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Campus Crest Communities, Inc. (NYSE:CCG)

Q4 2013 Results Earnings Conference Call

February 27, 2014 12:00 PM ET

Executives

Erik Johnson - Senior Vice President, Finance

Ted Rollins - Chief Executive Officer

Rob Dann - Chief Operating Officer

Donnie Bobbitt - Chief Financial Officer

Brian Sharpe - Chief Facilities and Construction Officer

Analysts

Paula Poskon - Robert W. Baird

Ryan Meliker - MLV & Company

Jana Galan - Bank of America Merrill Lynch

Michael Bilerman - Citigroup

Michael Salinsky - RBC Capital Markets

Buck Horne - Raymond James

Operator

Greetings. And welcome to the Campus Crest Fourth 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, Mr. Erik Johnson, Senior Vice President of Finance. Please go ahead, sir.

Erik Johnson

Thank you, Operator. Good morning. And welcome to the Campus Crest fourth quarter 2013 conference call. On the call this morning are Ted Rollins, CEO; Rob Dann, COO; 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 obligation 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 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 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 everyone, and thank you for joining us as we discuss our fourth quarter and year end results of 2013. 2013 was an eventful year for our company. I’d like to share some of the highlights with you. We increased our FFOA per diluted share 6.7% from $0.75 in year ended December 31, 2012 to $0.80 at the end of this year.

Our development platform had a busy year as we delivered six new growth properties and extension of an existing property totaling $184.7 million and 3,756 beds for the 2013/2014 academic year.

Based on in-place rate and occupancy this group development is expected to achieve between 7.5% and 8% weighted average yield. We commenced our continued progress on eight new development and two redevelopment projects totaling 7,455 beds with the median distance to campus of 0.3 miles to be delivered for the 2014/15 academic year.

We launched our third and newest brand evo, which integrates our industry-leading student-wide programming with an urban twist. We entered Montréal, Québec with two evo redevelopments.

In addition to the development driven growth, we welcome the complementary townhome brand to the Campus Crest family, with the staged acquisition of Copper Beech in February. In the fall we amended the Copper Beech agreement to provide more flexibility while preserving expected first year cash flows.

On the capital side of our business, we continue to prudently manage our balance sheet as we completed the $312.7 million common stock offering to fund the Copper Beech acquisition, which increased our flow by approximately 67%.

Additionally, we executed on the deposition of four non-core wholly-owned student housing properties with the total of 2,008 beds generating net proceeds of approximately $50 million.

We issued approximately $95 million of our 8% Series A cumulative redeemable preferred stock and $100 million of the operating partnership 4.75% senior exchangeable notes due in 2018 both at attractive cost. And finally, we increased the quarterly common dividend to $16.05 per share per quarter, an increase of 3.1% on an annualized in January of 2013.

In addition to these highlights, I’d like to also discuss our same-store quarterly and annual NOI results. These results which Rob will discuss in more detail shortly were impacted by decision we made to change our management policy on tenant account balances.

This resulted in the charge-off of approximately $1.3 million in the fourth quarter and although we feel this is a solid change for the way we run our business it created a short-term decrease in operating results. We constantly strive to improve our operations and this is one of many steps we took last year to continue this process.

We continue to work closely with Copper Beech to exercise the first purchase option which will increase our ownership and give us day to day control. Although, this is an option and we are not required to exercise it, we believe in the Copper Beech brand we will see it as a likely next step although not set out in our guidance which Donnie will go through.

As we move forward and start to look at projects for the 2015 delivery year, we expect to be prudent given the current cost of our funding alternatives, and although, we have raised capital to forward fund some of these projects, we still remain conservative with that capital and intend to do these projects in a joint venture format to limit our capital requirements. Donnie will talk further about this when he discusses guidance.

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

Rob Dann

Thanks, Ted. As Tend mentioned, our operating results in the wholly-owned same-store pool was adversely impacted by bad debt. As a result, same-store NOI was down 8.4% in the 28 properties for the quarter and 2.3% in 23 properties for the year. The bad debt expense has been same as it was in 2012 same-store NOI for the quarter and year were been over 1% each period.

To provide more color on our operations, we’ve included two new pages in Supplements Analyst package. One provides details on trailing 12 months NOI quarter-by-quarter in the 28 same-store pool grouping, while the other provides detail on operating expenses.

On the Copper Beech front, the 28 operating property portfolio performed in line with historic performance of Copper Beech for both the quarter and the year. Occupancy was in the mid to high 90s with NOI margin in the low 60s.

