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Edited Transcript of ACC earnings conference call or presentation 24-Apr-18 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2018 American Campus Communities Inc Earnings Call

AUSTIN Apr 30, 2018 (Thomson StreetEvents) -- Edited Transcript of American Campus Communities Inc earnings conference call or presentation Tuesday, April 24, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel B. Perry

American Campus Communities, Inc. - Executive VP, CFO, Treasurer & Secretary

* James Clarence Hopke

American Campus Communities, Inc. - President

* Ryan Dennison

American Campus Communities, Inc. - SVP of Capital Markets and IR

* William C. Bayless

American Campus Communities, Inc. - CEO & Director

* William W. Talbot

American Campus Communities, Inc. - Executive VP & CIO

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Conference Call Participants

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* Alexander David Goldfarb

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst

* Andrew T. Babin

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Austin Todd Wurschmidt

KeyBanc Capital Markets Inc., Research Division - VP

* John Joseph Pawlowski

Green Street Advisors, LLC, Research Division - Senior Associate

* Juan Carlos Sanabria

BofA Merrill Lynch, Research Division - VP

* Michael Bilerman

Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research

* Nicholas Gregory Joseph

Citigroup Inc, Research Division - VP and Senior Analyst

* Vincent Chao

Deutsche Bank AG, Research Division - VP

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Presentation

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Operator [1]

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Good day, everyone, and welcome to the American Campus Communities 2018 First Quarter Earnings Conference Call and Webcast. (Operator Instructions) And please note that today's event is being recorded.

I would now like to turn the conference over to Ryan Dennison, Senior Vice President, Capital Markets and Investor Relations. Please go ahead, sir.

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Ryan Dennison, American Campus Communities, Inc. - SVP of Capital Markets and IR [2]

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Good morning, and thank you for joining the American Campus Communities 2018 First Quarter Conference Call. The press release was 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. Also posted on the company website in the Investor Relations section, you will find an earnings materials package, which includes both the press release and a supplemental financial package.

We are hosting a live webcast for today's call, which you can access on the website with the replay available for 1 month. Our supplemental analyst package and our webcast presentation are one and the same. 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 fact may be deemed forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act of 1995. Although the company believes the expectations reflected in any forward-looking statement are based on reasonable assumptions, they are subject to economic risks and uncertainties. The company can provide no assurance that its expectations will be achieved, and actual results may vary.

Factors and risks that could cause actual results to differ materially from expectations are detailed in the press release and from time to time in the company's periodic filings with the SEC. The company undertakes no obligation to advise or update any forward-looking statements to reflect events or circumstances after the date of this release.

Having said that, I'd now like to introduce the members of senior management joining us for the call: Bill Bayless, Chief Executive Officer; Jim Hopke, President; William Talbot, Chief Investment Officer; Daniel Perry, Chief Financial Officer; Jennifer Beese, Chief Operating Officer; and Kim Voss, Chief Accounting Officer.

With that, I'll turn the call over to Bill for his opening remarks. Bill?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [3]

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Thank you, Ryan. Good morning, and thank you all for joining us as we discuss our first quarter 2018 financial and operating results.

As Jim will discuss, our Q1 property operating results were largely in line with our expectations, with the exception of cost associated with the extraordinarily cold and prolonged winter and related storms. He'll also provide comments related to our current leasing status for the upcoming academic year. William will then discuss how our industry's strong fundamentals and stability of cash flows continue to foster vibrant interest from global institutional investors and continue to drive transaction volume and increasing private market valuations. He'll also provide an update on our capital recycling activities as we continue to pursue only the highest risk-adjusted return opportunities. Daniel will then review our Q1 financial results, balance sheet condition, our ability to further capitalize on private market conditions as a strategic funding alternative, if we so choose; and reaffirm our 2018 guidance and underlying assumptions.

With that, I'll turn it over to Jim to get started.

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James Clarence Hopke, American Campus Communities, Inc. - President [4]

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Thanks, Bill. As Bill mentioned, our first quarter 2018 same-store operational results were largely in line with our expectations, with the exception of $500,000 on operating expenses associated with the unusually cold winter and related storms.

As seen on Page S5 of the supplemental, quarterly same-store property NOI increased by 0.1% on a 1.9% increase in revenue and an increase in operating expenses of 4.5%, consistent with the flatter growth profile for the first half of the year that we highlighted in the guidance discussion during our fourth quarter 2017 call. Our revenue increase for the quarter reflected the results of our '17-'18 academic year lease-up compared to the prior year. We expect our revenue growth for Q2 and part of Q3 will continue to be moderate as we conclude the '17-'18 academic year.

Expense growth in the first quarter was largely in line with our expectations with the exception of the repairs and maintenance and utilities increases, which combined to exceed our budget by approximately $500,000. This excess was a result of the recent series of winter storms that affected much of the country, primarily in snow removal, plumbing repairs and other miscellaneous costs associated with the prolonged and intense winter weather. Excluding these costs, our same-store expense growth would have been 3.8%.

The property tax increases compared to the prior year quarter were expected and were largely driven by the assessments for our recently developed properties that entered our same-store grouping in 2018. Adjusting for these properties, our property tax growth would have been 6.4%. While our marketing spend in the first quarter reflected 12% growth over the prior year, it was only $160,000 over plan for the quarter.

Our portfolio's leasing activity continues to trend within our expected leasing trajectory. And at this time, we are reaffirming our projection for opening same-store rental revenue growth of 2.9% to 4.4% for the 2018-'19 lease-up. We look forward to updating the market as we progress through the remainder of the year.

