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Campus Crest Communities, Inc. (NYSE:CCG)

Q4 2012 Earnings Conference Call

February 27, 2013 9:00 AM ET

Executives

Ted W. Rollins – Chief Executive Officer

Michael S. Hartnett – Chief Investment Officer

Robert Dann – Chief Operating Officer

Donald L. Bobbitt – Chief Financial Officer

Erik Johnson - Vice President of Finance

Analysts

Operator

Good day ladies and gentlemen, thank you for standing by. Welcome to the Campus Crest Community’s Fourth Quarter 2012 Earnings Conference Call. During today’s presentation, all parties will be in a listen-only mode. We will not be taking questions today because of the current equity offering. This conference is being recorded today, February 27, 2013. I will now like to turn the conference over to our host Mr. Erik Johnson, please go ahead.

Erik Johnson

Thank you operator. Good morning and welcome to the Campus Crest’s fourth quarter 2012 conference call. On the call this morning are Ted Rollins, CEO; Mike Hartnett, CIO; Robert Dann, COO; and Donald Bobbitt, CFO. Before I turn the call over to Ted, I would like to remind you that management’s remarks in today’s call may include statements that are not historical facts and are considered forward looking within the meaning of (inaudible) Securities Laws including statements regarding projections, plans or future expectations. These forward looking statements reflect current views and expectations which are based on currently available information and management assumptions. We assume no obligations to update these forward looking statements and we can give no assurance that the expectations will be attained. After results may differ materially from those described in the forward looking statements and will be affected by a variety of risks including those set forth in our prospectus and as updated on our periodic reports filed with SEC.

On this conference call we may refer to certain non-GAAP financial measures, reconciliation of these non-GAAP financial measures are available in the 10-K earnings release and supplemental [ph]annual package which can be accessed on the investor relations page of our website at campuscrest.com. And now I will turn the call over to Ted.

Ted Rollins

Thank you Eric. Good morning everyone and thank you for joining us today. Before we get started, I would first like to thank all of our team members across the country for all of their great energy, ideas, dedication and hard work without which we could not achieve the results that we do. Campus Crest people make the difference day-in and day-out and in 2012 we delivered solid results while furthering our corporate, environmental and social stewardship initiatives. As I am sure many of you have seen we filed an 8-K about a very exciting new opportunity. Our initial investment in this stage acquisition of Copper Beech Townhome Communities with a total enterprise value of approximately $970 million. Before I describe this exciting new investment however, I would like to discuss the positive trends of the student housing sector. The strong operating results of our existing portfolio and our significant accomplishments throughout 2012 and for the fourth quarter of 2012.

With respect to the student housing sector, we continue to see positive trend in a majority of our markets to continue to refine our market analysis and understanding of all that impacts student housing. We engaged a third party consultant to review this sector. They presented the results of their finding at our 2012 Investor Day in December in New York. The presentation outlined many facets of the industry that we continually study, such as enrollment trend, supply, the effects of student loan credit losses on our industry, the status of student loan availability and how state budgetary constraints are impacting this sector.

We are pleased to report that after an in depth review culminating in this report we remained confident in this sector. A few of the details from the report are as follows, there is stand up demand for 1.5 and 2.2 million beds of purpose built student housing in the United States and the projected 10-year deliveries for the student housing developers in America are estimated between 300,000 and 500,000. This will not fill that demand. Expected enrollment growth over the next 10 years will contribute to an additional demand of 500,000. Student loan defaults which impacts student’s after leaving school are a very small percentage in the total student population. Our research indicates that this is below 5% at approximately 50% of student who depend college do not have loans.

A college education has a significant value and there is a meaningful difference in earnings power and unemployment rates with those with higher education versus those without and as we say, it is becoming increasingly clear that a college education is the new high school education. Four-year public schools in the U.S. which is our sweet spot continues to experience growth in enrollment of around 2.1% as shown by the most recent government data. All this information was particularly interesting given some of the specters raised recently about over supply as well as credit risk concerns in the sector on a broader basis. Well there are markets here and there that maybe overbuilt, this is not the case across the sector and those markets where supply has been overbuilt, properties with the right product, right management and solid locations continue to perform.

