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Edited Transcript of ACC earnings conference call or presentation 20-Feb-19 3:00pm GMT

Q4 2018 American Campus Communities Inc Earnings Call

AUSTIN Feb 22, 2019 (Thomson StreetEvents) -- Edited Transcript of American Campus Communities Inc earnings conference call or presentation Wednesday, February 20, 2019 at 3:00:00pm 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

* 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

* Nicholas Gregory Joseph

Citigroup Inc, Research Division - VP and 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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Hello, and welcome to the American Campus Communities 2018 Fourth 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 2018 Fourth Quarter and Year-End Conference Call.

The press release was furnished on Form 8-K to provide access to the widest possible audience. In the release, the company has reconciled the non-GAAP financial measures to those directly comparable GAAP measures in accordance with Reg G requirements.

Also posted on the company website in the Investor Relations section, you will find an earnings materials package which includes both the press release and a supplemental financial package.

We're hosting a live webcast for today's call which you can access on the website, with the replay available for 1 month. Our supplemental analyst package and our webcast presentation are one and the same. Webcast slides may be advanced by you to facilitate following along.

Management will be making forward-looking statements today as referenced in the disclosure in the press release, in the supplemental financial package and in SEC filings. Management would like to inform you that certain statements made during this conference call which are not historical fact may be deemed forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act of 1995.

Although the company believes the expectations reflected in any forward-looking statement are based on reasonable assumptions, they are subject to economic risks and uncertainties. The company can provide no assurance that its expectations will be achieved, and actual results may vary.

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

Having said that, I'd now like to introduce the members of senior management joining us for the call: Bill Bayless, Chief Executive Officer; Jim Hopke, President; Jennifer Beese, Chief Operating Officer; William Talbot, Chief Investment Officer; Daniel Perry, Chief Financial Officer; Kim Voss, Chief Accounting Officer; and Jamie Wilhelm, 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 you all for joining us as we discuss our fourth quarter and full year 2018 financial and operating results. I'd like to start by thanking the team for another year of same-store growth in rental rate, rental revenue and net operating income, making 2018 the 14th consecutive year of growth since our IPO. The stability of cash flows that our sector has consistently demonstrated continues to attract institutional investors, both domestically and globally.

Transactions during the year reached a record, exceeding $11 billion as cap rates further compressed and are now on par with multi-family. 2018 also brought in some firsts for our company. During the year, we successfully completed the strategic joint venture partnership with Allianz, which opened up another attractive source of capital to fund our value-creating development pipeline. And as William will discuss, we recently commenced construction on housing for the Disney College Program, a testament to one of our core values to drive evolution within the industry.

Overall, despite the uncertainty within the macroeconomy, fundamentals in the student housing industry remain healthy and we believe that the stability of our business will continue to make student housing one of the most sought-after investments globally.

With that, we at ACC look forward to 2019 as we have the opportunity for accelerating revenue and NOI growth over the prior year.

I'll now turn it over to Jennifer Beese, our Chief Operating Officer, to provide color on our operational results.

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

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Thanks, Bill. We are pleased to report another year of internal growth now marking the 14th consecutive year since our 2004 IPO of the same-store growth in rental rates, rental revenue and NOI. As seen on Page S5 of the supplemental, quarterly same-store property NOI increased by 0.1% on a 2.2% increase in revenue, and an increase in operating expenses of 5.3%, which was primarily driven by anticipated increases in property taxes due to reassessments of our markets.

For the full year 2018, same-store NOI increased 1% on a 1.9% increase in revenue and a 3% increase in expenses. Our operational and asset management efforts resulted in annual expense growth for our controllable categories of approximately 1.5%.

Turning to our full year 2019 outlook, we are projecting same-store NOI growth of 1.6% to 3.4% based on total revenue growth of 2.3% to 2.9% and expense growth of 2.3% to 3.1%. Our revenue guidance takes into account our in-place leases to the end of '18/'19 academic year lease term as well as our projections for the 2019/2020 lease-up. We are projecting opening fall same-store rental revenue growth for the '19/'20 academic year of 1.5% to 3% based on the combination of occupancy and rental rate growth. As always, the low and high ends of our revenue guidance reflects execution risk of our fall lease-up, backfilling short-term leases, summer leasing initiatives and outcome in our other income growth projections.