I will now turn the call over to William to discuss our investment activity.

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William W. Talbot, American Campus Communities, Inc. - Executive VP & CIO [5]

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Thanks, Jim. Turning first to the overall transaction market, the strong demand for investment in the student housing sector experienced over the past 2 years continued into the first quarter of 2018. Demand for global and domestic investment groups resulted in approximately $1.6 billion of transactions in the first quarter of 2018 per CBRE data. As discussed at the recent Interface Conference that saw record attendance of almost 1,300 people, abundant capital is still chasing investment in the sector with demand continuing to significantly outpace available product for sale.

Cap rates for core assets pedestrian to Tier 1 universities are now routinely valued at 4.25% to 4.75%. The sector has a long runway in investor demand and should continue to produce strong levels of investment in student housing, facilitating the execution of our capital recycling activities. As it relates to our capital recycling activities to fund our announced growth, we executed a nonbinding term sheet with a joint venture partner for a minority interest in a portfolio comprised of our existing assets. As previously discussed, the valuation is in line with our previously provided range with economic cap rates expected in the mid-4% range. As we are largely through due diligence and in the final stages of negotiation of venture documents, we still expect the partnership to close in the second quarter of 2018.

Turning now to development. We are under construction and making great progress on our 2018 pipeline of owned developments and presales, which totals 10 projects, approximately 7,000 beds and $673 million in development cost. For 2019, we are pleased to announce we have entered into a presale agreement with The Dinerstein Companies, a prominent and well respected developer of student and conventional apartment communities for a core development pedestrian to the University of Oregon and located just west of the recently announced $1 billion Knight Campus for Accelerating Scientific Impact. The 443-bed development is located directly between our existing pedestrian assets in the market, providing further diversification with regards to product, location and price point offerings of our communities at the University of Oregon.

The presale purchase price of $70.6 million, which includes $2.4 million of ACC elected upgrades and specs and materials, is expected to close in fall 2019 shortly after occupancy. Dinerstein is retaining the development and delivery risk and ACC is responsible for the initial marketing, leasing and operations of the community. With this addition, our 2019 owned and presale developments now total 5 projects, 3,160 beds and $405 million in development. While 2018, 2019 developments are located either on-campus or pedestrian to major Tier 1 universities that are targeting stabilized development yields between 6.25% and 7% and presale development yields between 5.7% to 6.25%, representing attractive spreads of 125 to 200 basis points of current valuations for stabilized assets within these markets.

Turning to our third-party on-campus business. We are pleased to announce we have begun predevelopment services on our ninth development on the campus at Prairie View A&M University. The proposed development represents our 14th project as part of our 23-year highly successful partnership with the Texas A&M University system. The company anticipates providing management services for the 520-bed project upon completion although the full scope, feasibility, fees and timing have not been finalized. We're also making great progress on our predevelopment of our third-party developments at the University of California, Riverside; the University of California, Berkeley, Goldman School of Public Policy; and Delaware State University. We continue to pursue a deep set of on-campus opportunities totaling over 40 potential projects. We'll update the market as we make continued progress.

I'll now turn it over to Daniel to discuss our financial results for the year.

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Daniel B. Perry, American Campus Communities, Inc. - Executive VP, CFO, Treasurer & Secretary [6]

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Thanks, William. FFOM results met our expectations for the first quarter of 2018 as we reported total FFOM of $85.8 million or $0.62 per fully diluted share as compared to $83.2 million or $0.62 per fully diluted share for the first quarter of 2017. FFOM increased by $2.6 million, but per share amounts reflected an increase in weighted average shares outstanding of 3.4 million shares or 2.5% resulting from $191 million in ATM activity in the first half of 2017 to fund approximately $223 million in 3 individual property acquisitions.

We also acquired a partial interest in 4 operating properties for $282 million as part of the Core Spaces portfolio transaction and delivered 10 new developments totaling $609 million. As compared to the first quarter of 2017, these 17 growth properties contributed $13.2 million in FFO, offset by $9.8 million in additional interest expense and lost NOI from dispositions. As Jim discussed, same-store NOI contribution for the quarter was relatively flat, which was slightly below budget due to the impact of expenses associated with the excessive winter storms experienced in the first part of the year.

Moving to capital structure. As of March 31, the company's debt to enterprise value was 37%, debt to asset value was 38.6% and the net debt to run rate EBITDA was 7x. We intend to use the proceeds from the joint venture transaction targeted to close in the second quarter to pay down our $300 million term loan maturing this year and other outstanding floating rate debt, and expect at that time to be able to bring debt to asset value back below 35% and net-debt-to-EBITDA down to approximately 6x. Our floating rate debt, which currently stands at 30.4% of total debt, will also be reduced below 20% after the transaction. As William mentioned, given significant demand for core student housing product in the private market, we also have the opportunity to execute on additional capital recycling to further strengthen our balance sheet and position the company to continue to execute on an attractive shadow development pipeline.

With regards to our 2018 guidance, we are maintaining our previously stated FFOM guidance range of $2.33 to $2.43 per fully diluted share. For the balance of the year, the most significant factors that will impact our annual results are property NOI performance, interest rate fluctuations and third-party service fee income.

For property NOI, we previously communicated total owned NOI of $462 million to $470 million. Our ability to meet our NOI guidance is dependent upon the final results of our fall 2018 lease-up as well as our success with backfilling any vacancies that occur in the remainder of the spring or summer months due to short-term leases. Final NOI produced for the year will also be dependent upon our ability to maintain operating expenses, including term cost within anticipated levels, final property tax assessments and any additional dispositions in excess of guidance.