We remained focused on our differentiated strategy of focusing on the upper end of the non-flagship and the lower end of the flagship stores and believe there continues to be a significant number of very attractive development opportunities across the country.

Here are some of this past year’s highlights, this past quarter we grew our same-store wholly-owned NOI by 7% which brought our annual growth to 6.2%. We achieved this by continuing to drive revenue growth with a balance of rate and occupancy while maintaining our focus on operational excellence and cost controlling issues. With this we also saw our margins continue to expand as these changes took hold across the platform. Our wholly-owned same-store margins climbed from 51.9% to 53.3%, a 140 basis point increase throughout the year. As a result of these continued improvements across the business we experience solid gains in our adjusted funds from operation which grew 14.1% for the quarter and 16.8% for the year. In addition to these results, I am happy to report that once again we are ahead of the prior year and our leasing for the coming academic.

Our teams in this field have never been better and have achieved solid results so far with a combination of our training programs in our systems we expect this to continue. As of February 22, 2013, leasing of our wholly-owned portfolio for the next academic year was 350 basis points ahead of last year coming in at 46.2%. Additionally, our developments that were delivered in the fall of 2012 are tracking nicely for next academic year at 50.2%. Rob will talk a little bit more about that later in the call.

On the growth side of our business, we continue to manage a robust pipeline and have approximately 80 markets and varying levels of due diligence review with land identified and under control and approximately 30 of these markets. These 30 sites equate they are approximately $750 million of development that we expect to occur over the next 3 to 4 years. In addition, we are testing an urban project in Philadelphia as well as continuing to roll out our newly tested and very successful townhome projects. We believe that multiple product ties will give us more flexibility as we enter the more densely populated states as well as provide a second price point for our customers. And finally, we are on schedule to open our six new projects for the new academic year this summer, in some exciting new markets.

This year in 2013, our teams continue to achieve some great results. Some of our post quarter activities included increasing our unsecured credit facility from $200 million to $300 million with an accordion of $600 million.

This gives us plenty of [ph]dry powder as we move forward into 2013. We’re able to lower the cost on this line as well as add an attractive feature that provides a sublimit that allows us to finance our developments on this line and get credit in the borrowing base. Not only will this decrease our cost compared to using traditional construction debt, but it will simplify our execution by streamlining our process of construction loan administration.

We also extended our term on this line by another year to 4 years with a one year extension. This further helps us balance our materials. Also this year our board of directors approved a 3.1% increase in our dividend per share, signaling confidence in our business as well as the student housing image. And as I alluded to earlier, we added a new urban market concept with construction commencement of a 33-storey 850-bed student housing tower called The Grove at Cira Centre South for delivery in 2014 for that academic year. This $159 million project located in the University City area of Philadelphia is a joint venture with Brandywine Realty Trust and Harrison Street Real Estate Capital, two great partners.

We believe that this new concept will be a great compliment on a selective basis through our prototypical growth products especially as we enter the more dense urban markets in the north east.

I would now like to discuss our investment in Copper Beech which I believe will allow us to continue to build on our recent accomplishments while significantly expanding our scale. As I mentioned, we filed an 8-K about a very new citing opportunity. Our initial investment in the staged acquisition of Copper Beech Townhome Communities with a total enterprise value of approximately of $970 million. Our initial investment of $230 million is for a 48% equity stake that allows us to form a partnership with one of the larger and we believe better operators in the industry. We are also funding a $32 million loan to the remaining partners for a total initial investment of $262 million.

