American Campus Communities, Inc.
Q3 2015 Earnings Call Transcript

Published: 27 Oct 2015

[Operator:]

Good morning ladies and gentlemen. Thank you for standing by. Welcome to the American Campus Communities Incorporated 2015 Third Quarter Earnings Conference Call. Today's call is being recorded. At this time, all participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. I will now like to remind everyone that this conference again is recorded. And now I would like to turn the conference over to Mr. Ryan Dennison, Vice President of Corporate Finance and Investor Relations for American Campus Communities. Please go ahead sir.

[Ryan Dennison:]

Thank you. Good morning and thank you for joining the American Campus Communities 2015 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 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'd like to turn the call over to Bill for his opening remarks. Bill?

[William C. Bayless:]

Thank you, Ryan. Good morning and thank all of you for joining us as we discuss our third quarter 2015 financial and operating results. Based on recent analyst recommendations and investor feedback we've added additional disclosures to our supplemental in the areas of sources and uses of funds associated with our capital allocation strategy, more detail on the reconciliation of EBITDA and a more detailed breakdown of our guidance disclosure. With that said, let's now discuss our results. The quarter was highlighted with continued net asset value creation due to the core performance in our same-store properties with NOI growth of 5.9%. Given year-to-date operational results, coupled with the successful lease up of our same-store portfolio to a public sector leading occupancy of 97.7% and runaway growth of 2.9%, we now expect to finish the calendar year 2015 with approximately 4% of same store NOI growth. We would expect calendar year 2016 to have similar same-store NOI growth potential as we have the same 2.9% increase in rental revenue going forward as we did in the prior year, coupled with similar expense management opportunities via our asset management initiatives. With regard to the 2016 and 2017 lease-up which has already commenced we are even more bullish on the opportunity for enhancing same-store NOI growth moving into 2017. And we believe the opportunity exists to be at the higher end of our long-term historical target of 3% to 6% same-store NOI growth. This is due to the fact that we have the opportunity to yield 3% to 4.5% rental revenue growth in the 2016, 2017 academic year through a combination of rental rate growth and occupancy upside as this future same-store grouping is represented by our current total portfolio which currently sits at 96.9% occupancy. Our prospects for accelerating same-store NOI growth moving into 2017 are further enhanced by strong industry fundamentals including a decrease in projected fall 2016 new supply in ACC markets which William Talbot will discuss. The quarter also included the delivery of $298 million of new high quality owned developments. As we announced in our press release in late September, in light of the current market environment we're moving our focus away from acquisitions at this time and concentrating our capital allocation on our high yielding development opportunities. As detailed on the sources and uses table on page 15 of our supplemental, we have $308 million of development underway for a 2016 delivery and $177 million underway for 2017 delivery. We plan to fund these investments through a mix of available cash flow from operations and the continuation of our capital recycling program, including the disposition of noncore assets and given current private market valuations the potential disposition or joint venture of select core assets. As additional development projects become more a firm investment commitments we would anticipate increasing our dispositions or potential joint venture activity as necessary to prudently management our balance sheet. With regard to back billing [ph] our shadow pipeline of ACE development opportunities for 2017, 2018 and beyond, along with providing the continued opportunity for meaningful third party development income, this quarter we announced five new on-campus public-private partnership P3 awards including an ACE development project with a prestigious University of California at Berkeley. Including these five new P3 awards we have now announced 15 on-campus P3 opportunities 2015 alone, demonstrating colleges and universities confidence in American Campus as the sectors' best-in-class company and they are trusting us as the partner of choice. It is important to note that not all these projects will turn into owned ace projects, but rather a mix of ACE developments, third party development and predevelopment consultation as we empower our university partners to use our expertise to achieve their specific objectives. As I previously mentioned, student housing industry fundamentals remain strong. At the recent NMAC Student Housing Conference last month private and public operators alike reported increases in occupancy over last year's levels, with this year's fall occupancy being at 96% and rental rate increases ranging from 2% to 3.5. According to Axiometrics overall fall 2015 occupancy and rental rate across 470,000 same-stores beds in 203 collegiate markets showed occupancy increased to 96%, 65 bps over the prior year with rental rate growth of 2%. Axiometrics also reported new supply in fall of 2015 down approximately 25% and early expectations for new supply in fall of 2016 to increase by only a modest 2%. In the 72 markets where ACC owns assets, we're actually seeing a further decrease of 15% in new supply for fall of 2016. All of these dynamics signal tailwinds in our sector which we believe will allow competitors both public and private to be more aggressive in setting 2016 lease up rental rates and to be more prudent in holding and raising rates through the next lease-up cycle. This of course enhances our opportunity to do the same giving us more conviction and our ability to produce value creating internal growth in the upcoming academic cycles. With that said, I'll turn it over to Jim Hopke, our COO, to provide additional color on our operational results.

