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Edited Transcript of ACC earnings conference call or presentation 23-Apr-19 2:00pm GMT

Q1 2019 American Campus Communities Inc Earnings Call

AUSTIN Apr 25, 2019 (Thomson StreetEvents) -- Edited Transcript of American Campus Communities Inc earnings conference call or presentation Tuesday, April 23, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel B. Perry

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

* Jennifer Beese

American Campus Communities, Inc. - Executive VP & COO

* Ryan Dennison

American Campus Communities, Inc. - SVP, Capital Markets & IR

* William C. Bayless

American Campus Communities, Inc. - CEO & Director

* William W. Talbot

American Campus Communities, Inc. - Executive VP & CIO

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Conference Call Participants

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* Alexander David Goldfarb

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

* Andrew T. Babin

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

* Austin Todd Wurschmidt

KeyBanc Capital Markets Inc., Research Division - VP

* Daniel Marc Bernstein

Capital One Securities, Inc., Research Division - Research Analyst

* John Joseph Pawlowski

Green Street Advisors, LLC, Research Division - Analyst

* Michael Bilerman

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

* Nicholas Gregory Joseph

Citigroup Inc, Research Division - Director & Senior Analyst

* Samir Upadhyay Khanal

Evercore ISI Institutional Equities, Research Division - MD & Equity Research Analyst

* Shirley Wu

BofA Merrill Lynch, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good day and welcome to the American Campus Communities 2019 First Quarter Earnings Conference Call and Webcast. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Mr. Ryan Dennison, Senior Vice President of Capital Markets and Investor Relations. Please go ahead, sir.

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

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Thank you. Good morning, and thank you for joining the American Campus Communities' 2019 First Quarter Conference Call. The press release is furnished on Form 8-K to provide access to the widest possible audience. In the release, the company has reconciled the non-GAAP financial measures to those directly comparable GAAP measures in accordance with Reg G requirements. Also posted on the company website in the Investor Relations section, you will find an earnings materials package, which includes both the press release and a supplemental financial package. We are hosting a live webcast for today's call, which you can access on the website, with the replay available for 1 month. Our supplemental analyst package and our webcast presentation are one and the same. Webcast slides may be advanced by you to facilitate following along. Management will be making forward-looking statements today as referenced in the disclosure in the press release, in the supplement 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; Jennifer Beese, Chief Operating Officer; William Talbot, Chief Investment Officer; Daniel Perry, Chief Financial Officer; Kim Voss, Chief Accounting Officer; and Jamie Wilhelm, our EVP of Public-Private Partnerships. With that, I'll turn the call over to Bill for his opening remarks. Bill?

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

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Thank you, Ryan. Good morning, and thank all of you for joining us to discuss our first quarter 2019 financial and operating results. As you saw on last night’s press release, it was an excellent quarter for the company. One marked by strong core performance with over 11% earnings per share growth and same-store NOI growth of 5.1% over the same quarter prior year. We were also delighted to announce yet another prominent on-campus award, having been selected by Cal Berkeley to serve as their student housing master plan development partner via highly-competitive RFQ process. As William will discuss, this initiative is expected to provide in excess of 6,000 new beds on their campus, over multiple phases, potentially utilizing a variety of transaction structures. We believe this award from the world's #1 public university further substantiates our position as the world's best-in-class student housing company. With that, we'll go ahead and jump right in, and I'll turn it over to Jennifer Beese to discuss our operating results.

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Jennifer Beese, American Campus Communities, Inc. - Executive VP & COO [4]

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Thanks, Bill. We are pleased that our first quarter 2019 same-store operational results exceeded expectations, coming in at 5.1% NOI growth. Our highest growth quarter since 2015. Our 3.1% revenue growth consisted of 3.4% rental revenue growth, which was partially offset by year-over-year decline in other income. The decrease in other income was in part due to reduced utility reimbursements correlated to the reduction in utilities expense this quarter. As we discussed on our last call, we expect our rental revenue growth to moderate in Q2 and Q3 as a result of May-ending leases at our res hall properties that contributed strong growth during the '18, '19 academic year and the backfilling of May-ending leases at our apartment communities. We are very pleased with the expense growth profiles reported in the first quarter, coming in with a total growth of only 0.5%. Excluding property taxes and insurance, quarterly expenses were 0.7% below the prior year quarter. Our utilities category benefited from our continuing efforts to renegotiate expiring cable and Internet agreements at lower rates as well as lower electricity cost from favorable weather patterns and savings at properties that have recently undergone LED replacements. We are pleased with our savings in the marketing category for the quarter. However, some of the savings are timing related, and we expect the category's growth in 2019 to trend toward slightly greater than inflationary growth. Payroll expenses benefited from lower health care costs for the quarter and continuing benefits from our internal employee development program. Over the year, we expect the category to trend more towards inflationary growth. Looking forward to Q2, one specific item, we want to point out is that we expect double-digit growth in R&M as we have a particularly tough expense comp in this category from one-time items that benefited the prior year quarter. Turning to our portfolio's leasing activity. We continue to trend within our historical and expected leasing trajectory. And at this time, we are reaffirming our projection for opening same-store rental revenue growth of 1.5% to 3% for the 2019/2020 lease-up. Additionally, we are pleased with our pre-leasing progress for development properties opening in the fall. With this grouping of properties currently pre-leased to 93% and trending towards year 1 stabilization. We look forward to updating the market as we progress through the remainder of the year. I will now turn the call over to William to discuss our investment activity.