It's also important that we reemphasize our continued expectation for same-store NOI growth that will be slightly negative to slightly positive for the first 6 months of the year, with an improvement in the same-store growth profile in the second half of the year due to increased revenue growth anticipated from our fall 2018 lease-up.

Our guidance range also includes third-party fee income in the range of $16.5 million to $20.5 million, with $4.3 million to $7.5 million expected to be recognized from third-party development projects commencing in the second half of the year. At the low end of guidance, we have assumed only Delaware State and the first UC Riverside project commence and start producing fee income. While at the high-end of guidance, we also assume UC Berkeley and Prairie View Phase IX projects commence construction. All of these projects are in the process of feasibility evaluation and document negotiation.

You can also refer to pages S16 and S17 of the earnings supplemental to get complete details of each of the components of our 2018 guidance. In this quarter, we have added a column reflecting year-to-date actual results to facilitate reconciling each component of our guidance to the company's consolidated financial statements.

With that, I'll turn it back to the operator to start the question-and-answer portion of the call.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first questioner today will be Alexander Goldfarb with Sandler O'Neill.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [2]

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Just 2 questions from us. The first one, Daniel, in your comments you talked about the strong demand for assets and, obviously, we saw that at Interface, just the -- everyone who walks in, so that's not the question. But for you guys as a public company, the market can -- wants growth, the market wants dividend growth. There's NAV, which is a investment metric but it's not tangible to outside investors that you can attract capital, for generalists trying to invest in REITs, if you're trying to deliver growth.

So how do you guys balance the fact, that, yes, your assets are worth more in private hands and to the extent that you can match funding, continue to grow earnings and grow the dividend -- that's a good thing. But how do you balance it against -- and I don't know maybe you're not going there, but other REITs have done where they've diluted growth and then investors at the moment are left with flat prospects when they were originally thinking they were growth prospects. How do you balance those?

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Daniel B. Perry, American Campus Communities, Inc. - Executive VP, CFO, Treasurer & Secretary [3]

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Certainly -- and it's an ongoing conversation we have with our board from a capital allocation standpoint. Looking at NAV growth relative to earnings per share growth. And if we're doing the right things to drive improvement in our overall returns, both of those should benefit from it. The consideration we have to think about during the periods like this is, with a good shadow development pipeline and good capital allocation opportunities, when you're looking at attractive valuation for existing assets, and being able to harvest that and deploy it into high-yielding developments, that certainly makes sense from a capital allocation standpoint.

So you have to consider, well do you want to de-risk that growth and consider that cap rates may move on you, and so you go ahead and harvest that capital now or do you try to more match time it? And so that's a ongoing assessment for us. We will certainly continue to try to balance it and drive as much growth as we can while managing our balance sheet.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [4]

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Okay. But I mean, I think part of the issue that we've seen in the sector is that for "value creation and development", it gets wiped away on the capital recycling side. So it seems like you guys found a good niche here to sell low cap to fund higher yielding development. So hopefully, we'll continue to see earnings growth going forward as opposed to flattening. I mean, I know you've not giving '19 guidance, but hopefully, the message is that we'll see growth unless you are telegraphing that we should think of '19 as a flat year.

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [5]

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We're not telegraphing anything at this point, Alex, going into '19, but certainly the point that you made is valid and obviously -- this is Bill. The point that you made is very valid where the prior year's acquisitions, where the recycling of the value-add further for distant campuses with a higher cap rate. We're now in a much better situation with the private market environment and having the core portfolio that we do that any dispositions that we're undertaking are going to be at a significantly accretive spread to the investments that we'd be making in the development pipeline.

As William mentioned in his script, typically, the presale and the development opportunities we're looking at are 125 to 200 basis points of accretive spread in nature. And so the private market is the private market. Cycles come and go in that area too. But right now, where it seems to be with the long runway that William talked about, certainly for the near- to mid-term, it seems to put us in an opportunity to be advantageous as we consider when it is prudent to execute the [matched] funding of the opportunities.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [6]

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Okay. And then the second question is, you mentioned The Dinerstein deal, the presale. As you guys are looking at new presales mezz developments, are you finding all the developers moving up their target dates for delivery such that everyone is now targeting sort of a May/June? Or are some of the deals that you're looking at still targeting sort of an August delivery where there is a risk that it may not complete on time?

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William W. Talbot, American Campus Communities, Inc. - Executive VP & CIO [7]

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Yes. Alex, this is William. Certainly, there has been a renewed focus on the on-time deliveries within the industry. You've heard ourselves and EdR publicly talk about it. We are seeing other developers focus on that as well. And so I think they're continually balancing the cost of accelerating the delivery to with -- offsetting the risk of delivery. So we specifically, on our [column], we do presales in our mezzanine agreements that we have very defined liquidated damages as it relates to delivery dates. So that delivery risk stays with the developer in that case. But we're seeing more and more sensitivity throughout the industry to making sure that the on-time deliveries occur.