On the expense side, our same-store expense growth expectations of 2019 are inflationary in majority of our categories. Property taxes, our largest expense category, was the most meaningful expense growth driver in 2018 and continues to be the largest contributor to our budget expense growth in 2019 at roughly 4%. The growth is lower than the increases seen in 2018 as we do not anticipate the same level of reassessment in 2019.

Turning to new supply. The environment remains consistent with what we discussed on our Q3 call. For fall 2019, in ACC's 69 markets, we are projecting new supply in 36 of those markets, totaling approximately 28,700 beds or 1.3% of enrollment, in line with our long-term average. Of the 36 markets with new supply this year, 20 had no significant new supply last year. The new supply we are tracking this year is much less concentrated than what was delivered in fall 2018. As the average number of new beds per market receiving new supply is expected to decrease 20% from last year. This year's new supply is also less concentrated from a NOI impact perspective, as the largest 10 new supply markets represent approximately 18% of ACC's total NOI versus 29% last year.

We look forward to updating the market as we progress through 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 development, we are excited to have executed the ground lease and broken ground on the first 5 phases of our 10,440 bed, $615 million development project that will serve participants of the Disney College Program. The community will be delivered in multiple phases with the first phase delivering 778 beds in May 2020 and will include one of two 25,000 square-foot amenity centers and the 25,000 square-foot Disney Education Center. Subsequent phases will deliver over the following years with final completion expected in May 2023. The 10-phase development is expected to produce a 6.8% nominal yield upon stabilization.

We also executed the ground lease and began construction in February on our second phase ACE development on the University of Southern California Health Sciences campus. The 272-bed, $42 million project is a continuation of our highly successful 456-bed first phase community that's had an average wait list in excess of 200 persons since opening in 2016.

The new phase is expected to deliver in time for the 2020 academic year. With this progress, we're currently under construction on 8 owned developments and presales totaling 9,011 beds and $875 million targeted to deliver between 2019 and 2021. All ACC owned developments are expected to achieve between a stabilized 6.25% to 6.8% nominal yield and presale developments are targeting between 5.75% to 6.25% yield.

With regards to our fall 2019 developments, we've seen excellent lease-up progress with the 5 communities currently 87% pre-leased for the upcoming academic year.

With regards to on-campus third-party development, we are currently under construction on 5 third-party projects on the campuses of the University of California, Irvine; the University of California, Riverside; the University of Arizona; the University of Illinois, Chicago; and Delaware State with an additional 3 to 5 projects expected to break ground in 2019.

The redevelopment of Calhoun Hall Honors Residence at Drexel University, which will house first year honor students is now a third-party development. Drexel has traditionally used their balance sheet to own all their first year housing and relied on the ACE program to fund all other housing. The 400-bed project is expected to deliver for occupancy in time for this academic year.

Turning to the transaction market. 2018 produced another record year of investment in the student housing sector. According to CBRE's 2018 year-end student housing report, transactions totaled over $11 billion for 2018, highlighted by the Greystar-Blackstone acquisition of EdR. Cap rates continued to compress in 2018 with numerous core pedestrian properties trading at a low 4% cap rate range, including our sale of 3 assets to Greystar at a 4.1% economic cap rate and our sale of a minority interest of existing assets into a joint venture at a 4.4% economic cap rate.

It should be noted that investment volume remained strong and cap rates continued to compress during the fourth quarter despite increasing interest rates. Investor interest remains very strong for student housing product of abundant financing resources widely available.

With that, I'll now turn it over to Daniel to discuss our year-end financial results and 2019 guidance.

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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 final financial results for 2018, including fourth quarter FFOM of $100.2 million or $0.72 per fully diluted share and full year FFOM of $319.8 million or $2.31 per fully diluted share. This was in line with the midpoint of our updated guidance.

As Jennifer discussed, same-store NOI growth of 1% in 2018 was driven by a 1.9% increase in same-store revenues and 3% increase in same-store expenses, which was within 10 basis points of our original guidance midpoint provided at the beginning of the year.

With regards to new store properties, our 10 development and presale development properties opened in fall 2018 fully stabilized. Their performance, combined with the strong year 2 leasing results for our 2017 development and acquisition properties resulted in total new store NOI that was above the high-end of our original guidance for this group.

As we look to 2019, we expect to see an acceleration in same-store NOI growth driven by both higher revenue and lower operating expense growth relative to 2018.