As we mentioned on the last call, our operational goal is to drive NOI growth. On the topline, we look to create an unparalleled customer experience, which in turn will drive revenue growth.

On the expense side of equation, a meaningful investment in people, systems and practices have helped to keep controllable expenses for the exception of bad debt and check.

As Ted said, the bad debt expenses are unacceptable and our teams are working to address the situation with long-term sensible solutions. Later this year we will be rolling out all new applications to give us better insight into your business to drive sales and better control our expenses. We expect us to help drive NOI in the latter half of 2014 and beyond.

We are pleased with the leasing progress for the 2014/15 academic year. Our 41 Grove branded properties were up 390 bits in the previous year as of February 23rd, a 31 wholly-owned properties were 49.4% leased, which represent the 290 basis point increase year-over-year.

Our 10 joint venture operating properties were 30.2% leased, which is approximately 680 basis points higher than the previous year. Our 2014 deliveries were 17.5% pre-leased with three evo projects lie in the rest of development portfolio.

Our Montreal evo projects are exciting additions to the Montreal market. We’re being warmly received by the university community and are in talks with the consortium schools including McGill and Concordia on doing blocks of beds.

Our Philadelphia evo on the ground lease UPenn has been targeted to the graduate student at Penn. We're working with the various grad departments at Penn as they start to send our acceptance letters to next year’s class. Campus Crest and Penn is very excited with this project as it enhances the graduate total experience at school.

And finally, the 28 property Copper Beech portfolio was 60.5% leased, compared to 67.8 to prior year. Copper Beech has come of the gate a little slower this year in five markets. We’re pleased the entire portfolio is 1,000 basis points higher than the three public companies, but are very focused on getting the slower markets back to its historical velocity.

Now let switch to development. We had announced nine development and redevelopment projects for the 2014/15 academic year prior to our release last night. For the fourth quarter earnings release, we're announcing a Grove project in Gainesville, Florida.

The modified prototype Grove community will consist of 676 beds and its just 0.3 miles from the University of Florida, which has a total enrollment of approximately 50,000 students.

Residents will have easy access to the university and enjoy the amenities and lifestyle programming offered at this property. All 10 projects remain on time and on budget, we look forward to delivering them in the fall.

With regards to future projects, we continue to maintain an attractive full pipeline of development opportunities. We’re currently evaluating project options for both to 2015/16 and 2016/17 academic years and we look forward to discussing those in the coming quarters.

With that, I'll turn it over to Donnie to discuss our financial results.

Donnie Bobbitt

Thanks Rob. For the quarter ended December 31, 2013, the company reported FFOA of $13.5 million, compared to $7.7 million the prior year. On a per diluted share basis, FFOA was $0.21 per diluted share versus $0.20, which equates to a 5% increase over last year.

For the year ended December 31, 2013, the company reported FFOA of $48.1 million, compared to $26.3 million in the prior year. On a per diluted share basis, FFOA was $0.80 per diluted share versus $0.75, which equates to a 6.7% increase over last year. We continued to focus on FFOA per share as our primary measure of earnings in order to remove non-recurring and non-cash items as the earnings power of our core operations is highlighted.

On the capital front, we continue to proactively manage our balance sheet and opportunistically access the most attractive sources of capital. In October 2013, we issued approximately $95 million of our 8% Series A cumulative redeemable preferred stock, and $100 million of our operating partnership's 4.75% senior exchangeable notes due 2018. The $195 million in proceeds we used to repay debt and for general corporate purposes.

And in December, we completed the disposition of four non-core wholly-owned student housing properties, generating net proceeds of approximately $50 million. These transactions combined for gross proceeds of $245 million, which forward funded our academic year 2014-2015 new development deliveries in addition to providing the company growth capital for future investments.

Of this, the company had $26.7 million of restricted cash on its balance sheet as of December 31, 2013. As a result of the timing of these capital raises and asset dispositions and the timing of when those proceeds begin generating income, when our property investments come online due to short-term pressure on our FFOA, to which I’ll address in more detail in our discussion of guidance for 2014.

Additionally, the company had not sold any shares under its $100 million aftermarket common equity offering program as of year end. As a result of the capital raises and property dispositions in the fourth quarter, along with cash generated from operations, we believe we have ample capital for our development projects being delivered in 2014, in addition to future investments.

As of December 31, 2013, the company has funded approximately 80% of its share of equity capital to these projects. The remaining funding will be fulfilled by contributions from our credit facility, construction loans or joint venture equity, which has previously been committed.

