Campus Crest Communities' CEO Discusses Q2 2013 Results - Earnings Call Transcript

Nov. 1.13 | About: Campus Crest (CCG)

Campus Crest Communities, Inc. (NYSE:CCG)

Q3 2013 Results Earnings Call

October 31, 2013 09:00 AM ET

Executives

Erik Johnson - VP, Finance

Ted Rollins - Co-Chairman and CEO

Robert Dann - EVP and COO

Brian Sharpe - EVP and Chief Construction and Facilities Officer

Donnie Bobbitt - EVP and CFO

Analysts

Jana Galan - Bank of America Merrill Lynch

Paula Poskon - Robert W. Baird

Ryan Meliker - MLV & Co LLC

Michael Salinsky - RBC Capital Markets

Nick Joseph - Citigroup

Craig Kucera - Wunderlich Securities

Buck Horne - Raymond James

Dave Bragg - Green Street Advisors

Operator

Greetings and welcome to the Campus Crest Community’s Third Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Erik Johnson, Vice President of Finance. Thank you Mr. Johnson, you many begin.

Erik Johnson

Thank you, operator. Good morning and welcome to the Campus Crest third quarter 2013 conference call. On the call this morning are Ted Rollins, CEO; Rob Dann, COO; Mike Donnie Bobbitt, CFO; and Chief Facilities And Construction Officer Brian Sharpe.

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 applicable 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’s assumptions. We assume no obligations to update these forward-looking statements and we can give no assurance that the expectations will be obtained. Actual 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 the SEC.

On this conference call we may refer to certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures are available in the 10-Q, earnings release, and our supplemental analyst 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, Erik. Good morning everyone and thank you for joining us, as we discuss our third quarter 2013 results. It was an eventful quarter, and I’d like to highlight a few items for you.

In this quarter, we increased quarterly FFOA per share by 15.8% from $0.19 to $0.22. We delivered six new growth properties and a Phase II expansion in Flagstaff, Arizona, at occupancies we believe will enable us to achieve weighted average yields of 7.5% to 8% in the first year of operations.

We launched our third and newest brand, which is called evo, and integrate our industry-leading student-wide programming with an urban twist. We entered our first international market with a redevelopment in Montreal, Quebec, which is our second property under our evo brand, and finally we amended our Copper Beech transaction to provide more flexibility, while preserving expected first year cash flows.

I would also like to address our same-store quarterly NOI, which was lower as a result of our slower leasing velocity, which we highlighted in our October 1 leasing update. Out of 62 markets where we operate, there were three markets that proved to be somewhat challenging, given the management turnover at the property level, and our entry of new supply in those markets.

Although we did ultimately reach the midpoint of our guidance on leasing, we did so later in the quarter than anticipated, and hence our revenues lagged the prior year on our same-store portfolio. We were however ultimately able to reach the occupancy we targeted as of September 30.

Of the three markets that were challenging, Columbia, Statesboro, and San Marcos, our leasing shortfall was limited to just Columbia and Statesboro. In these two markets, we fell short of the previous year’s leasing by 331 beds in aggregate. We have since replaced the teams in those markets and feel confident that we will see these properties return to more normalized operating results.

We remain confident in our teams in the field, and they have continued to improve year-over-year. This year we have had the highest number of our 100% club winners in the history of the company. Although we did experience increased competition in roughly 5% in the history of the company.

Although, we did experience increased competition in roughly 5% of our markets, I’d like to reiterate that selective markets are not indicative of the overall strength of the sector. Moreover, our strategy to focus the majority of our investments in primary non-flagship schools has and will continue to produce solid results.

Just quickly, I would like to discuss a few of the macro purpose built student housing market fundamentals. Based on our continued research and analysis of national statistics, we believe there remains a significant level of pent-up demand in the student housing market, yet each campus is an individual market that must be analyzed separately. Significant enrolment declines in this past year have been limited to segments of the higher ed market that we do not target.

Much of the decline in the enrolments can be attributed to the shift in consumer behavior of the more non-traditional students, that has occurred following the past four major recessions since 1969. Non-traditional students typically go back into the workforce as the recession recovers, whereas our core demographic, which is 18 to 24 year olds that are full time attendees in a four year public institution, with undergraduate enrolments over 5,000, is still strong and growing.

The Department of Education continues to project enrolments growing by over 2 million over the next 10 years, which also increases pent-up demand. The broader higher ed market has begun to adjust for rising tuition and with students finding money from grants and scholarships, and many institutions rolling back for capping tuition. In addition to this, there continues to be migration to public education for an undergraduate degree.

The average student loan balances at a four year public institution remains significantly below those at four year private institutions, and other cohorts of higher educations not targeted by purpose built student housing.

We continue to spend a lot of time researching this sector, with a goal of being the leading provider of the industry related data. Earlier this week, we posted save the day for our 2013 Investor Day in December in New York. We look forward to seeing you there.

As we look forward to the future, we expect to have strong growth from both internal operational improvements and economies of scale, as well as externally, through our unique development platform and multiple brands. We believe this dual approach to value creation will continue to add value.

By having a focus on operations and complementing that with our internal asset management function, we are able to drive better results across the existing properties, and be mindful of the best time to recycle capital or renegotiate various bulk agreements with utilities or vendors.

Additionally, our unique vertically integrated approach to developing and constructing prototypical assets will continue to be our primary focus for external growth. If you think about it, our vertical platform and prototype allow us on a scalable and sustainable basis to build high quality assets at a discount to our peers. There is no place that this is more apparent, than when you look at our first year yields in the range of 7.5% to 8% when we forecast 85% to 90% occupancy to make this happen. This clearly illustrates the power of our platform.