Moving to capital structure. As of December 31, 2018, the company's debt-to-enterprise value was 34.6%, debt-to-total asset value was 36.5% and the net debt to run rate EBITDA was 6.3x. As you will see in our own development update on Page S-10 of the earnings supplemental, we have commenced construction on $765 million of development for delivery through 2021, with $525 million remaining to be funded over the next 3 years. In the capital allocation and long-term funding plan on Page S-16, we reflect additional phases of the Disney project through delivery in 2023 as well as the remaining funding on our presale development projects. Through a funding mix of cash available for reinvestment, additional debt and equity joint venture and/or disposition capital, we anticipate maintaining a debt-to-total assets ratio in the mid-30s and a net debt-to-EBITDA ratio in the high 5s to low 6s.

Our capital plan for 2019 includes approximately $100 million to $190 million in proceeds from dispositions and the sale of a minority joint venture interest in existing properties. We already completed increase in our line of credit from $700 million to $1 billion and a new $200 million term loan anticipated to close in the second half of the year. We also continue to have plans for an unsecured bond issuance, most likely in early 2020. To mitigate interest rate risk on that offering, we have entered into a 10-year treasury swap on half the expected issuance size.

Finally, turning to our 2019 earnings outlook. We've provided an FFOM guidance range of $2.35 to $2.45. You can turn to pages S-17 and S-18 of the earnings supplemental to get complete details on each of the components of our guidance. One specific item impacting our earnings guidance that is not consistent year-over-year is that under the new lease accounting standard, which I'm sure you have all been following, starting in 2019, we have to expense certain initial leasing and marketing costs that historically were capitalized. These expenses will show up in our new store operating expenses going forward and are expected to be approximately $1 million in 2019. Excluding these costs, FFOM guidance would have been $2.41 per share at the midpoint in line with Street consensus. Other than that, some of the major assumptions in our outlook are as follows: Same-store property NOI is expected to increase 1.6% to 3.4%, driven by 2.3% to 2.9% revenue growth and 2.3% to 3.1% operating expense growth. Our same-store revenue growth range includes the contribution to the first quarter and part of the second quarter of the 3.6% rental revenue growth achieved this past fall from our '18/'19 academic year same-store lease-up.

When we move into the summer semesters, as typically experienced, we expect to see lower seasonal revenue growth impacting the second and third quarters. And finally, we're targeting a 2.25% rental revenue growth midpoint for our 2019 lease-up, which will contribute to the third and fourth quarters. Our same-store expense growth range is primarily driven by property taxes and salaries and benefits, which together represent over 40% of total operating expenses. Both are projected to increase approximately 4% in 2019, with most notably, some moderation in property tax growth relative to the 8.3% experienced in 2018 due to significantly less impact from reassessments expected in 2019. Also, third-party fee revenue in the range of $26 million to $30 million is included in guidance for the year. This includes 3 to 5 third-party development projects that have been awarded to ACC and are expected to close during the year.

As noted in our guidance detail slides in the supplemental, this year, we are taking over facilities management of the existing Disney College Program housing until they are taken off-line as our new internship housing at Disney is delivered into service. As part of this facilities management agreement, the existing staff will stay in place with Disney reimbursing ACC for the overhead cost of those employees. As a result, from an accounting perspective, we are required to increase both third-party revenue and expenses by the estimated $3.2 million in reimbursement and overhead cost.

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 this morning's first question comes from Shirley Wu from Bank of America.

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

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So given your experience that you've experienced so far with elevated supply at FSU, what do you guys plan on doing differently going into '19? And what's included in your assumption for guidance?

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

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I'm sorry, Shirley. Can you restate that question? We didn't fully catch it here.

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

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Okay. So given like the elevated supply at some of these schools, like FSU, you have a -- you've had quite a track record with just high supply. So what do you plan on doing differently going into '19? And how much of that have you assumed in guidance?

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

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Yes, and Tallahassee is one of the markets that we talked about on last quarter's call, but certainly given the supply that's coming in is an area of a short-term concern for us. From a long-term perspective, we're very comfortable with our investments in the Tallahassee market and think they will do will over the long term and meet our yields. Obviously, last year, we were a little bit down in Tali. Occupancy was around 91.7%, I believe 91.5%. We were a little conservative in our guidance this year, given the new supply that is coming in. We had a little bit of overall growth plan in the guidance. I want to say, it was about 1.5% to 2% overall in overall rental revenue consisting of occupancy and rate. It's still early, but we are doing extremely well in Tallahassee this year. Our velocity is significantly outpacing last year, and so we believe we are in a position that we will do okay in Tali from what we've assumed in our guidance.

