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Edited Transcript of ACC earnings conference call or presentation 24-Oct-17 2:00pm GMT

Thomson Reuters StreetEvents

Q3 2017 American Campus Communities Inc Earnings Call

AUSTIN Nov 23, 2017 (Thomson StreetEvents) -- Edited Transcript of American Campus Communities Inc earnings conference call or presentation Tuesday, October 24, 2017 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. - CFO, EVP, Secretary and Treasurer

* James C. 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 and Executive Director

* William W. Talbot

American Campus Communities, Inc. - CIO and EVP

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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 and 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

* David Steven Corak

FBR Capital Markets & Co., Research Division - Former VP & Research Analyst

* Jeffrey Robert Pehl

Goldman Sachs Group Inc., Research Division - Research Analyst

* 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, and welcome to the American Campus Communities 2017 Third Quarter Earnings Conference Call. (Operator Instructions) Please note that this event is being recorded. I would now like to turn the conference over to Ryan Dennison. Please go ahead.

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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 2017 Third 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.

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 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 and 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 statements are based on reasonable assumptions, they are subject to economic risks and uncertainties.

The company can provide no assurance that its expectations will be achieved, and actual results may vary.

Factors and risks that could cause actual results to differ materially from expectations are detailed in the press release and from time to time in the company's periodic filings with the SEC.

The company undertakes no obligation to advise or update any forward-looking statements to reflect events or circumstances after the date of this release.

Having said that, I would now like to introduce the members of 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 will turn the call over to Bill for his opening remarks. Bill?

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

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Thank you, Ryan. Good morning, and thank you all for joining us as we discuss our operational and financial results for the third quarter of 2017.

Consistent with our prior announcement detailing the results of our fall lease-up and the expenses associated with Hurricanes Harvey and Irma, the operational and financial results for the third quarter did not meet our internal expectations. This, coupled with 2 other nonrecurring and/or timing-related items discussed in Daniel's quote in the earnings release last night, have led to the updated guidance range, which Daniel will discuss in detail in his prepared remarks.

Before we get started, I'd like to address the results of the 2017-'18 academic year lease-up and how they may correlate to broader student housing fundamentals. I'd also like to provide brief insights related to the implementation of our strategic business plan and capital allocation strategy.

While our fall lease-up at 96.6% occupancy with 2.9% rental rate growth led the industry and provides our 13th straight year of same-store rental rate and rental revenue growth, it was 60 basis points in occupancy behind the prior year. And while it fell within our guidance range, it was a full 100 basis points below the occupancy target at the midpoint of our guidance.

As we discussed in our late September press release update, the rental revenue shortfall can be entirely attributed to the prior year variance in occupancy and rental rate in 3 markets: Lubbock, Texas; Champaign, Illinois; and Rochester, New York. Our remaining 57 same-store markets achieved 98% occupancy, representing a gain of 50 basis points over the prior year in those markets and saw strong rental rate growth at 3.2%. The performance of these 57 markets speaks to the sound long-term fundamentals that continue nationally in the sector, while the underperformance in the 3 markets reflects the short-term impacts and challenges that can arise as new supply is absorbed.

When combining our new store assets, which are currently 86.6% occupied, our same-store property grouping for the '18-'19 academic year lease-up is currently 95.5% occupied, providing an opportunity for improved rental revenue growth moving into Q4 of 2018 and into 2019.

I'd now like to briefly address the status of our strategic business plan and corresponding capital allocation strategy. As those of you who have followed the company since IPO know, we have always preached the fundamentals of our investment criteria focused on one, securing locations that are pedestrian and/or bicycle business to the Tier 1 flagship universities; two, product differentiation, with a particular focus on affordable and diversified rental rates within each market; and three, being located in submarkets with barriers to entry, where new development hopefully takes place outside of our locations versus between us and the campus.

If you go back just a decade ago, American Campus stood alone in the core belief of these fundamentals. As such, during our first decade of growth as a public company, and as the industry consolidator, when we undertook the larger portfolio transactions, we usually had to take a portion of assets that were not always consistent with our own market selection and adherence to these fundamentals. As our investment thesis held true throughout the years, consistently producing industry-leading results and a stable stream of rental rate, rental revenue and same-store NOI growth, the industry transformed to where American Campus' investment criteria has now become the bedrock fundamentals for the entire industry, with cap rates for core assets in major Tier 1 markets that meet our investment criteria now trading in the 4s.

Over the last 3 to 5 years, nearly all of our competitors' new developments meet ACC's investment criteria. This industry maturation, coupled with our emerging proprietary business intelligence platform, now provides us with the opportunity to be even more sophisticated and more discriminate in implementing our strategic growth plan and corresponding capital allocation strategy.

As you know, over the last several years, we have disposed of nearly all of our nonpedestrian, nonbicycle locations previously acquired in larger M&A transactions. These sales taking place at cap rates ranging from 5.75% to 6.25%, allowing for accretive reinvestment into our high-yielding development pipeline.

While 2/3 of our growth to date has been via acquisitions, the disposition of these noncore assets has left us with a higher-quality portfolio of core assets that is comprised approximately 50-50 of ACC-developed assets versus acquired assets. Within this higher-quality portfolio, we believe there remains a significant opportunity for accretive capital recycling, especially given the opportunity to take advantage of the current market cap rate environment for core assets.

As such, it is our intent to monetize via outright sale or joint venture some of the value we have created over the years to fund new, higher growth accretive opportunities, especially in the areas of owned development and the presale purchase of competitors' developments. Our first evolution of a more discriminating investment focus relates to our target market selection, where we now intend to predominantly focus on Power-5 conference schools and R1 research universities, as classified in the Carnegie Classification of Institutions of Higher Education. We believe these institutions have the highest degree of residential housing demand, stability and growth. This has been reflected in cap rate maturation that is occurring in the sector. Over time, this will likely lead to the strategic exit of some markets that we currently are in that do not fit both or one of these profiles.

We then intend to utilize our business intelligence platform to proactively identify those markets that offer the greatest long-term growth and value creation and expand our market share accordingly while also gaining operating leverage through multiple asset market efficiencies. Within these markets, we will also seek to harvest value when appropriate and reinvest in higher growth opportunities in those same markets.

Once again, we believe our emerging business intelligence and our proprietary operating platform provide us with the unique opportunity to proactively take advantage of future market trends versus reacting to market conditions after the fact. As we look to implement this strategy in conjunction with our current cost of capital and current market conditions with core market cap rates ranging from 4% to 5%, we prioritize our capital allocation decisions as follows: first, owned development, both on campus with our ACE program, and off-campus, with stabilized yields for each ranging from 6.25% to 6.75%; second, presale development purchases with stabilized initial yields ranging from 5.75% to 6.25%; and third, acquisition opportunities only when they include a significant presale development component that provides stabilized initial yields at a 50- to 125-basis-point spread to current market cap rates.

By strategically harvesting some of the value created within our portfolio at the current market cap rates, each of these investment opportunities is accretive and should further improve our internal growth prospects.

The recently announced Core Spaces transaction is consistent with this refined investment thesis and capital allocation strategy as the transaction exemplifies our refined target market strategy, builds upon our expansion of market share in those markets we believe provide the greatest future growth opportunities, offers multiple property market efficiencies in 5 of the 7 markets and includes a significant component of presale development that enables a 5.4% nominal stabilized yield with accretive funding expected to come in the form of asset sales or joint ventures consummated at cap rates consistent with the 50- to 125-basis-point accretive spread just discussed.