Our strategy is crystal clear, to be the off campus housing provider of choice in primary, non-flagship, four year public schools, as well as selectively developing in flagship four year schools both in the US and in Canada. These schools offer a higher education value proposition to students, thus resulting in a continued demand for their services and enrolment growth for years to come.

Additionally with our multi-brand strategy, we intend to increase our market penetration by providing options to various segments of each college market. We believe that there are substantial opportunities to continue to build out both our Grove and Copper Beech brands across our footprint.

An example of this was our newest Copper Beech development in Ames, Iowa, where we opened a Grove property in 2011. This allows us to have two complementary brands in a compelling market and gain management efficiency, and with the addition of our latest brand, evo, we gain access to urban markets where we are increasingly being invited to participate.

Although it is new product type, our teams have once again developed a prototypical approach to this housing type, allowing us to efficiently grow this brand in urban locations throughout the US and Canada.

For the 2014-2015 academic year, we have announced eight development projects and expect to announce one or two more in the fourth quarter. These eight projects equate to approximately 5,700 beds, with our share of the total cost at nearly $190 million. With regards to future projects, we maintain a robust pipeline of development and continue to focus on off market properties, as we have done from the start of this business.

Through our research, we identify markets and purchase off market deals. In fact, over 90% of our property (inaudible) markets and purchase off market deals. In fact, over 90% of our property purchased is off market. When this platform is coupled with our three distinct and recognizable brands, we believe that we have a foundation for accretive growth for years to come.

Finally, on the acquisition front. We currently view this as an avenue for growth, only if it is strategic in nature and can be executed in a manner that works with the cost of our capital. One-off acquisitions are less attractive, as they are often time consuming, less accretive and are prone to operational disruption. The Copper Beech Staged acquisition is one such example of a strategic transaction. As we are able to acquire a different brand and product type and a complementary footprint.

As you saw in our October 1 press release, we also restructured this transaction to increase our ownership in 30 assets, which enjoyed stronger leasing results, while deferring ownership in seven of the lower leased assets. This amendment enables us to preserve the cash flows we originally underwrote, as well as provides more flexibility in the first purchase option by extending the outside date to August 2014.

Our teams have done a great job of moving our company forward on many fronts this past quarter, and continue to focus on our vision to be thoughtful and balanced leaders in the space. Our next initiative provides the framework to help us balance our economic results, together with environmental and social stewardship. It’s more than a commitment, it’s a way of thinking, and our people embody this vision. Thank you again to our great employees, our investors, vendors and financial partners for all of their great ideas and contributions to our success. We look forward to finishing 2013 and embarking on an exciting 2014.

With that, Rob will now provide more color on our operations and development for the quarter. Rob?

Robert Dann

Thanks Ted. We closed out the 2013-2014 academic year leasing on September 30 at 92.1% leased, at all properties across both Grove and Copper Beech brands. Our 32 wholly-owned properties were 92.6% leased as of September 30, which represents a 70 basis point decrease year-over-year.

As we highlighted in our October 1st leasing press release and Ted mentioned, Statesboro and Columbia were the primary causes of this lower result. Net of these two properties, our remaining properties continue to stabilize, with an average occupancy of 94.1%, a 130 basis point increase year-over-year. Our seven joint venture operating properties were 82.9% leased, which is approximately 420 basis points higher than the previous year. Our 2013 deliveries were 85.8% pre-leased, which is in line with our underwriting expectations. Finally, the post amendment 28 property Copper Beech portfolio was 96.1% leased.

For our third quarter 2013 operating results, the wholly-owned same store pool was adversely impacted by challenging leasing and several markets in the final stretch, which resulted in a revenue lag in August and September. Our teams were able to effectively manage expenses, with growth of only 1.1% for the quarter, thus yielding a year-to-date increase in our NOI, even though we were down for the quarter.

On the JV portfolio, same store NOI year-to-date was up 14.2%, while it was down 1.1% for the quarter. On the Copper Beech front, based on leasing results and management’s expense expectations, we expect the 28 property portfolio to perform in line with a consistent store performance of Copper Beech with margins in the 60s.

I’d like to now talk about our overall operational strategy. Our goal to create an unparalleled customer experience, which in turn will drive revenue growth. Our focus on systems and practices will facilitate diligent expense management, thus driving our NOI. To achieve this, we have made meaningful investments in people, systems and practices. These investments have laid a solid foundation we believe, that will continue to bear fruit in the near and long term.

In the first quarter of next year, we will be rolling out all new applications to give us better insight into our business, to drive our sales and marketing efforts, and to continue to control our expenses. Since late 2011, we have developed more rigorous employee training, as well as added a dedicated recruiter, to ensure we are starting with the right employees to execute our business model. A branded approach gives us standard prototypical assets and centralized strategies that are far easier to roll out and monitor their effectiveness. The Scores Lifestyle Programming continues to be the cornerstone of being a resident at one of our properties, and we continue to elevate its offerings.

Based on our annual customer survey responses, these efforts are paying off, as customer service approval ratings are now the highest they have been in the history of the company. Additionally, our renewal rates continue to increase year-after-year, achieving 41.7% this year across the portfolio. Our tier pricing strategy creates a sense of urgency, driving the renewals and new leases alike.

Finally, we have begun leasing for the 2014-2015 academic year, and are pleased with our leasing progress, particularly in markets where leasing occurs earlier. We are still finalizing our views as to raising occupancy expectations for the portfolio, and we will provide that guidance on our next earnings call.