[Jim Hopke:]

Thanks Bill. Our strong same-store NOI growth of 5.9% was driven by a combination of 3.7% growth in revenue and a modest 2.1% increase in operating expenses. The revenue increases were driven by rental revenue growth over third quarter 2014 as well as increases in other income, specifically summer occupancies at our traditional residence hall properties, application fees, early move-in fees at various properties and damage recoveries associated return. From an expense standpoint, our asset management initiatives are continuing to create efficiencies and we expect to achieve our targeted operating margin above 53% for calendar year 2015. As you can see on page six of the supplemental, the two notable areas of quarterly operating expense are repairs and maintenance and marketing expenses. The 8.9% increase in quarterly R&M expenses are a result of increases in one-time events primarily at three properties, which accounted for nearly 50% of the variance. We also experienced some churn costs associated with establishing multiple asset market churn processes. We expect full year R&M growth to be slightly above our original budget for this area. Q3 2015 is the seventh straight quarter of meaningful reductions in per bed marketing expenses. From our 2013 high of $213 per bed and our long-term historical average of $187 per bed adjusted for inflation. Our 2015 spend is expected to finish under $140 per bed establishing a new baseline for marketing costs. Much of the savings is due our multiple property market efficiencies and branding activities. We remain focused on continued margin improvement with the goal of achieving 55% in the next two to four years. Moving to leasing, I'd like to thank the entire operations, marketing and leasing teams as this is the 11th straight year that American Campus has delivered a best-in-class occupancy versus our public sector peers. At quarter end occupancy at our same-store wholly-owned properties was 97.7% with a 2.9% rental rate growth. Our aggregate 2015 development deliveries were 89% occupied with the summit at Drexel and 2125 Franklin expected to stabilize by fall of 2016. In the case of the Summit, Drexel will be fully implementing a sophomore residency requirement in fall 2016 which is the primary targeted student for this facility. In Eugene we believe 2125 Franklin's lease-up did end up being impacted by the market's apprehension created by competitive properties missing their construction delivery in the prior year, despite our property being completed on time. With strong renewals expected and no new supply scheduled to come online in fall 2016 we expect to fully stabilize next fall. reviewing NOI, our initial 2015 same-store NOI growth guidance was in the range of 2.3% to 4.7% driven by 2.8% rental revenue growth in the 2014, 2015 academic year. We now expect actual same-store 2015 NOI growth to be between 3.8% and 4.2% in the upper half of that initial range. And now I will turn the call over to William to discuss their investment activity.

[William Talbot:]

Thanks Jim. Student housing continues to be a very attractive investment class commanding strong private market valuations and deep institutional demand. According to a recent report by Holiday [indiscernible] based on information tracked by Real Capital Analytics year-to-date investment volume for student housing in 2015 is already at $3.5 billion which is 37% higher than 2014 year-to-date volumes and is expected to eclipse historical high volume of $4 billion in 2012. We continue to see institutional capital committed to the sector with five new notable entrants investing in this sector for the first time in 2015. Cap rates for corporate, SG&A and assets remained in the sub 5 or 5.25% cap rate range. As per data received from CBRE since 2014 we have seen over $1.9 billion of core product trade was an average cap rate of 5.18% for the $1.1 billion of trades that provided cap rates. Lending remains attractive for this sector with many competitive options for buyers on par with more plus [indiscernible] lending terms. ACC has strategically capitalized on the strong transaction market in 2015 with the disposition of 20 older assets located further from campus totaling $437 million at 6.3% economic cap rate on in-place revenue. The sale of these assets coupled with our high-quality growth properties has further strengthened ACC's best-in-class portfolio reducing median distance to campus to 0.2 miles and reducing the average age of the portfolio to nine years. Recycling this capital creates significant value for our shareholders in the form of revenue growth potential, operating expense efficiencies, greater NOI growth prospects along with greater stability of long-term cash flows and reduced capital expense needs. We believe investment in our corporate SG&A developments continues to make sense in the current market. As we are able to development these assets between 6.5% to 7% nominal yield with private market valuations in the sub 5% to low 5% economic cap rate range. Current market cap rates would indicate residual values a result of an unleveraged internal rate of return in the high teens to mid 20s for recent developments if transacted with some even achieving over 30% unleveraged return based on current performance. With regards to development, as Bill mentioned, we delivered $298 million of owned developments this quarter or expected to achieve a 6.3% nominal yield in the first year of operation with projected stabilized returns of 6.8% by the second year. Furthermore we currently have $308 million of development in presales underway for 2016 and 177 million currently under construction for 2017 at targeted nominal yields of 6.5% to 7%. In addition to the progress of creating a shadow pipeline of ACE transactions Bill discussed, we continue to have success as well in developing shadow pipeline opportunities in the area of owned off campus development for 2017 and beyond. With that I will now turn it over to Jon to discuss our financial results.

[Jonathan A. Graf:]

Thanks William. For the third quarter of 2015 we reported FFOM of $48.7 million or $0.43 per fully diluted share as compared to FFOM of $46.5 million or $0.44 per fully diluted share for the comparable quarter in 2014. FFOM increased by $2.2 million per share amounts were impacted by 7.1% increase in the weighted average shares outstanding, primarily from shares issued in January 2015 under our ATM program to fund our growth pipeline. As compared to the third quarter of 2014 the 2015 third quarter results benefited from the previously discussed same-store operating results and the 18 growth properties placed into service since the third quarter of 2014. This was partially offset by lost FFOM from the sales of 20 disposition properties during 2015, whose FFOM contribution was $5.7 million less this quarter as compared to 2014 and $2.1 million in lost FFOM from University Crossings which was taken off-line this summer for renovations. It should be noted that the third quarter is historically seasonal in nature as compared with the other quarters as we experience the impact of higher operating costs associated with the annual turn. During the quarter we completed $32.1 million in property dispositions and paid off $35.8 million of maturing fixed-rate debt. For the year our cash proceeds of over $1 billion from property dispositions, our September 2015 bond offering in Q1's ATM activity have been more than adequate to fund our previously discussed 2015 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 development. Fixed rate debt maturities within the next 12 months are approximately $94 million or 3.3% of the Company's total indebtedness. Taken into consideration our final 2015-2016 lease-up the financial results achieved through the third quarter of fiscal 2015, our recent $400 million bond offering, and dispositions and acquisition activity for the year, we are tightening our 2015 FFOM guidance range to $2.32 to $2.36 per fully diluted share. Our previous FFOM midpoint of $2.36 was impacted by $0.09 from reduced NOI on the timing and amount of dispositions which was slightly offset by $0.02 of NOI from the timing and amount of acquisitions. This previous midpoint was also impacted favorably by about $0.04 in interest expense as increased proceeds from dispositions assumed at our midpoint allowed us to fund our growth pipeline and slightly delay our bond offering to September 2015. Additionally, the previous interest expenses functions were favorably impacted by reduced interest expense on certain property sold that had mortgage debt and a slight increase in capitalized interest as a result of the growth in our development pipeline. Last of all, the previous FFOM midpoint was impacted favorably by about $0.01 in third-party revenues from the interest paid in 2015 fourth quarter commencement of our OSU Cascades project and anticipated construction savings from recently completed third-party projects, neither of which were assumed at the midpoint of our guidance. This revised midpoint of $2.34 is varied by $0.02 at the high and low primarily to account for over or underperformance in property NOI and the commencement or lack of commencement of planned third-party development projects. The assumptions utilized in our current FFOM range are disclosed on page 16 and 17 of our third quarter supplemental. With that, I'll turn it back to Bill.