Our debt to total market capitalization was approximately 35.1% at the same point in time. For 2014, we expect to continue to prudently manage our balance sheet. We remain focused on our capital recycling initiative as an attractive source of capital, and continue to evaluate both wholly-owned and joint venture projects for possible dispositions.

Additionally, joint venture capital, both for development projects and contributing operating assets to joint ventures remains attractive. As Ted mentioned, we expect to structure the 2015 deliveries as joint ventures to minimize our capital requirements while continuing to create value and growth opportunities for the company.

With respect to Copper Beech, the economics in the fourth quarter remains the same as disclosed in the September 30, 2013 amendment to the purchase and sale agreement where we received 67% of the cash flows on the 30 properties as well as the monthly portion of the $13 million preferred payment.

This will continue until March 18th, at which point preferred expires and the window for the first purchase option opens. The $110 million purchase option would increase our ownership in the 30 assets to 85%, and allow us to receive 100% of the cash flows. While in the seven deferred assets, we would increase our ownership from 0% to 18% and receive 33% of the cash flows.

However, if we don't exercise this option by August 18, 2014, then our ownership and cash flow share would convert to 48%, across all 37 properties with no promoted cash flows. As Ted mentioned, the first purchase option is only an option and we are not required to exercise it. We are in active discussions with our Copper Beech partners to reach an agreement for this next stage and we will update guidance if and when we reach an agreement.

Now, we’ll move to guidance for 2014. We're estimating FFOA per common share for 2014 to be in the range of $0.72 to $0.74 per fully diluted share. This reflects a blend of 2013, 2014, and 2014 and 2015 academic years, and is outlined in the earnings release as well as the base case for Copper Beech. I just outlined in the event, we do not elect to exercise purchase option one.

As mentioned due to certain capital transactions at the end of 2013, and these options for 2014, we expect to have short-term dilution of approximately $0.16 to $0.18 per fully diluted share, that is embedded in our guidance for 2014, which is partially offset in 2014 by the impact of other items such as our new properties being delivered in Q3 2014, which were funded by these capital transactions.

These 2013 capital transactions and 2014 assumptions include the impact of the preferred and exchangeable notes capital raises executed in the fourth quarter of 2013, which represents a very effective manner to create liquidity at attractive blended cost compared to common equity issuance.

The loss of FFO contribution from recycling capital via the four wholly-owned dispositions in fourth quarter 2013 and the base case in Copper Beech structure in 2014 in the event, the company does not elect to exercise purchase option one. We think this is an appropriate and conservative way to guide, but we will update if and when we reach an agreement.

Our FFOA guidance excludes non-recurring and non-cash items, such as the write-off of deferred financing costs as a result of early payoff of financings, potential impairments, transaction costs associated with the Copper Beech investment and other acquisitions and the mark-to-market adjustment of the Copper Beech debt. Additionally, it excludes the potential impact of any asset dispositions or capital raises.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Paula Poskon with Robert W. Baird. Please proceed with your question.

Paula Poskon - Robert W. Baird

Thank you. Good morning, everyone.

Ted Rollins

Good morning, Paula.

Paula Poskon - Robert W. Baird

I would like to focus my first few questions on Copper Beech. Donnie, first to start with you, it sounded if so, you guys still are optimistic about the probability of continuing down the road with Copper Beech. Were that to be the case under the terms that you currently are working under, what would have been your guidance?

Donnie Bobbitt

Hey, Paula. Good morning.

Paula Poskon - Robert W. Baird

Good morning.

Donnie Bobbitt

It would be as opposed to the midpoint of $0.73, would be close to I would say $0.80 to $0.81. The impact of, the way we modeled it in, which is based on the in-place agreement versus, if we would have like you said, pushed ahead with this option one is about $0.07 to $0.08.

Paula Poskon - Robert W. Baird

That’s helpful. Thanks. And Rob, can you give us a little color on what happened in the Copper Beech leasing efforts since our last update, which I believe was the Investor Day -- your Investor Day in December where the portfolio was up year-over-year?

Rob Dann

Sure. Good morning, Paula. Copper Beech actually -- we have a couple of different delivered dynamics going on, Paula. So, I will try not to give too much granularity here.

Paula Poskon - Robert W. Baird

I think more granularity is better than less, Rob.