Across our entire portfolio, based on what we know now, we expect approximately 16,099 new beds in 17 of our 62 markets. These 17 markets have total enrolments of approximately 466,319 students.

And now I will switch to development. We had announced six development projects for the 2014-2015 academic year, prior to our release last night. Four of the projects are Grove branded and two are branded evo, one of which is our joint venture in Philadelphia and one is our joint venture redevelopment in Montreal, Quebec.

With the third quarter earnings release, we are now seeing a growth project in Mount Pleasant, Michigan. The four storied prototypical Grove community will consist of 584 beds, and its in close proximity to Central Michigan University, which has a total enrolment of over 20,000 students. Residents will have easy access to campus and enjoy the amenities and lifestyle programming offered at this property.

We are also announcing a 636 bed Copper Beech branded property at Ames, Iowa. Situated just 0.3 miles from campus and in close proximity to the Grove at Ames, the property will be the first development, in which the company will complement an existing brand in the market. As previously mentioned, we view this as a natural way to complement our footprint and improve operational efficiencies.

We also continue to make progress on our project in Montreal, called evo at Victoria station. In July 2013, the company announced a joint venture partnership, owned 20% by Campus Crest and 80% by Beaumont Partners to acquire the 711 room, 33 storied Delta Center Ville Hotel in Downtown Montreal, Quebec. This asset will be renovated an repositioned to offer an upscale student housing option to the roughly 82,000 students who’d attend three universities within a one mile radius of this property. The redevelopment of the tower, which will result in approximately 1,200 beds, is slated to be completed to the fall of 2014, with leasing to begin in the fall of 2013. We expect to announce further details around the redevelopment later in the future.

With the addition of the Mount Pleasant and Ames projects, our total development delivery in 2014 equates to approximately 5,700 beds with our share of the total cost at nearly $190 million. We expect to announce an additional project or two for delivery in the fourth quarter. With regards to future projects, we continue to maintain a robust pipeline of development opportunities. Our teams continue to work on building a strong pipeline for both 2015-2016, and 2016-2017 academic years, and we look forward to discussing those in the coming quarters.

With that, I will turn it over to Brian to discuss the construction.

Brian Sharpe

Thanks Rob. The company delivered six 2013-2014 academic year Grove branded projects, and one expansion of the Grove at Flagstaff in the third quarter of 2013. One of the deliveries is our project in Pullman, Washington, that was partially destroyed by fire late in the building cycle in July of 2014. We did deliver 96 beds for fall 2013 opening, and expect to deliver another 208 beds by January of 2014, and with the proceeds from the insurance company, we expect to rebuild and deliver the 280 beds at the destroyed buildings for the 2014-2015 academic year.

Total estimated cost for all six projects and the Phase II expansion were approximately $184 million, of which [$118 million] is our investment. For the fall 2014 deliveries, which represent our 10th generation Grove prototype, we continue to make progress on our previously announced projects in Greensboro, North Carolina, Louisvill, Kentucky, Grand Forks, North Dakota, and Slippery Rock, Pennsylvania.

Also our 33 story 850 bed student housing tower in Philadelphia, which the company is developing through a joint venture with Brandywine Realty Trust and Harrison Street Capital, is progressing nicely and on track for fall occupancy in 2014. Currently, the project is 12 stories above street level, and adding a floor approximately every four days.

Each year, we refine our building design in an effort to make them more efficient from the operation and construction perspectives. Internally, we call this the speed initiative, special project for energy efficient design. Among other things, included in this year’s changes, we have upgraded all building envelope walls, which will reduce the energy consumption associated with heating and cooling, once the buildings are operational.

In concert with this improvement and specification, we have also undertaken project team training, to introduce best practices and accountability for installation of improved material. Taken together, these improvements should mean lower operating costs.

I’d now like to turn the call over to Donnie to discuss our financial results for this quarter.

Donnie Bobbitt

Thanks Brian. For the quarter ended September 30, 2013, the company reported FFOA of $14 million compared to $7.4 million in the prior year. On a per diluted share basis, FFOA was $0.22 per diluted share versus $0.19, which equates to a 15.8% increase over last year. We continue to focus on FFOA per share as our primary measure of earnings in order to remove non-recurring and non-cash items, so that the earnings power of our core operations is highlighted.

On the capital front, we continue to proactively manage our balance sheet and opportunistically access capital to fund growth, while maintaining a conservative capital structure. As part of this philosophy, subsequent to quarter end, we raised approximately $195 million in gross proceeds, through the reopening of our 8% series-A preferred stock, and a new issuance of 4.75% exchangeable senior notes. The proceeds were used to repay debt and for general corporate purposes.

We also remain focused on our capital recycling initiative as an another attractive source of capital. As we mentioned in the second quarter call, we continue to evaluate the disposition of two to four assets and expect to have additional details by the end of the year.

Finally, as of September 30, 2013, the company had not sold any shares under its $100 million At-the-Market common equity offering program. As a result of these capital raises, along with cash generated from operations and property dispositions, we believe we have ample capital for our development projects being delivered in 2014.

Additionally, we continue to position the balance sheet with the goal of being a rated issuer. Pro forma for our capital raised and subsequent paydown of construction loans on the 2012 wholly-owned deliveries, 23 assets or 64% of our 36 wholly-owned assets will be unencumbered and part of the unencumbered pool of the credit facility. As of the quarter end, our debt-to-total market capitalization was approximately 39.1%.