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

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Thanks, Jennifer. Turning first to the overall transaction market. We recently attended the InterFace Student Housing Conference here in Austin with nearly 1,400 attendees from all over the globe, interested in investing in core, core plus and value-added strategies within the sector. Cap rates for core-pedestrian assets in Tier 1 markets continued to trade in the low to mid-4% cap rate range and are expected to remain at those levels in the near term. The sector has solidified itself as an institutional class of real estate investment for global and domestic investors with a strong runway for investment demand. Turning now to development. We're under construction and making great progress in our 2019 pipeline of owned developments and presales, which totaled 5 projects, approximately 3,150 beds and $404 million in development cost. The developments are currently on time and on budget. And as Jennifer mentioned, pre-leasing is going well, indicating our continued ability to deliver assets fully stabilized in their first year. All developments are located either on campus or pedestrian to major Tier 1 universities and are targeting stabilized development yields between 6.25% and 6.8% and presale development yields between 5.7% to 6.25%, representing attractive spreads of 175 to 275 basis points over current valuations for stabilized assets for our own developments within these markets and 100 to 200 basis points for our presale developments. Turning to our on-campus partnerships. We're very excited to announce that American Campus was selected as a student housing master plan development partner for the recent high profile, highly competitive UC Berkeley Student Housing Initiative. The initiative apart -- is part of UC Berkeley's plan, provide in excess of 6,000 new beds on several project sites. Currently, we are in exclusive negotiations for the first development site that's expected to provide 1,500 to 2,000 new beds on campus. The full scope, transaction structure, feasibility, fees and timing have yet to be determined. In addition, during the quarter, we closed on a third-party on-campus redevelopment project of Drexel University. The 400 bed Honors College project began construction in late 2018 under 100% reimbursement agreement, and the residential portion is targeted to open for fall 2019 with the associated administrative and academic space to open in early 2020. ACC is expected to earn $1.8 million in development fees. Once complete, the primarily first-year residence hall will be a natural feeder along with all on-campus freshman housing, to our 3,200 ACE beds of housing, which serves sophomores and upper division students. Subsequent to quarter end, we also closed on the financing and commenced construction on our ninth development on the campus of Prairie View A&M University. The 540-bed third-party project is targeted to open in fall 2020 with ACC expected to earn $2.5 million in development fees. ACC will manage the community upon completion, bring our total portfolio of developed and managed beds at Prairie View to 4,900. We're also making progress on predevelopment of our third-party developments at the University of California, Riverside and the University of California, Berkeley, Goldman School of Public Policy. Demand from universities for on-campus P3 projects remained plentiful, and ACC is pursuing a deep pipeline of opportunity. I'll now turn it over to Daniel to discuss our financial results for the quarter.

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

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Thanks, William. Last night, we reported the company's financial results for the first quarter of 2019, which at $0.69 of FFOM per fully diluted share, grew 11.3% over the first quarter of 2018. Overall, this was in line with our expectations.

However, diving into the components of the financial results, same-store and new-store net operating income were better than we projected while third-party fee income was lower, primarily due to timing. With regards to property NOI, revenues were in line with our expectations, but as Jennifer discussed, operating expenses came in approximately $1.7 million lower than projected due to good cost controls in payroll, utilities, marketing and repairs and maintenance. This was offset by lower third-party fee income as the closing of the UC Riverside development and associated fee recognition, originally expected to occur in the first quarter, is now expected to occur in the third quarter. This is certainly a good start to the year, but we are not making any updates to our 2019 earnings guidance at this time as the traditional primary risk to earnings still exist and the management of any summer vacancies; the completion of the fall 2019 lease-up; continued operating expense management throughout the year; and the successful closing still do occur on 2 of the 4 third-party development projects included in the midpoint of guidance. Further, as implied by the 1.5% to 3.4% same-store NOI growth guidance we are maintaining for the year, we anticipate the remaining quarters of the year to experience less same-store NOI growth than the 5.1% achieved this quarter. This is due to the slower seasonal revenue growth in the summer months and the 2.25% targeted rental revenue growth from the fall 2019 lease-up as well as tougher operating expense comps in the remaining quarters. On a separate note, like many residential REITs have done in recent years, the implementation of our next-gen operating systems will allow us to outsource online resident payments to third-party processors starting this fall for the 2019-2020 academic year. Historically, these payments were initiated through our portal, which required us to record a portion of the online payment as other income with an offsetting expense for the payment to the processor. With a fully outsourced online-payment solution, both the required revenue and expense entries will be eliminated. This will be neutral to NOI. However, during the initial 12 months of implementation, we expect this to reduce our quarterly same-store revenues and expenses by $700,000 to $800,000 and reduce revenue growth rates by approximately 40 basis points and expense growth rates by 80 basis points. Again, this does not impact our NOI and is already reflected in guidance figures for 2019, though we wanted to highlight for everyone the temporary effect it will have later this year and into the first 3 quarters of 2020. With that being said, you can refer to Pages S-15 and S-16 of the earnings supplemental to get complete details on each of the components of our 2019 guidance. And as usual, this quarter, we have added a column reflecting year-to-date actual results to facilitate reconciling each component of our guidance to the company's consolidated financial statements. While we are not making any changes to the earnings guidance range or the major components of it, I do want to point out that you will see we have adjusted our same-store guidance to reflect 1 property being moved to held for sale and recategorized bad debt expense from operating expenses to revenues in accordance with FASB's new lease accounting standard. This was a required change, I'm sure, you've already been hearing about from other REITs. Historically, we had included bad debt expense in our operating expenses and did not anticipate this change when we provided the same-store revenue and OpEx components of guidance at the beginning of the year. These reclassifications do not result in any change to our total NOI guidance. Moving to capital structure. As of March 31, the company's debt-to-enterprise value was 32%, debt-to-total asset value was 37.3%, and the net debt to run rate EBITDA was 6.5x. As you will see, in our capital allocation and long-term funding plan on Page S-14, we have not made any significant changes to the growth and funding plan. At this point, our development pipeline for 2020 is pretty much set at $280 million, and we expect to meet our capital needs for 2019, 2020 and beyond through a funding mix of cash available for reinvestment, additional debt and approximately $100 million to $150 million per year in disposition, joint venture and/or equity capital. This will allow the company to maintain a debt to assets -- total assets ratio in the mid-30s and a net debt-to-EBITDA ratio in the high 5s to low 6s. Our current 2019 guidance includes approximately $100 million to $190 million in proceeds from dispositions and/or the sale of a minority joint venture interest in existing properties during the second half of the year. 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 today comes from Shirley Wu with Bank of America Merrill Lynch.

