's not only gives you a more stable and positive same-store NOI growth profile but it's a better investment. You're creating value over and above on the return you would have achieved on those properties that you’ve disposed. We're not talking about a large acquisition plan at this point. We said to the last couple of quarters that the acquisitions we’ll be doing will be more selective one-off right now. As Bill talked about all of the acquisitions we've done this year have been multi asset markets except for Sirkis [ph] and that was effectively and a-still. We don’t call them a-still because it's a little more arm's length, but it's on ground lease with university, it's surrounded on three side by university, it's a great asset with what we believe is a very protected NOI growth profile. The rest of assets are all in multi asset markets where we think we can drive the benefits that we talked about in the initially answer to the question and get a yield on it in excess of what that does market cap rates imply.

[Dave Bragg:]

Okay thanks for that that's helpful and you're certainly buying assets with better growth profiles and what you're selling but how do you think about the decision as you sell the assets to instead perhaps pay down debt or buyback stocks, how do you weigh those two options versus acquisitions?

[Daniel Perry:]

Well certainly the buying back or using disposition proceeds to pay down debt is going have less of a return on an acquisition, so if we felt we were over levered which is obviously an interesting question that we debate a lot with you guys because right now at 40% levered, 40.9% we're only 2.1 percentage point above our all-time low leverage of 38.8%. So we think we're in a very comfortable leverage range, especially when you take into consideration the defensive nature and the stability of cash flows of operation. We think that that’s something that people don't give enough credence to in thinking about where we should be operating our balance sheet. When it comes to stock buybacks, there is a question we get a lot from investors certainly if you think your FFO growth is higher than the market does, then yeah that’s a good investment to buy back stock, the reality of it is where the problem comes in how much stock can really go buy back and do you want to be leveraging your balance sheet to do that. We are in the business operating student housing and we want to use our capital to buy student housing assets and if there is time, times where our stock doesn't make sense as a source of capital and we don't use it, we don't incur that cost of capital. And that’s our philosophy.

[Dave Bragg:]

Just one last question on operations. Bill, thinking back to the 2013 Investor Day you mentioned that target operating margin of 55%, what’s an appropriate target in terms of when you will get there, especially now that the same store portfolio has improved in quality through asset sales?

[Bill Bayless:]

We've always talked about that on a three year to five year horizon, and certainly think it's something that can't be achievable over the next three years. Now this year is to get it over the 53, part of it and it's has a couple of pronged approaches you just alluded to, you see and kudos again to Jim and Jennifer and the team here with the operating results that you are seeing is that we’re just driving those operational efficiency, the asset management initiatives are really taking hold and we’re still very early stage for that, we think there is great opportunity just in that area alone. You couple that with what we’re discussing in terms of the improvement in the overall portfolio quality certainly the high yielding developments that we’re bringing online coupled with these core pedestrian acquisition have much better margin profiles and margin improvement opportunities going forward then you do in the older dispos [ph]. So when you couple those two things together, I think it is very realistic to get there over three year on the short-term or five year on the long-term.

[Dave Bragg:]

So it's really a mix of that portfolio that we’re all looking at in 2013, you are proving that but you are also really tearing out the weaker assets and bringing in higher quality assets and through mix of all of that you will ultimately get to the 55%.

[Bill Bayless:]

Correct.

[Operator:]

Next we have a question from Alexander Goldfarb of Sandler O'Neill.

[Alexander Goldfarb:]

Hey. Daniel, just, sorry to go back through a few things. Just want to make sure I have the pieces correct. So where you guys are guiding to the midpoint of guidance, the elevated disposition levels are sort of, it sounds like offset by delays or possibly not even doing a bond deal. And then as far as the 50 basis point, I think that's what you said improvement that you'll get on the acquisitions, that is taking effect this year or that's something that we would see improvement to those assets next year?

[Bill Bayless:]

As Daniel gets in that, Alex this is Bill, the first offset to the certainly the dilution of the dispositions being at the high-end of our disposition guidance, but first off to that is stronger core operational performance, so go ahead Daniel and address the other side.

[Daniel Perry:]

I guess the first part of your question was alluding to, are we effectively assuming that the delay timing need of the bond offering offsets the drag of the higher amount of disposition. Is that what you are asking?

[Alexander Goldfarb:]

Yes.