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Operator [8]

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And our next questioner today will be Nick Joseph with Citi.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - VP and Senior Analyst [9]

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Just following up on Alex's question, what's your appetite -- you did 1.25% of presale developments. Obviously, it comes with the dilution in terms of funding it and you're not getting as high of a going-in yield as you are on your existing development pipeline?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [10]

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Yes, Nick, for us, it's very, very selective. When you look at the 2 presales we're talking about in this cycle and the next, it is with our holdings at Florida State at Stadium Center that are core to those holdings and have great opportunity beyond the initial going-in yield because they are part of the multi-asset market initiative in the long-term markets that we want to be in. And so we're much more selective in terms of looking at those presales and look at that yield, not just in the context of the headline but what it means in a more strategic aspects of what the company is looking in terms of market selection and/or the efficiency growth. And also, as William pointed out, we're mitigating all the development delivery risk associated with that and have the ability to mitigate that risk and even walk away.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - VP and Senior Analyst [11]

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And then on the potential JV, how many assets are going to be included? And what's ACC's retained ownership percentage?

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Daniel B. Perry, American Campus Communities, Inc. - Executive VP, CFO, Treasurer & Secretary [12]

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Nick, this is Daniel. I think we've talked about on the last call that would include 6 assets. We did not give an exact percentage on the transaction, but it would be a majority interest maintained for ACC with a minority interest from the partner. And ACC would maintain operational and asset management control of the properties.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - VP and Senior Analyst [13]

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And then can you provide any color on the partners, if domestic or foreign capital? And do they own other student housing assets? Or is it their first entry to the space?

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William W. Talbot, American Campus Communities, Inc. - Executive VP & CIO [14]

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Yes, as we said in our last call, we didn't really specify the specifics of the partner, and certainly once we close the JV, we'll be providing more specifics. But when we brought out the joint venture opportunity, we saw a lot of interest from both the large global institutional and domestic, and certainly, one of those type groups is who we are working with. But at this time, we don't want to give any more specifics until the transaction is closed.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - VP and Senior Analyst [15]

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And just finally on 2019, it'd be Oregon presales, 2019 development and presales now complete? Or is there an opportunity to continue to add there?

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William W. Talbot, American Campus Communities, Inc. - Executive VP & CIO [16]

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This is William, again. Yes, I mean, at this point, being where we are in the cycle, it would be very difficult to add to that presales/development pipeline unless there's something unexpected came in or someone who is already under construction wanted to potentially do a presale to eliminate their -- or to reduce their stabilization risk. But for now, I would assume that you would not see any additional projects to the '19 pipeline.

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Operator [17]

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And our next questioner today will be Austin Wurschmidt with KeyBanc Capital.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [18]

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You guys have previously talked about some challenges, particularly on the supply side in markets like Austin, College Station and Tallahassee. As we sit here at this point in the preleasing season, are there any other markets that are showing similar challenge or where maybe there has been an unexpected anomaly similar to what happened at Rochester last year, for example?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [19]

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Austin, the 3 markets that you pointed out are the 3 that we have watched closely, continue to watch closely in Austin, Tally and College Station. College Station is probably the softest supply market in the nation. Certainly it was last year, will continue to be this year. Between new supply and vacant beds, last year's total of 9,000 beds to be absorbed this fall. The team there candidly is doing an incredible job. Last year, we significantly outperformed the market. We basically held our rental revenues flat, where other people were down in the 70% occupancies and rental rate diminished as much as 10% to 15%, and the team this year is doing an incredible job again. And right now, based on our trending, we expect to be able to hold pretty close to flat again and not have any diminishment in that market, which may be we're the only company that's making that column in (inaudible) currently.

In Austin and Tallahassee: Austin -- obviously, in Austin and Tallahassee, we do expect slowing velocity this year with new supply. But in both of those markets, we continue to hold on to rate as an indicator of how strong demand is. Austin rental rates are still trending for the portfolio above 3%, Tallahassee about the 2.5% and above. And so we continue to watch those. As Jim commented, the overall portfolio leasing, when you look at the rest of the markets, we are confident in terms of the trend being within the historical confines that we historically have seen that gave us the comfort to reaffirm the guidance range of 2.9% to 4.4% in the rental revenue growth.

There is -- we don't at this point in time see the trend that you saw last year in Lubbock, Champaign and RIT. And again, Lubbock was more than half of those 3 properties combined with the 3,000 beds there. And so, at this point in time, we do not see any of those anomalies developing. And the 3 that we identified, we'll continue to watch closely and manage.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [20]

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I appreciate the detail there, Bill. And then as far as College Station, I mean, what do you think the absorption period is? You mentioned 70% occupancy for some of your peers last year. How long do you think it takes that market to get back to a more stabilized occupancy level?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [21]

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There, the university's growth has been prolific. Last year, I believe enrollment growth was up 2,500. And so they're having significant 1-year gains. I believe enrollment is now in the low 60,000s. And the university has made a statement that they intend to take enrollment to 100,000. And so with that kind of enrollment growth, I think College Station will mature slowly. We do think a lot of the development folks are going to get hurt. I mean, their pro formas have not been met, some built too far from campus. And so it may be a great buy opportunity in the next 18 to 36 months.

But on the long-term basis, it will be fine. College Station, again, we're very proud. I want to salute the College Station team publicly on the call. And it is really a testament to our investment strategy and our overall management capabilities to have been able to weather probably what is the worst overbuilding situation in any single market in our company's history and to have flat rental rate growth and not having it diminish. And so for us, it's probably the best unsung accomplishment we had as an organization recently.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [22]

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Appreciate that. And next question, in the last 3 to 6 months, just curious how much upward pressure you've seen on construction costs over that period particularly? And then if you're seeing any differentiation by region, in particular, and maybe hurricane impacted markets?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [23]

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Yes, and certainly for the '18 and '19 pipeline that are under construction, those jobs are fully bought out and we don't have escalation risk in that. But as we look at underwriting 2020 deals and beyond, typically, we're seeing 4% to 8% in escalation. As you all may have heard, wood's at an all-time high. And so you're seeing some pressures on stick-frame pricing. Obviously, some of the tariff discussions related to steel can impact steel buildings, which depending on geography and whether you have concrete as an alternative.