Our prior deleveraging activities in 2015 and 2016 were undertaken to place our balance sheet in a position allowing us to execute upon the opportunities as they arose this year. And we remain committed to using the most attractive sources of capital to maintain a balance sheet that allows us to be opportunistic in executing our growth plan going forward, maintaining an upper leverage target of 35%. Based on the current public versus private market valuation disconnect, we expect the most attractive source of capital available to us will be the recycling of our own assets. With this significant dislocation between public and private market valuation, acquisitions that do not include higher-yielding presale development components simply do not make sense at this time. As such, again, our current capital allocation strategy is focused on development, presale development purchases and acquisitions only when they include a significant presale development component, where the blended stabilized yield provides an appropriate spread to current market cap rates.

With that, I'll turn it over to Jim to discuss our operational results for the quarter.

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

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Thanks, Bill. Turning to our operational results for the quarter, as Bill noted, we experienced a challenging third quarter due to the final leasing results as well as Hurricanes Harvey and Irma affecting many of our properties in our Texas and Florida markets. We were fortunate that we had no reported resident or staff injuries, and the damage was generally limited to unit water intrusion, landscaping cleanup and roofing repairs.

These were the primary factors in our third quarter same-store NOI declining by 0.8% compared to the third quarter of 2016 on a 1.3% increase in revenue and a 3.3% increase in operating expenses.

On Page 5 of the supplemental, we've noted that third quarter NOI would have increased by 2% excluding the expenses related to the hurricanes and lost revenue related to the Province in Tampa, which was impacted by fire in the first quarter, and Lofts54 in Champaign, which was out of service this summer for nonroutine maintenance.

Expenses relative to our forecast in payroll, utilities and insurance were lower than expected, but more than offset by the $1.9 million of hurricane expenses and the $700,000 of real estate tax and related consulting fees that were above expectations. Excluding these 2 uncontrollable costs, quarterly expense growth would have been only 0.2%.

Turning to supply, for ACC's 68 owned markets, we are projecting that between 25,000 and 27,000 beds will be delivered in 2018, representing a decrease of 7% to 14% in new supply from 2017. We are anticipating new supply in only 29 of our 68 markets, and as always, we focus on markets where we have significant presence. This year, those markets include Austin, Tallahassee and College Station.

As Bill highlighted, our 2018-2019 academic year same-store portfolio was 95.5% occupied on September 30, and based on our initial rate-setting exercises and occupancy projections, these properties are expected to produce rental revenue increases for the '18-'19 academic year same-store in a range from 2.5% to 4%.

On the expense side, we continue to implement asset management initiatives that should drive additional cost controls and improved operating margins over the long term. We look forward to updating the market on our fourth quarter call regarding the specifics of our guidance expectations.

With that, I'll turn the call over to William.

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William W. Talbot, American Campus Communities, Inc. - CIO and EVP [5]

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Thanks, Jim. Turning first to the Core Spaces transaction announced in September, we are pleased to have acquired 7 high-quality assets, which include 3 higher-yielding presale developments. The portfolio features 4 Class A core pedestrian assets totaling 2,276 beds, including the recently exercised option on the Hub Seattle. In addition, the transaction includes 3 presale assets that will deliver in 2018 and total 1,500 beds. In total, the portfolio assets are located 0.2 miles to campus, average under 1 year in age and serve universities of an average enrollment over 35,000.

The assets are all located in ACC target markets, consistent with our refined investment thesis. Via the transaction, we also expanded market share in 5 existing ACC markets that we believe offer some of the greatest growth potential as we average 99.4% occupancy and 3.8% rental rate growth this year in those markets.

In addition, we have the opportunity for yield expansion through multi-asset efficiencies in the 5 existing markets. Upon completion and stabilization, we are anticipating a 5.4% nominal and 5.2% economic yield for the 2019 academic year, which represents a 50- to 125-basis-point spread over stabilized cap rates for similar core pedestrian assets in similar markets.

Turning next to development. We successfully delivered 10 owned developments on time in August 2017, totaling 7,454 beds at a development cost of $609 million. We are currently under construction or in the final stages of predevelopment on 13 owned developments and presales, including the 3 Core Spaces presale developments, for delivery in 2018 and 2019, totaling 9,348 beds and $966 million, with all projects targeting between a 6.25% to 7% nominal yield for developments and a 5.7% to 6.25% for presales.

In addition, we are pleased to announce we have executed a predevelopment agreement for a second phase of our highly successful ACE project on the University of Southern California Health Sciences campus. The new project consists of 297 beds and total development cost of $42 million and will share amenities and be operated out of the existing first phase, which has maintained 99% occupancy since opening and is already over 100% applied for next fall. The next phase is targeted to open in fall 2020.

With regards to on-campus third-party development, we completed 2 projects this fall at the Texas A&M San Antonio and Corpus Christi campuses, and we are currently under construction on our fourth phase of development on the campus of the University of California, Irvine for delivery in fall 2019. In addition, we are in predevelopment on third-party developments on the campuses of the University of Illinois at Chicago and the University of Arizona and expect both to commence construction in the fourth quarter.

Overall, the interest and activity for public-private partnerships continues to remain strong. We recently completed or are currently under construction or in predevelopment on 19 on-campus projects totaling 12,200 beds and $1.1 billion in development costs and are currently tracking nearly 3 dozen potential procurements for future P3 developments.

Turning now to acquisitions. In October, we successfully continued our expansion strategy at the highly desirable University of Washington market in Seattle with the acquisition of the Bridges @ 11th. The 258-bed asset, located immediately adjacent to TWELVE at U District acquired in June, is under a long-term ground lease with the University of Washington that includes some marketing assistance, branding rights and priority leasing for faculty and staff, essentially making this an ACE acquisition. After $1.2 million budgeted for amenity enhancements, upgrades to on-site technology, FF&E purchase and other upfront capital improvements, based on current occupancy levels of 98% for the first year, the acquisition would represent a nominal cap rate of 4.7% and economic cap rate of 4.5% for the first year.

Upon full stabilization and increased density via shared accommodations, the project is expected to achieve a stabilized cap rate of 5.3% nominal and 5.1% economic in year 3. In addition, there is an opportunity for 25 to 50 basis points of additional yield for all 3 Seattle assets through multi-asset efficiencies.

With the completion of the Core Spaces portfolio and our expansion within the Seattle market, our near-term investment strategy will primarily focus on growing our significant development pipeline and focusing on predevelopment sales opportunities.

With regards to the overall transaction market for student housing, the sector remains in high demand. According to CBRE's third quarter student housing market overview, over $5 billion of student housing product has transacted through the third quarter of 2017. With a large number of assets currently under contract and expected to close in the fourth quarter, most brokers are anticipating that transaction volume will meet or exceed record levels of 2016 of $8 billion when excluding Harrison Street's [entity] purchase of Campus Crest. International, institutional and fund buyers make up over half of the transaction volume to date in 2017, indicating continued strong demand for investment in the sector based on the strong fundamentals of the industry.

With that, I will now turn it over to Daniel to discuss our financial results.

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Daniel B. Perry, American Campus Communities, Inc. - CFO, EVP, Secretary and Treasurer [6]

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Thanks, William. For the third quarter of 2017, we reported total FFOM of $61.2 million or $0.44 per fully diluted share. While the results of the annual lease-up that have been discussed had a negative impact on earnings this quarter of approximately $0.02 per share, we also had 2 unusual events that negatively impacted the quarter by an additional $0.02.

As previously noted, the cost of repairs this quarter following Hurricanes Harvey and Irma were $1.9 million. We also had to record approximately $700,000 of noncash interest on the Blanton Common property currently in receivership while final transfer to the lender is being settled.

Finally, although same-store operating expenses only increased 1% this quarter, excluding the hurricane expenses, we were targeting approximately $1 million or $0.01 less in expense growth than what we ultimately achieved. As Jim mentioned, the primary expense areas where we saw overages versus our goals were in property taxes and nonroutine repairs and maintenance costs.