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Shirley Wu, BofA Merrill Lynch, Research Division - Research Analyst [2]

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So my first question is on expenses. I'm guessing your 1Q '19 expenses were less than expected, and your guidance update as of this quarter was on the back of your accounting change. How comfortable are you with your expense guidance of 2.2% to 2.9%? Or hitting the midpoint or even the lower end of guidance?

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

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Yes, I mean, obviously, we're off to a good start for the year. The midpoint of our earning -- our expense growth for the year was 2.7%. We expected that -- the cadence of that to be pretty consistent throughout the year ranging from just below the mid-2.5% range to the upper 2.5% range or the upper 2% range. Certainly, we're happy with the first quarter. We outperformed our expectations. We still have to get property tax assessments in, which, obviously, are less under our control. We do believe that we at least will see a deceleration in property tax expense growth versus last year, but we're still subject to where those assessments come in. That aside, most of the areas where we saw outperformance in the first quarter were specific to the quarter. I don't necessarily think it may -- and implies a trend of those lower expense growth rates throughout the year. And so that's why we're holding that range for the year as -- we still have 3 quarters to go and all the normal risks associated with that.

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Shirley Wu, BofA Merrill Lynch, Research Division - Research Analyst [4]

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It kind of sounds as if even on facility utilities, the savings there went beyond the easier winter comps. How much of that, I guess, could you breakdown into energy efficiency savings versus just an easier winter?

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

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It's a bit of a -- this is Bill. It's bit of a mix. We have 46 properties where the LED initiatives were being felt in this quarter in terms of the sequencing power, you rolled them off, 32 properties associated with renegotiations of cable and Internet and those are -- will have some lingering benefits into the quarter. Obviously, the winter weather across the very broad geographic portfolio that we have nationally is something -- it's always subject to variation quarter-to-quarter, and so, certainly can't speak to -- despite my love of the Weather Channel and liking to watch it, can't give any perceptions into how the future may be. And certainly, hurricane season comes upon us later in the year. And so, hopefully, we'll continue to have good fortunes that relates to that, but certainly nothing we can speak to in terms of having that continue throughout the year.

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Operator [6]

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And our next question comes from Austin Wurschmidt with KeyBanc Capital Markets.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [7]

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You guys have talked about the awards from the UC system being more likely to go third-party. So just wondering what the probability that some portion of this UC Berkeley deal goes ACE? And then could you provide some additional detail just around the earliest timing for the 1,500 to 2,000 beds that William discussed, the potential yield, et cetera?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [8]

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Yes, and certainly we're very pleased that, that was a very high profile and highly sought after and competitive process. As you all know, from looking at the current 2 transactions we have done with Cal Berkeley. The first one was ACE. The one we're currently in predevelopment on is going to be third party. Given the scale of these projects and the amount of total development taking place, I think the school is going to analyze all the transactional structure alternatives that they have, ranging all the way from ACE and full privatization to perhaps the third party to, maybe, even some geo where we're engaged as developer in that regard to bring the core competencies in developments. So very much, yes, too early to tell in terms of how the overall transaction structural will come together, would expect it to be a variety versus any one particular. And whether or not those play into ACEs is yet to be seen too early for us, to be including in our investment profile, but certainly we'll keep you aware as we move forward on those.

The first transaction -- and these are core urban sites and California has a fairly complicated environmental approval process at CEQA. And in that regard, we're probably the earliest looking at breaking ground in '21 for a '23 delivery. And so the nice thing about this kind of fits -- if it did end up turning into ACE, it fits nicely into the capital allocations, it would be gearing up as Disney's rolling off. And so a nice flow to our sequencing, but way too early to announce any of it as ACE at this point in time. Would love to invest, obviously, and that would be some of the finest real estate in the company, but we're still too early in the process to see that play out.