But certainly that's something we look to as we underwrite deals in 2020 and beyond is looking regionally for that escalation, which we see ranging between 4% and 8% and make sure we're underwriting it appropriately and having pro formas based on that escalation versus being surprised and pulling the trigger on something down the road that doesn't have the yield we want.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [24]

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And anything geographically that's differentiating?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [25]

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And certainly, when you get into heavy construction, typically, your choice is concrete and steel. And so when you get into those situations in the Pacific Northwest and the Northeast, and you have your high-rise and your union trades is where you're making those decisions and trade-offs. And for us, that's a market-by-market local decision based on the type of pricing that we're getting on each one of those commodities. And obviously, again, wood frame, absolutely when you get into your traditional stick-frame construction in the Southeast and Southwest, where the hurricane was impacted and wood frame construction is still the norm, yes, you're seeing the pressures of wood geographically there.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [26]

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Thanks for that. I mean, does that make -- given the combination of rising construction costs as well as the upward pressure on property taxes you've talked about, does that make ACE more attractive than off-campus today as you look out 2020 and beyond, given you don't pay property taxes on ACE deals and as well as the ability to kind of adjust the ground rent to back into your targeted yield?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [27]

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Absolutely. The advantage that you've always had on the on-campus transactions is the valuation of land and the negotiation that is the inverse of our required yield. And you do have the potential benefit in most of the ACE transactions of not having real estate taxes. That's usually offset by the universities' expectations of a more institutionalized commercial product, especially for the first-year residence halls and doing the dance with them in terms of the material specifications to Ivory Tower spec versus a private real estate owner. But certainly, the ACE transactions do tend to give you more flexibility to overcome the challenges that you see in the private market related to escalation, land cost and real estate taxes and so. And this year, you've seen the development pipeline with 5 of the 10 being ACE transactions.

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Operator [28]

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And our next questioner today will be Juan Sanabria with Bank of America.

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Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [29]

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Just a couple of questions from me. On the asset you're handing back to the lender, what's the latest with that? And could you remind us how much NOI, if anything, is associated with that asset and why the timing slipped back a little bit?

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Daniel B. Perry, American Campus Communities, Inc. - Executive VP, CFO, Treasurer & Secretary [30]

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Yes, Juan, this is Daniel. So that asset's in receivership with the lender right now and we've been working on that for -- since kind of middle of last year. In all honesty, I think as with most lenders, they don't want to own the assets long once they actually take them over. So I think they're hoping to see some improvement in the lease-up of the property to try to maximize their valuation when they take it back out to flip it. The amount of NOI coming off of it was about $800,000 to $1 million a year. So it's, in terms of a -- effectively a disposition, it's a very low cap rate. It's about a $27.4 million loan that's going away with that. So effectively that's the sales price.

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Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [31]

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Okay. And then just on guidance, you took the hit from the higher weather -- from the colder weather and the storms. And presumably floating rate debts maybe were a little bit higher than you'd expected, at least earlier in the year. Were there any other gives on the positive that kind of kept your guidance unchanged? Or are you kind of more comfortable with the low end? Any color there would be fantastic.

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Daniel B. Perry, American Campus Communities, Inc. - Executive VP, CFO, Treasurer & Secretary [32]

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No, so on the operating expense side, the impact of the winter storms being about $500,000 was certainly notable on the operating expense growth for the quarter, being about 70 basis points. But when you look at it for the year, you're talking about 15 to 20 basis points. And with property tax assessment still coming in, still finalizing our insurance renewal, which is completed every May -- obviously, those can have a positive or negative impact on overall guidance expectations for same-store operating expenses, and so it wasn't material enough for us to change our guidance on operating expenses at this point. As we get more information on the other larger components of operating expenses, we'll be able to dial that in a little bit more.

On the interest expense side, as we talked about in the prepared remarks, we're going to be paying down a lot of that floating rate debt with the proceeds from the joint venture during the second quarter and so that reduces a lot of that exposure to interest rates. Obviously, another component is with regards to our bond offering that we included in guidance during the fourth quarter. And we did allow for increases in interest rates in our assumptions there. And even with the run up that we've had to date, we're still looking at pricing pretty much in line with what our expectation was, although certainly, if we continue to see additional increase in rates, at some point it could be an impact. The positive thing is, certainly on the bond offering is we have seen some offset in the rate increases on the spread side of the equation. And so that's helped maintain overall rates.

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Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [33]

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And just a last one from me on the University of Oregon, on the presale there. Could you just comment on what supply is like in Oregon -- at the University of Oregon, excuse me? And on the mezz loan, what's your earnings there? What kind of rate are you earning? And why did that deal require a mezz loan? Just a little background there.

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William W. Talbot, American Campus Communities, Inc. - Executive VP & CIO [34]

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Sure, Juan, this is William. First of all, other than the subject development that we are working on, we're not tracking any other off-campus development in the next 2 years. There is a potential on-campus development RFP that is out there for a net of about 900 beds on the east side of campus that we are also reviewing, so not a lot of supply. And then on the other side, the enrollment side, the university has actually made a very concentrated effort to grow enrollment by about 3,000 over the next 8 years. They have actually hired out-of-state recruiters, have seen significant improvements in out-of-state enrollment. So pretty positive side on the supply-demand metric.