Finally, we will have three consecutive options to buy the remainder of the portfolio during the next three years at fixed prices. Copper Beech has 20 years of solid performance and experience as demonstrated by attractive margins and occupancies in the high 90s. They also have a vertically integrated platform like ours and deliver their properties at compelling costs. This transactions brings into our company a portfolio of high quality well located properties with a total bed count of approximately 15,645 beds and an average age of 7 years located in 18 different universities with an average total full time enrollment of more than 28,000 students. We believe this is an excellent portfolio and operating platform and has been and will continue to be a pleasure to work with Dr. [ph]MacWarder and his team.

Our transaction increased a strong partnership with Copper Beech and allows us to take measured steps to increase our ownership and operational control without pressuring either our balance sheet or operational infrastructure. This stage acquisition brings significant strategic benefits to our business as the combined companies will have nearly 42,000 beds and reach 57 markets with interest in 81 properties, including our deliveries this year as well as Copper Beech’s deliveries.

Campus Crest will become the second largest public student housing company by beds and our platform will benefit from enhanced scale diversification in internal as well as external growth opportunities. With this acquisition, we are also making a serious commitment to adding a second brand focused on townhome living. As Copper Beech is a well recognized brand and is known for its townhome product. We believe that although apparently we have only 6 locations in common, we can selectively roll this product out whether there is already a growth property, and gain a share of the market we’ve otherwise, we’re not tapping into.

We believe we will be able to leverage the operations across the platform as well. Further to this, we will be able to roll out our lifestyle program as well as our ancillary product offerings to drive revenue even further, like Copper Beech. We believe the transaction will be accretive in the first year of investment, given the attractive cap rate and purchase price relative to our cost of capital. The acquisition is continued upon the successful completion of the follow on offering.

As I discussed earlier, we continue to be optimistic about our industry and we are taking advantage of attractive growth opportunities that make sense from a financial and a strategic perspective. The Copper Beech transaction is one of those truly unique growth opportunities that will significantly grow our footprint while adding a complementary product in brand. Growth through development which has traditionally been our growth driver continues to offer accretive opportunities and our teams have built one of the strongest pipelines in the company’s history. Across the country, we are finding opportunities and flagship and non-flag state universities with strong demand characteristics and irreplaceable locations near campus. This is a result of our national reach of our platform, which enables us to have an intimate knowledge of local markets, which in turn helps us to better source, develop and build properties, which taking advantage of synergies we get from the size and scale of our vertically integrated organization.

Overall 2012 was a very successful year for Campus Crest. We started the year strong and put together consecutive quarters of consistent result. Though we are pleased with these results, we are not satisfied and will continue to improve our people, systems and processes as we look forward to the future.

With that, Rob will now provide more color on our operations for the quarter end year.

Robert Dann

Thanks Ted. As Ted mentioned our teams work extremely hard to produce strong results quarter after quarter in 2012. Throughout the year, we continue to improve our leasing processes and continue to make changes in our personnel, incentive compensation, work load allocations and systems, result is a more efficient and effective leasing process and an ability to control operating expenses, thus driving better margins. This is all reflected in the 7.0% quarterly and 6.2% annual increase and wholly-owned same-store NOI.

For the quarter, our 25 same-store wholly-owned properties had an average occupancy at 92.2%, which is a 380 basis points increase year-over-year. Margins on these assets were 54.9%, a 250 basis point increase over the prior period. New wholly-owned properties reported average occupancy of 95.6% and margins of 62% when combined the 32 property wholly-owned operating portfolio posted average quarterly occupancy of 93% and margins of 56.7%. The portfolio is strengthening everyday as we continue to drive operations and leasing the process.

For the year, our 21 same-store wholly-owned properties had an average occupancy of 91.7% which is a 210 basis point increase year-over-year. Margins on these assets were 53.3%, a 140 basis point increase over the prior period. The new wholly-owned properties reported average occupancy of 90.8% in margins of 57.2. The combined 32 asset wholly-owned operating portfolio posted average quarterly occupancy of 91.4% and margins of 54.5%. As the newer higher margin properties roll into the new store pool, we expect our statistics to continue to improve. On the joint venture side of the business, results lagged the wholly-owned portfolio.