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Daniel B. Perry, American Campus Communities, Inc. - Executive VP, CFO, Treasurer & Secretary [9]

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I think the other question you -- this is Daniel. The other question you had asked as part of that was what were we thinking from a yield perspective? Obviously, during the RFP process, we're still talking very high level with the universities, but we are still, just in general, targeting our 6.25% to 6.75% development yields.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [10]

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Got it. And then -- so when you -- from the initial UC system RFQ, how many beds have yet to be awarded? And is there potential for any of these to be owned on-campus type deals?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [11]

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Most of the other UC system transactions have tended to go toward the third-party route. And the system very much does like the UC Irvine model that we implemented there. But the lion share of the UC awards, the biggest transactions have taken place, we're very pleased. The one -- the biggest third-party, one being UC Riverside. Obviously, Berkeley being the crown jewel of the system in the public education of America was the most highly sought after in that. And our work continues at UC Irvine. And so the lion's share of that initiative has taken place. Certainly, the largest transactions have now been decided, and we're very pleased with our efforts and the results of our participation in that process.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [12]

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Got it. And then just switching over to same-store revenue. With the upcoming expiration on many of your 10-month leases, which we have previously talked about growing at an above average rate, if you were to put your meteorologist hat on, can help us understand kind of the magnitude of the deceleration you expect into the second quarter?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [13]

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Yes, this year, we have right at about 3,000 May-ending leases across the portfolio throughout our apartment property, so just not the first year on-campus residence halls. And that is very consistent with where we were last year. And so we're right on par in terms of the number of May-ending leases. And as I did mention on the last call, one of the initiatives that we do have in place is attempting to do some May-to-May leasing where we can. It's kind of a different approach from stub -- filling this short period of summer with an interim lease is rather looking at doing some May-to-May conversions, which have some upside there. And so too early to talk about any potential results of that initiative, but something the team is certainly focused on in terms of mitigating any diminishment in revenue that occurs from that.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [14]

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So -- but as far as kind of the deceleration -- I mean you talked about 10 to 20 basis points from fourth quarter, first quarter. How should we think about it from first to second quarter?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [15]

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Yes, typically, that historical diminishment has been 20 to 30 basis points. So the 3.4% you see in rental revenue this period, typically, in Q2, you would see that go to 3.1%, 3.2%.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [16]

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And then there could be some additional, I guess, impact from other income growing at a below average pace. Is that fair?

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Daniel B. Perry, American Campus Communities, Inc. - Executive VP, CFO, Treasurer & Secretary [17]

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Yes, that's right, Austin. This is Daniel. What we talked about at the beginning of the year is that we expected other income for the year to come in the flat to up 1% range.

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Operator [18]

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And our next question comes from Alex Goldfarb with Sandler O'Neill.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [19]

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Daniel -- you guys spoke a bit about the variability on expenses for why you're maintaining guidance. You talked about potential for move-outs. But the other thing that is in here is that it looks like if I look at your first quarter, your supp last night versus the supp that you put out with fourth quarter, it looks like you're now giving yourself a wider range on dispositions. Before, everything was third quarter. Now you're saying, at the low end of guidance, yes, it would be third quarter, and the high end, it would be late fourth quarter. So again, can you just go over some of the variabilities for why you have the strong beat if your May expirations are the same as last year and everything else looks in trend? And clearly, at the InterFace Conference, your peers were very bullish on how pre-leasing is going, so it doesn't sound like there's any slippage there. Just trying to figure out what are the other variables in here. Because it looks like you guys have widened the disposition timing, which would sort of flatter your earnings and yet you're keeping the range unchanged.

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Daniel B. Perry, American Campus Communities, Inc. - Executive VP, CFO, Treasurer & Secretary [20]

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Yes, so no update to the disposition/joint venture activity planned for the year. Actually, that reference to at the high end $90 million of or -- excuse me, 80 -- $90 million of joint venture activity in the fourth quarter. Putting the -- in the fourth quarter was just a clarification that we realized we didn't have in there at the beginning of the year. We do, every year, if we have any kind of capital activity like that, equity type capital activity like that, we'll range the timing just to allow for any difference that occurs versus what we expect. We've also been asked about the amount being $100 million or $90 million to $180 million in joint venture proceeds and what was driven -- driving that, was it potential dis -- difference in pricing or portfolio size? And it's portfolio size. We may go out with a larger deal, which would, obviously, drive us towards the lower end of guidance and a smaller deal later in the year, which would drive us towards the higher end. With regards to not updating guidance at this time, it's still early. We're 1 quarter in. We've got, as I've said in my prepared remarks, all the normal risk to the year in terms of the management of summer vacancies, controlled expenses throughout the year, obviously, the impact of any uncontrollable expenses, the fall lease-up.