Specifically to the mezzanine loan on the project, we did a, I'd say, 10% interest rate that's accrued monthly and paid at closing, netted off the closing price. This -- we've seen this widespread, not just with a prominent developer like Dinerstein but with others that are still able to get attractive construction loans, but not at the LTVs or LTCs that they used to be able to achieve. And so they're utilizing what is a relatively attractive mezzanine rate with us to help bridge that capital stack to get a little bit higher from a loan standpoint and reduce their amount of equity, but they're still putting in 10% equity. So they've got a significant skin in the game to complete the project.

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Daniel B. Perry, American Campus Communities, Inc. - Executive VP, CFO, Treasurer & Secretary [35]

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And Juan, this is Daniel. Just to clarify, and I don't know if you caught what William said there on the interest paid on the mezzanine investment, the 10%, that is accrued and netted against the purchase price at closing. So it's a reduction in our basis and does not flow through interest income on the income statement.

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Operator [36]

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And our next questioner today will be Drew Babin with Robert W. Baird & Company.

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Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [37]

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Circling back to Alex's question at the beginning, I know deleveraging has come up in the past as something that's kind of kept core FFO growth or FFOM growth in check. I think also rotation in terms of portfolio quality has also been behind that, and I think Alex touched on that. In your lease-up for this year, are there any signs you're seeing in some of your more recently acquired assets like in Seattle some of the existing Core Spaces assets, things like that, that really point to that outsized growth of some of these lower yielding assets that have been acquired. Is there anything you could point to at this stage of lease-up that proves out that those assets might be able to have a growth profile in the near term that exceeds maybe your average portfolio asset?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [38]

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Obviously, we're not going to be, until we finish this year's lease-up and finalize those occupancies and rates, we're not going to be able to point to anything at this point in time where we're just in our first turn on those assets. But all of those assets that we undertook those lower cap rate initiatives are all based on our ability. Seattle is certainly our poster child for where we believe, based on the supply-demand metrics and the fact that it's the most underserved market in America, that all of the purpose-built student housing, which is so limited, that we're able to acquire development in that market, will offer outsized returns like you saw similarly -- Austin over the last 7, 8 years has averaged close to 6% to 7%. And so we think the market metrics over the, call it, 2 to 10 year period offers substantial outsized returns in those areas. And so we'll certainly, if we have those case studies materialize based upon our successful point to them, but that is certainly the strategic aspect in entering and undertaking those transactions.

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Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [39]

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Okay, that's helpful. And one more question on Texas A&M. Obviously, with holding rates steady and things looking maybe a little more attractive than you would have thought initially, what specifically do you attribute that to? Is it more aggressive attitude towards leasing? Is it just leveraging the location of your properties relative to supply kind of...

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [40]

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Yes. And it really -- notice -- my comments really started saluting the investment team and the American Campus investment philosophy. When you look at our assets at College Station, and certainly we were one of the early companies in that market, we basically back in the late '90s and early 2000s bought all the larger land parcels pedestrian to campus. And so the products that we built there were 3 stories stick-frame, right across the street, at a very low basis.

As the market began to become built out and more of your postage stamp mid-rise and high-rise developments came in with heavy construction with the type of escalation we were talking about in those areas, we typically saw a $200 to $300 per bed premium by newer product, but it was smaller unit plans in equal or worse locations than ours. And all of a sudden our value pricing metric -- and again, our build for the masses, not the classes -- and the price point, really proved and provided that staying power.

And then also that's one of the markets where we have significant scale and because of the number of properties and beds that we have there, we're also the official sports marketing sponsor of Texas A&M Athletics. And so we have incredible presence in the football stadium, in the baseball stadium; and the brand recognition in that market is phenomenal. And also it's been -- College Station has been one of our -- always been one of our bedrock staff that we proudly pull as many corporate personnel from over the years as anywhere else and that team continues to just outperform its competition year-in and year-out. I got a couple of Aggies in the room giving me the Gig 'Em sign, so...

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Operator [41]

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And our next questioner today will be Vincent Chao with Deutsche Bank.

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Vincent Chao, Deutsche Bank AG, Research Division - VP [42]

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Just a couple of quick ones here. Just in terms of the winter expenses, obviously, very clearly outlined the impact in the first quarter. I guess, is there any excess costs that you think will be notable for next quarter? I know there is a few storms there in April as well, early April. Just curious if there is anything that you're aware of at this point?

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Daniel B. Perry, American Campus Communities, Inc. - Executive VP, CFO, Treasurer & Secretary [43]

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Vin, this is Daniel. Certainly, with what we saw in the first quarter, we've been keeping an eye on it for second quarter. We're only a few weeks in here. I will tell you that when we were in that February time frame, we certainly were hearing a lot more from the properties around pipe breaks than we would normally hear. Not hearing as much of that chatter right now because of the temperatures aren't obviously as extreme. While they're not comfortable relative to typical for this time of the year, they're not extreme enough to be causing that problem. And then on the snow side, again, not as much. These storms have been unexpected and later than normal but also melting quickly. So...

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [44]

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The other thing as we get into the end of Q2 and we get into June is, hopefully, that mild winter will translate into a mild summer. I know this weekend, I had to go in and get a jacket in the middle of the afternoon, which is odd to do in Texas in the -- late April. So hopefully, as we get into the second part of June, that we'll see we don't have an extremely hot summer; but rather those mild, temperate temperatures will carry over and maybe we'll get a little benefit from that. But we'll have to wait and see how Mother Nature throws us a curve or not.