[William C. Bayless:]

Thanks Jon. In closing, I'd like to thank the entire ACC team for their hard work and dedication and the excellent results that they continue to produce. You are the heart and soul of American Campus's best-in-class reputation. With that, we'd like to begin the Q&A session.

[Operator:]

Thank you, sir. [Operator Instructions] The first question we have comes from Ryan Meliker of Canaccord Genuity. Please go ahead.

[Ryan Meliker:]

Hey, good morning guys. I just had a couple of quick questions. The first one I was hoping you could give some color on is, you know you talked a little bit of dispositions and obviously in your slide deck and your supplemental you outlined a plan for dispositions of I think a minimum of $300 million to help fund development that will come on line over couple of years. How many assets would you still consider non-core that are left in your portfolio and I guess, what’s the overall scope of what could be marketed from a non-core perspective?

[William C. Bayless:]

Yes, well Ryan there is still about and when you look at the number of properties it ranges between 12, and 18 and it represents about 9% of our net operating income. There is still non-core dry properties is available for immediate disposition.

[Ryan Meliker:]

Okay, that’s helpful thank you. And then the second question I had and I know last quarter we talked a lot about leverage and where you are guys are comfortable. I don’t want to get into a ton of detail on that. Everything has been pretty clear about where it just stands today. I am just wondering if on the periphery has anything changed over the past couple of months given where the credit markets are today versus where they were? You know in late July when we had our call before which credit tightening and seems like and there could be some concerns on that front do you maybe want to take a more conservative approach to leverage now then you would have three months ago?

[William C. Bayless:]

Certainly when we look at where we are from a leverage perspective and the capital allocation plan that we put forth as you can see, we are very sensitive to increasing our leverage and want to make sure that we create additional capacity through the continuation of the disposition program. And certainly also as we talked about we have completely stepped away from acquisitions as well as we create that additional capacity, we are going to use it solely to focus on the high-yield development pipeline.

[Ryan Meliker:]

Great, that's helpful and the last quick thing from me was, can and I apologize as I missed it in the prepared remarks, but you guys have 15 new public-private partnerships announced this year, how is the shadow pipeline looking as we look out to 2016, 2017?

[William C. Bayless:]

You know as Jamie has been commenting for the last really five to seven calls it seems that we constantly have a dozen or more active procurements taking place. And so the pipeline of colleges and universities that are looking for P3 solutions has really reached a steady state where there is always about a dozen ongoing and so we think that market is as strong as it has ever been and again I think we could all agree to state budgets are not going to have more dollars available for higher education going into the future, but if anything equal or less. And so we will continue to see schools that still have a plethora of 1950 and 60 having stock on their campus that has to be replaced look more and more to P3s and so the outlook for that sector couldn’t be better.

[Daniel Perry:]

Now one thing you said, this is Daniel Ryan, but one thing you said there was as we look to 2016, 2017 most of those transactions that we would be looking at in the shadow pipeline would be more for a 2018 or beyond kind of timeframe.

[Ryan Meliker:]

Yes, from an opening, I understand. I am just more thinking about with the procurements of them, but that’s helpful thank you. And then so, is it reasonable for us to assume that, I mean I know without giving guidance that you guys should be able to continue announcing these types of projects at a similar pace that you have been recently given the shadow pipeline at a similar size?

[William C. Bayless:]

We certainly hope that that is a repeatable year-to-year thing that you will be hearing from us all those transactions are always on a competitive nature and publicly procured. But as you can see American Campus has clearly established ourselves as the best-in-class choice for colleges and universities and we intend to do everything we can to maintain that position in the market and not to let it get away from us.

[Ryan Meliker:]

And nothing has changed in that environment, that would lend you to take a view that you might generate less market share going forward than you have over the past year or so?

[William C. Bayless:]

No, I mean and again that sector of our market continues to have the highest level of barrier to entry than any other aspect of our business and the colleges and universities are looking for more than just real estate. Again it is about establishing the living and learning community environments and partnering with them and that’s something there is a very few number of capable folks that are out there to be able to do. And with the pool increasing, we think our fair share will continue to represent equal or expanding development opportunity from a total project and dollar volume as you’ve seen in the past and perhaps escalating down the road.

[Ryan Meliker:]

All right, that is all from me. Thanks.

[William C. Bayless:]

Thank you.

[Operator:]

Dave Bragg, Green Street Advisors.

[Dave Bragg:]

Thank you, good morning.

[William C. Bayless:]

Good morning, Dave.