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Shirley Wu, BofA Merrill Lynch, Research Division - Research Analyst [6]

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Got it. And so also -- so quick to the -- to your Disney program, so it's definitely very interesting how you guys have pivoted from a traditional student housing into your -- the Disney internship development. What are your thoughts about maybe getting into corporate housing or different means of business besides your core?

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

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Yes, and while Disney would be considered corporate housing as these students are employees of Disney. It was a very natural pivot for us given that, again, the students that we are housing at Disney are indeed the exact same target market that we have been serving throughout the company's history. And so it's in many cases the same 18- to 22-year-old and in some cases, folks attending the exact same university that we're already serving. And so from a floor plan design, from a programmatic design, the development of the Disney Education Center is exactly on par with all the honors college developments that we've done at ASU, Northern Arizona, University of Arizona. And so it is a very consistent pivot. So at this point in time, it made great sense for us and we haven't made any commitments for explorations of a definitive nature beyond that program.

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Operator [8]

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And the next question comes from Nick Joseph with Citi.

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

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How successful were you on backfilling December-ending leases? I mean, given that, what do you expect 1Q same-store revenue growth to be?

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

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Yes, Nick, it was a really good year for us. As we mentioned on last call, we had about 150 additional December ending leases. We were very successful when the backfill. The team did a great job. The 1 notation that I would make is that those backfilling of leases, typically those December-ending leases are at a premium price to the market rate because of the short-term nature. And then, when we backfill them in January, they are either at market or sometimes at a discount to market. That's candidly what causes a little bit of the seasonality and why you typically see about a 20-point bp diminishment in rental revenue because of the rate variation in the backfilling. Also on occupancy basis, we did very good. And on a racing -- rent perspective, we wouldn't expect more than 10 to 20 basis points diminishment from the [3.6%].

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

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Great. And then, what's the expected development spend in 2019? And then based off of the 2019 sources of capital you discussed, where do you expect net debt-to-EBITDA to be at the end of the year?

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

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Yes, Nick, this is Daniel. So if you look at, I mean, and we really look at it not just '19 because we have development under construction for both '19 and '20 that we're committed on. And so, when we look at the amount of spend that we have throughout that time period, it's about $590 million of development spend to be funded and also the buyout of our presale developments. When we look -- and also, if you'll notice on our capital funding plan page, we have 1 less development for delivery in '19 than we had last quarter with the Drexel Calhoun hall redevelopment converting to a third-party deal. So that took about $42 million worth of development funding out.

But as you go through the funding of that $590 million, we obviously have cash on hand of $71 million, about $60 million a year in free cash flow available for reinvestment. Beyond that, we would expect to fund the remaining $400 million through a combination of debt and equity or dispo capital being about $100 million of debt and $300 million of disposition or equity capital. Obviously, with where our cost of equity is today, the intent as we include in our capital plan is for that to be via dispositions of about $150 million per year. We have, at the midpoint -- well, we have a range of $100 million to $190 million in total disposition capital for this year. The other thing I'll point out, as you recall, on the last couple of calls, we've been talking about our intent to better time that disposition -- those disposition proceeds with the developments coming online to provide a better and more consistent earnings growth trajectory. So we are planning on those transactions occurring in the third quarter of each year when the EBITDAR NOI contribution from the developments comes on and you have a more timing -- more of a timing match between capital raised and capital deployed.

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

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So just to follow-up on that, so guidance is assuming about $150 million of dispositions at the midpoint, but it could be up to $300 million of the combination of dispositions and equity, but right now, guidance assumes that, that is debt, is that right?

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Daniel B. Perry, American Campus Communities, Inc. - Executive VP, CFO, Treasurer & Secretary [14]

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No. No. It'd be $300 million over the next 2 years of debt and/or -- or dispo and equity capital, which we would spread between the 2 years. So $150 million is what we expect in our guidance and in actuality for this year.

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Operator [15]

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And the next question comes from Austin Wurschmidt with KeyBanc.

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

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Just curious, how much appetite does your capital partner have to continue to partner on joint ventures in the disposition side? And do they get first look on any potential sales?