Rob Dann

Sure. Okay. Overall, being at 60%, we feel is a good number for us to be at. It’s an interesting portfolio that leased up very quickly in the past years and obviously got to very good occupancy this year, running 96 plus percent, but I think they left a little rate on the table in the past. There are some markets more in particular. Columbia is a prime example, extremely strong market. Last year, they were already full during February, which is in our mind very early to be full and clearly has a supply-demand ratio there for that particular product that was out of wack.

So we yanked it back a little bit and Columbia for example, to slow it down a little bit. Now, there are a couple markets that we are challenged in. One is Purdue. We have a terrific team there. I personally spent some time there with Bobby Heiser from Copper Beech to analyze the market. We have a little bit of supply issue in Purdue. We think we can combat it, but it is coming out of the gate a little bit slower.

The Mount Pleasant is another one in the Phase I which is in the 30 bucket and the Phase II is in the seven bucket. If you look at the seven bucket in the Phase II, it’s doing extremely well, new products. And I think it’s pulling a little away from the Phase I.

I believe that both Phase I and Phase II in Mount Pleasant for example will get there and get to be 100%. But the Phase II is coming out of the shoot much quicker, Paula, and it’s -- it is dragging down on the Phase I. State College in general is doing much better. They have one asset that I’m a little concerned about which is their oldest asset in State College which is the CB1 as they call it.

That particular asset I think has a little more of a mix of student and non-student in it. It’s lagging behind a little bit but overall, in general, I feel much better about State College for Copper Beech this year. And as you can see in our JV, grouping the State College in Grove is doing quite well year-over-year.

We’ve also done and I think you’ve seen it personally a perk set up there which is a joint effort between the two to create a hub for the students that are looking both the Copper Beech and Grove. And it seems to be working quite well for us.

Other than that San Marcos, we’ve got some supply issues there, Paula, and we’re seeing it in both Grove and Copper Beech to some of what we did last year but if you remember Grove last year struggled in San Marcos and we ended up filling the property.

So I think that’s a pretty dynamic market. Like I said there is supply coming to it. It’s affecting Copper Beech and like I said it is affecting our growth as well but I think it will get there. That’s really the individual properties of having the effect, Paula, on the overall portfolio different from what you saw on the Investor Day.

Paula Poskon - Robert W. Baird

Thanks. I appreciate that, Rob. And Ted, just to stick with the Copper Beech theme here, how is this playing out relative to your initial expectations that made you go down in the path -- this path in the first place? Now that you have moved in together, cohabited for a while, is it lesser off, is it not what you had expected, how is it different from your initial underwriting? Can you just provide some color around that?

Ted Rollins

Sure, Paula, we feel confident in that portfolio and the team that’s there. As we've dug in, and we've gone to all the properties and we’ve met with all the managers and continue to integrate. We feel confident of their ability to deliver results.

I think we've added some processes that are positive on things such as rate tier and how we price and may be it drags their leasing a little bit more than typicals like the Columbia market where it would be below where it was a year before. We’re not sure in our minds if that’s not going to end up being a better solution.

With respect to integration, there is always a little bit of, I would say, anticipation on the company that you are buying part. So I think we’ve quelled a lot on that with your team over the last six months and people seem to be working well together with reporting and monthly meetings.

And so we’ve not had I would say any negative red flags come up on the acquisition. It’s a solid brand. People like the product. The students that we interview on our customer surveys. They are very positive about that product. And we think that’s a long-term good acquisition for this company. They are very additive to us on a brand basis.

Paula Poskon - Robert W. Baird

Thanks Ted. And then just two other questions on other topics, Donnie, can you just give some color around what prompted the change in your accounting policy around the bad debt expense recognition?

Donnie Bobbitt

Hey Paula, it’s Donnie. Good morning. I will briefly respond to that then I’ll let Rob speak to it again. It’s not so much a change in accounting policy as it is our, I think our procedure at the property level and how we’re managing our tenant balances. And now I’m going to let Rob speak …

Ted Rollins

I’ll jump in here for second, before he hands up to Rob. Paula, this is Ted. I looked at this with Rob and I and Donnie and our team is operating the properties. And we basically decided what are -- where our window for leniency was going to be with respect to current residence and the way we went about collecting the money. And so it resulted in a little bit more aggressive focus which I think we needed to do to tighten that down a little bit because I would tell you I felt like our understanding with respect to tenant not paying their rent was probably more than it should be and so did, Rob and Donnie.

We mad that call in October after we started reviewing how the leasing is going for the year and the tenants have moved in and trying to understand the current rent role. Do you want to add to that?