While we have had success with the cost control and efficiency initiatives assumed in the 1% to 1.5% annual same-store expense growth we targeted in guidance, it would be fair to say that we didn't leave ourselves enough room for unexpected overages in these less controllable expense areas.

Moving to capital structure. As of September 30, 2017, the company's debt-to-enterprise value was 31.2%. Debt-to-total asset value was 35.8%, and the net debt-to-run-rate EBITDA was 6.4x. From a balance sheet management perspective, we closed on a $300 million term loan during the quarter as an interim financing vehicle for the initial phase of funding on the Core Spaces portfolio. Also, we accelerated the timing of our bond offering originally planned for later in the year to take any interest rate risk off the table. This leaves us in a good position from a capacity perspective to have ample capital to execute on our growth pipeline.

With regards to capital allocation, the staggered timing of funding over the next 2 years of both the Core Spaces transaction as well as our development portfolio allows us the flexibility to pursue the most attractive sources of long-term capital as we continually manage the health of our balance sheet with an upper end debt-to-asset value target of 35%. In light of this, as disclosed in the capital allocation and long-term funding plan on Page 16 of the supplemental, management intends to monetize approximately $400 million to $450 million of investment and select existing core assets in our portfolio via disposition or joint venture partnerships, thereby taking advantage of the very high demand environment we are seeing for core student housing from private capital around the globe.

Turning now to our 2017 outlook. Taking into consideration the final results of our lease-up for the '17-'18 academic year and the year-to-date financial results as well as capital and external growth transactional activity, we are revising our 2017 FFOM guidance range to $2.28 to $2.32 per fully diluted share.

The primary factors that caused this reduction in guidance are as follows: first, the occupancy levels from this academic year's lease-up were slightly above the low end of our expectations for the same-store properties and slightly below the low end of our expectations for the new store properties. This is expected to result in approximately $0.04 per share or approximately $5 million less in revenue for the fall semester than originally anticipated at the midpoint of our guidance.

With regards to the impacts of Hurricanes Harvey and Irma, we expect repair costs for the year to have a $2 million or $0.015 negative impact on our guidance.

Next, while we included an unsecured bond offering in our original guidance for the year, we ultimately executed it 2 months earlier than we had contemplated at the midpoint of the original guidance, which will result in $2 million or $0.015 of additional interest expense in 2017.

And finally, the decision to transfer Blanton Common, a noncore property in Valdosta, Georgia, back to the lender was not originally included in our guidance and will result in approximately $1.3 million or $0.01 in lost NOI and excess noncash interest expense that had to be recorded. These items, along with changes to other components of guidance that were net neutral to earnings expectations, are detailed on Page 18 of our earnings supplemental.

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 question will come from Nick Joseph of Citi.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - VP and Senior Analyst [2]

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Bill, I wanted to know how you evaluate if your current business model and capital allocation strategy is working and when investors should expect to see earnings growth going forward. And I ask this question in the context of the last few years of performance and not just what's happened in 2017. So if you go back to 2013, core FFOM was $2.27, and this year, core FFOM is expected to be $2.30 at the midpoint. So over the 4 years, that's 1% total core FFO growth. Over that time period, you've averaged same-store NOI growth of about 3%. You've done over $2 billion of developments and acquisitions. Now I recognize you sold about $1 billion of assets and delevered. But still, there's been very minimal core FFO growth.

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

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Yes. Nick, and I appreciate question. Certainly, the biggest driver to the drag on the FFOM per share growth is, indeed, the deleveraging activities and the asset sales that took place to put us in a position to execute on the plan. And so that certainly was a large delay in terms of the meaningful FFOM per share that we would like to produce. The focus in the plan has always been and continues to be in creating net asset value in the Core portfolio and growing thoughtfully to create long-term value creation. Certainly, we believe the earnings per share following the deleveraging will follow that in the long-term perspective. For us, and one of the most unique things about our business, when we think about capital allocation, and you heard us touching on in our remarks, is that in a mature sector of real estate, which most of the other REITs operate in, the capital allocation decision of when to hit the gas and when to hit the brake and markets acting in unison -- if you're a multifamily company in 10 major markets, the market tends to move in unison in terms of the growth opportunity, the declines and when it is very clear what decisions you should be making. In the student housing business, we have a little bit of uniqueness, it's a little bit more complex, but also much more opportunistic in that then when you look at the 68 markets that we are located in, and you look at -- when we think of real estate, we say where are we in the cycle? And usually, at the macro level, those are very easy answers to make. When you look at our business and our opportunities and you say where are we in the cycle? Well, the first aspect of that cycle is from a supply and demand perspective. And so when we talk about the modernization of student housing and the amount of purpose-built student housing in each marketplace, and that competitive level that has a big influence in terms of driving the future growth rate and the opportunities in those markets, we have a very wide range. The University of Washington, which we've been talking about, Seattle here recently, 2% purpose-built beds as a percent of supply to demand, being enrollment, that provides an incredible underserved opportunity that typically you don't see in other sectors of real estate. On the flip side of that, ranging up to some institutions like Austin and College Station, where that number is now maturing at a higher level, in the 40s. And when you look within each one of those markets, even within those markets, you have various assets, distance to campus and product types, they also don't act in unison and can have variation in their income potential and growth streams. And so when we look at the internal growth opportunity and proper capital allocation decisions in terms of external growth, one of the things that -- in many cases, people -- I've heard this statement over the last couple months is that our consistency of stabilized growth in rental rate, rental revenue and NOI is based on our operating platform. And while that's certainly true to a significant degree, it is as importantly based upon our capital allocation decisions and understanding through what I would reference as our emerging business intelligence function, the understanding of opportunities in terms of evaluating the 68 markets that we're in, what our current asset base is, and more importantly, what the growth profile of that asset base is, and then looking at the ability to achieve much greater growth and much greater yields in the opportunities that present themselves -- in growth opportunities. And in that regard, it speaks directly to the comments that I made in my opening remarks related to capital allocation and using the Core transaction as an example, certainly we believe, first and foremost, we need to preserve our capacity for the highest growth that we have, which is in the development opportunities, especially the on-campus and the yields that we see there. But simultaneously, and certainly at times like this, when the private market to public market disconnect, is what it is, the opportunity to harvest value, especially in assets where we may have done an excellent job in creating that growth value and have the opportunity to harvest it at very attractive levels than the cap rates you see today, and to reinvest that in growth that has a much higher yield based on the market and asset characteristics that we described, is what we're always thinking about in terms of long-term value creation. And so we have always believed that if you take care of the real estate business and you are constantly being a good steward of your capital in terms of always investing and reinvesting in things that are accretive and a higher-growth profile, in the long term, those things will play out. Certainly, I do believe the earnings per share will follow. I mean -- the billion dollars of dispositions of the noncore absolutely was a large, large drag on the FFOM per share, and so we believe the growth opportunities that we're undertaking, and now we're getting into a position where the dispositions that we do for self-funding are not at value-add cap rates that were not accretive for reinvestment in the type of opportunities that I described. But we're now in that point to where the assets that we can look at monetizing being in the range of the 4s, now we have the opportunity for instantly much better match funding and accretive growth as we implement the strategy that I described in my opening comments.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - VP and Senior Analyst [4]

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So would you expect Core flow growth to start turning positive really in 2018? Or are we still a little ways away, just given the capital allocation decisions over the last 12 to 18 months?

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

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So certainly, the results of this lease-up and the comments that I made there is when we expect to start seeing the growth impact is in Q4 of 2018 and moving into '19.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - VP and Senior Analyst [6]

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And then just on capital allocation, given the size of the development pipeline, the future opportunity, which you've spoken about, the targeted value creation and the forward capital commitments associated with that business model, why do large-scale acquisitions makes sense? And how do you think about the overhang that staggered acquisitions create?