[Dave Bragg:]

Good morning. As it relates to the development pipeline could we just walk through the assets that will be delivered in 2016 and 2017 that are not summarized on page 15? It seems as though you have on the owned development pipeline section you have one more for 2016 and two more for 2017 that is $150 million or so. And then on the ACE section page 11 it looks like you have three more that would deliver in 2017?

[William Talbot:]

Hey Dave this is William. When you look at 2016, if you take the five that are currently under construction add in university [indiscernible] that is under construction, but the ground lease because of some administrative items hasn’t been signed yet and then also add in the Stadium Centre pre-sale that gives you seven projects for about $308 million that would be total for fall 2016. Obviously at this point that number will not change. And then on 2017 we've got the two projects currently under construction. We have two more that are down in the owned development pipeline and then two under [ph] that could potentially fall in the 2017 though that’s certainly not determined at this point and may slip to 2018. And then as I mentioned in my prepared remarks we always have an off campus shadow pipeline that’s working that could potentially hit 2017, but most likely would be 2018 and beyond.

[William C. Bayless:]

And so Dave, what we will do as any of those projects move in and actually become firm development commitments, we will obviously look at our capital allocation in terms of the amount of disposition and/or joint venture activity needed to fund that in an increased capacity to do so. The other thing we talked about from a capital allocation perspective in the new document that we put out that you see us updating our supplemental, what we’ll continue to do is each quarter as those commitments become firm, we obviously will adjust that capital allocation document to reflect to the market exactly how we intend to fund commitments as they do become more firm.

[Dave Bragg:]

Okay. That’s helpful, first I missed that on 2016 thank you William. And it sounds like when I look at page 15 the 2017 number could go a good bit higher from here, although it remains to be seen where it ends up it will be funded with dispositions correct?

[William C. Bayless:]

Yes I would say it’s highly probable it will increase from the 177 that you heard us refer to in the script and most likely would achieve the normalized levels you see in that area of 300. Now the potential is it could go a little higher than that and certainly we would create capacity if it goes higher than that through increased dispositions. We still have about tying back the first question asked, we still have about $600 million in properties that are drive non-core properties that are in that disposition pool. And so we have plenty of immediate access to that group right now and as we talked about the market for that I think the CCG trade is a great point of data in terms of the cap rates available for non-core dry properties that are available there for us and the market is there for us to execute on that.

[Dave Bragg:]

Right and Bill that is a big portfolio that could be sold, but given the development deliveries for 2016, 2017 and there is full pipeline for 2018, you’re reading through pretty quickly and that’s – and we haven’t even talked yet about leverage reduction. So that leads to our question on the potential sale or JV of core assets, can you please talk a little bit more about that, how is that shaping up and could it include any ACE assets?

[William C. Bayless:]

Sure. And certainly and as we just have discussed and you have seen us execute in the past it is a very prudent and no brainer for us in terms of the execution on our non-core and that $600 million worth of portfolio there it creates capacity. As we look to potential for expanding our capacity through potential joint venture of core assets, certainly the market there is extremely vibrant and a significant amount of interest. We’ve had conversations with numerous intermediaries as well as some direct sovereign funds and pension funds. Obviously there was a huge appetite for core as in when we look at the ACE transactions, the one thing that we would look at in terms of any ACE joint venture opportunity that we had, one our colleges and universities want to do business with American Campus and want us there as their long-term partner in control of that relationship. And so to the extent that we ever structured a joint venture that included any ACE assets it would be toward that joint venture partner was clearly a minority owner where American Campus retained all of the control within that partner in the joint venture itself and with our university partner. And in that regard I think that would only if we did decide to execute any ACE transactions in that form that’s only going to alleviate a great concern colleges and universities may have when they undertake these transactions and seeing they are part of our plan of creating a capital event to create liquidity in those assets. Actually we are executing in a fashion that they see American Campus staying in as their long-term partner and perhaps bringing in a joint venture minority partner that has the same long-term hold characteristics such as a pension fund or sovereign wealth fund. So we think that it could be successfully executed on some select ACE assets if we chose to do so and certainly the opportunity exists on other core owned off campus properties too.

[Dave Bragg:]

Great thanks for that Bill. One last question if I may, you said you've stepped away from the acquisition market, what are the most important things that ACC needs to see or accomplish to step back into the acquisition market?

[William C. Bayless:]

Well, right now and as we had talked about Dave, the focus for us is on the high-yield development pipeline and even if the stock tomorrow was at $45 a share for us with a capacity that we have in being sensitive to leverage we are going to use that capacity and expand that capacity to execute on the development pipeline to the extent that the opportunities and acquisitions presented themselves in a manner that we thought were accretive for our shareholder typically you wouldn’t see us pursuing and certainly not in any type of meaningful nature without doing what we have always done, come to the market, tell the story and talk about how we raised equity to create value for you. And so, we are focused on the development, maintaining in or increasing our capacity for that opportunity.

[Dave Bragg:]

Thank you.

[Operator:]

The next question we have comes from Alexander Goldfarb, Sandler O'Neill.

[Alexander Goldfarb:]

Good morning. So going to the page 15 the funding page, really it is helpful, but just a question maybe for Daniel on the selected credit metrics, you guys have where you stand right now at quarter close and then you have your estimated range, but as you guys have just talked about there is you are going to remain actively developer sounds like 2017 will actually increase on the development front. You are also going to you have dispositions or maybe JVs. So how much of that estimated range is sort of a steady-state in an ideal world where you've completed the development program and there is nothing more versus every year it is going to ebb and flow and that number is going to fluctuate, so basically when do you think that will actually be within that range or is that more of a steady-state type range?