Rob Dann

Yeah. Paula, let me give you a little granular on it. We and I think, you know this over the last couple of years, I've been very focused personally and getting our renewals up and creating a better experience in the properties. We’ve been pretty successful at it. Three years ago we were 33%.

Last year, we are at little over 42%. Renewals of our existing tenant which we feel pretty proud of. Right now, it’s a matter of fact 60%, actually 60.4% of our leases that are on the books are renewals from existing tenants. Obviously there is a lot of reasons we like that. It means that we are running the properties better.

They like our experience. It lowers our marketing cost. As you can see our marketing cost is half of what our competitors are. I think that’s part of the reason because of that. However there is two sides of the story.

When you have a renewal who signs in call it, March, April, May, and then they obviously don’t move out. They stay on, we got to October 1 and then the senior team we looked at it, looked at our bad debt and where our delinquencies were and found that a lot of the issue was in our renewals where they were current when they signed the lease or maybe I’m a lot behind and then suddenly got very behind.

So by the time, we got into October, we had some renewal that had several months in arrears. And we decided to go after them much stronger than we had in the past. And what it did it, it spiked our skips and evictions with this new pressure that we added onto them. And it actually turned out, there is about 500 of them that’s skipped or we went through the eviction process.

Now we back lease some of it. But I think it was the right thing to do as a company. We as the senior team made that decision. This is we believe the right way to run the organization going forward. And we took a hit forth in the fourth quarter. But we took a long range view of it instead of short-term view.

We don’t want to live quarter-to-quarter. We think that the operations are going to be better served by having stricter controls on it. So it was a group effort making that decision.

Paula Poskon - Robert W. Baird

That is very helpful perspective, Rob. Thank you. And, Ted, just one final question for you, I saw your announcement this morning that one of your Board members will be leaving. I don't think it is lost on anyone that this is the second Board member to leave in the four years you have been public. So can you just kind of give us some perspective on what the process is for finding new Board members? Do you have process in place other Board members are participating et cetera, just give us some color on that?

Ted Rollins

Sure. Yeah. We hated to lose Bill but Bill had other demand on his time and just couldn’t continue to serve and be as active as we would have liked. And so he is stepping down. When Mike Hartnett -- there were two non-independent Board members, myself and Mike Hartnett and when Mike steps down this year, we were going to replace his seat with an independent Board member.

So we use our governance committee to do that. They follow the process where we can search, we go through interviews the nominating and governance committee does. We get background studies. We have in-person interviews. We have telephonic interviews and we obviously do the requisite questionnaires to qualify independence. And then they make a recommendation to the Board.

And so we had started that process when Mike, his announcement came out last fall because we wanted to replace his seat with a independent Board member and up our independent Board members from right around the low 70% to low 80% of total membership. So that was basically how we followed it, in accordance with our charter and our best practices.

Paula Poskon - Robert W. Baird

Thanks very much.

Operator

Our next question is from Ryan Meliker with MLV & Company. Please proceed with your question.

Ryan Meliker - MLV & Company

Hey good morning guys. I just wanted to real quickly talk first about development to some extent. It looks like evo at Square Victoria pricing went up a little bit that sort of bed count. Can you talk a little about that? And then it looks like Louisville and Greensboro pricing went up a little bit in terms of development. What is going on there and is there anything we need to be wary of?

Ted Rollins

Yeah. This is Ted. We increased the bed count in Louisville and as you said in Square Victoria in Canada. Those were dollar spend to increase revenue basically for the most part. So we felt they offset the other. Greensboro, we added a few beds in Greensboro and complied with some state laws in that town with respect to, I think, dormitory classification and zoning versus a multifamily classification zoning.

Ryan Meliker - MLV & Company

Okay. That makes sense. It’s helpful. Now thinking big picture Ted, obviously the stock is trading at a material discount to NAV as you’ve highlighted in the past as recently as your Investor Day. There is -- you see no desire to issue equity to fund the growth at current stock prices. What is the plan to kind of reduce that discount to NAV going forward? Is it simply execution? Are there other things you guys are going to try to do? Have you looked at potentially reducing the development pipeline and looking at maybe share buy backs or something along those lines?

Just trying to get a feel for how you guys are -- whether you guys are going to take a more active approach to trying to reduce that discount or just going to continue to try to stay the course in terms of operations and hope that the street sees what you guys see in terms of valuation?

Ted Rollins

I think we’re going to focus on a few things, obviously expense cuts where we can and at the property level, we always focus on that. So we’re looking at different areas. We can cut at the property that makes sense without sacrificing customer service.