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William C. Bayless, American Campus Communities, Inc. - CEO and Executive Director [7]

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Yes. And large acquisitions that do not encompass a presale component do not make sense. And so first and foremost, the Core transaction as a case in point, started as a marketed portfolio of 13 assets, and that made no sense for us whatsoever. But when you look at the strategy that we outlined in terms of the target market strategy, the building of scale in the markets we believe have the greatest growth coupled with the efficiencies, we were able to customize that transaction, include the large component of the presale, only take the -- we couldn't -- we would would've loved to have only cherry picked the presale assets, that transaction could not have gotten done in that manner, and so we were able to do it in fashion to where we do have the 50- to 125-basis-point spread from the deleveraging activities we'll take through assets, sales of core assets, to be able to create the room on our balance sheet to pursue those opportunities. And so in a prioritized fashion, certainly again, owned development, 6.25% to 6.75% yields are first and foremost the greatest opportunity and what receives the highest priority. But what we will always do is, again, as we look at a large portfolio of 166 assets over 68 properties, and we look at the ability to accretively monetize as much of that, that is necessary to invest in opportunities as we described that have greater growth and greater value creation, then we'll undertake that -- I hate to refer to it, I think, but it's transactional engineering to create growth for you.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - VP and Senior Analyst [8]

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And then just finally, how did the Seattle acquisitions of Bridges @ 11th and TWELVE at U District fit into that presale strategy? It feels like those are more kind of market stabilized assets versus kind of the premium you hope to achieve on presale deals?

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William C. Bayless, American Campus Communities, Inc. - CEO and Executive Director [9]

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Yes, and this is something we started talking about -- about I think 2 to 3 quarters ago, we started talking about our focus on the University of Washington market in Seattle. And that as I mentioned, at 2% purpose-built beds as a percent of enrollment, UDub is the greatest major institution in America in terms of the underserved nature of the student housing supply-demand equation there. This is a market that we believe on the -- when you look at the markets that we have created the greatest value over the last 5 to 10 years, and the Austins and the Tallahassees, we believe UDub has that type of growth potential. And so while on the surface, these look as though they're fully priced assets in an acquisition, we believe that, that market has a great dynamic, evolving role in the value creation. We also, and what we liked about this Bridges acquisition, which we've been working simultaneous with the AVA acquisition, but it took longer because as William mentioned, it's on a ground lease with the University, and so in essence, it is an ACE acquisition, and we really like the strategic focus of forming a formal relationship via a ground lease with a university that we believe is the most underserved in America. And so in the case of UDub, this falls much into our target market strategy as it relates to the market that we believe have the greatest growth potential that we believe would be a significant missed opportunity on the long-term value creation for our shareholders to not be in that market and gaining scale and taking advantage of what is, again, 2% supply to demand. And so there, I think the business opportunity and value creation will speak for itself over the next decade.

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Operator [10]

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Our next question will come from David Corak with FBR.

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David Steven Corak, FBR Capital Markets & Co., Research Division - Former VP & Research Analyst [11]

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I guess I'm just curious to get your remarks on the end of the leasing season. One of the themes coming out of NMHC last month was that everyone had a really disappointing last 4 to 6 weeks of lease-up, but no one could really give a good sense as to why other than supply, maybe some of the higher price points. But could you just give us your take on kind of what happened the last kind of 4 to 6 weeks of the season?

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William C. Bayless, American Campus Communities, Inc. - CEO and Executive Director [12]

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Yes, and it was -- if you go to -- and then I heard those comments also, and for us, this year is really the tale of 2 scenarios in that, again, you had the 3 markets where we had the underperformance, but then when you look at the other 57 markets, we had really significant gain in strength in terms of the 50 bps gain in occupancy at a 3.2% rate. Now I will say, with that said, the -- when you looked at the trending, up until when we released -- I think our last release prior to the final update we gave was July 21, and we were running 30 bps ahead. And so certainly, the trending prior to the last 4 weeks, if you go back to the report before that, at NAREIT, we were 20 bps behind. So we -- there was an acceleration that took place from June through that July 21 report that gave us -- I mean, when we issued that report on the 21st, we still believed that the opportunity was get to the midpoint of our guidance because of the velocity pickup we had seen in that prior period in June and July. From our perspective, when you look at where we ended up, especially looking at those 57 markets, it wasn't so much the diminishment in the last 30 days as it was -- or I'm sorry, the velocity in the last 30 days compared to prior periods, prior years but rather, the ramp-up we were seeing right before it that really didn't continue with that same velocity. Now as we looked at where we came in and what happened in the last 30 days, the first places we went, say let's analyze it and see if there's anything that we can put our finger on, because, again we heard the same comments that you did at NMHC, and it sounds like other companies felt it much more than we did in terms of the core performance that we reported. The first thing, the one thing we got questions from investors more often is, is this international students, and is this from the late rush, and our data shows that, that wasn't the case at all. And again, we can't track country of origin, per fair housing, in our own numbers, so we actually have to wait for the universities to report their enrollment numbers because they do have those statistics. And in the 11 markets and universities that have reported, actually, international enrollment is slightly up. And even in the markets -- you look at the 3 markets that we had most issues in terms of RIT, Champaign and Lubbock, Champaign international enrollment was up. RIT, it was down negligible, 40 students in enrollment for the entire University, and Lubbock has a very, very low percentage of international students in the mix, and they actually had their largest freshman class in history. And so whether that came from domestic or international doesn't appear to be it. The one thing that we hypothesize, and again, this is only a hypothesis at this point, is that with the modernization and the maturation of the higher-quality core pedestrian assets and their percent of supply increasing, they tend to -- students that want to live in those don't tend to wait till the very end, and that they are the highest demand products, they are the most desirable, and so they typically aren't the latest beds to lease in the season en masse. And so perhaps as other companies, and again, others felt it much more than we did in that regard. But perhaps those other companies saw that is because everybody has tended to improve their portfolios, as we mentioned, consistent with our philosophy of having more of that core. So I don't know that, that really answers your question, David, is that as we looked at our own facts and statistics in analyzing that, that's kind of our thoughts.

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David Steven Corak, FBR Capital Markets & Co., Research Division - Former VP & Research Analyst [13]

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No, it's helpful. You certainly answered my next question about the enrollment of international students. So appreciate that. But I just want to turn it over to supply. I appreciate the update on some of the numbers you gave, but I think we're all trying to figure out if supply will be more less impactful in '18 than in '17. So 2 questions. Can you update us on the supply as a percent of enrollment in '18? And if that will be more or less than you saw in '17? And then second, how many of the schools, of your schools, receiving supply in '18 also received supply into 2017? And is the compounding effect there pretty detrimental to certain schools?