As we disclosed on October 1, 2013, the company entered into an amendment to the purchase and sale agreement to acquire Copper Beech on September 30, 2013, that subject to the receipt of third party lender consents, will enable the company to acquire a 67% ownership interest in 30 properties, while deferring ownership in seven properties until the company exercises future purchase options.

In conjunction with the amendment and subsequent to quarter end, a $31.7 million loan was repaid by Copper Beech and Campus Crest, subsequently reinvested $16.2 million into the 30 properties. As of September 30, 2013, the company’s effective ownership interest in the entire Copper Beech platform was approximately 47.2%.

Finally, the company is tightening its guidance range for full year 2013 FFO from $0.82 to $0.88 per fully diluted share, to $0.80 to $0.82, based on management’s current estimates for the fourth quarter, including the impact of the preferred stock and exchangeable note capital raise in October 2013.

Additionally, we have a resolution with our insurance provider on our Pullman development, and we believe that there will be no negative financial impact in the current academic year. The guidance excludes non-recurring and non-cash items, such as the write-off of deferred financing costs, as a result of early pay off of financings, transaction costs associated with the Copper Beech investment or other acquisitions, and the mark-to-market adjustment of the Copper Beech debt.

With that, we’d like to open the call up for Q&A. Operator?

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions). And our first question comes from the line of Jana Galan with Bank of America. Please proceed with your question.

Jana Galan - Bank of America Merrill Lynch

Thank you. Good morning.

Ted Rollins

Good morning Jana.

Jana Galan - Bank of America Merrill Lynch

I was wondering if you could provide what the same store growth third quarter over third quarter would look like, if you were to exclude the Columbia, Statesboro and San Marcos assets?

Robert Dann

Jana, hi it’s Rob. Actually, on the occupancy side of it, if you take out the Statesboro and Columbia asset, I think I said a little earlier, 94.1% we would have been this year. We are this year as (inaudible), and at the 94.1, it still is a gain year-over-year and the exact number here, of 130 bips, 94.1 versus 92.8. The Columbia and Statesboro assets were the ones that dragged the portfolio. The San Marcos asset was an asset that I spoke to earlier in the years, we were having some challenges as we had skewed supply coming into the marketplace. We were actually – the strength in the market, really healthy asset up, as well as some of the techniques in place, and we ended up getting almost a full in San Marcos. So it really didn’t hold the stack at all.

So it was really the two assets, Columbia and Statesboro that held us back. Those assets both (inaudible) the previous year, and combined they were 71.7% versus a 100% the year before. That’s really where the drag was in the portfolio. Does that answer your question?

Jana Galan - Bank of America Merrill Lynch

Yes. Thank you. Then I guess, just if you can help us with the wholly-owned and same store occupancy and rent, the leasing results for the 2014-2015 academic year, I think it maybe a five asset difference. If you could provide what you are expecting for 2014-2015?

Robert Dann

No, we haven’t announced that. Our leasing goals for 2014-2015 that will come out with the guidance in the fourth quarter earnings call.

Jana Galan - Bank of America Merrill Lynch

I am sorry, but if we look at the October 1st release and see where you’ve ended your leasing for the year, and just same store assets?

Robert Dann

Maybe I am not understanding. I thought you were asking about our guidance for the 2014-2015 academic year.

Jana Galan - Bank of America Merrill Lynch

Oh no I am sorry, where you finished leasing for 2014-2015, if you were to exclude the five assets for current and same store?

Robert Dann

You mean, 2013-2014 I think, right? Because that’s the current academic year?

Jana Galan - Bank of America Merrill Lynch

Yeah. Same (Inaudible).

Robert Dann

There is a lot of confusion. We have that. I will give you that. I just don’t have it right in front of me, Jana. You’re saying, if you net up the five assets, where we would have ended up?

Jana Galan - Bank of America Merrill Lynch

Yes.

Donnie Bobbitt

Well it’s Donnie, I am sorry, there is a little bit of a confusion here. Which five assets are you asking about?

Jana Galan - Bank of America Merrill Lynch

When I look at your same store pool its 27, and you provided the leasing for 2013-2014 for the 32 wholly-owned assets?

Donnie Bobbitt

Okay. I believe on page 16 of our supplement, (inaudible) about midway down of the same store properties to A grouping wholly owned. Those 27 stores were 92% this year versus 92.8% last year.

Jana Galan - Bank of America Merrill Lynch

Thank you. I am sorry about that confusion. And then Donnie, I just had one more on the JV debt maturing this year, what are your plans for paying that down?

Donnie Bobbitt

We are in the process of extending that for another 12 months, with very similar terms that we currently have in place with our lender, Citibank.

Jana Galan - Bank of America Merrill Lynch

Thank you.

Operator

Our next question comes from the line of Paula Poskon with Robert W. Baird. Please proceed with your question.

Paula Poskon - Robert W. Baird

Thanks. Good morning everyone.

Ted Rollins

Good morning.

Paula Poskon - Robert W. Baird

Rob, could you walk us through in more detail what happened at Columbia? I know, many of your competitors have weakness in Statesboro as well and that was more market specific, but a lot of other folks did pretty well in Columbia?

Robert Dann

Sure. Good morning Paula. Statesboro is -- exactly right, supply issue and there were struggles in the market across the board and in Copper Beech as well, so that was kind of the universal thing. Columbia was a different situation. It was more of a management thing, definitely an operational issue. We had a general manager that had that relationship with the school, and by the time we found out about it, it was very difficult for us to react. So we contacted the school, the school has, what’s called a three-strike rule, and what they do is they pull you off of everything for an entire academic year. There is no going back. So they don’t it semester by semester, they do it for the entire academic year.