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William W. Talbot, American Campus Communities, Inc. - Executive VP & CIO [17]

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Austin, this is William. So Allianz, they viewed the venture as an entree into a partnership with American Campus. They do have a greater appetite to grow that platform. However, we do not have any exclusivity with them or any first look, but would certainly look to them as our established partner when we look at other available capital resources to fund our growth.

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

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And then you mentioned in your prepared remarks that cap rates had compressed further in the fourth quarter. And I'm just trying to understand, can you give us a sense of how much that was? And what we should be thinking about from an expectation of the dispositions you've assumed in guidance, where cap rates will shake out?

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William W. Talbot, American Campus Communities, Inc. - Executive VP & CIO [19]

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Yes, as we noted, overall, you saw cap rates compress and really more specifically, importantly, when we look and think about our dispositions, we continually saw those core pedestrian cap rates trading in the low 4% in line with what you saw the ACC transactions of 4.1% and 4.4%. You saw other transactions that were in that similar low 4% cap rate range. And certainly, as we look and with the capitalized or venture out some of our corporate issuing assets, our expectations are in line with that low 4% cap rate range.

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

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Appreciate that. And then just separately, I was curious as far as how the leases break down, what percent of your fall 2018/'19 leases have a 12-month term? And do you know off-hand what revenue growth was for that subset of assets?

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

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Yes, and when you look at -- and we have our residence hall properties, and Daniel, try to remember if I give any misnumbers please give me the correct one. When we look at our 10-month residence hall properties, I believe in the Q4 that represents about 18% of our NOI as a whole, correct answer, of revenue -- 18% of our revenue. And actually, we had great rental rate growth there. Sorry, my mic was off. Could you hear what I was saying, Austin?

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

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Yes, yes.

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

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Okay. We were at 4.2% revenue growth on that 10-month property where the 12-month apartments were 3.5%. And so 18% from the academic year properties, what we would call academic year lease, and the 72% coming from the -- 82%, rather, coming from the 12-month apartments.

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

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So 82% at 3.5% and 18% at 4.2%?

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

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Yes. And the one thing that we would say, and we started talking about this about 2 years ago, is that the majority of ACE transactions that we are now being awarded are residence hall products for first-year students that are on that academic year lease. And so we talked about you'll continue to see just a little variation in seasonality, especially in Q2 as those residence hall leases roll-off and the apartment leases continue. And so just something to be aware that that's a trend that we'll probably continue to see that potentially come in.

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

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When you look back, historically, maybe just 1 quick follow-up. When you look back, historically, have those 10-month leases outperformed the 12-month leases over the last several years when we've seen kind of the...

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

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You got to break them into 2 categories, in that the majority of those assets are on-campus residence halls where you would see your rate profile be in the area of 2.5% to 3% coupon clipping revenue growth. We only have a couple of properties that are off-campus, private residence halls, being the Callaway House in Austin and College Station. Those 2 assets that are 2 of our legacy flagship assets that have been some of our best performers have always pushed that rate up over the last 5 years. I would tell you that over the long term, and with the growing amount of that coming in the on-campus arena, you would expect that to be a more normalized, consistent 2.5% to 3% revenue growth over the long term.

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Operator [28]

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And the next question comes from Samir Khanal with Evercore.

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Samir Upadhyay Khanal, Evercore ISI Institutional Equities, Research Division - MD & Equity Research Analyst [29]

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Bill or Daniel, I guess, I guess, what gives you the confidence that you'll be able to hit the midpoint or the lower end of the expense range that you provided for '19? And if I go back historically, right, in '18, you started off with 2.5% to 3.3%. You hit kind of at the higher end of that range. '17 was kind of a similar situation, it was 1% to 1.5%. And you kind of, I think, if my math serves me right, it was kind of at the high end of the range when you exclude the impacts from the hurricane. So just trying to get color around sort of expense growth here and how you're thinking about it.