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William C. Bayless, American Campus Communities, Inc. - CEO and Executive Director [14]

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Yes, and this year is really not any differentiation in terms of overall supply. It is going to be about 1.3% of enrollment, which it has averaged for the last decade. Also, when you look at the amount of supply coming into each individual market, nothing out of the norm. As Jim mentioned in his comments, we always look at where we have the largest presence in the top 10 supply markets, and the 3 that we watch this year -- that we're watching this year are College Station, which is continuing supply for the last 4 years; Tallahassee; and Austin. Now when you look at the -- and this -- to give you some stats here in terms of, and this ties into the capital allocation discussion we were having with Nick in terms of understanding the intricacies of each market. Take College Station, as an example, and that's something -- probably our company's greatest

accomplishment this year that you will have heard nothing about is our performance in College Station over the last 3 years and this year. And that College Station is the one market that I would describe as your traditional real estate development market where there's just been irrational exuberance over development, and it has continued. And that over the last 3 years, there have been 9,500 beds of competitive apartment housing delivered at College Station. And this year, it was the highest delivery point that they've had in a while. And when you look at our assets in College Station over that 3-year period, we have actually been flat, with all those beds coming online over that 3-year period as it relates to occupancy and rental revenue, where the market is down about 15 basis points in occupancy and 10% in rent. And so this speaks to our investment criteria and implementation of that in terms of asset choices, price points and location. And then in College Station, we have weathered the biggest barrage of supply that you have seen, then believe our assets for the long term over the next decade, as now you have many less development sites available, will continue to do well. Also on that list of the supply over the last several years, Tallahassee is in the top 10 in that they have had over 3,400 beds that have come in. Over that 3-year period in Tallahassee, we have had 16% growth in rental revenue, combination of rate and occupancy. It's almost all rate because the market has been full. And so as we've always said, supply, in and of itself, because of the modernization that is taking place in the space, is not typically the main concern that we have in our space. And so this year, we don't see a lot of differences from prior years, but we do -- we will keep our eye on Tallahassee, Austin and College Station, is that College Station continues to have another 2,400 beds coming in this year. Tallahassee is going to have -- let me grab my notes here, 2,400. And Austin 1,500. Now Austin and Tallahassee, again, have been big supply markets in the past, and the absorption there has been amazing, and the rental rate growth has been amazing through that process. We certainly are optimistic that will continue, but just anytime we have those supply numbers, we look at it very focused.

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David Steven Corak, FBR Capital Markets & Co., Research Division - Former VP & Research Analyst [15]

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Okay, that's helpful. The data points are obviously helpful, but, I guess, overall, do you feel better or worse about the supply impact in the '18-'19 school year versus '17-'18?

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William C. Bayless, American Campus Communities, Inc. - CEO and Executive Director [16]

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Actually better, and the reason I say that is when we look at our big supply markets last year, like Lubbock, and we knew Lubbock was going to be tough, we talked about it, again, with 2 of our 3 markets we're focused on being Austin and Tallahassee and their historical performance for absorption and pricing, we feel better about that going into this season than last.

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Operator [17]

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Our next question will come from Juan Sanabria of Bank of America Merrill Lynch.

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Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [18]

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Bill, I was just hoping you could give a little bit more color on the internal growth prospects of kind of the new or refined strategic assets you're targeting versus some of the older kind of legacy products and kind of the differential in that growth rate we could expect to kind of pencil in if we think about kind of like a 5-year business plan and how that changes over time?

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

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Yes. Certainly, we talked about it for the last several years, and as Nick brought about on his question, this was the year we'd hope to see that this lease-up would hit. And so the long-term historical numbers that we always talk about of the 3% NOI to the high 6% NOI growth from year-to-year, are the targets, historically, that we believe that the portfolio is capable of. Certainly, as you look at going into -- we mentioned in the press release that we believe going into the '18-'19 academic year, the 2.5% to 4% revenue growth gives us the opportunity, always depending upon the expenses, to be into that more historical target range of 3% and north. And so certainly, the thing that enables that is, indeed, if you do look industry-wide, and the Axiometrics data has supported this now that it's been out, they're transparent, the core pedestrian bicycle portfolios nationally have significantly outperformed the drive properties. The same holds true in this year's lease-up. The Axiometrics data, I have it here in front of me, your same-store portfolio of 411,000 beds is 94.5% versus 95.3%. When you look at assets that are inside of 0.5 mile, they're 95.3% from 95.8%, where those outside of a mile had 180 basis points of diminishment. And so certainly, as we refined our portfolio in terms of the acquisition -- or the dispos we did on the noncore assets, we've got a better pool of assets now where we hope to even outperform the Axiometrics national numbers. Here's where we talk about our own capital allocation strategy, which includes 2 things: one, when we're doing acquisitions, having better business intelligence than anybody else in terms of what we're choosing in the enhanced growth profiles of those. And certainly when it relates to ACC developed assets, imploring our approach of building for the masses, not the classes, more affordable and diversified rental rates, which we believe give you better rental rate growth prospects.

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Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [20]

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So the growth would be more outperforming on the occupancy perspective rather than driving higher rate growth? Or they...

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

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Well, certainly on the short term, the opportunity, if you look at the same-store grouping into '18-'19, as we mentioned in the release, we're at 95.5%, which is one of the lower base occupancies that we have had as a comp to grow off of. And so when you look at, just to translate what we said, 2.5% to 4%, if you're at 95.5% next year with only 2.5% rental rate growth, you can achieve that low end without improving occupancy at all, and then the opportunity for upside in terms of occupancy improvement getting you closer to the 4%. And so over the short term, I would say it's a balance of occupancy and rate where the opportunity exists. And over the longer term, probably more driven by rate than occupancy as we get back to those historical performance levels closer to the 97% occupancy.

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Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [22]

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Okay, great. And then just following up on the previous question on the supply in '18. It seemed like just 3 schools and a couple of smaller schools that you guys don't typically talk about kind of hurt the overall occupancy. I mean, what's the degree of confidence that you're not going to have the same kind of idiosyncratic risk at a couple of universities, particularly with 3 of your bigger universities having -- being in top 10 supply markets that the same scenario in '17 doesn't repeat this next coming school year?

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

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Yes. I mean, there's never a guarantee that it's going to be a 100% successful in every market, and so we will continually strive to be and to outperform in each and every market that we're in and utilize our data and systems to do so. That business intelligence component and operational data only gets better and better every year in early identification and in making the adjustments that we need to. And so certainly while it is our goal and objective that we have -- we do not have what took place in Lubbock and Champaign and RIT occur again next year, certainly, there's always possibilities those one-off markets can arise and hurt you, but we focus on it each and every day in the monitoring of our data and the decisions we make.

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Juan Carlos Sanabria, BofA Merrill Lynch, Research Division - VP [24]

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And just lastly, quickly on the disposition/joint ventures that are targeted, do you have a preference? And how would you think about structuring a potential joint venture? Would it just be a one-off joint venture where you contribute your assets? Or would you look to grow that joint venture with a partner acquiring assets in the open market?

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

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And certainly we will look at both. We are looking at both alternatives, and we'll evaluate the economic merits of straight disposition versus joint venture. And that certainly will be a large driver in that regard. Also though, as we think about the joint venture opportunity, and this is something, certainly, when you look at where the cost of capital was today from a stock price perspective, makes a joint venture relationship more attractive in terms of being able to execute on transactions that we know will be long-term accretive for all of our shareholders and having that alternate source of capital available. And so if we do end up the joint venture route versus the disposition route, we would think of it in a relationship perspective, but not a one-off. It's something that we can look at systematically as a potential opportunity. The -- certainly the internal conversations that we have and the conversations we have with our board is making sure that any joint ventures that we consider to undertake are done in the simplest structures and formats to provide the greatest level of transparency and understanding of the market in terms of valuation, but it's something we are seriously considering and think that it can be a quiver in our -- an arrow in our quiver that we have not had historically and been able to rely upon.

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Operator [26]

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Our next question will come from Alexander Goldfarb of Sandler O'Neill.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research and Senior REIT Analyst [27]

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Two questions for you. First, Daniel, on the last call, you had talked about possibly 100 basis point expense savings in the fourth quarter. So curious your update on that. And then as it relates to some of the earlier -- your earlier comments about just the cushion in the expenses. If we think about how the expenses trended this year and then we think about where the revenue is coming in, it sounds like next year, backing out the hurricane comparison, the NOI for next year is going to be below what we're seeing this year ex the hurricane. So just -- if you could just comment on both of those.