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

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Let me comment to the lease-up, Daniel. And Alex, you brought up the student housing comp. And certainly, the one thing we don't want to diminish is -- the student housing industry remains an incredibly attractive sector. The industry is benefiting from a great cost of capital as it relates to the interest in the space. As far as people's pre-leasing commentary, when we look at the nation -- as Jennifer said in our results, our lease-up is in line with our historical and our expectations. When we look at the Axiometrics data for the national portfolio, we show that their March numbers, the same-store portfolio that they track in the top 175 markets is within 30 basis points of last year. So good news, where everything is on the historical trend. No surprises there. But I wouldn't take commentary from individual developers as exuberance that we should be raising our guidance in any form or fashion. We're in the throes of a lease-up as we always are. As you know, the very reason we quit giving leasing updates is so people wouldn't take a point in time, a piece of information of above and behind our comment and translate that into exuberance in changing numbers. And so we're in the middle of a lease-up. As Daniel said, we got a lot of work to do. We are pleased with the tailwinds that the sectors continues to have in terms of fundamentals, but we don't want to get too far out ahead of ourselves nor do we think the industry should.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [22]

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Okay. And then the second question is on development. Again, at the conference, there was a lot of talk about how supply has come down. I think 40,000 beds were delivered in 2018 down from like the 60,000 plus a few years ago. You had developers talking about how it's more difficult, some developers even getting into the acquisition game versus -- given the inability to make development math work. But that said, developers always seem to find a way to develop. So what is your view on supply expectations for the coming year? And do you expect this 40,000 bed that they delivered last year to stay down there? Or is your expectation that this is going to rebound and all that money that you talked about is going to find its way into development that gives us sort of the oversupply that we had a few years ago?

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

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No, I think what's happening -- and the reason, again, real estate developers have never, historically, done a good job in tempering their own desires to develop. Everyone in real estate knows that. The reason you have seen the slowdown in this industry is because of the absolute natural barriers to entry that geographically exist in these college towns. And that these higher density urban areas and in-fill areas around the colleges are tough to develop in. And so the reason you have seen the slow down and the reason we think that you'll see the level of development that currently exist continue to moderate in those levels is the natural barriers to entry in the space. And so the development on -- and the entitlement process are difficult to put together, the sites are fewer and further between. And it's a natural barrier to entry. And it’s the only way you would see an uptick in development, and I don't think you'll see this and would be surprised if you did, is that the only way that you could see a significant uptick if people went back to the old investment model of building drive properties further from campus. And everybody has already seen how that game has played out. You don't have the defensiveness and the stability of cash flows there. And so with a paradigm shift, with the industry all recognizing, candidly, that the American Campus investment model of proximity to campus, walkable to class is now becoming the norm and following suit of what the business product needs be. The natural barriers to entry are slowing that growth. And so it's geographically constrained driven more than anything else.

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Operator [24]

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And our next question comes from Nick Joseph with Citi.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [25]

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Can you anticipate a minority JV later this year? Are you broadly marketing the deal? Or is it going to be with your existing JV partner?

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William W. Talbot, American Campus Communities, Inc. - Executive VP & CIO [26]

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Nick, this is William. Right now, the strategy would be to potentially expand our current JV with our partner, but also be ready if they are not in position to execute or don't come to terms. We could look at it in the further away than that. But right now, when we formed the joint venture of Allianz, the idea was it would be a true partnership of which we could use as another bucket of -- in a cost of capital.

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

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But, Nick, shortly -- certainly, no shortage of interest whatsoever. The litany of JV partners that won in this space is more voluminous than it's ever been. Obviously, as Willy said, we'd give a first look to our existing partnership. And it's been a good relationship for us. But under no circumstance does the environment give us any concern about the ability to execute with the current partner or others.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [28]

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And then it sounds like the number of assets may shift. Would it be the all off-campus assets? Or could you include some ACE assets in this JV?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [29]

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Yes, we always, and we've talked about this in the past. We never say never. But certainly, the decision to joint venture any ACE assets would have to be something we do very thoughtful in concert with the university partners that might be impacted if we did that. We're really looking at a small amount of joint venture, right now, activity. When you look at the amount of funding we need, it's just not that great. Your ACE transactions relationship tend to be much larger in that regard. I would say, most likely, it would not be an on-campus portfolio, but we'd never say never.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [30]

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Bill, it's Michael Bilerman by here with Nick. I don't know if Bill or Dan wants to answer it. But how are you thinking about, I guess, raising additional capital today before the -- adding additional things to the pipeline from a development or acquisition perspective? Recognize you have the joint venture end of the year. But do you feel that you'd want to delever the balance sheet more meaningfully? And outside of doing asset sales or joint ventures, what's your current sort of take on issuing equity either through the ATM or in a marketed deal? Given the stock has moved back to the high 40s, do you feel the need that you want to get this balance sheet in a place where you have more flexibility to continue to add to the future pipeline?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [31]

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Let me first address some of the opportunity, and then I'll let Daniel go ahead and get into the capital allocation strategy in terms of timing of the balance sheet needs. The -- obviously, we've been out of the acquisition game for a while, given where our cost of capital is versus the cap rate environment that's out there. And in the near term, don't see that changing for us. And so we continue to be out of the acquisition's game at this moment in time. The other thing is, as William talked about, and this is, certainly, I think one of most attractive aspects of the student housing industry today, is the development yields that William was mentioning now being a 175 to 275 basis points above where our current market cap rates are. When we went public, Michael, that spread was 100 to 175 basis points above market cap rates, and so one of the few sectors that have seen that development to market -- the development yield to market rate grow exponentially, which gives us a great amount of comfort and cushion in terms of where open market conditions are as it relates to capital recycling to where our yields are.