[William C. Bayless:]

I think you will see, given that we are in a constant changing stage right now as it relates to transactions, selling properties to create capacity, bringing developments online. But obviously from quarter-to-quarter you are going to see some ebb and flow it is just impossible not to. But as we put out in our first capital allocation strategy document, certainly as you look at the full execution over of that you actually see an improvement in those credit metrics and keeping it stable in the area that it is, but a little bit of the ebb and flow is just impossible not to have because of the transactional nature of the execution.

[Alexander Goldfarb:]

But when do you think, Bill when do you think that will be, are you guys committing to being within that estimated range in a set time period or that is more of a “longer term goal”?

[William C. Bayless:]

Again I think you will see us fluctuate within it and slightly out of it on an ongoing basis as we execute obviously when we go out and create capacity for disposition that will – in the next it will improve decline slightly within and without of it through the execution period. But when you go take the timeline that we put forth in the original document and which showed what would occur at the end of that period 2017 is actually an improvement in those metrics.

[Alexander Goldfarb:]

Okay so it’s more of a 2017, okay. On the supply front, it seems like it’s a bit of a Goldilocks environment where the landlords overall have pretty good pricing this year, supply continues to come down there is a strain, there is capital coming in, but hasn’t created craziness. Does that make you concerned or do you feel like somehow the industry has gotten hold of itself or you are worried about the good backdrop is just going to attract more capital and thus it is going to eventually make its way into another supply boom.

[William C. Bayless:]

We view this all as positive and if anyone attended the NMHC's Student Housing Conference you've heard these sentiments echo throughout the entire conference. And what has happened is as you have seen the decrease in supply from our perspective when you look at in our markets as William said is going to be down 15%, it is solely related to the fact that the merchant development community and the other short term holders have realized as we've been preaching since our IPO that the real opportunity for sustained value creation in our sector is in core pedestrian assets close to campus and that’s the ability of cash flows. And so now you see probably 75% to 90% of the development taking place in most markets being in those pedestrian locations. And because of the natural sub markets barriers to entry in many of those college towns that’s why you see the slowdown in supply as the maturation exists. When you look at some of the new capital coming in and again it is self fueling many of those platforms that are developing it down the road when you know in a different capital environment that are the M&A opportunities for us to continue to be the industry consolidator. One of the things that we see, we were looking at our own data compare to Axiometrics, you noticed that Actual Metrics had a slight uptick about 2% and their supply is down to 15. Part of what we’re seeing is there is some move to core pedestrian development in tertiary markets and so if you see some development taking place and some money flow is going into that sector which obviously is not where we do business and where we play. But we only see what’s happening in the tier 1 flagship schools that we do business and the investment developments taking place being positive maturation of the sector and what you’re seeing take place, William talked about there is $1.1 billion in core trades is CBRE report that reported cap rates that were 5.18 that’s a great data point, 29 transactions in that and so what is happening is as this industry matures people were now establishing the correlation and the comp compression in cap rates based on the stability of cash flows associated with the core aspect of this business and so we see it all as positive. That’s not to say from time to time you won’t have a market that at any moment in time could be over saturated on a short term perspective those type of things will occur on a micro basis.

[Alexander Goldfarb:]

Okay, that’s helpful. Thank you.

[William C. Bayless:]

Thank you, Alex.

[Operator:]

Next we have Nick Joseph of Citigroup. Please go ahead.

[Nicholas Joseph:]

Thanks. Going back to the disposition conversation what are going to the ultimate decision to sell the non-core assets versus JV in core assets or should we expect you to sell the $600 million of dry properties before exploring JVB in any deals?

[William C. Bayless:]

We're really exploring simultaneously Nick. Where and how the execution ultimately lines up is something that we will do very thoughtfully and in full consent with our board and based on the capital market and in the private market environment add to the balls. But it is something that certainly as we look at the opportunities that are available to us given all market variables it's something that we'll analyze and pursuing the relationships simultaneous and so the ultimate execution obviously will let me do say this. The execution on the disposition of non-core has been ongoing and continues to be ongoing, but we’re working those paths parallel.

[Nicholas Joseph:]

If you were to JV a package of the ACE communities today what nominal cap rate do you think you could achieve on the sale given it would be a minority stake in those properties.

[William C. Bayless:]

I think so five and if were to do it and again we were very clear to point out on the prior question is to how we would approach that because as we have said one of the most important components of ACE is our university partners understanding that we are with them for the long-term and what they have engaged us for and that we would pursue that in a manner where it is a positive to the program and in no way a negative diminishment.

[Nicholas Joseph:]

I think can you breakdown the academic years 2016, 2017 revenue growth guidance between occupancy and rental growth assumptions.

[William C. Bayless:]

Yes, and we will give a clear range on both of those obviously when we put out guidance. When you look at the 2016, 2017 lease-up for what will be the 2017 store property group and that is the current total portfolio which sits at 96.9%. And so when you look at our historical and certainly over the last two to three years delivering in the area of the 97.7, obviously right there, there is you formed the conclusion that there is the potential for about 80 bps or perhaps greater in terms of the occupancy upside. Then when you look out where runaways will come in I would say right now based on what we are seeing in the market probably a good midpoint of rental rate growth moving into 2016, 2017 would be the same type 2.9 that you are seeing us out now. It could end up being greater, it could end up being slightly below, but so that’s kind of the variable you see there looking at the office with the 96.9 and where we have historically performed over the last couple of years and again the market dynamics for our competitors we would think we should be able to replicate that moving forward and as we formulate our guidance moving in the next year those of the type of variables that you’ll see that we would expect the midpoint to pan out in those ranges.

[Nicholas Joseph:]

Thank you.

[William C. Bayless:]

Thank you.