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Daniel B. Perry, American Campus Communities, Inc. - CFO, EVP, Secretary and Treasurer [28]

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Well, first, with regards to expenses, as you said, we did target lower expense growth in the third and fourth quarters relative to the beginning of the year to get to that 1% to 1.5% same-store expense growth we were including in guidance. If you look at our guidance update, the expenses that we include at the same store -- in the revised same-store grouping, and we did get some comments that it would have been nice for us to show those percentage changes relative to the revised same-store group prior year, that's something we'll certainly include going forward. That group, excluding the hurricane costs, now would be 1.5% at the high-end expense growth to 2.2% at the low-end expense growth. That is 50 to 70 basis points above our original expectation, primarily driven by the third quarter. We had about $1 million of overages, as we talked about in the prepared remarks, $700,000 in property taxes and related consulting fees and then a few hundred thousand dollars in repairs and maintenance, nonroutine incident response type costs. In the fourth quarter, we're expecting still to be relatively flat compared to the prior year in terms of expense growth to get us to that high 1% total expense growth, excluding the hurricane costs. As we move into 2018, we are obviously not giving guidance yet on -- in terms of expense growth. Jim did mention that we are continuing to see opportunities on the efficiency side to drive cost controls and help minimize that expense growth. Obviously, for the first 8 to 9 months of the year, with the results of this lease-up at 2.3% and then any impacts on that to the positive or negative, whether we see better or lower than the 2.3% in terms of other income revenue growth, will be the determining factor on whether or not we're able to drive good same-store NOI growth in those first 9 months. And then beyond that, into the third and fourth quarter, will largely depend on the lease-up.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research and Senior REIT Analyst [29]

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Okay, but it would seem fair to say that when you guys budget for next year, there's going to be some conservativeness. The expense is probably going to be higher than what we normally see given an element of conservativeness. Is that fair?

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Daniel B. Perry, American Campus Communities, Inc. - CFO, EVP, Secretary and Treasurer [30]

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I mean, it's -- certainly, it's fair, especially as you look at the last 2 months -- last 2 quarters of this year, with very low expense growth numbers. Third quarter, as I said, was 1% excluding the hurricane costs. So we've had good success implementing a lot of efficiency initiatives, and so that's a tough comp as we move into the second half of the year. Maybe a little better comp in the first half of the year, where, as you saw, we were running a little bit above 3% this year in expense growth.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research and Senior REIT Analyst [31]

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Okay. And then the second question is on the funding side, you guys have about $400 million to $450 million of dispos targeted for funding, and then there's sort of a plug of about $350 million. So can you just talk about how you think about the costs of those as far as cap rates or funding rates? And then given where your stock is, obviously, it's hard to adjust your development program based on where the stock is trading in a real-time basis, but given the depressed level, does it impact how you guys think about new investment just given that if you're selling stuff, presumably, it's going to be at cap rates that are probably wider than if you were issuing equity.

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Daniel B. Perry, American Campus Communities, Inc. - CFO, EVP, Secretary and Treasurer [32]

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Wider to what we would issue equity at?

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research and Senior REIT Analyst [33]

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Yes, I mean, where you would normally issue equity, presumably, would be inside of where you'd be selling the equity.

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Daniel B. Perry, American Campus Communities, Inc. - CFO, EVP, Secretary and Treasurer [34]

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Well, that's why we -- yes, and that's why Bill in his capital allocation discussion talked about really turning towards looking at the core portfolio and joint venturing interests in those assets or actually outright selling those assets at the cap rates that we're seeing available in this favorable market environment, in the mid-4s, and especially picking assets where we feel like we've been able to drive good NOI growth over the last several years and maybe we see -- may see a bit of slowing relative to what we can invest it at. So when we look at the $400 million to $450 million, that's how we're thinking about that capital cost, and that's what we want to go out and execute on first. As we talked about in the nice part of our capital allocation plan that we lay out in the supplemental is that of this $869 million of capital commitments, $656 million of it is going to be funded over a 2-year period all the way through the fall of '19. And so we have plenty of time to assess the oppor -- what we want to do on that remaining $273 million to $323 million of capital that we reflect there, and looking at what we think are the best sources of capital. Right now, from a heat map perspective, dispositions make the most sense. Obviously, you would put equity at the prices that we're trading at today pretty much off the chart. And so we will continue to assess the portfolio, look at what assets we think make the most sense from a long-term cost of capital perspective, taking into consideration the NOI growth profile of those assets and a match fund as we move through that 2-year period.

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Operator [35]

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Our next question will come from Austin Wurschmidt of KeyBanc Capital Markets.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [36]

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Touching a little bit more on the disposition side, I was wondering if you could detail your guy's asset sale criteria and how you guys would expect to achieve the sub-5 cap rates for assets that fall outside of those target criteria of a Power-5 Conference or R1 university, as you described it in your prepared remarks.

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William C. Bayless, American Campus Communities, Inc. - CEO and Executive Director [37]

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Yes. Those are 2 comments, in terms of our long-term target market desires and the Core transaction that we're talking about in the imminent future, are not necessarily directly related. And so as we -- one of the things Daniel said is we look at where we have created significant value that may make the most harvesting, they may well indeed be within some of those target markets that we do want to be in long term, but perhaps not with that -- those particular assets. And so those -- the exit of non-Power-5 and Research 1 markets should not be taken in concert with this particular disposition and joint venture we are discussing.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [38]

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That's helpful. And then can you just update us where you are in the process in terms of have you taken assets to market? What's the expectations in terms of timing? Can you just give us some color there.

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William C. Bayless, American Campus Communities, Inc. - CEO and Executive Director [39]

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Yes. The process will commence prior to the end of this year, and we hope to close in the first 2 quarters of next year.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [40]

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That's helpful. And, lastly, just want to talk a little bit -- so, you guys have baked in rental rate growth at 2.3% for '17 and '18. You outlined targeted growth of 2.5% to 4%, which seems reasonable to think 2.8% revenue growth expectation for 2018. What other factors could impact that either up or down? And how are you thinking about those as we move into the next year?

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William C. Bayless, American Campus Communities, Inc. - CEO and Executive Director [41]

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If you look at the statement there in the release, the 2.5% to 4% relates to the '18-'19 lease-up. And so that is the growth rate that we would anticipate that we can produce on the revenue side through the next lease-up for the '18-'19 academic year. So that is not a calendar year '18 reference. And as Daniel said, we're not going to give expense guidance on this call. And so we'll give that on the February call in terms of the final expense projections and what that growth rate is for the first 3 quarters of '18.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [42]

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Right, but I was just kind of looking at the 2.3% that's baked in for '17-'18, which you'd have in the first half of next year coupled with kind of that back half of the year revenue growth contribution from the '18-'19 year and kind of putting those 2 together, and so just curious what other moving pieces, as we saw this year, right? Other income and some of the short-term leasing impacted revenue growth. How are you thinking about that next year?

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William C. Bayless, American Campus Communities, Inc. - CEO and Executive Director [43]

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That's exactly the proper variables to consider, and we will, again, we'll update guidance on all of those components when we get into giving the '18 guidance. As we look at the number of short-term leases in the portfolio, it's relatively on par with what we had last year, and so we have comfort in that level in terms of there's no extraordinary situations related to that.

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Operator [44]

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Our next question will come from Drew Babin with Robert W. Baird.

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Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [45]

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I wanted to circle back on something that was said earlier about FFO growth for next year. I think, Bill, you said that the FFO growth would begin to be seen in 4Q '18. I wanted to clarify whether you were talking about FFO growth or NOI growth? Because certainly consensus estimates would paint a different picture for the first 3 quarters of next year.

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William C. Bayless, American Campus Communities, Inc. - CEO and Executive Director [46]

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And, again, we're not giving any guidance for any point in time next year, but when we talk about where the improvement in the internal growth numbers that we believe will occur starting in Q4 of next year, overall, what we're saying is that positively impacts all of your numbers, NOI and earnings per share, provided that -- those revenues are put in place and so it's not meant to imply any certain targets.