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

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Yes, Samir, this is Daniel. And when you look at 2018, we hit ultimately 3% expense growth versus a midpoint, as you referenced, of 2.9%. So we were at the end of 10 basis points of our original midpoint from the beginning of the year, which we consider to be pretty good performance relative to expectations. As you look at 2019, with a 2.7% operating expense growth, midpoint for same-store, it's a 30 basis point improvement over 2018. We -- that is primarily driven by our expectations for a moderation in property tax growth. We came in really close to the property tax growth that we expected for 2018 albeit it was a high number. We expected that going into the year. This year based on our consultation with our advisers -- our tax advisers, we believe that a lot of the reassessments that we saw in 2018 have now pretty fully baked valuations. We do have a few markets where we expect big reassessments this year that's built into our 4%, but we already have some of the new assessments in for 2019. For example, in Philly, where we had $1 million increase in taxes, we already know our assessment, we have a very small increase. So we're pretty confident with that 4%. The other area that has caused some higher expense growth in the past is related to incident response cost related to hurricanes and other incidents like that pipe burst. We've really tried to build in and allow for that better this year in our incident response budget. And so that's in our 2.7% growth, and so we feel pretty good about it. The other area that certainly is a focus for all industries is payroll. As I said in my remarks, we're expecting 4% growth in payroll this year. If you remember, I think, we came in at 1.9% in 2018. That -- we feel like that gives us room to be able to perform well against any payroll increases. We also have pretty good management of our payroll. Our inside track system provides a great bench of talent for any replacements that we need to do at the property level. I mean, as you can imagine, those are new employees that may not be -- or certainly aren't more expensive than any existing employees you lose. So we feel pretty confident in those numbers as well.

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Samir Upadhyay Khanal, Evercore ISI Institutional Equities, Research Division - MD & Equity Research Analyst [31]

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Just as a follow-up on the reassessment. I mean, how does that exactly work? I mean, as you sit here today, you have a pretty good idea of sort of the reassessments for the next 12 months, I would think. But I mean, are there any surprises that -- that could come up? I mean, has there been instances in the past where 3 months later or 6 months later those came up and that impacted sort of your numbers?

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

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Yes, you do get surprises. Fortunately, it tends to average out because you get surprises to the positive. So when we look at what our original expectation was for property taxes in 2018, it was 7.9%. We revised it to 9%. We came in at 8.3%. So pretty tight band there of ultimate growth. And so we have multiple national advisers that we use for property taxes and they are able to give us pretty good direction that in combination with our in-house experts, we're able to project those pretty close to what actually ends up turning out.

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Samir Upadhyay Khanal, Evercore ISI Institutional Equities, Research Division - MD & Equity Research Analyst [33]

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Okay. And I guess -- just one last one from me. I guess, what does your presale development pipeline look like right now? You got the 2 off-campus projects, it's The Flex and the 959 Franklin. I mean, what does that pipeline look beyond sort of '19?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [34]

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For us, that's something that we look at in concert with our overall capital allocation opportunities. As we say, our first priority is always on the owned development where we're still getting 225 basis points of spread to current market cap rates. And so, we allocate that as our #1 priority. We look at presales and there is always good opportunities out there, but we are very selective in analyzing them in concert with the growth profile going forward and line them up against the capital allocation we have for our own development, and so that's something -- the pipeline is good, but we only choose to execute when it makes sense and it is not our highest priority with our development opportunities.

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Operator [35]

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And the next question comes from Daniel Bernstein with Capital One.

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Daniel Marc Bernstein, Capital One Securities, Inc., Research Division - Research Analyst [36]

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Just wanted to ask about the capital recycling guidance for '19. You did over $600 million in '18. 2019 guidance is $150 million. Is that just -- is that decrease just a matching to the development needs? Or is there some other strategic decrease in recycling, especially in light of some of the cap rates that you've been quoting on '18 sales and decreasing cap rates in 4Q. I thought maybe the recycling number would be a little bit higher?

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

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If you really look at 2018, we had 2 things going on in terms of the amount of recycling we did. When we brought Core Spaces or entered into the Core Spaces transaction in 2017, you'll remember that was a 3-year funding that we agreed to with that partner given their tax objectives. We were funding part of it in fall of '17, part of it in fall of '18 and part of it in fall of '19. And so the joint venture that we did in 2018 that produced proceeds of about $367 million was a funding mechanism for that Core Spaces transaction that we had planned when we entered into it in 2017 and talked about. We also did an additional $245 million of dispositions that we actually didn't anticipate when we gave guidance at the beginning of the year, but the Disney project came together during the year and we wanted to get capital in place for that project on the front end so we felt comfortable with committing to a 5-year development there. That's taken care of now, and so we're really looking at everything that we have in place and trying to now match time that better, and so it puts us in a position to do a little less and do it from a timing perspective with the delivery of the developments each year.

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Daniel Marc Bernstein, Capital One Securities, Inc., Research Division - Research Analyst [38]

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Okay. So if the development picks up for some reason, then maybe the acquisitions will too, but otherwise it's kind of matching?