The other thing, as we talk about, a lot of -- most of our development at this moment in time, also continues to be on-campus. As you hear in the awards and the -- what we commented in Alex -- with the environment off-campus is those sites are few and further between. And so we've got really good long-term purview into those development pipelines and how they may materialize, and also the fact that they're very low risk in terms of delivering stabilization given the environment on-campus and how those come together and -- from the delivery and stabilization perspective. And so with that said, we've got long runway of opportunity to evaluate. And when we look at the 270 up to 275 basis points of accretion that we can put in to play through a prudent and well-timed capital recycling is how we evaluate that balance sheet. Now I'll go and take it over to Daniel to...

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

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Yes, I mean, I don't know, Michael, that I have a lot to add to what we put out there as of our plan. I mean we talked about that we want to, going forward, better match time, our capital events to the delivery of the NOI. We do want to drive a better earnings growth profile trajectory going forward. So right now, we've got $280 million in the pipeline for 2020. At this point, we don't have anything else that we're showing you that we have coming behind that. So we think that pipeline is pretty much set. It's smaller than it has been over the last few years. It would require between '19 and '20, about a $150 million to $200 million in dispositions, which we think is very manageable. And obviously, for the pipeline beyond that, we will continue to look at opportunities to raise all types of equity type capital to continue to manage our leverage levels. The stock itself right now is not at a level that we think is quite yet appropriate for raising common equity, so we will continue until that changes to look at the capital recycling program through whether it's straight dispositions or joint venture as our main source and try to time that up as best as we can with the development pipeline.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [33]

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That's helpful color. I guess if this call was 2 weeks ago, would you've said the same thing about where the stock was at just over $48?

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Daniel B. Perry, American Campus Communities, Inc. - Executive VP, CFO, Treasurer & Secretary [34]

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I mean, probably, yes. NAV -- at least consensus NAV is up in the $50 million, $51 million range right now. While using an ATM minimizes the discount that you get through a regular offering, it's still below NAV. And we have held ourselves to that, and we think we can get a better cost of capital through the capital recycling program right now.

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [35]

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Right now. Yes, Michael, at this moment in time, and again, the key is that 275 basis points spread. I mean when you do look at the larger components of the development pipeline being Disney and if -- it's way too early to say anything if Berkeley is going ACE, but if it did go ACE, those are transactions that are so highly accretive that there's plenty of risk mitigation in terms of any movement market rates to be more accretively be able to fund them on a timing basis than going out right now and doing a major delevering.

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Operator [36]

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And our next question comes from Drew Babin with Baird.

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

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Most of my questions have been answered. I just had one more on the lease-up this year. I know, from the beginning this year, you highlighted Florida State as a market that was seeing a decent amount with supply. I was just -- and I know last quarter, you are relatively optimistic on how lease-up was shaping up there. I was hoping for just kind of an update, qualitative if need be, on Florida State, how that's shaping up? And I guess, if it is doing better, kind of, what's driving that progress relative to last year? Is it better understanding of the products? Is it students just wanting to be closer to campus? Just any color you could provide on FSU, it would be very helpful.

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

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Yes, FSU absolutely was the market that we highlighted at the beginning of the year. It's one of the ones we are most concerned about with the historical supply over the last year coupled with another year of strong supply coming in. The market as a whole is somewhat behind again this year. We continued to be very fortunate that we're pacing 13% ahead on velocity and have given up minimal rate. We're about 3% down on rate, but 13% up on current velocity, so we have the opportunity there to have rental revenue growth by exceeding last year's occupancy, which was about 92%. Obviously, we always want to pay tribute to our approach to data, and how we do business and the implementation of our marketing program. I've got to give a huge shout out to the American Campus team. And that -- when we had our leadership conference last fall, the Tallahassee team came to Jennifer and I, and said, we're going to do it this year. And they were very passionate and very tenacious. And when I tell the story, one of the things I have to say is you cannot, in any way, sell short the human resource implementation that is taking place. And that the team is just simply passionately outworking every other competitor in the market, again, using the best data and the best platform available, but they are outperforming what I think any company's expectations would be in this marketplace. So a big shout out to them.

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

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Great. That's helpful and I guess the obvious follow-on would be, are there any other markets that are sort of emerging as outliers relative to expectations as the year progresses either on the positive side or negative side? I know some of the Texas State universities have a very strong enrollment growth and coming off of a lower base at A&M and Texas Tech a couple of years ago. Does anything surprise you? Has anything sort of been an outlier relative to initial guidance or expectations?

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

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No, we -- and -- certainly, we're in a total of 92 university markets so you look at all of them. But the major markets we look at, as we talked about the beginning of the year, we're going to always -- we're to keep a close eye on Austin where you have new supply coming in. Texas State, also, is on that list. In both cases, we see those markets as more manageable than we expected Florida State to be, which again, the team has outperformed. We've got a couple of small markets where we don't have a lot of presence, Kennesaw State is one in Atlanta that the market velocity is running a little slow this year, but plenty of time there, and that's historically a late market. Lubbock, which you mentioned, continues to recover extremely well. And we're running ahead of the last year, which was running well ahead of the other years. So not a lot of surprises in this market. Champaign also was 2 years ago, which is one of the markets. We're also doing extremely well there too. And so, all in all, pretty good picture when we look at the individual markets where we expected to be soft this year. But as Daniel said and I reiterated in my comments, it's only April. We've got 3 months left in the leasing season. It's never over till it's over. We've got to tenaciously implement till the very end, and hopefully, report a good number on September 30. All implementation going well.