[Operator:]

Next we have Jordan Sadler, KeyBanc Capital Markets.

[Jordan Sadler:]

Good morning. I wanted to follow up on sort of the dispositions a little bit, not to beat a dead horse here Bill, but I am curious, one if you could handicapped whether or not you would sort of joint venture ACE deals and how we should be thinking about that or if that is sort of more off the table, I know it sounds like it’s obviously on the table here, but I can’t get a feel for whether or not this is something you guys will go out and do or if it just a non-starter?

[William C. Bayless:]

No I would say if we were going to, if we end up joint venturing a core portfolio what would be more likely is that we took out - we had a core portfolio that included one or two ACE deals versus putting together an exclusive ACE portfolio and going out just with that. And then they demonstrate to the market what they get and enough variation at the demonstration what the break out of ACE would be so the market to see the valuations prepared in off campus.

[Jordan Sadler:]

And then the sources and news slides are helpful and that presentation is helpful especially as you are adding to the pipeline. I am curious here. I know it’s depends on marketing conditions to some extent, but you are also adding new projects with regularity here. So how should we think about the timing of the sales? I mean it doesn’t look like there is anything left in the guidance for this year, but I remember earlier in this year you guys obviously sold the big slugs, so should we be thinking about timing?

[Daniel Perry:]

Yes, Jordan this is Daniel. We already are in discussions with some buyers for transactions that could close in the early part of the 2016, but we do expect it to happen throughout 2016. And so as Bill was talking about and answering Alex’s question earlier, obviously that’s going to cost that leverage ratio to fluctuate around our ultimate estimated level to the extent we get out a little ahead of the spend on the construction pipeline, leverage is going to float a little below that estimated level and to the extent the constructions are up a little ahead of dispositions that’s going to be a little above. Obviously, there is a trade off to the two and the - our dispositions are coming earlier and there is little bit more short-terms dilutions if they come later it lays at a low. So, it will be mixed throughout the construction cycle we've got a little bit lined up for early next year, but we are expect to kind of expand the entire period.

[Jordan Sadler:]

Hey guys, it’s Orson Wasserman [ph] here with Jordan. I just to follow up at one I was wondering if you give us a update on the ground lease terms on some of the more recent deals any change in terms of term or any of the other on the operating side?

[William C. Bayless:]

No and this is where we continued to stay very disciplined and true to form that for those ACE transactions to be valued as real estate those ground lease terms have to be a real estate transactions. So, as it relates to finance being able to finance them, being able to trade them, being able to grow your margins and your NOI and have control of those variables, we continue to approach them and also that’s you have to remember that is always is in concert with the universities who to choose a subjected. And that those that choose ACE are doing so because they want the most credit friendly structure. So that the rating agencies ultimately never determined that they impact they and direct their ratios and the key for that is for it to be true equity ownership buy in outside entity that has pull downside risk and upside. And so when you don’t do that you longer-term create a liability for the institution in terms of their indirect credit treatment down the road and so it is something we continued to stay true to an educate our university partners that if someone comes in selling something different it would really less than that they run the risk of negative credit impact for themselves down the road.

[Jordan Sadler:]

So it is fair to say still 50 plus years.

[William C. Bayless:]

Yes, oh yes.

[Jordan Sadler:]

Thank you.

[William C. Bayless:]

75 is what we strike off.

[Operator:]

Next we have Anthony Paolone of JP Morgan.

[Anthony Paolone:]

Excuse me, thanks and good morning.

[William C. Bayless:]

Good morning Anthony.

[Anthony Paolone:]

Good morning, on the leverage side even if I kind of understand you are going above or below the range and the timing and that sort of stuff, it still seems that you are guys are comfortable with leverage over time running about a turn perhaps north of where we're seeing a number of other REITs that we are development oriented kind of target is that something you guys, do you look at it that way how do land on what you think is the right leverage level here, because I think one thing that it seems is emerging is that level for you guys is a little bit north of where again some of the more development oriented REITs you're targeting?

[William C. Bayless:]

Look we are absolutely sensitive to leverage and always want to operate at a level of leverage that allows us to be opportunistic in a down market. And so, we would be rather be lower leveraged than we are today, sure, absolutely, you know current market conditions are where they are. We are comfortable where we are, but we need to create additional capacity through dispositions. That means we've talked about to pursue our development pipeline and we do not want leverage to tick up. But certainly over the long haul when there are opportunities to appropriately de-lever being sensitive to dilution and to grow earnings per share on a long-term basis, we will always explore that with our Board of Directors. And so, I never want to give the indication that we're comfortable operating at high leverage, we are not. We think at the levels that we are and the ability, the private market is offering us to be able to execute on creating addition capacity, we are able to execute on the incredible development opportunities in the accretive opportunity for value creation that provides to our shareholders.

[Jonathan A. Graf:]

The only thing that we would be point out to everybody, that unique thing about student housing and I think goes underappreciated that should give people comfort with what our leverage is today as we put forth our capital allocation planned to execute through dispositions to continue to pursue development is the stability of our cash flows compared to other sectors in that regard.

[Anthony Paolone:]

Got it and you have mentioned the sensitivity to dilution in the short-run, is that an impediment to the timing question? It seems like your commentary around the capital markets are such that if you wanted to accelerate a bunch of sales and just bring the leverage down, you could probably execute in this environment fairly well. So is it that sensitivity to dilution or just trying to understand that?

[William C. Bayless:]

Yes, and again we will always be prudent and sensitive to the dilution as well as leverage. However, we are going to let private not the overall market environments dictate what is the prudent thing to do. And this is something that the level, the level of conversation that takes place of this nature every quarter with the management team and our Board of Directors in terms of the current environment, the emerging environment and execute to make sure that we do what’s right for the long-term is an ongoing discussion that is always, that there is something there is plan involving and an action to be prudent versus any philosophical ideology that drives us in that regard.