So we were shut out of housing fares, etcetera, being sponsored by the school. It’s really suppressed us obviously. We, since then, have spent enormous amount of time at the school. They pointed out some things that they wanted from us, which we did. We changed the management completely. We have also changed the area oversight as well from the sales perspective, because it was our view that should have caught the area person much sooner in the year and it wasn’t; as we changed that out as well, and now have an official letter from the school, that we are absolutely in their good graces, and have already been to their housing fair and we are actually leasing 2014-2015 ahead of last year. Already, (inaudible) for first three weeks.

Paula Poskon - Robert W. Baird

Thanks very much. Appreciate that. And Donnie, can you walk us through in greater detail please, the accounting treatment of the insurance proceeds related to the Pullman, Washington fire; because I think there was a fair amount of misunderstanding about not only how it was accounted for, for the third quarter, but what that’s going to look like going forward? It seems to me that essentially revenue is understated and your margin will be overstated for some period of time?

Donnie Bobbitt

Hey Paula, that’s largely correct. So on page 8 in our supplement, what we did in the wholly-owned portfolio, is we pulled out the new store operations, the results for Pullman, and also our Toledo redevelopment, and I will touch on that in a second. As you could see the bottom line there on page 8, we list the Grove at Pullman and Toledo NOI and we share what their contribution was. The reason for that is, in Pullman, for the third quarter, we opened up a portion of our property, I believe it was 96 beds of the property, where there are students living (inaudible) paying rent.

The balance of the targeted net operating income in operations was funded via business interruption insurance proceeds by insurance carriers. So the check that we got from our insurance company, which was sizeable to fulfill our NOI for the quarter, was credited against operating expenses. So on our consolidated income statement, that is embedded in our operating expenses, it was a credit, as opposed to having grossed up revenues and grossed up operating expenses to get to the NOI number.

So in the third quarter, you got a little bit of both of those. In the consolidated income statement, you’ve got roughly 96 beds that are paying for their rent, up in student housing revenues. Some operating expenses that go along with that, and then the remainder of the net operating income is a credit to operating expenses via the check we got from our insurance company. Like you said, that will continue through the fourth quarter, the first quarter, and the second quarter of 2014. It will start to shift a little bit, because we are going to be moving some more students into the Pullman property, probably in the fourth quarter. So we will be getting more regular rent, and the insurance check will go down, the NOI will still be the same. But you are right, through to the balance of this full year, there will be a little bit of noise in the NOI.

Paula Poskon - Robert W. Baird

And do you expect that students will continue to move in throughout this academic year, or there will be just a point in time where the reconstruction isn’t ready yet, such that there is just only so many beds you can open this year?

Robert Dann

Hey Paula, it’s Rob. So if in Staged, when the academic year started, we reoccupied two, what we call small buildings, that’s 48 beds each, which is 96 beds. We finished off construction in two larger buildings, one at a time, they both have 80 beds, each of it. The kids for those particular assets were housed in a dormitory we set up with the school, and they are moving out of the dorm, as the buildings become available.

The next to come online here before the end of the year, will be another small building, 48 beds. Looks like at this point, based on the count, we will have about 280 kids in beds on the property by January 1. Some like they said in the very beginning, some phased in over the fall here. The rest of that asset will be finished for next (inaudible), and we are producing on that now.

Paula Poskon - Robert W. Baird

Thanks so much. I will jump back in the queue. Go ahead.

Robert Dann

Sure.

Operator

And the next question comes from the line of Ryan Meliker with MLV and Company. Please proceed with your question.

Ryan Meliker - MLV & Co LLC

Good morning guys. I was just hoping to potentially get a little bit more color on the lease-up this quarter. It sounds like, and correct me if I am wrong, that you had a larger number of leases than – correct me if I am wrong, that you had a larger number of leases than typical, actually commenced after the academic year started, is that correct?

Ted Rollins

Ryan, this is Ted. We had a slower velocity coming into the final leasing position and remember that out west, some of our properties don’t take occupancy until the fourth week of September. And so as a result, the leasing in those markets and some – usually, there is a 30 day window after the move in, where there are some beds moving around in the market, there is a student who doesn’t like where he lives, they are moving out of the dorms, or just transfer students. And so that actually leased slower than we thought. There is a velocity of reaching more of the leases towards the back part of September.

Ryan Meliker - MLV & Co LLC

And when you say the back part of the September, that’s half for the academics, (inaudible) at that most of those universities, correct?

Ted Rollins

In most of the schools, yes, except for our western ones, couple of western ones.

Ryan Meliker - MLV & Co LLC

I guess, so then how many beds do you typically end up filling after the start of the academic year, and then how many did you fill this year?

Ted Rollins

I don’t have it broken our like that, but we can get it for you Ryan but I would just say, usually we will fill 500 or thereabouts and after the kids move in, they will move in from August 15, towards the end of August or labor day, and then we will pick up leasing. Into the year, we picked up 500 to 1000 beds. It’s just, when a lease starts at the end of September and the middle of September, you just don’t get that revenue in August. So you’re really not giving up half of August, you’re giving up all August, because the rents are 12 period, so one period (inaudible), even though they moved in half way through.

Ryan Meliker - MLV & Co LLC

That makes sense, then I guess, obviously the leases are in place now. The lower than expected same store revenues in 3Q will translate to 4Q. But as we think about next year and next year’s 3Q, do you think that this was a trend in terms of the lowest leasing velocity and a larger number of beds being leased after the academic year began. Do you think that’s a trend that will pursue it to next year? Do you think you have actually created a relatively soft comp for yourselves on the same store NOI basis?