[Daniel Perry:]

Yes, although there is a lot more factors that John reviewed that are impacting it, obviously we've had really good success with our operational performance in the first six months of the year, our year-to-date same store NOI growth is 4.3% versus an expected ranging guidance of 2.3% to 4.7% so we’re in the higher-end of that range. So that obviously offsetting it some, and then this delay timing in the bond offering, a little bit more acquisitions also that we assumed at the lower end of our guidance range, a little earlier timing on the acquisitions also has benefited. So there is a lot of parts in there but all of those in sum we think are trying to bring in each other back towards the middle area of our guidance. Now the reason we didn't change the guidance is because we feel like with potential additional selective core acquisition opportunities through the rest of the year the completion of lease up, continue to operating expense control that we can range up and down in that guidance depending on the success or lack of success in those areas.

[Alexander Goldfarb:]

And then 50 basis points of improvement is that something we’ll see on the acquisitions is that at this year or that sort of a next year?

[Daniel Perry:]

I would tell you on part of it which is the portion where we talked about there is a cost -- management cost that everybody underwrites assets that they buy typically its 2.5% of revenues and that infrastructures in place. Obviously, when you go out and you buy $1 billion portfolio or something like that, there is probably is going to be some additional infrastructure that you added on as you have regional managers and things like that. But right now especially in an environment where we're actually selling some assets, we've got if anything capacity in terms of the infrastructure and more capacity than we would normally have, so we're not adding in any kind of management cost, so 2.5% of revenues that's in that cap rate that market cap rate that we're quoting we're not going to incur. So that's out of the gate and that's about 25 basis points. The remainder is just efficiencies from operating multi asset market some of that probably comes pretty immediate, but some of that is going to come as we start to develop this multi asset market management approach that we've been talking about. We're launching at this year here in Austin. We're going to experiment with it throughout the year and see where we have the best success with it and where it doesn't necessarily work and based on that we're going to be rolling it out to the 42% of our NOI that's currently in multi asset markets and we think it's going to be an overall improvement to our NOI growth profile, but it certainly on these assets that we're acquiring in multi assets markets of benefit as well. And our early estimate is that could be about 25 basis points. Again some of it, we'll probably be able to see early and some of that will take some time.

[Alexander Goldfarb:]

Okay and then Bill on the dropout and making sure that all the students who signed up actually show up with a cheque [ph] in hand, when we look at the leasing stats, the percent applied for that's about it's about 100 basis points below last year but yet the percent leased is on track, are you saying that we shouldn't read anything into the fact that the applied for is a 100 basis point less, that it's really about how you guys make sure that those leases actually show up or is that the cushion that means you guys are going to have try a lot harder to make sure that everyone shows up?

[Bill Bayless:]

Now, it is a headline general number, it's insignificant and if you had a 100 bed waitlist in a property last year and this is 50 that probably has no impact whatsoever on the managing of your backfilling. And so the general number as a whole is not something in any way that is a negative indication.

[Alexander Goldfarb:]

Okay and then just finally, Daniel, I think we know about two years is away from the or outside of the marketing you have increased elevated marketing of two years ago, where do we stand as we head into the fall, is all of that back down so we now have a normal run rate or is there still some additional cost as you look towards the fall that you think should come out for the upcoming leasing season?

[Daniel Perry:]

Yes, I mean that certainly something that we're looking at commenting on, we're looking at commenting on going into this call. We wanted to allow the completion of this lease up which will go into next quarter. Our attempt is to give you a view of the past four quarters, next quarter of marketing expenses per bed. We've really driven some great efficiencies there, created a lot of cost savings even when you compare it to our normalized run rate not 2013 elevated levels, but our normalized run rate of marketing expenses.

[Bill Bayless:]

The historical run rate to adjust it from inflation should be about 187 a bed, this year's guidance we're about $1.50 - $1.52 on the same-store portfolio. We've been beating that and again we want to hold off on giving the stabilized guidance on that going forward because we want to finish our Q3, which now the four quarters that will then report it Q3 will have compensated a full academic year, that is the normalized cycle, but there is no doubt we have significantly beat our own expectations on that. And this is where when we make broader comment, Alex, on the asset managers initiatives being in their infancy, you've seen that over the last two years that the focus on taking a very sophisticated approach especially in those multiple property markets is where you've seen those benefits derived and so it's definitely better than we had anticipated in the original $1.50 to $1.52 and come the completion in Q2 I think we'll be able to make a comment on what is the new run rate that you should expect inflationary adjustments to going forward.