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Daniel B. Perry, American Campus Communities, Inc. - CFO, EVP, Secretary and Treasurer [47]

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Right, and I think, what -- Drew, what Bill was really speaking primarily to the NOI and that as you -- with the 2.3% resulting revenue growth from this lease-up, it provides an obviously, a more difficult revenue number when you start to take into expected expense growth in terms of NOI for the rest of the '17-'18 academic year. With regards to FFO, the big -- obviously, the big drag, as we've talked about, is that as you moved from '13 through '14, '15, and '16, we had about $2.5 billion of capital activity between dispositions and equity. We had about $1.3 billion in terms of development and acquisition growth. I think Nick at the beginning referenced a larger number, he's taken into consideration '13 and '17. I'm really looking at what changed between 2013 and 2017. And then when you take just '16 by itself alone compared to 2017, we had $600 million of dispositions at the end of 2016, which really is being deployed, and we also had a large equity offering in 2016, which is being deployed into our growth portfolio in '17, '18 and '19. And so that -- there's a lag there that's really what's caused this slow growth in FFO as we've deployed that capital. You should start to see it take effect in '18. You would expect that. So we're just hesitant to start committing to any kind of levels of FFO growth before we give our guidance for '18. You've got to look at when you go through all the individual components of it, as we go through the budget for this year -- for '18, at the end of this year, in terms of what that will ultimately allow us to drive in terms of FFO growth. But you would expect as you move into -- you should expect as you move into '18 and '19, and we're getting that capital deployed, and we don't have the drag of the prior year comparison of lost NOI and increase in weighted average share count, that you should see improvements in that FFO growth.

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Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [48]

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Right, that's what I thought. I just wanted to clarify. And secondly, on Texas Tech, or Lubbock, for this past year, you talked about your positioning relative to new supply and wanting to be inside of the new supply. Was that the case largely in Lubbock? And if you look at your supply markets for Austin, Tallahassee, College Station for '18, how do you feel about your positioning relative to the supply?

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

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Yes. And first, in Lubbock. In Lubbock, we're in a -- as we've talked about consistently, 3,700 beds of new supply coming into Lubbock, of which we were 1,313. The good news in that market is we are in premier locations in the pedestrian submarket and have a predominant position in that market. Also, we have no new supply coming in next year, and we have the largest freshman class at Techs, 7,148, up 4.7% from the prior year. Their long-term enrollment goals have been 40,000 by 2020. They've gone from 28,000 to 37,000 along that trip. And so we continue to remain bullish on the long-term investment that we have there. As it relates to Austin and Tallahassee, we have excellent asset locations. And in each of those markets, we have premier pedestrian locations to campus, and that's why, I mentioned Tallahassee, where you've seen over 3,000 beds come on in the last 3 -- and this is, again, this is a great point of capital allocation. You go back to the NMHC conference that took place 4 years ago, and everybody talked about Tallahassee being the scariest market over the 3 to 4 years that just passed. We utilized our business intelligence function, and we went big in Tallahassee. And while that growth came in, as I mentioned, we have had 16% growth in rental revenue over a 3-year period. And so we -- we attempt to always position ourselves well in those markets to sustain consistent long-term growth.

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Operator [50]

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Our next question will come from Jeff Pehl with Goldman Sachs.

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Jeffrey Robert Pehl, Goldman Sachs Group Inc., Research Division - Research Analyst [51]

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I just want to turn to scale for a moment and kind of get your thoughts there. You have $400 million of NOI with $30 million in G&A, and in apartments, Essex has $40 million of G&A and $900 million of NOI. I'm just wondering if you can think you can scale your platform from here.

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William C. Bayless, American Campus Communities, Inc. - CEO and Executive Director [52]

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Yes. And we certainly can scale the platform from here. And part of the -- and that's part of the challenge also, as we've talked about the deleveraging activities and the major dispositions over the last year is that as you look at the market and property count, we're largely in the same size as we were from an operational perspective 5 years ago. And so certainly, when you look at the infrastructure of American Campus, and a little more complex than a multifamily company, given our significant P3 business and the third-party business there in the transaction side of the on-campus transactions. But certainly, we are incredibly scalable at this point and basically have the infrastructure in place operationally to grow another 25% to 40%.

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Jeffrey Robert Pehl, Goldman Sachs Group Inc., Research Division - Research Analyst [53]

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Great. And then just turning to the third-party development services revenue, you increased guidance this year to $11 million. Just for next year, just how is that looking for those deals? And could that trend a little lower than this year or be flat?

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Daniel B. Perry, American Campus Communities, Inc. - CFO, EVP, Secretary and Treasurer [54]

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Jeff, this is Daniel. Yes, this is obviously a big year. I mean, if you look historically, on the third-party side, we've tended to run in the kind of $10 million to $15 million range, including both development and management services. This year, we're approaching $20 million. We've had a really good year in terms of third-party development closings. We had 3 new construction starts. And then we've got some advisory fees for transactions in addition to that. In a normal year, you've got to have those development starts where you're recognizing that big piece of the development fee upfront as you commence construction. And so it all depends on how much we're able to backfill with new awards for next year. We do, as William talked about, have -- continue to have a great RFP pipeline, which will inevitably include some third-party developments. So if we can be awarded those, certainly that's where we would see the backfilling. But to see a year like we had this year shouldn't be expected. I would expect it to be more in that $10 million to $15 million kind of range as opposed to the $20 million that we had this year, unless we have another big award year like we did in '17.

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Operator [55]

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Our next question will come from Vincent Chao with Deutsche Bank.

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Vincent Chao, Deutsche Bank AG, Research Division - VP [56]

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Most of my questions have been answered here already. But I would just maybe from a bigger picture perspective, Bill, I'm trying to tie in your comments about your competition and now basically using your development criteria and tying that back to the historical 3% to 6% internal growth range. I mean, should that necessarily mean that we just drift down to that 3% over time and some of the upside is eroded away by competition? And then a similar question on the spreads that you're achieving on your developments. Should that necessarily come down as people sort of adopt your approach?

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William C. Bayless, American Campus Communities, Inc. - CEO and Executive Director [57]

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Overall, we are still early enough in the maturation of the space. And, again, when you look at the pie charts that we show on our investor charts, in the 68 markets that we're operating in, when you look at core pedestrian student housing off-campus as a percent of enrollment, it's just over 10%. And so there is still so much runway in the space from a modernization and new supply perspective that we view the adoption of the appropriate fundamentals of the space for long-term success as a positive as it relates to the significant opportunities to grow nationally in the markets that we desire to be in, without it driving down the opportunities for us in terms of achieving the type of NOI growth that we have seen historically. We also -- and while we think that folks have gotten a lot better in terms of their development prowess and how they think about what they can see, we still do benefit from typically anything -- anytime that we buy anything, bringing the efficiencies and effectiveness and superior management operations to create that upside. And so, overall, we still see the additional competition in terms of the adoption of our business plan as an overall net positive than its impacting, slowing growth rates.

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Vincent Chao, Deutsche Bank AG, Research Division - VP [58]

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Okay. And then just another question. Earlier you'd mentioned where you'd allocate capital, and acquisitions had a caveat as needing some presale upside on top of the initial acquisition, and I was just curious how you factor in sort of the time it takes to generate that presale upside. I mean, if we look at the Core Space stabilizations a few years out, a lot of things can happen between now and then. So, I guess, how do you factor in the time it takes you to reach that stabilization?

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Daniel B. Perry, American Campus Communities, Inc. - CFO, EVP, Secretary and Treasurer [59]

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Well, Vin, this is Daniel. The presale cap rates that we're quoting are year 1 cap rates. They're higher because you're getting that higher cap rate given that you're taking the lease-up risk from the developer. They're still taking the construction risk, which is why it's elevated above a typical -- or below a typical development yield. But you get the -- you're taking, or we, as the presale purchaser, are taking the lease-up and stabilization risk during construction. So you're getting above an acquisition cap rate. So that's why you get that blend between a typical development yield and a -- to a stabilized asset, existing asset cap rate. So it's a year 1 cap rate that we're quoting for those presale developments.