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

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Yes we feel -- and we feel comfortable about where our balance sheet is at this point. If development picks up, we certainly will look at where cost of capital is but the intent would be to match time it better. That's something we talked about with wanting to bring more stability to our earnings growth trajectory and move to more of a match timing funding strategy.

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Daniel Marc Bernstein, Capital One Securities, Inc., Research Division - Research Analyst [40]

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Okay. And then there was that NMHC, and it seems like a lot of developers and investors are looking at alternative assets besides multi-family, mentioning student housing. So have you sought out or have any investment partners potentially sought you out as a new capital source besides Allianz? Just trying to see if you have the desire there to expand that.

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

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The answer to that, for the last 3 years to 5 years has been yes and continues to be yes. There is certainly plenty of money and opportunities of folks that would love to joint venture and partner. As William said, we're very pleased with our relationship with Allianz. They do not have exclusivity or first look, but we are enjoying that relationship and have no reason at this point to necessarily look elsewhere unless someone had set a cost of capital that was so much more attractive, but certainly, there is no shortage of opportunity for us in terms of those sources.

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Operator [42]

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And the next question comes from Alexander Goldfarb with Sandler O'Neill.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [43]

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So I appreciate the comments on the equity side for capital funding. In the guidance for 2019, is there anything that you are budgeting you had to address, maybe taking an early stab at the 2020 maturities?

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Daniel B. Perry, American Campus Communities, Inc. - Executive VP, CFO, Treasurer & Secretary [44]

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Well, what we have from a debt standpoint is, as we talked about, we already closed on an expansion of our revolver to more match up with the size of our ongoing development pipeline. We also have -- as you remember, we paid off multiple term loans in 2018 with the proceeds from our disposition activity. We do intend to do a small-term loan in the second half of this year. From a long-term kind of a fixed rate funding perspective, we are looking at doing another bond offering, probably in early 2020, as I commented in my prepared remarks, and also said that we had entered into a 10-year treasury swap for half of that transaction to mitigate any interest rate risk in the interim.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [45]

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Okay. That's helpful. And then, just another on the development funding side. It looks like if you take out the Core Spaces, which I think was $130 million, the one that you took down in the fourth quarter, the overall development pipeline shrunk by about $100 million but the amount spent to date stayed the same. Is that literally just happens to be just how Core Spaces worked out? Or is there something going on -- something else going on with the budgeting on the developments?

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

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Net-net, it went down $100 million because you paid the $130 million, it was about $139 million, I think, on the Core Spaces deal. And then you had the $42 million deal with Drexel Calhoun come out. So that's the net $100 million change. So no real changes other than that from last quarter. Obviously, we continue to have, if you look at it by line item, funding that occurred, but everything else should be pretty consistent with what we disclosed before.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [47]

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Okay. And then, just a final question. In looking at your development, the total commitment looks to be about 12% or so of your gross assets and you guys have been trying to do a much better job on the funding side to better match it up. Is there sort of a target amount that you're seeing that you're more comfortable with having annually deliver, so that way, on the funding side, there seems to be maybe there is less discussion of what you need to source from dispositions or equity and it becomes something more sustainable through free cash flow and maybe a few asset sales versus something that gets a bigger conversation, if you will?

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

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I mean, look, we always look at that. It's something we discuss with our board. We've talked historically about we think that a 5% of assets per year development pipeline is appropriate. When you're talking about the ability to recycle capital in the low 4s into 6.25 and above development, that's a really attractive trade. And so we don't see any reason to change that capital allocation strategy at this point. Even if you were to see cap rates start to tick back up a little bit, we still have so much cushion. Right now, you're looking at almost over 200 bps of spread between what we can develop at and what we can recycle capital at. So that remains -- that continues to be attractive to us. And so our 5% of assets kind of development strategy we think continues to make sense as well.

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Operator [49]

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(Operator Instructions) And the next question comes from John Pawlowski with Green Street Advisors.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Analyst [50]

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William, a question for you on opportunity zones. I know it's very early and there's still a lot of uncertainty. There are a lot of low income U.S. census tracts in and around college campuses. Do you foresee any of your markets seeing a supply wave from opportunity zone development?