As far as abilities to pass through certain expenses this year, we have the ability to pass through credit card fee charges, which can be a meaningful amount of cost recovery. We have our new systems rolling out that gives us tighter control over day-to-day operations, which I think will be helpful and it really puts us in a format, that’s real-time and a good basic system to keep the basics in front of us. So it’s basic blocking and tackling to drive value at the core portfolio and eliminate variability.

With respect to conservation of capital, I think it’s important to note that our plan isn’t to use shareholder money, raise equity to fund developments. And likely that you will see us use joint venture money to fund the development to the extent we do that this year. And then, we’ve talked about shareholder buyback programs, our share buyback programs and we continually evaluate that. And I think the trick there is what prices makes sense for us to do that.

And then, we also evaluate are we in the student housing business or the stock trading business, and I think we go back and forth on that. We have a lot of dialogue around that at the board level as well as at the senior management level. Those are the things I would say. And then again last but not least is finalize what we’re going to do on this first purchase option with Copper Beech which is one of the bigger opportunities we have to shift that shareholder value as well.

Ryan Meliker - MLV & Company

And Ted, is it possible, or, I mean, I know there is a lot of possibilities here with regards to the first purchase option with Copper Beech, but is there an option to may be bring in a third joint venture party that would eat up a lot of the cost in the second phase and potentially even the third phase and give you guys the opportunity to take over control and benefit from some of the cost synergies, I am sure you underwrote when you initially did the deal? Or is that something less likely given Jack's involvement coupled with you guys?

Ted Rollins

Obviously we looked at that and we’ve looked at it with several partner. Of course our standard go to partner on joint ventures. We have two of those, one is Harrison Street and the other is Beaumont. And so we’ve discussed that with both of those. I can’t say one way or the other how it will land, but that’s certainly something we’re considering to take the next step down. We’re also considering other types of structures with the seller that I think will come and be more clearer over the next 30 to 60 days that we believe will be something that we resolve and is on the top of our list to finish up.

Ryan Meliker - MLV & Company

Okay. That’s all for me. Thanks, Ted.

Ted Rollins

Thanks.

Operator

Our next question comes from Jana Galan with Bank of America. Please proceed with your question.

Jana Galan - Bank of America Merrill Lynch

Thank you. Good morning. Going back to the bad debt expense, it looks like it was $1.2 million in the same-store pool. Did you have that same problem with delinquencies in the Copper Beech portfolio?

Rob Dann

Hey, Jana, it’s Rob. No, actually, we did not. Copper Beech has done a really good job over the years. Their structures are little bit different, Jana. We’re renting by the bed. They were doing jointly several leases on the majority of their portfolio. Meaning if you had four people on the four bedroom apartment, they were all under one lease with four guarantors which gave them a really good strength on their collection. Their collections is actually quite good. We’ve learnt a chapter from them for sure.

Jana Galan - Bank of America Merrill Lynch

And then for the same-store pool, is this kind of one-time true-up due to the change in your policy or is possible we will some residual bad debt clean up in first quarter?

Rob Dann

No, I just want to reiterate not a change in policy, it was a change in management approach and it is a fourth quarter cleanup and we don’t see this going forward.

Jana Galan - Bank of America Merrill Lynch

Thank you. And then looking at the 2014-‘15 academic year leasing, can you provide what rate you’re achieving on the total operating portfolio and what you’ve achieved in Copper Beech so far year-over-year?

Rob Dann

Sure. As far as the growth is concerned, we are targeting a 1% to 2% rate growth and in the Copper Beech, we believe it will be around 1%.

Jana Galan - Bank of America Merrill Lynch

Thank you. And then just on the dispositions, it looks like the restricted cash is structured as a 1031 exchange, do you have acquisition target in mind or maybe if you could discuss your expectations for acquisitions in 2014?

Donnie Bobbitt

Hi, Jana, it’s Donnie. Good morning. Yes, it was already structured to go into our future developments and land purchases for our development pipeline. So at year end, it was just a timing mechanism where it was hung up in restricted cash and the majority of that’s been redeployed into the development pipeline.

Jana Galan - Bank of America Merrill Lynch

Thank you.

Operator

Our next question comes from Nick Joseph with Citigroup. Please proceed with your question.

Michael Bilerman - Citigroup

Hey, good morning, it’s Michael Bilerman with Nick. I was wondering if we can spend a little more time on sort of bad debts and really try to understand a little bit more about controls and procedures. And I am glad you’ve corrected everyone that this is not a change in policy, this is $1.2 million of rent that you thought you’re going to get and people skipped or were evicted, which I think is a major concerned.