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Operator [41]

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And our next question comes from Samir Khanal with Evercore ISI.

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Samir Upadhyay Khanal, Evercore ISI Institutional Equities, Research Division - MD & Equity Research Analyst [42]

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Bill or Daniel, you made some comments on the development side, but just kind of sticking to that, what should we be modeling for development completions over the next few years and kind of beyond 2020? I know we've talked about sort of $400 million in the past, but it sounds like you're kind of the number could be lower. And I guess, what's driving that number to be lower? Is it sort of higher labor cost, construction cost? Is it sort of any development yields you're not kind of achieving? Just kind of any color around that would be helpful.

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

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No, and I think -- we've talked about the -- over the years, the run rate being anywhere from $300 million to $500 million. Yes, that one outlier year where we had $600 million come into play. The $300 million to $400 million run rate, we're a little below that right now in terms of next year delivery, which is more just a natural progression of deals selection. The off-campus transactions, we have slowed down just given the scrutiny of what's taking place in the market. And again, most of our competitors who are chasing sites take a different approach than we do where we do to build for the masses, not the classes and hold price point dear. All the other developers in the space tend to be still continuing to build at pro forma, attempting to capture the first top 5% socioeconomics, and so they're using only the highest rental rate point in the market in their pro formas and looking at 800-bed deals plus to make those number work. And so we're patient. We've seen that game before. Those will be the acquisition opportunities 36, 48 months from now that have a lot of upside as you can then buy below replacement cost, and we look forward to those days as we did back in '09, '10 and '11. And so when you look at the on-campus transactions, which is where the bulk of the shift has now been in the development pipeline and you see that continue to be. The diminishment in the dollars on the pipeline right now is the diminishment in the off-campus development, not the on. And so the P3 transactions on campus continued to be a robust pipeline of opportunity. We're incredibly pleased as we've continued to say over the years. And certainly, this quarter is the probably the pinnacle of it in terms of the flagship institutions that are undertaking the P3 model as the mainstay delivery, and Cal Berkeley, again, being the pinnacle of that from a quality of institution perspective that is mainstreaming it. We also love being the only public company in the space now in that arena and think it is absolutely a huge competitive advantage for us. And so continued to see a steady pipeline there into the future. So I'd say, the $300 million to $400 million a year is probably a good long-term number. You will see years where we fall slightly under that and if all things came together perfectly, some years where it came in slightly over that, but I think it's probably still a good numbers, that $300 million, $400 million.

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Samir Upadhyay Khanal, Evercore ISI Institutional Equities, Research Division - MD & Equity Research Analyst [44]

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Okay. And then I -- I guess my second question is getting back to sort of the guidance for same-store NOI. You've kept the range consistent at sort of the 1.5% to 3.4%. I guess what needs to happen that kind of get you to the low end of the range? And you've done 51 in the first quarter. You kind of take the average for the next 3 quarters, you're doing about 50 basis points to get the low end, I guess, which seems pretty low. I guess, what am I missing here being that it's a pretty low bar to cross here?

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Daniel B. Perry, American Campus Communities, Inc. - Executive VP, CFO, Treasurer & Secretary [45]

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Yes, I mean -- this is Daniel. In that low end, you're obviously allowing for the lower lease-up for the fall, at the 1.5% end of the 1.5% to 3% range that we gave for this fall's lease-up. And at the high end, you're allowing for the surprises that can happen in expenses. And where we can get surprised by expenses is, obviously, in the non-controllable areas: property taxes are a big one, insurance, certainly that market can be difficult at times; and then you have incident response cost in your repairs and maintenance area that sometimes can come in unexpectedly. We try to allow for it in the contingency, and that's what you see at the higher end of our expense growth, which is driving the lower end of potential same-store NOI growth.

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Operator [46]

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And our next question comes from John Pawlowski with Green Street Advisors.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Analyst [47]

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Are any of your schools currently revisiting mandatory on-campus requirements for upperclassman in addition to a few that have hit the last few years?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [48]

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John, there's none that have publicly put statements out or proposals in front of their Board of Regents at this point in time, but it's something that we always monitor. We have a, maybe, somewhat of a unique view on that. For the most part, we view colleges and universities having the first year students on-campus as a long-term positive. And that the most likely student to live in an American Campus community where we have private off-campus properties that compete in the open market, the most likely student to live with us is a student who is migrating from on-campus. And that the way that we run our academic program, and our residents life program and location to the classroom, we like to position ourselves as the nonuniversity academic alternative for the upperclassman that are being forced off-campus and can no longer live on. And so when the universities are implementing a first year housing program, we look at that as broadening the target market base. There always may be that 1 year where you're concerned about losing some potential freshmen in markets where you have it, but after that first year, our history shows us that as a net positive. And then certainly in markets where we are building on-campus housing, sometimes we like to initiate the conversation of those housing requirements where we have on-campus products. And so it's something we monitor closely and always keep a strategic purview on how we may be impacted on a short-term basis and a long-term basis. But overall, net -- on the long term, we view those decisions as net positive, not net negative.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Analyst [49]