Ted Rollins

I don’t expect it to continue next year. I think this year, we had a couple of outliers that dragged the stack a little bit, and I were to expect, that we put the teams in place and have the market pricing and strategy in place, so that we now experience it again. So it would be of course, when we are confident [against something] where we had that with this outcome.

Ryan Meliker - MLV & Co LLC

All right. That’s all for me. Thanks a lot.

Ted Rollins

Yup.

Operator

Our next question comes from the line of Michael Salinsky with RBC Capital Markets. Please proceed with your question.

Michael Salinsky - RBC Capital Markets

Hey guys, good morning. Just to go back to a couple of follow-on questions. As you look at the 2014-2015, and I am not asking for guidance, but can you talk a little bit about the leasing strategy, just given the slower August and September, might there be a push to kind of lease up a bit faster? If I take some of the leasing that’s done in those later months off the table?

Robert Dann

It’s Rob. That’s a very good question. So we shifted the strategy a little bit, and I have to go back in history here to kind of bring you up. Two years ago, we started leasing September 15, which was pretty early for us, we have never done that before. We got a good jump out of the gate. Last year, we made a clean break, and we started October 1, as we finished leasing at September 30. This year, we took a hybrid of those two approaches, and we took and analyzed property-by-property and market by market, which were the earlier leasing markets, versus those that had more of a normalized rate of velocity. And we found a couple of markets, I will give you a couple, just off the top of my head. One was a State College and the other was (inaudible), those happen to be two assets that we delivered this year.

Last year, we didn’t start leasing them, until later into October. So at this point last year, we had zero leases on the books for either one of those assets. Both those assets are at or above 30% pre-leased already. So I think the approach this year of analyzing market-by-market, the earlier ones than the later ones, will give us a better flat run rate as we go forward. That and some of the strategies we have shifted around with concessions and incentives, I think we should have a more normalized flat run like we have had in previous years.

This year, of the leasing later in September, we believe in the operating group was not only based on our portfolio, something Ted didn’t talk about, that we experienced this, the 15 full 100% properties this year, which we have never had that many before in our portfolio, even as a percentage of the total.

Some of those leased up very-very early. Even though, Texas for example this year, we had a 400 bed master lease at school, in Huntsville, Texas, which was only less than 90% the year before, became 100% by April 1, which was very-very quick. The market absorbed this supply very quickly, and came back to us in the following year, and this year we got to 100%. Some of those build up very quickly. Some of that, I think, we are going to temper back with rates and pushing rates a little bit harder if we can in these markets, and not experiencing new supply, which will again slow down, that’s filling up very quickly, and should level the playing field.

Does that make sense to you?

Michael Salinsky - RBC Capital Markets

Makes a lot of sense. Second question for Donnie. You touched upon dispositions on last conference call, you think you have (inaudible) over this year? I would have thought this would be further along at this point, can you just kind of talk about timing on those, maybe size, pricing, anything you can kind of give us on those?

Donnie Bobbitt

Hey Mike, good morning. I think we talked about that late summer, early fall, we had a different plan on. (Inaudible) to, that was closed out by the end of the year. So we are here at the end of October, we are still pretty confident that we will close them and sell, we are targeting two to four of our order generation group assets. So it’s still in process, and we will see that done by the end of the quarter.

Ted Rollins

And Mike, this is Ted. We are under contract, we are just not past the diligence period, so that’s why we are not announcing anything, until we get past the diligence period, then the deposit goes hard, when we expect that the next month.

Michael Salinsky - RBC Capital Markets

Okay. That’s helpful, and finally just as you look at the portfolio as it constitutes today, which university – as you are looking at supplies for next year, which universities do you expect are going to face pressure?

Robert Dann

Hey Mike, it’s Rob again. There is really two that are jumping off of age for us across Copper Beech as well as the Grove brands. In the Copper Beech brand in Purdue, the school is adding 4,300 beds on campus. It’s a master plan that they have had on the books for years, and they are starting to execute on that. So we do expect some pressure there.

The other one that we are concerned about again is San Marcos. Now we have really put a deep dive into San Marcos. We have analyzed all our competitor’s supplies that has come in there, which was very large this year as well. The market did very well, it averaged at 94% plus across the entire purpose built student housing.

So demand seems to be there in the market, but there is several thousand more beds coming in San Marcos again this year. So that market concerns us.

Statesboro is the third one that we are concerned about. There is no more supply coming in at this year, but there was a tremendous amount of supply last year, and the market did not react well, as Paula Poskon pointed out. No one in the market did well on Statesboro, and that has been 100% for us, the day we built it.

So those are really the three markets that we are zeroed in on this year.

Michael Salinsky - RBC Capital Markets

Thank you.

Operator

Your next question comes from the line of Nick Joseph with Citigroup. Please go ahead with your question.

Nick Joseph - Citigroup

Great thanks. Sticking with Mike’s question, just what would you expect the Phase II supply next year? What’s your plan there for preleasing compared to the rest of the portfolio?

Robert Dann

Hey, it’s Rob again. Well I can take it asset by asset. We talked about Purdue, and we have a very strong team there in Purdue. We have a leader there and a system leader there, who has been there for multiple years. They know the market extremely well. We have positioned a little bit lower in there, to try to get some early leasing going. We have upped in marketing as well, to push strong marketing campaigns in that particular market, and we think we will do okay with that strategy. We are going to reevaluate that strategy again December 1, and see how our pre-leasing numbers are going, because it’s quite early right now, and then we will adjust our strategy going forward.