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Vincent Chao, Deutsche Bank AG, Research Division - VP [45]

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Okay. And then just on the marketing expense side, I know you framed that out as maybe $160,000 over budget. But I'm just curious, and it sounds like supply-demand in general is healthy outside of 3 markets that you have highlighted in the past. I'm just curious though, I mean, is there any color you can provide? I mean, a few years ago, there were some marketing expense overruns because basically the lease-up had gotten ahead of you a little bit or behind you a little bit, I guess, and you had to play catch-up. Is there any markets where you're in that situation today? Or any other color you can provide on whether or not these marketing expenses may remain elevated going forward?

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Daniel B. Perry, American Campus Communities, Inc. - Executive VP, CFO, Treasurer & Secretary [46]

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Yes. Just speaking to what we saw a few years ago, that was actually in 2013 where we had that period where we got behind early in our lease-up as part of the integration efforts associated with the portfolios we had acquired in 2012. We had excess marketing spend in the second half of the leasing season. So kind of post to this quarter because we had to do a lot of remarketing to try and catch up.

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [47]

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Yes, we were 700 bps behind. It was the 1 year we were completely outside of the historical cycle that we commented on; we are within this year.

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Daniel B. Perry, American Campus Communities, Inc. - Executive VP, CFO, Treasurer & Secretary [48]

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Where this is occurring earlier in the season, and in all honesty, it's really more part of our effort from a couple of different strategic standpoints. One, in markets where we're really trying to push rate, trying to get out and achieve as much of that early as we can, where we're trying to also in some markets get as much in renewals as we can. We have a tight window there to execute on that and so want to really market through that. And then certainly in the markets where we're trying to turn around from last year in Lubbock and RIT and Champaign, making sure that we get off to a good start in those markets. So we feel like we're seeing the progress from the dollars spent and it's been prudent to do.

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [49]

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Yes, and it's a small number. As Jim mentioned, we're only $160,000 over our planned spend for the quarter, which is just over $1 per bed. And so we're really well. At 12%, number looks big, it's really not in the context of the nominal dollars being spent and certainly nowhere near the historical highs in that category.

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Vincent Chao, Deutsche Bank AG, Research Division - VP [50]

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Got it. And then maybe one last question just to clean up on the expense side. Last quarter, I think you talked about insurance being up 19%. I know the renewal doesn't happen until May. I guess, is it still your expectation that, that line item will be sort of in that 19%-plus range for the year?

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Daniel B. Perry, American Campus Communities, Inc. - Executive VP, CFO, Treasurer & Secretary [51]

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We're looking at some options there to try and control that. We're still finalizing the renewal. We look at whether we would ever increase our deductibles and to manage the rate increase on premiums. You're making a trade-off there for increased deductibles, which would hit more repairs and maintenance and then control your insurance growth. And we'd go through the analysis and look at, well, how much of risk are we taking there, and what kind of historical costs we had associated with claims, and would it be worth the trade-off? So still finalizing that, but certainly, you'd think that, that our guidance is going to cover us on that side.

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Operator [52]

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(Operator Instructions) And our next questioner today will be John Pawlowski with Green Street Advisors.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Senior Associate [53]

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I understand your comments on the robust private capital interest in the space. Just curious on the lowest quality segment in your portfolio, and pick a number of bottom 5%, bottom 10%. Are you seeing or do you expect to see any weakness in pricing in that quality?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [54]

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No, and when you look at the portfolio now, and we're largely done with all of our dry properties to where the bottom portion of the portfolio is more of your 0.5 mile to 1 mile what we would refer to as your bicycle properties. There has continued to be cap rate compression in that area also. And so that's probably today in the 5.25% to 5.5%. And so it continues to be a vibrant product category that is probably down another 25 bps to 40 bps from where it was 12 to 18 months ago.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Senior Associate [55]

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Got it. And then Bill, in the past you mentioned when you were talking to the on-campus development pipeline, you had roughly 30 deals in the hopper, you're currently working on. Curious, over the next 5 to 10 years, as universities assess their housing needs and perhaps an outdated housing stock, does that number head meaningfully higher?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [56]

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It has -- the thing we commented on -- it was probably about 3 calls ago -- was the number we used to always say, it seemed to be working 20 prop -- 20 transactions tracking at a time and now it's 30. With the average age in the markets that we currently operate -- and again, ACE can go well beyond the markets we currently operate in -- the average age of the existing housing stock is 52 years. And we're seeing more and more of the on-campus ACE transaction be the replacement of that older first-year housing. And so the universe for opportunity is continuing to expand.

That is the one sector of our business that does continue to have the highest barriers to entry, the cost per university. This is not just about real estate, it's about creating the living and learning environments, which very few companies understand and have the ability to do like American Campus and EdR. And so in that regard, we do see it as a stable and growing opportunity for the company and would not expect those numbers to shrink over the years.

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Operator [57]

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And there looks to be no further questions. Actually, we do have a follow-up question from Nick Joseph with Citi.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [58]

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It's Michael Bilerman, just under the wire. Bill, I'm just wondering at some point, given the fact that the equity is trading at a pretty sizable discount to the inherent value of your assets, do you evaluate just hitting the pause button on some of the external growth initiatives without commensurate funding of lifting your disposition proceeds, right? And so I get it that you're working on the joint venture, but you've continued to commit to a presale development this quarter, the overall development pipeline. And I understand the growth needs, but when you can issue equity, I guess, why not be more aggressive at match funding when you are committing new capital?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [59]

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Absolutely, and I think when you look at priority of that and it's, in reverse order, presale, off-campus development, ACE is the way that we think about how you scale back that growth to make sure you're only taking the highest -- pursuing the best risk-adjusted opportunities in that regard. As I mentioned on my comments related to the Oregon presale, that's where we're very selective, in that -- in terms of undertaking those only when it absolutely makes sense from the longer-term strategic objectives of the organization. And it's pretty easy, given the environment, to turn the faucet on and off as needed on the presale and the off-campus developments also.