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Understood. But on the off-campus side, does that statement hold in a negative demand or a negative enrollment growth school? Take a Portland State, take a Missouri, Marshall University. I mean there's -- you're losing bodies in aggregate, so is it a kind of our race to the bottom where the university tries to fill its own coffers at the expense of your off-campus communities even if they are well located?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [50]

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Yes, what you'll find out, though, that even in those -- and again, the typical markets that we are operating in, overall, have net positive enrollment growth over the long term. Use Mizzou as an example that'd be a good where you saw something out of the ordinary in terms of a dip in enrollment. The universities, on average, only have 22% beds as a percent of on-campus enrollment. And they typically reserve all of those beds for the first year incoming students whether they have a housing requirement or not. But the main reason most universities do not have a housing requirement is because they don't have enough beds to fulfill it. And that's the reason they don't require students to live on campuses because they can't. Even in the declining environment, the on-campus beds that are the best located, typically, don't have an issue filling. Certainly, when you look at what happened to Mizzou, your off-campus properties that were a drive from campus, and Mizzou only has 22% beds as a percent of enrollment, where you saw softening was in your off-campus beds that were a drive from the university. Our property in Mizzou, which is located across the street, drawing that -- during the entire enrollment downturn was 100% occupied. And the University is much, much better. And so we don't necessarily see -- the universities that are implementing that mission, typically, does not have to do with, oh, economically we need to fill our beds. They have no problem filling their beds. It's whether or not they have capacity to serve the number of first-year students that are entering.

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Operator [51]

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(Operator Instructions) And our next question comes from Daniel Bernstein with Capital One.

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Daniel Marc Bernstein, Capital One Securities, Inc., Research Division - Research Analyst [52]

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Most questions have been answered. I think I have more of a broad question. If you're thinking -- a couple of years out, most of your recent wins have been more third-party or management. Do you see the business tilting a little bit more towards the management business versus an equity owned business for you over time? Or is it's -- I mean it's hard to predict where capital markets will be, and I'm sure you'd like to own more assets, but do you see it tilting a little bit more towards the management business than an owned equity business?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [53]

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No, we don't. We continue to see a mix of opportunities. Certainly, we have always -- that our company started as a third-party developer and the manager. And it's in that arena where we build our brand among colleges and universities. And that's a great business for us in terms of not only building our brand, but also enabling us to have more credibility in getting through entitlement process as off-campus because of the relationships that we've harvested in that arena. Over the long term, again, we're continuing to be in an industry that is highly underserved. As -- we talk about Mizzou, the average university only provides 22% beds as percent of enrollment. The average age of those beds is 53 years old. Most of what we're doing in that arena continues to be replacement housing. Some universities -- and again whether a university decides to do a third-party transaction or an equity transaction, almost always has to do 100% with their balance sheet capacity. And so Arizona State is the example of an ACE University where President Crow's mission was, "I'm going to preserve every ounce of capacity that I have for research and academic facilities and allow someone else's balance sheet to handle the housing." Other universities have a balanced approach to that based on what their funding is. And so we think those choices in the future will continue to be diverse choices by university. We're agnostic as to what methodology sits -- fits them best and whether we play the role of third-party provider or equity owner. And I also think, again, with 22% of the beds being off-campus, the off-campus market continues to be 3x the size of on-campus and will continue to be that in that ratio at public universities. And while things have slowed down right now from acquisition and M&A perspective that's a moment in time in the cycle. And so as we think about our company over the next 10 to 15 years, the greatest opportunity that we see before us right now, you have a lot of capital coming into the space that is partnering with private companies that have, historically, been merchant developers that have built and flip, built and flip, built and flip. And now that those merchant developers have institutional capital that has a longer hold period for the first time. You have these development platforms that are building scale for the first time and managing 20, 30, 40 property portfolios. And candidly, their forte is not operations. And so with some great product that's being built nationally in great locations, we think there is going to be a significant amount of opportunity left in merchant developers that have become holders for the first time because the market conditions will do okay. But when this company was really producing earnings per share is when we're in M&A activity where we've got 200 to 400 basis points of occupancy and operational efficiencies that we can bring to bear along with rental rate economics over the initial investment period. And so I think those days are ahead of us, again, 36, 48 months on the horizon, but there's going to be more opportunity in that arena than we've ever had before.

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Daniel Marc Bernstein, Capital One Securities, Inc., Research Division - Research Analyst [54]

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Okay. So it's more of just where you are in the cycle than a change in an MO?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [55]

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Correct. Although we love the third-party fee revenue. Make no mistake. That's great income.

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Operator [56]

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And ladies and gentlemen, this will conclude our question-and-answer session. I'd like to turn the conference back over to Mr. Bill Bayless for any closing remarks.

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

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Yes, we'd like to thank you all for joining us for Q1. As we said at the beginning, it was a very good quarter that we're very pleased with. It's early in the year. We've got a lot of work to do. And I want to thank the team for all of their hard work and effort and their commitment to finish strong through this lease-up and continuing to deliver the type of results that we talked about today. Thank you so much.

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Operator [58]

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