In San Marcos, we have actually come out of the [shoot] quite well. We are watching it really closely. I can’t tell you though, pre-leasing is over last year’s pace, which is welcome news to us at this point. We have adjusted our rates to be flat this year, we have not raised our rates in San Marcos. We are going to try that strategy. It seems to be working so far. Again, we are going to reevaluate that at December 1, and we will adjust our strategy there.

In Statesboro, the market is not absorbing the supply very well at all. I am very concerned about that, more so than the other two. Statesboro, we have actually dropped our rate. We dropped our rate last year, fairly significantly, and we did that in the latter half of the year. We were about even in the leasing (inaudible), we did that in the latter half of the year. We were about even in the leasing pace, up until about April 1st, and we decided to really trail off at that point. We made some adjustments, and not as deep as I would have liked, we are looking back on it. So we are going in pretty aggressively with our rate strategy in there. We have pumped some extra marketing dollars into their budget for this year as well, and we have some very aggressive incentive programs we are going to be rolling out at the end of Q4 and the beginning of Q1.

That’s what we have for those three particular markets.

Nick Joseph - Citigroup

Thanks. Then, you mentioned in your release, that you believe additional redevelopment opportunities exist in Montreal. Can you talk about your plans for Canada and what you are seeing in the market today?

Ted Rollins

I can talk to that, this is Ted. In Canada, we have looked at Canada for several years, and we were approached by Beaumont as a partner and operator, and in Montreal, our property there at the delta, there is a few things that are important to note.

Number one is, it services a community of roughly 133,000 students, directly around it. Of those schools that it serves, only 5,000 all-in campus beds that are provided. The majority of the kids live off campus. I was actually just meeting with one of the head of housing at Concordia, and they have a consortium put together to solve their housing problems for students there.

If you look at the way that building is located on top of the subway and the underground walking tunnels, every school that we serve is accessible through a walking tunnel, as well as the subway, the metro system there. So it was a strategic acquisition for us. We went in as a 20% joint venture partner and operator, and we think that market is very strong. The rates there are strong, and the demand profile in that market is strong. Our capture rates were very low, and it’s likely that we would be asked by Beaumont to participate in another acquisition within that market.

So we feel very good about that. It fits in our northeast geography from Maine to run out of that region. So from a management and operational oversight, I think we have a solid plan, and it doesn’t stretch the organization. And then we have hired local talent there, that has deep roots in the market, that understand more of the nuances of that particular market.

Finally, we have developed solid relationships with each of our schools, given our partners (inaudible), many are the heads of their schools. So we feel positive about it.

Nick Joseph - Citigroup

Great. Thanks.

Operator

Thank you, and our next question comes from the line of Craig Kucera with Wunderlich Securities. Please proceed with your question.

Craig Kucera - Wunderlich Securities

Hi good morning. Given that you guys are able to build a prototype at a lower cost, can you discuss kind of your thought process about may be disposing of assets to exit weak markets, as opposed to trying to slug it out, as far as on a leasing perspective?

Ted Rollins

Well I’d say our goal is to be prudent about how we dispose those assets and make sure that we have tried everything possible to make that asset perform. And so, most recently, the two to four that we selected, were really based on market dynamics and the fact that we didn’t think we got long term rate growth in those markets, and we didn’t think we’d ever hit this occupancy stride that we ultimately wanted to have, given our growth in rate.

So we do look at that, and we want to recycle that capital. Another benefit of that, is that you take it out at one of your earlier generations, with a lower bed count and a lower margin, and not efficiently built to operate, given our newbuild products. And so we look at that pretty carefully, we do that every year in the fall, after leasing cycle, and this year, we selected two to four markets, that we are going to do exactly that, and then redeploy new capital into new markets that we are building this year.

Craig Kucera - Wunderlich Securities

Have you disclosed or what are your thoughts on kind of the cap rates you might achieve on those dispositions?

Ted Rollins

We have not disclosed that, but I’d say they will be within market, around 7% to 8% cap rate, just depending on the quality of the market.

Craig Kucera - Wunderlich Securities

Okay. Thanks.

Ted Rollins

You’re welcome.

Operator

(Operator Instructions). Our next question comes from the line of Buck Horne with Raymond James. Please proceed with your question.

Buck Horne - Raymond James

Hey good morning guys. Just wanted to talk a little bit about the development pipeline. It sounds like you got eight properties coming for this 2014 year. One to two more yet to be announced, and it sounds like you have got a really full pipeline building for the next, the following year and the year after that, plus these Montreal opportunities you are talking about? I mean, this sounds like you have got some very ambitious growth plans, I am just wondering, given your cost of capital at the markets, they are still not cooperative with those growth plans. I mean, what – I mean, obviously dispositions are a part of this, but what alternative capital plans do you have or are you willing or able to shut down or slow down the development pace, to avoid a dilutive equity rate?

Ted Rollins

Buck, this is Ted. We are able to scale our platform and like we are doing this year, if you look at our pipeline, only three of those are holding out. So the way we manage that capital usage and leverage, is through the use of our joint venture partners. And if you look at the ones that are this year on that exhibit, you can see them. Three of them are wholly-owned, and the remainder are joint ventures. So we are currently using joint venture equity but, the broader issue is, are we able to manage the pace, and the answer to that is yes. We have the ability, our construction, it has always been scalable, and our developments, we have set up contracts where we don’t have a lot of contracts that were forced to do anything, with respect to purchasing land. And so we are able to manage that pace.

In addition to that, as we are doing this year, we are able to use joint venture equity.