[Anthony Paolone:]

Got it. And a separate issue, you think about sales particularly on the core side and if I'm doing my math right it seems like ASU exposure is getting to be about 10% of the enterprise, is that something that you would consider sharing or do you feel comfortable with it at that level, how would you think about just one school like that?

[William C. Bayless:]

We are very comfortable with that in the case of ASU and we talk about 10% being kind of the maximum tolerance that we have in a general market situation, in terms of an off-campus situation, where we have open market products that compete with everything in the market. When you look at Arizona State you really have to bifurcate our holdings. And that first day issue is the largest university in America with an enrollment of over 72,000. And you then look that we currently only have 2200 apartment beds that compete in the open market at Arizona State University. So our open market risk and those 2200 beds performed exquisitely through the economic downturn of 2009, 2010 and 2011 and had positive growth each year. The remaining of our investment there is in first year residence hall communities under the university's first-year housing expectation. And so when we give our presentations to the University typically provide 21% of total beds to enrolment. ASU as an institution is actually low in their 21%. They are closer to 18% and we are half of that mix. And so our product differentiation, one of the three pillars of American campus investment criteria our product differentiation in ASU actually probably has us the most insulated from open market downside risks there, than any other holdings that we have.

[Anthony Paolone:]

Okay, got you. And then last question, in the quarter in the same-store, I think your rent per bed was up like 5.5% year-over-year. It just seemed like an outsized number given where at least your rent increases were for the 2015, 2016 school year. Was that, I think maybe I heard in a commentary better utilization of some asset in the summer, what kind of juiced that up there?

[William C. Bayless:]

Yes and you are looking at the seasonality page, when you see it. A couple of things that Jim spoke about were summer occupancies or the traditional residence halls which do include the camp conference fee, other income and application fees, early in fees and damage recoveries. But then also you have a big change in terms of that compared to the number and you'd have 22 dispose. Those 22 dispose are properties that had rents well below the average rental wean off last year's 2.8. And also in this quarter you've got a lot of noise in terms of that average rent in that all of your – then you go back to last year's lease-up anywhere where you have slower properties at the end of your lease-up where you do short-term leases, where you may have nine-month leases, all those beds become vacant during that quarter and those were beds again that are your lowest rental rate point and where you back filled occupancies and other properties to maintain that is at higher rates and so that's why you end up always in this quarter with a little bit of an anomaly related to that calculation.

[Anthony Paolone:]

Okay, got it. Thank you.

[William C. Bayless:]

Thank you.

[Operator:]

Next we have Drew Babin with Robert W. Baird

[Drew Babin:]

Good morning.

[William C. Bayless:]

Hey Drew.

[Drew Babin:]

Quick question on the non-core asset sales, obviously the time at which you started talking about the potential of the JV core assets was around when the stock price was much lower than it is today and you had mentioned that the nominal cap rates theoretically on a deal like that could be below 5% which was certainly very low. Theoretically if a stock was trading above NAV in the high cap rate on your stock was I'd call it 5.25 would you prefer issuing equity at 5.25 or parting with very good assets or at least a share of them at a slightly lower yield if you had to?

[William C. Bayless:]

Yes, yes. Certainly, if you can raise equity above any of the units readily available to you that would be something that is probably more desirable. However, I do think when having been a public company now for 11 years and matured as an organization, almost all of the REITs always have an avenue available to them in terms of joint venture relationships that they can turn to you when it makes sense to do so. And so as an organization we are one committed to nurturing those relationships and making sure that we have them in place to be able to execute when and if it makes sense to do. And so something strategically is an organization, so we need that arrow in our quiver. The other thing that we look at in this as you know, some folks had conversations with us earlier, when the stock was significantly lower and perhaps let's say if the private market was not as lucrative as it is right now. When you look at the value you know some folks said should you guys slow down development completely? Well, let's talk about why we don't slow down development and why we are continuing to execute and look at disposal of the non-core and why it might even make sense to include some core down the road if we needed to create capacity through that be able to do so. One of the things that - we check our 2013 developments, which was pretty much an average year. We delivered $311 million of development. It was seven projects. Those seven projects included three ACE transactions and four off-campus transactions. When we look at that those seven development properties now entering the 2015-2016 academic year that we have just undertaken going into their third year of operation they have had same-store NOI growth of 10.8%. They are currently operating at an 8.2% yield versus they are growing in yield of 6.75 to 7 that was targeted off of those developments. If you then look at private market valuations more you mentioned 29 trades at 5.1 take a 5.1 which would be conservative that would imply in an NAV that would translate to a 22% internal rate of return that we have created in that pool of development. And so when you look at these significant value creation opportunities that our development pipeline of bringing on those new ACC communities creates for you and for us together as shareholders, being able to continue to fund that obviously through the disposition of non-core to where you could never create the kind of value that I just discussed. In some cases if you had to join ventures some core assets where you have created significant value and you could harvest some of that, to have the opportunity to do it again in the type of numbers we just discussed, then joint venturing core assets would still makes sense in that regard. And so having that opportunity available to us within our capital allocation strategy is something that makes sense in the long-term to certainly have available to us to be able to execute when it makes sense. Certainly when the stock was at 32 it made a heck of a lot of sense. The stock is you asking your question was trading above NAV, it may not at that moment in time, but having the opportunity available to execute to create value for you in the most accretive fashion and the opportunities where it is greatest is something we have got to strategically ready for to execute as an organization.

[Drew Babin:]

That's helpful. Thank you.