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William W. Talbot, American Campus Communities, Inc. - Executive VP & CIO [51]

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We really have looked at all the -- how the opportunity zones overlay within our existing markets and specifically where they are. But if you go back to our initial investment criteria, one of the things we really focus on is barriers to entry and that really existed prior to the opportunity zones. So while we see people looking at the opportunity zones, we really haven't seen an increase in supply as evidenced by the overall supply numbers that we've dictated that's been driven by that opportunity zone today.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Analyst [52]

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Are you seeing a lot of pitchbooks floating around for plans to raise money in and around your footprint?

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William W. Talbot, American Campus Communities, Inc. - Executive VP & CIO [53]

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Not really on the student housing side, no.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Analyst [54]

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And then, Jennifer, maybe a question for you on just the sensitivity to rental rate growth with the financial markets. I know you're more stable versus other real estate types. But if you could provide some color on, for instance, if the stock market goes down by 20% ahead of next fall's lease-up, what could rental rate growth look like? Does it go flat or just any sense for what you've seen historically in your pricing systems in terms of sensitivity to ebbs and flows of the financial market would be helpful.

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Jennifer Beese, American Campus Communities, Inc. - Executive VP & COO [55]

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First question ever. I'm a little nervous, I must say, how are you today?

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Analyst [56]

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Anybody at the table could.

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

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No. We'll let Jennifer answer it.

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Jennifer Beese, American Campus Communities, Inc. - Executive VP & COO [58]

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We do not see any fluctuation right now on our rental rates at this time.

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

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If you look, John, long term, whenever we've seen the macro environment change, certainly, throughout the great recession would be the greatest evidence. And through '09, '10 and '11, when you saw major macro crisis, we saw the most continued consistency in our rental rates and our cash flows. And so, the macroeconomics just don't tend to play out and impact us. And then it comes down to the macroeconomics of supply and demand in each university market and we see little variation hardly if ever. The only time that we have ever really seen it in the company's history, and you really got to go back and it was before the modern supply of student housing was at the levels that it was today is back in the early 2000's, in '01, '02 in an Austin or at University of Colorado, which has the Broomfield, Northern Denver sub-market, you would see multi-family softness somewhat impact, and this is back when students didn't have the purpose-built product in walking distance to campus, but there was more of a shadow market in that multi-family, you'd start to see some impacts then, but we have not seen it in the last 15 years at all.

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Daniel B. Perry, American Campus Communities, Inc. - Executive VP, CFO, Treasurer & Secretary [60]

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And if I can pile on to Bill there, if you go back '08, '09 and '10, I think, that is a pretty perfect correlation to the scenario you're asking about, John. Our same-store revenue growth in '08 was 4.2%, in '09 it was 4.9%, and in this is -- sorry, this is opening for the fall lease-up of each of those years, and then in 2010, it was 4.4%. So really, really good revenue growth.

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

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We don't root for recessions, but when they happen, we tend to do really well.

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Daniel B. Perry, American Campus Communities, Inc. - Executive VP, CFO, Treasurer & Secretary [62]

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If you go back and dig, some of that is a combination of occupancy -- some of it was rate, some of it was occupancy. The good thing was we had positive growth in both occupancy and rate throughout that time period. So that's the nice part of student housing.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Analyst [63]

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My only pushback there would be '07, '08, '09, the demographic wave was firmly at your guys' back and now it's a slowing environment.

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

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The demographic rate may be slowing but the enrollment at the institutions that we're serving is not and this is the way you have to look at. When you look at the demographic of 18 to 22 year olds and the amount of students that are available to go to college, we are operating at the premier institutions across America where there is incredible competition for those seats. And so we do not see any impact. When you look at the things that have been concerns over the last several years, macroeconomics, international student population, every seat at these institutions gets filled and there is a significant backflow for it. We always talk about our home State of Texas, the top 6% of high school students get into A&M and UT. The backlog of students waiting for those seats -- and that's consistent across your Tier 1 public institutions across America. So the supply side of the equation and the buying power of the student is truly not a historical risk nor the one that we see presently.

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Operator [65]

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And that concludes the question-and-answer session. I now would like to turn the call back over to management for any closing comments.

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

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In closing, we'd like to first thank the entire American Campus team for a very solid year in 2018 on what they produced, especially with the successful fall lease-up. It sets the stage for accelerating growth into 2019. Also, being our 25th anniversary, we would like to thank every team member, every university partner and all of our vendor partners that have been instrumental in our success over the last 25 years. We look forward to seeing many of you at the upcoming investor conferences and talking to you shortly in April about our Q1 results. Thanks so much.

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Operator [67]

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