You said it was 500 students -- the 500 beds, so it’s 3.4% of the same-store pool. That’s about $2,400 per head, that’s almost five months rent, and those are the people that you evicted or just left in the middle of the night. How big was this problem in terms of how many beds were delinquent in rent, so did you start off, was it 2,000 beds, was it 3,000 beds and by the end of all your prodding and being able to lock them out of their room, calling their parents, taking away from their key cards, doing all the things that I'm sure you went to do, how big of a problem was this? How many people were delayed on their rent because what we really want to understand is what were the underwriting standards of putting these people in their beds? And if you said the majority of them were renewals, the 500 would be even a greater percentage. If your renewal rate is 42%, that means instead of it being 3.4% of the population, it is well over double of that. So, can you give us a little bit more granularity on why we shouldn't be significantly concerned about operating controls?

Rob Dann

Sure, Michael; it’s Rob. Clearly, it was more than 500, it was in 2000, I can’t give you an exact number off the top of my head. What I can tell you is definitely more than 500, you are absolutely correct putting pressure on a group, there was a certain group that responded to us, who paid us, who got back into good graces of us, and there were those who did not and that was that approximately 500 beds.

As far as what we do going forward, there is a concerned about the renewals and that’s when Paul asked me that question, I was focused on that. For the last three years, we have been very focused on getting renewals because we felt that was a good way to control our marketing expenses and sales expenses. It’s easier to please an existing resident than go out to find the new. And we still as a team believe that that’s the right strategy. And I think you’d find our competitors still the same way.

The issue is we got blacks to be honest with you over the summer with these renewals and was very focused on leasing on new people because the renewals come in, in the fall and the early spring and then the next cycle is obviously going out and finding external people to fill the rest of your beds. And we got two lax, you are absolutely right. And so that’s why as a senior team we decided to change our view on it and get much tougher on the renewals.

Now going forward, how do we make sure that never happens again, which I am sure is on everyone’s mind is, we don’t allow people to renew that have a balanced period. And now we have a specific way that we sit actually on a weekly basis is what I am doing right now and I go through every lease, that’s been signed with the renewal. And we check their balances. We make sure they are zero. And if they are not, we pull them out of the system.

So with that type of control Michael, we feel very comfortable that we won’t get ourselves in this situation again.

Michael Bilerman - Citigroup

So the 500 were all renewals, there wasn’t any problems with new residents not paying their rent. I mean, what’s receivable balance like and is anyone delayed there?

Ted Rollins

Obviously, having 20,000 plus residents just in the Copper Beech -- sorry just in the growth portfolio. Of, course there are some people that are delinquent and we chase that everyday. But we found that the core of the problem were the renewals. Absolutely, we have some that are new, but if you think of it mathematically and if they move in, call it September 1, they’re not going to be that delinquent come in the fourth quarter, they’re only going to be a month or so behind and a little bit pressure we usually get them to pay up. So renewals is really the core of the issue.

Michael Bilerman - Citigroup

So did you have any write offs from students that ended their lease in the fourth quarter from the prior year?

Ted Rollins

Not very many, no. Like I said the majority of this is renewals.

Michael Bilerman - Citigroup

Is renewals. And then you call out the 1.2 million just in the same-store pool, was there anything in the Harrison Street joint venture, those assets that was impacting those numbers?

Ted Rollins

Yes, absolutely, not to that magnitude, obviously their pool is much smaller, but, yes, obviously it was a companywide issue and not strictly wholly-owned.

Michael Bilerman - Citigroup

And then maybe we can just go to the Copper Beech. So, Ted, one of the big things on this deal when you did the deal that was on the call and had a lot of questions was alignment of interest, right? And the seller you didn't give him stock, right? So that there would be an incentive for him to obviously work with you to maximize profitability because what would be good for Campus Crest would be good for him in terms of his currency, so you passed on not doing that.

And so how are we getting comfortable? And you also have a fixed price, so that if the assets are not performing, if you don't exercise, then you are in a position where you own 48% of assets with no control, which is not ideal either. And so I think Paula asked, how is it relative to your expectations? You’ve already amended the deal, you may not exercise the option and the assets are under performing relative to where they were last year. So, how do we get comfort that this is not an issue?