[Operator:]

Next we have Aaron Hecht of JMP Securities. Please go ahead.

[Aaron Hecht:]

Good morning.

[William C. Bayless:]

Good morning.

[Aaron Hecht:]

I'm wondering what the rent growth variability looks like between your universities today and where you are seeing the highest rent growth versus the lowest?

[William C. Bayless:]

Yes. And you know we now have a property of 150 assets across 72 collegiums markets and you will have markets just looking at this year some of our hardest hit markets, at LSU we were down 5.6% in rental rate. In other markets some of our highest recalls were the 10%. And so throughout the portfolio you will have a handful, you will have a dozen or so properties. Last year when we look at the number of properties in the grouping below 95% occupancy in many cases and that property grouping our rates are flat to decreasing in order to create revenue growth in the next year through occupancy. In our 98% plus category last year I think that probably represented by its self collectively about 3.2% rental rate increase in the overall that ended up at 2.9 and you had rates as high as approaching 10%, so it's a wide variation throughout the portfolio.

[Aaron Hecht:]

Was the decrease in rate at LSU associated with the university's financial troubles or was that a separate…?

[William C. Bayless:]

No, no. That was purely a supply issue and our three assets, our four assets at LSU are assets that we none of them we bought individually. Two came from GMH, one came from the Campus acquisition and they both came from the Kayne Anderson portfolio. And they were all drive assets. They are all part of that non-core portfolio and because of that there are outside of the traditional range of being protected from the [indiscernible] barriers to entry. And this year you had two off-campus properties come on the line inside of us which we said and this is why again folks we talk about core pedestrians and liquidating their portfolio. You see some of those properties occupancies dipped down this year to 88% with rental rates down 5%. That's why we talk about core pedestrians is where the stability of cash flows are and we've evolved our portfolio to where 91% of that exist and we are getting rid of that last nine.

[Aaron Hecht:]

And then where are you getting some of these 10% rent growth numbers from?

[William C. Bayless:]

Austin, Tallahassee has been very strong for us and again these are on an asset to asset basis and so in the Ann Arbor and your tier one college towns where we have well located assets where you know it is especially in use when no supply is coming in you are able to make those rate adjustments. You know our option is now we have one property this year that is at 12.

[Aaron Hecht:]

Okay and then just kind of a side note on the development page it looks like there was a $2 million cost increase at the U Club on Turner [ph] development what was associated with that?

[William Talbot:]

Aaron this is William. That was just as we'd got final pricing and the specs of the property came in, so that $2 million was based on final GMP and pricing.

[Jonathan A. Graf:]

Not material to the expected yields.

[Aaron Hecht:]

And did that work against, it doesn’t work against your yield or you just, you think…?

[William Talbot:]

No because we also say upside on revenue runaway projection as well.

[Aaron Hecht:]

I see, thanks very much, nice quarter.

[William C. Bayless:]

Thank you.

[Operator:]

[Operator Instructions] Next we have [indiscernible] of Bank of America Merrill Lynch. Please go ahead.

[Unidentified Analyst:]

Thank you. Just a quick question on the 55% NOI margin target, are you getting there from revenues growing faster than expenses or are you targeting specific expense items like you did with the marketing spend per bed?

[William C. Bayless:]

Yes, and we are and again kudos to Jim Hopke, Jennifer Beese and the entire marketing and leasing operations team in terms of the progress made there. We're doing in every area of the business. Obviously the utilities and energy conservation programs are a huge area where because the eclectic nature of our portfolio and eclectic policies that we inherited many cases from others is something that we've ear marked over the years as a place that has great potential for us. We also, as we look at the multiple market efficiencies, they are the multiple property market efficiencies that certainly translates over into many areas certainly in the staffing area where we can gain efficiencies in that and then also just across every single major category of operations we continue to focus. And so marketing certainly provided the greatest opportunities Jim talked, we are projecting this calendar year $140 per bed. And so in that regard that is an incredible accomplishment down from the historical run rate of $187 a bed and from the high end 2013 of $211 a bed. So we're focused across the entire array of our operations and we'll continue to drive them down everywhere that we can and we always point this out, it is our employees. We are driving down expenses without ever sacrificing customer service, curb [ph] appeal and the preservation of our assets. It is about how we do it the most to how we accomplish our qualitative objectives in the most efficient manner.

[Unidentified Analyst:]

And on the multiple property market efficiencies, should we think about that $140 per bed that you achieved as the marketing rate going forward or is some of that helped by earlier lease-ups?

[William C. Bayless:]

The $140 a bed is across the portfolio. So it is a combination of multiple property market efficiencies. There was an exhaustive effort by our marketing and leasing and operations team to do a historical look back, looking at some of the historical LAMs [ph] data to try to better ascertain what drove traffic from past marketing activities and really eliminate those that we thought were not driving that benefit which indeed held up and also just looking at continuing to be as prudent as possible in spending money in concert with the velocity. And so yes, to the extent that markets leased up quicker, turning off those markings faucets is also a benefit, it is those three components.

[Unidentified Analyst:]

Great, thank you Bill.

[William C. Bayless:]

Thank you.

[Operator:]

Well at this time, there are no further questions. I will go ahead and hand the conference back over to management for any closing remarks. Gentlemen?

[William C. Bayless:]

We would like to thank you for joining us. We are pleased with the quarterly results. Again we'd like to thank the American Campus team and we look forward to visiting with many of our shareholders at [indiscernible]. Thank you much and have a great day.

[Operator:]

And we thank you sir and to the rest of the management team for your time also today. The conference call has now concluded. At this time you may disconnect your lines everyone. Thank you again for participating. Take care and have a great day.