[Operator:]

And the next question is from Nick Yulico of UBS.

[Nick Yulico:]

Thanks. I'm a bit confused about why you guys are delaying the bond deal, if I look at your balance sheet your cash is below $10 million. It hasn't been this low since 2007; you have a lot of development funding, and yet, you seem to be saying that you don’t need to do an unsecured bond deal because you're in okay capital share?

[Daniel Perry:]

Nick, this is Daniel Perry. So, yes, the cash this quarter at quarter end ended up being lower than you normally see it typically we run about at $25 million float on cash, but that's all it is really is the float. I'd say this quarter it's really just a timing think of how much cash happened to be sitting on-hand at end of the quarter. We certainly -- like I said with cash flow from operations and right now we're just funding the development pipeline, we have the 32 million that came in from the MTSU, disposition post quarter end, so we are in a fine cash position. Timing into the bond is really just -- we are keeping a very close eye on the market, deciding when we think is the best time to go. When we saw the run up in treasury rates, I think everybody across the board thought that was overdone. And a lot of people sat back and waited to see what treasury went from there. They have come back, I mean we’re down a good 20 basis points from what they were at a month ago. So -- and the thing is we actually have other alternatives to just doing a bond offering. One of the things we wanted to let play itself out a little bit more was the completion of our disposition program for the year. Looking at how much we wanted to do in terms of selective core one off acquisition and how much actual capital we need. Do we want to do a bond offering or do we think that a term loan from our bank group might be a more attractive source. We have got a hole in our debt maturity schedule five years out from now, which is obviously a very appropriate term of debt to use a bank term loan for and obviously you can get very attractive financing almost more efficient financing on bank term loans then you can on a bond, even after you go and swap the LIBOR on your term loan. That’s one thing that you guys are missing is you are not -- you talk about how much floating rate debt we have. You are not accounting for the fact that $350 million of the term loan debt that we have out there is swap and you're assuming it goes up with LIBOR and it's not going to. So we feel really good about where we are from the capital same point and think we can watch the market and look for the right opportunity to do our transaction.

[Nick Yulico:]

I guess what we're trying to figure out here is that, I mean by not doing a bond deal, we're not doing a term loan that you're swapping out, you're just keeping your variable rate debt exposure higher for longer. So how do we think about what point you start paying down the line or are you just going to keep the line balance high through all of 2016? Because, A, your leverage is today one of the highest among student housing or multi-family REITS, we have a lot of development to come and your FFO growth has could be highly sensitive to your leverage in floating rate debt exposure, it's hard to get more visibility on what that growth can be without knowing, what your capital structures could be as far as your leverage target? And what's going to be floating versus fixed over the -- through 2016 and 2017?

[Daniel Perry:]

Nick I misunderstood the first part of your question you said a high portion of value -- valuable debt?

[Nick Yulico:]

I just said, if you're delaying the unsecured bond offering, all you're doing is keeping more on your line of credit this year, that's why your interest expense is now at the low end of the range, not the high end of the range. So, how do we think about that? I mean typically, companies are paying down their lines of credit. It’s not like your bond deal is going to do that and now you're saying, maybe that doesn't happen.

[Daniel Perry:]

No, I mean certainly we are going to look to pay down the line of credit with some form of debt capital rates. Whether that’s a bond deal, a term loan or some other form will be looking in term that out. So that certainly the case, you should assume that gets turned out at a rate of five to ten year deal that’s part of the variance in our guidance and we are going to look at what we think is most appropriate. We certainly like the look -- at that’s what I was saying we like look of a five year deal right now and how it fits into our debt maturity schedule. We disagree with you on leverage -- the level of our leverage and our comfort level with it. We know that there other REITS that are more highly rate than we are, that have hire other multifamily REITS. That are more highly rated than we are, have higher leverage than we do. We are 2% point above our all-time low leverage, we talked about the range that we want to operate in of 35% to 50%, we’re in the lower half of that range right now, so I think we stated clearly what kind of levels we’re comfortable operating within, that’s going to fluctuate given different capital rates opportunity and environment. But right now we think that it's very comfortable level, we can addressed it upward or downwards when we see the right opportunity and we can let it float up and still be in very comfortable position.