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Vincent Chao, Deutsche Bank AG, Research Division - VP [60]

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Right. But, I guess, in this case, some of those don't deliver for a while. So that lease-up risk gets spread out over a number of years. And so, obviously, conditions can change and things like that. So just curious how you factor that in.

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Daniel B. Perry, American Campus Communities, Inc. - CFO, EVP, Secretary and Treasurer [61]

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Yes. I mean, it's just like -- it's the same as any -- if you're thinking about that, they're all '18 developments, right? And so you're talking about the same lease-up environment risk that we would be taking with our own development portfolio for 2018. The reason we talk about 2019 is that's when we're fully buying out all of the Core Spaces joint venture interest holdings in those properties, in the fall of '19. So we're really talking about once we bought 100% of their interest and we're getting full contribution from all the presale developments in terms of ownership relative to the existing assets we bought in 2017. That's when you're seeing the first full year of 100% ownership interest and a full blend of the NOIs and yields off those assets.

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Operator [62]

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(Operator Instructions) Our next question is a follow-up from Nick Joseph of Citi.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [63]

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It's Michael Bilerman here. I'm just curious how you thought about potentially raising capital alongside doing this acquisition. And I say that just from the perspective of while you may have a lot of confidence in the ability to execute and raise $700 million, $750 million of capital to fund this transaction, the market never likes uncertainty, because there's a certain amount of uncertainty over the period of time, both in terms of what could happen in the disposition market, what could happen to the operations of student housing assets, and you're also taking risk in terms of lease-up. So did you consider doing a joint venture on this acquisition to bring in foreign capital or other capital that you think is so strong in the sector? And then continue to sell or do other assets that would just be incremental to furthering your strategy?

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William C. Bayless, American Campus Communities, Inc. - CEO and Executive Director [64]

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Yes. We did, Michael. We went through all of that, and also certainly had those discussions also at the board level. Certainly, in these transactions, while it's been announced and closed here recently, obviously, these discussions started much, much earlier, toward the beginning of the year, in terms of the process, in terms of getting to the finish line. And throughout that process, we looked at all the various forms available of raising capital. Certainly the stock at various times was a much different level than it is today in terms of looking at raising equity. Also, when looking at the joint venturing opportunities, and this ties back into while there's certainly execution risks that you talked about there in terms of the market moving away, the decision and discussion between joint venturing directly on this opportunity versus joint venturing or dispo on the existing Core really had to do with the evaluation of growth rates and return that we look at with regard to this portfolio versus what we may transact upon. And so those decisions were driven and going through all of that analysis and looking at what we believe would be the most accretive and weighing that against the risk and then making that decision. And so all of those variables, indeed, were discussed and, again, not just internally, at the board level in terms of making the funding decisions in terms of how we'd go forward.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [65]

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Right, but the spread is, I mean, if you're talking about a 4.5% cap on in place, right, you still have growth in '18 and '19, '19 and '20. Arguably, those assets, if you just grew them at the portfolio average, that almost gets you to a 5%. The difference between a 5% and a 5.4% to put the pressure on your balance sheet is almost 3/4 of $1 billion of capital raise and impacts your stock price. It doesn't seem like a really good trade for this period. And I would think that being able to announce a transaction where you're bringing in a new joint venture partner, and by the way, it's always easier to bring in a joint venture partner on an acquisition versus selling existing assets off your balance sheet because you never know who's getting the better end of that deal. So, I guess, I'm struggling with trying to understand why you wouldn't have brought in joint venture capital and still executed other joint ventures and other sales along with your strategy.

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

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Yes. And in that regard, Nick (sic)[Michael], the -- one, this in and of itself, with Core, is somewhat of a joint venture in terms of the structured buyout over time that is taking place. And so a little more difficult in terms of the ability to bring in joint venture capital at the outset of the transaction versus perhaps prior to -- you still had the opportunity in terms of the delivery of all these assets to look at other forms of capitalizing the transaction. At the end of the day, though, those decisions do come down to, in the analysis, to the future growth rate. And looking at -- and certainly when we underwrite transactions, we do a conservative -- if you look at all the assets we bought in Austin in 2011, it was based on a pro forma 3.3%, where for the rental rate growth over the last 3 years in those assets has been 25%. And so as we look at the long-term potential of the Core Spaces portfolio that we are acquiring, and, again, looking at a growth rate value-creation opportunity, we would prefer to own that outright and to joint venture -- or dispose of the assets that we're going to in terms of the trade-off for that risk. But the thing that -- and, again, I understand it on the -- in terms of the economic quotations you went through there, your comments. But at the same time, we go through a much more in-depth analysis internally and at the board level when looking at that and making those decisions.

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Daniel B. Perry, American Campus Communities, Inc. - CFO, EVP, Secretary and Treasurer [67]

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Michael, this is Daniel. One thing I'll add to that, too, is that when we have looked at and considered whether we would joint venture any transactions, or whether we would enter into any joint venture partnerships, and add that as a source of capital to our quiver, the way we think about it is, okay, do we want to joint venture existing assets? Or do we want to joint venture the new growth, as you're talking about we could have done with Core? And we always feel like the joint venture -- the private joint venture market has a lower cost of capital. What we're seeing from buyers of student housing, especially the international funds that are coming, sovereign wealth-type funds that are coming in is they're looking for coupon clipping-type investments. They're not -- I mean, at the end of the day, what we hear from advisers is they're not even that concerned about the NOI growth. They buy it at the cap rate it's at, and the NOI growth is all gravy to them. And so whatever piece of -- in a joint venture partnership, whatever piece we're deploying into that joint venture, we look at as the public markets capital, which has a higher cost of capital than the private market. And we can generate a better IRR on those new development -- on those new growth properties than what we feel like we're monetizing in our existing portfolio. And so we want to use as much of the capital we're going to deploy on that new growth stuff, where we can generate a higher IRR and use where we believe there's a lower IRR to sell to the private market that use that as a sufficient return.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [68]

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Just last question in terms of timing. Arguably, by closing at least the initial phase of the Core Spaces acquisition and continue to fund development, your leverage levels are likely to materially increase prior to selling. And so I'm just trying to understand sort of how we should be thinking about where leverage goes, call it 4Q, 1Q, 2Q? And at what point do you expect to start having some sales to bring that leverage down to this 5.8%, 6.6% pro forma that you have in the supplemental?

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Daniel B. Perry, American Campus Communities, Inc. - CFO, EVP, Secretary and Treasurer [69]

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Yes. So as of quarter-end, we said our debt to asset value was sitting right around 35%. There's not as much to be deployed in the immediate coming quarters in that it's the ongoing funding of our development pipeline. The bigger commitments on the Core portfolio aren't until fall of '18 and fall of '19. So based on our projections, we see the debt-to-asset value ratio creeping up a couple, 2, 3 percentage points until we execute on those dispositions and then coming back down towards the mid-30s. Obviously, if we funded the rest of the capital needs that we show on the capital allocation page there all with debt, we would get back up around that 38% pro forma debt-to-asset ratio that we show there by fall of '19. The intent would be to access -- or use additional dispositions as a portion of funding that remaining capital need of $273 million to $323 million to make sure we start to bring that ratio back down towards the 35% goal that we're talking about over the long term.

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Operator [70]

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Ladies and gentlemen, this will conclude our question-and-answer session. I would 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 and Executive Director [71]

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We certainly want to thank you for taking the time to visit with us on the third quarter results. We hope the broad discussion today in terms of business strategy and capital allocation strategy was helpful to you all, and we look forward to visiting with you all at NAREIT here next month.

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Operator [72]

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