We have acquired four assets from Harrison Street over the past 14 months, thus making the pool now seven operating assets, much smaller and more susceptible to stress. We have confidence in each of our joint venture markets and properties and believe we have put the right team in place to improve our overall performance in this pool.

Finally, we are hard at work releasing for 2013 and 2014. The changes we have made in our leasing processes have made us more flexible and adaptable to market conditions. As of February 22nd, our 32 wholly-owned operating properties were 46.2% prelease which is 350 basis points higher than we were last year at this time.

On the joint venture front, the seven operating properties were 31.2% prelease, which is 230 basis points higher. Our six 2013 deliveries, three wholly-owned and three joint venture were 34% prelease, which is in line with where our 2012 deliveries were at this point last year. Our leasing results continue to be encouraging and our teams are focused on achieving our targeted levels for 2013-14 academic year. As Ted mentioned, 2012 has been an outstanding year and I wanted to also add my thanks to our team members for embracing change and producing tremendous results.

These changes in expense control and leasing strategies have laid the groundwork for a strong future for the company. Next, Michael, will discuss our investment activity.

Mike Hartnett

Thank you, Rob. The company is on schedule to deliver six new communities for the 2013-2014 academic year in the third quarter of 2013. Development of these six projects comprised of three wholly-owned assets and three joint ventures with Harrison Street Real Estate, represented total investment of $163 million and is progressing according to plan. The median distance to Campus of these six projects is 0.3 miles, and they serve schools with an average enrolment of approximately 25,000 students and represent our ninth generation prototype.

In addition to the six 2013-2014 academic year projects, the company has formed a joint venture partnership with Brandywine Realty Trust and Harrison Street Real Estate to develop a 33-storey, 850-beds student housing tower on a site leased from the University of Pennsylvania in Philadelphia. The project called The Grove at Cira Centre South has a total cost of $159 million and will be financed with a $98 million from PNC Bank and Capital One Bank. Campus Crest and Brandywine will each own 30% of the joint venture, while Harrison Street will own 40%. This new development, located at the corner of 30th Street and Chestnut Street will serve the students of the University of Pennsylvania and Drexel University, each having total enrolments of roughly 25,000 students. The two universities create a strong and consistent student housing demand and our project which is located on average less than 0.1 miles from the two campuses will serve the market very well.

We believe this Philadelphia development will be a great complement to our existing Grove prototype and will serve as a springboard for us to selectively pursue other opportunities in more dense, urban settings. While this is our first foray into in-fill development, we have been able to leverage our prototypical construction expertise, as we have utilized the interior unit layouts of our typical growth product as the building blocks for the living spaces within the new tower. We are also pleased to be working with Brandywine Realty and believe that our respective complementary skill set will enable the partnership to create a successful nationally recognized market-leading project. Brandywine has extensive experience in urban, high-rise development and deep roots in the Philadelphia market, while our company brings market-proven programmatic insight as well as industry-leading resident life focused management techniques to this development opportunity.

Construction commenced this January, the leasing effort will kick off during the fall of 2013 and the project has a targeted completion date for the fall of 2014. The company continues to maintain a robust pipeline of development opportunities. We currently have approximately 80 markets in varying levels of due diligence review, with land identified and under control in approximately 30 of these markets. These 30 sites represent a total pipeline of properties under control of approximately $750 million, a majority of these types were not actively marketed and were only discovered because of our research-based approach to market selection and underwriting, combined with the on-the-ground presence of our regional development partner. Approximately one-third of these 30 locations will be ready for our next development cycle, and the remaining opportunities will follow within the next 24 to 36 months.