[Nick Yulico:]

Right, I guess that I mean 35% to 50% is a pretty wide range, pretty usual to have such a wide range as REITS. So that why I mean I think is more helpful if you guys gave more precise leverage target because 35% to 50% is a pretty wise range, you can have significant fluctuation on your FFO.

[Daniel Perry:]

Yes, well that’s a reality of what happens I mean our leverage is range from 38% in 2012 to the mid 50s right after we bought GMH. So given that you raise capital opportunistically in different environments your leverage moves around as you are growing and you address it when you think it's appropriate.

[Nick Yulico:]

Alright, thanks for that.

[Daniel Perry:]

Right now we would say that we’re at the lower end of what we target and we feel like it's at a comfortable place.

[Operator:]

[Operator Instructions]. And our next question will come from Ryan Meliker of Canaccord Genuity.

[Ryan Meliker:]

Just a follow-up on the balance sheet, I understand everything that you were saying there, Daniel. I think last year around this time, you had mentioned that over time, you were hoping to get into the leverage range of a low 6s in terms of net debt-to-EBITDA. Obviously, you're still above 7%, so you're comfortable in the leverage ratio relative to your assets, but what about relative to your EBITDA? Obviously, as you're acquiring assets and cap rates are coming down across the property types, it's impacting your leverage to EBITDA. How do you balance that ratio with the debt to gross assets that you're talking about in terms of 35% to 50% range?

[Daniel Perry:]

Right now when we look at our models and if we build out a 5% of assets development pipeline our debt to EBITDA just through the pure growth in the base portion of our NOI would naturally start to come down at low 6s, so that is something that we can let happen. And when I say that we’re -- we’ll be growing through 5% of assets development pipeline that’s just assuming we fund that with all debt. And even with funding with all debt we would see our debt-to-EBITDA get down into the 6s. The reality is over the long-term as that plays out we’ll likely fund some portion of that with some form of equity capital that could be dispositions through capital recycling or that could be equity. Obviously, the equity has the quickest downward pressure on debt-to-EBITDA, but dispositions have a very beneficial impact to debt-to-EBITDA as well. So even without addressing it through those forms of equity dispositions or ATM or regular way equity it's going to come down just due to growth of the base NOI to the levels we’d like to see it go to eventually. The kind of three years to five years’ timeframe we would be doing additional things to drive that even quicker.

[Ryan Meliker:]

That's helpful. And then, I'm just curious in terms of how you guys have thought about leverage over the past year or two or three. Obviously, your ACE component has increased. I think as of 2017, it's going to be somewhere around 17%, 18% of your overall portfolio. Seems to be a much lower risk business given the practical guarantees by the universities for occupancy and rents. Does that get you more comfort on running at higher leverage levels than you may have been two or three years ago?

[Daniel Perry:]

I think that we've always felt that the student housing sector and the stability of cash flow provides a more of a comfort for the balance sheet and for the operating statistics than other sectors. I mean we were one of the only companies that actually went out and upside our revolver during 2009 when -- and the banks were there for us, when other people were downsizing their revolver. So certainly that stability and a lot of that was driven by the fact that we had same store NOI growth and revenue growth through and rental rate growth through the downturns, and that gave the banks comfort. So I don't know that, that changes our comfort level with where leverage is, I go back to that as you were saying, Ryan, over the last two years to three years. Over the last two years to three years our leverages ranged from 38% to 44% -- 38.8% to 44.4%.

[Bill Bayless:]

And that is been our typical operating range and that is been time that’s picked up where we had a major transactions and we immediately de-levered once it got over the amount, that’s our typical range. The other thing Ryan this is Bill, and we do love ACE make mistake, man you love that location on campus, it meets our investment criteria. But I think the real story is well beyond ACE and what Daniel said in terms of stability of the whole portfolio, for 11 years now the portfolio as a whole has averaged over 97% occupancy, this year when you look at our leasing update over 100 properties are above 98% and that is the consistent portfolio over the entire portfolio, and so that has been a constant stage for the 11 years of our history, and so I think that’s you seen a consistent theme in strategy throughout whole time.

[Operator:]

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

[Bill Bayless:]

Again we want to thank you as you've joined us this is the most critical four weeks of our operation year and so again we want to thank the staff and wish them well as they get out there and do it. And we look forward to updating you on our final leased up results on the next call. Thank you very much.

[Operator:]

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