The one, Michael, that we're very cautious with and make sure that we maintain the capacity to pursue the opportunities that are great accretive long-term opportunities is the on-campus business. And if -- we have a brand there, we always do go after the best-in-class transactions there. And that's where we want to make sure that we preserve the powder that we do have. And when we do have the opportunity to match fund through now -- what's now accretive dispositions, that we take the opportunity to do so. But certainly, looking at prudence and diligence and slowing down that faucet when we need to, to make sure we're doing a good job of match funding is something that is the forefront of our thoughts and our discussions with the board.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [60]

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Well, the capital is pretty scarce, right? And your stock price should be telling you something about committing significant new capital when leverage is already elevated. And I think you've been working on this joint venture for the last 9 months. I guess, you haven't really increased the disposition bucket that much. Why not try to accelerate the disposition side to put the balance sheet in a position where people won't question doing a forward development presale or increasing the ACE assets or doing a large-scale acquisition like you did last year that sort of put you into this box? I'm just -- I don't understand why you're not being more aggressive on the disposition front.

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [61]

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Yes. And certainly, the opportunity is there with what William talked about to execute very quickly and timely on the dispositions. Lessons learned and being in the box that we were after announcing the core. The decision we made back at that time was to not do the disposition at the beginning of core and take the dilution but rather go through and match fund. The good news is in hindsight from an accretive perspective, it looks as though it's going to pan out, given with the closing of the disposition. Certainly, we did pay the penalty in being in that box. When you talk about it, there is a lesson learned from that. And so to the extent that we would see additional pipeline opportunities related to development, looking at prefunding that through disposition, it is something we seriously consider and will look at and are fortunate to be in the environment right now that if we choose to execute on that, we have the ability to do so quickly.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [62]

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But arguably with your stock trading at 6 cap, your own portfolio would be the place where you'd want to buy into rather than bringing new assets on, right? And so you're sort of -- you can't issue your equity, you probably would want to buy it back, but your leverage is too high and it just becomes a little bit of a vicious cycle.

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Daniel B. Perry, American Campus Communities, Inc. - Executive VP, CFO, Treasurer & Secretary [63]

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Understood. And this is Daniel. I mean, that's an ongoing conversation we have with our board and we will continue to look at what we have in the shadows as options for that. But with regards to diluting the stock buybacks, that's also a conversation we have with the board, comparing that against external growth opportunities. The reality is, you have to figure out whether it's going to be a persisting issue before you consider executing on that; and as you referenced, you also don't want to leverage up to execute on that, given the pipeline you have.

I think that the point to make with the University of Oregon deal is that, Bill said that is the place where we're the most selective. We're not adding deals without fully considering the opportunity there and whether from a capital allocation standpoint we think the return is justified, given the balance sheet risk. But understand your point, and it's an ongoing dialogue we have with our board on how to really manage all that.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [64]

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Yes, I mean, like all of us would love to have larger portfolios. I'd love to buy the apartment next door to me and have a bigger apartment, but I'm conscious of not levering up and making sure that I have the capital to do it. And so there is always that push versus pull nature of things.

In the discussions you're having on the joint ventures, had you thought about maybe going down the road and doing 2 joint ventures? If there is all this interest and you're very pleased with the foreign as well as domestic capital, why not cap and do 2 joint ventures? Unless you're going through all the brain damage of doing this stuff, why not just taking the time to really raise the capital at attractive -- what appears to be an extraordinarily attractive time?

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Daniel B. Perry, American Campus Communities, Inc. - Executive VP, CFO, Treasurer & Secretary [65]

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Yes, and I think it is pretty widely known, and we've discussed that we actually ran a simultaneous process when we looked at this joint venture of full fee simple dispositions as well as the joint venture partnership, so that we would have both options available to us or have 1 available if the other didn't work out. We saw great interest on both processes. And that is something that has given us comfort in pursuing the University of Oregon deal, knowing that we have that alternative route to -- as additional capital raising capability. And what we're -- we're really trying to use that and be prudent in managing the balance sheet or knowing we have opportunities to manage the balance sheet, but we're also driving as much earnings growth as we can to improve that profile, going forward.

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [66]

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And Michael, this joint venture process, I will comment strategically as we talked about how we approach it and undertook it. When we are in a position here in Q2 to announce who it is and what we've done, I think the market will be quite pleased with the quality of folks we're talking about. But this was very much not ran and selected as a one-off joint venture. But rather we picked a partner that we look at as a joint venture partner that this can be the first of numerous transactions. And they certainly viewed it from that same perspective and have an appetite for that. And so while it is a single joint venture, it was not conceived nor put together in the context that this will be a one-off transaction.

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Operator [67]

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

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [68]

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With that, we -- it was a pretty straightforward quarter with not a lot of activity. We're now entering the beginning of the summer months and heading forward with the last 4 to 5 months of closing out leasing and heading into terms. So I want to thank the American Campus staff again for all their activities. And we look forward to talking with you all at the summer conferences and on our next Q2 call. Thanks so much.

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Operator [69]

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And the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.