We remain confident in our ability to continue growth through development at or above the rate we have over the past two years. As Ted mentioned, the Copper Beech acquisition is an exciting transaction for Campus Crest. We have looked at numerous opportunities in the student housing space and it is rewarding to find one that is very complementary to our footprint and portfolio and purchase at the right price. We look forward to leveraging their platform to expand the townhome concept into new markets and those available locations where we currently operate Grove aspects.

Now, I would like to turn the call over to Donny to discuss our financial results for the quarter and the year.

Donald Bobbitt

Thanks, Mike. For the quarter ended December 31, 2012, the company reported FFOA of 7.7 million or $0.20 per dilutes share. The FFOA represent a 14.1% increase over the 6.8 million from the fourth quarter 2011. For the year ended December 31, 2012, the company reported FFOA of 26.3 million or $0.75 per diluted share, which is the top end of our guidance range. The total FFOA represent a 16.8% increase over the 22.6 million from 2011. As Rob mentioned, our quarterly wholly-owned same-store NOI grew 7% to 9.5 million from 8.9 million, while our year-to-date wholly-owned same-store NOI grew 6.2% to 30.4 million from 28.6 million. We experienced increases in our average quarterly and annual occupancy and benefited from higher margins due to diligent expense control. The company’s strategy is to actively manage our balance sheet and look to opportunistically access capital, fund growth and maintain a conservative capital structure.

As of December 31, 2012, our debt-to-total market capitalization was approximately 35.4%. In December, we entered into a new 10-year $18.1 million Freddie Mac financing on the Grove at Statesboro at a rate of approximately 4%. Proceeds from this financing were used to repay the existing term loan and reduced outstanding balances under our credit facility. This transaction represents the third series of permanent financings the company has completed with Freddie Mac. Although rates and proceeds for this type of loan product are attractive, the company continues to maintain discipline and limiting the amount of long-term secured debt it incurs.

In January 2013, the company closed on its amended and restated unsecured credit facility, which is now comprised of a $250 million revolver and a $50 million term loan. This amended facility meaningfully improves the company’s access to debt capital and is a significant milestone for the company for several reasons. It increases the facility size by 50%, from $200 million to $300 million with an accordion feature of up to $600 million from certain conditions, extend the initial term to four years with a one-year extension option from satisfaction of certain conditions, provide the ability to fully form development properties while receiving borrowing base credit, which will make the development financing process more cost and time efficient, reduces pricing, increases the number of assets in the unencumbered pool of the credit facility to 19, with the addition of the Grove at the Huntsville, the Grove at Moscow, and the Grove at Valdosta, and demonstrates support of our existing bank group and has four new participants.

Now, we move to guidance for 2013, which as Ted mentioned, does not factor in the impact of the Copper Beech acquisition and equity rates. We will provide updated guidance subsequent to the expected closing of the entire transaction in the first half of 2013. For CCG on a standalone basis, we are estimating FFO for common share for 2013 to be in the range of $0.82 to $0.88. This reflects the blend of 2012-13 and 2013-14 academic years and is based on wholly-owned NOI for 32 operating properties, excluding the 2013 deliveries of $51.2 million to $53.4 million based on 91% to 93% occupancy and total RevPAR of $508 to $513. Expected weighted average development yields of 7.5% to 8% on the 2013-14 academic year deliveries, which is three wholly-owned and three joint ventures, FFO contribution from JV properties of $2.4 million to $2.7 million, including the 2013 deliveries, net development, construction and management services fees of $4.8 million to $5.3 million, general and administrative expense of $9.3 million to $10.3 million, interest expense of $12.7 million to $13.7 million, preferred dividends of $4.6 million and weighted average fully diluted shares and units outstanding of 39.1 million. With that, we would like to thank you for your participation in today’s call and have a wonderful day.

Question-and-Answer Session

Operator

Thank you. As a reminder, we will not be taking questions today because of the current equity offering. Ladies and gentlemen, this concludes the Campus Crest Communities fourth quarter 2012 earnings conference call. Thank you for your participation. You may now disconnect.

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