Buck Horne - Raymond James

Okay. Then my last one is one the Copper Beech option, with the remaining seven assets that weren’t quite up to par. If we looked out a year from now, and the stock price still is not quite as cooperative, and maybe [sitting in an] implied cap rate above the implied yield on the Copper Beech assets. Is that something you’d be willing to walk away from, and just leave those seven assets out there? How would you structure those seven assets?

Ted Rollins

Well Buck, from our standpoint, and Dr. [McBorder’s] standpoint, we all kind of work together to address whatever circumstances there are, given the point in time, other than (inaudible) like this fall, and I would say that, if those assets didn’t perform again, we’d put our head back together and figure out a way to defer that acquisition, given the fact of underperformance. I can tell you just coming out of preliminary budget meetings we have had with Dr. [McBorder] and his team this week, I think they are very focused on it, and so, the wholesales failure of those seven year pro forma, we don’t see as a likely outcome. Nonetheless, it could happen.

But I think our MO is to, number one, that was why we wanted to take a little longer and expand the option, outside date, so that we get through the leasing cycle, and then the other is, we are – if it didn’t come to pass, or the stock price didn’t cooperate, we would obviously look at different ways to either defer that or – I don’t think our goal is just to end up trying to totally terminate the future acquisitions, rather defer it. And in a very-very worse case, is we end up owning the percentage of a good portfolio that we have with them.

So I think there is a lot of options, and certainly when that time comes, we will be very thoughtful about how we approach that.

Buck Horne - Raymond James

Okay. Thanks Ted.

Ted Rollins

You’re welcome.

Operator

Our next question comes from the line of Dave Bragg with Green Street Advisors. Please proceed with your question.

Dave Bragg - Green Street Advisors

Hi good morning. My question is really a follow-up to Buck’s last question, following the capital raising activity from last quarter, earlier this quarter actually. Can you really just quantify your development funding needs and your Copper Beech funding needs for the next two years, and outline for us, the capital sources and leverage plans that we should look for from you?

Donnie Bobbitt

Hey Dave, Donnie, good morning. So for the developments that we have announced for 2014, wholly-owned and JV, the overall remaining amount contribute to those is around $50 million. So when you pair that with structured financing that will be or could be arranged, we have got adequate liquidity and funding for those. The next stage of the Copper Beech transaction is around $100 million to $120 million. We just raised net about $190 million from the preferred raise, balance the exchangeable notes raise. That combined with our plan to sell two of these assets by the end of the year, could provide another – two to four assets could be $25 million to $50 million of proceeds there.

So we feel like we have got adequate funding capacity for the next 12 to 18 months for what we know about. Now in that case scenario, obviously we are going to want to raise common equity to fund Copper Beech additional purchases, but back to what Buck was asking and Ted was commenting on, the common stock price isn’t at where we wanted it to be, and we are not able to go out – not willing to go out, do a large raise and fund that next stage. We will figure out what’s the next best way to do that. And we feel like, we have got several different options now, between the bank debt, our credit facility, preferred equity, exchangeable notes, JV, partnerships, asset sales. And then, we have got our ATM kind of sitting in the background, which we have not used yet, to match fund our development.

So we feel like we have got sufficient options.

Dave Bragg - Green Street Advisors

Thanks for that. So under that plan that you just outlined, where will leverage go, assuming equity is not there?

Donnie Bobbitt

Well we are, after this last raise, square debt total market cap is in the low 30s. I think we were at 39%, right at the end of September 30. So when you factor in the preferred raise and jump down to the mid 30s. So when you fund up the developments through next year, assuming there is no move in the stock price, it was in the low 40s, low to mid 40s on an average, which is about the top end of the range that we want to operate at.

Dave Bragg - Green Street Advisors

Okay. Thank you. How are you thinking about acquisitions? Your public peers have recently stated that given the change in their cost of capital, they are more or less on the sidelines. Is the same the case for Campus Crest?

Ted Rollins

Hey Dave, this is Ted. I mean, we have never been built on acquisitions, other than if it was strategic, for example, like Copper Beech. For example, a Montreal acquisition ends up with better yield than our typical redevelopment, because it’s a value add opportunity. So that’s really, if you are looking at acquisitions from us, that’s traditionally what we have done, more focused on development and actually in Copper Beech and in Grove right now.

Dave Bragg - Green Street Advisors

Ted, you’re right. To ask another way, how about next year’s development starts? How will the stocks trade in effect to your plans there?

Ted Rollins

Well I think it will impact the capital side from our use of capital with the JV equity that we have with Beaumont and Harrison Street, usually in the event that the capital accessibility from us doesn’t make sense than the public markets. The JV capital and property sales is a natural infill and of course, depending on what you size that up to be, you can size your pipeline. So I think our pipeline is scaleable, and as well it’s our use of JV, equity, and property sales.

Dave Bragg - Green Street Advisors

Great. Thanks. And last question is on property sales. You mentioned the two to four assets that you are planning to sell for 7% to 8% cap rate. How large is the pipeline of potential sales like that, beyond those two to four?

Ted Rollins

Probably, there is another two to four that we consider out there, and that also encompasses a couple of assets at Copper Beech as well, Dave.

Dave Bragg - Green Street Advisors

Okay. Thank you.

Ted Rollins

You’re welcome.

Operator

We have no further question in queue at this time. I would like to turn the floor back over for closing comments.

Ted Rollins

We’d like to thank everybody for their participation today, and feel free to contact us, should you have any further questions. Thank you.

Operator

That concludes today’s teleconference. You may disconnect your lines at this time, and thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!