Ted Rollins

Michael, that’s a great question. To me, when we started the transaction, we felt like this the fact that we had a stage transaction and not the obligation to go forward. It was a big incentive for Copper Beech to perform. And I think the reason we fixed the prices because we felt like long-term you’re going to do better in that asset and we didn’t want to pay more and we felt like we can protect the downside by going back and saying look we’re not going to -- I mean we’re not going to go to the next step until we fix the problem.

So we felt like, although it was a stage transaction, it wasn’t in stock. There was incentives on their part to perform. There was incentives for them to continue to pay attention to the way we’re earning on the assets. And so that we didn’t feel like that there was necessarily just because we didn't take stock, there was a misalignment. We felt like there was an alignment in that. If we're going to go the next step, we had to perform. We were coming in at 48% level at that point and so that we felt kind of saying (inaudible).

Now I’d tell you after the fact when we sat down and looked at its leasing results from 2013 in the summer, we naturally went there and we said okay, these were the 30 assets that are doing, what you said they will do. And these are the seven that aren’t and that why we restructured that to take the 30 assets that were performing and get more of them so that our economic didn’t get impacted.

I mean, what we found all along the way is that (inaudible) is working with us. We’re hand in hand with them. So if there is not a contentious relationship, they understand that those performance issues, they understand that we have to manage that risk together and that we both own the results. I’m not seeing any example where and they aren’t entirely focused on improving the situation or entirely focus with us as we go through this together on what’s the next step.

There is that level and then there is the teams working together. I think they’re integrating together. As Rob talked about the leasing on several of those assets and we’re not by any stress the imagination sitting on our heels and not talking to them about this and how that would impact the next step. And in fact, (inaudible) around that currently.

So I’m not sure Michael that obviously them having shares or OP units is a very positive outcome. And we didn’t get that upfront given the age and his estate planning and the document order was billing. We did get the staged acquisition. We do how, what I would consider an alignment of interest with the company. And we don’t have any signals currently that we’re not walking together looking to get to the next step in a reasonable fashion and happened prior to this call. We felt the most prudent thing to do would be to put the most conservative case.

Michael Bilerman - Citigroup

I will politely disagree with the characterization of walking arm and arm. I do think having full alignment of interest where a seller either you have full control or he has your shares, that’s just the way you do it or you don’t do it or you don't do a transaction. Maybe we can go with the four assets sales and you have characterized them as non-core. These are not that far old developments for you. They were sold at a material discount to your construction cost, so those four assets I think were north of $75 million close to $80 million relative to $50 million that you sold them for.

How do we get comfort on the remaining assets you have and the inherent value of those because you sold four at pretty low price at pretty high cap rate? How do we get comfort around you want to battle around saying NAV is very high relative to the stock price, is that really the case?

Ted Rollins

Michael, if you look at the assets we’ve sold in the market say we’re in, I would tell that drove what I would consider the difference in value there. These were the four markets Jacksonville, Alabama, Jonesboro, Arkansas, Wichita Falls, Texas and Wichita Kansas. Those four markets have lagged in performance for years. And we looked at their capital as we got out of that and we’re able to deploy kind of markets we felt it was in the long term best interest to sell those.

Those markets were at the bottom of our portfolio. We worked a lot of years to try and get them to perform at the end of days and market dynamics just weren’t there. Those were the markets that we have that are -- of kind of quality. We have a handful of market such in Copper Beech, we have a Kalamazoo as one of those markets we intend to sell. We have some properties, one in Arkansas, one left in Conway, Arkansas we intend to sell, but it's rotating out of those weak markets. And there is a handful of them, but this was the big chunk of them.

I mean, if you look at the portfolio statistics as a result of that sale and the negative impact that they had. We looked at those markets as the ability to take capital from non-leveraged assets and redeploy it into markets that have better earning power and growth over the coming years. And that's really what was the fundamentals underlying that decision?

Michael Bilerman - Citigroup

And final question just on Gainesville. This was a project that looked like you had land basis of -- you had a 20% share in the land and now it is 100% owned development $41 million total cost which you are going to take all on balance sheet. You obviously have a lot of development for the ‘14, ‘15 year already. Your cost of capital is very high despite the fact you raised some proceeds recently.

Why even -- even if the return on the development is attractive, why even add another capital commitment, another execution and another project to the plate for the team when there are so many other things going on within the company whether it is on the operational side, the development side, the acquisition side you are going up to up to Canada, you have a high rise project that you are developing in Philadelphia in a joint venture. Why not just say, you know what it is attractive but we have to hold off, let's hold down our capital and let's get through Copper Beech, let's get through all these developments, let's get everything grounded before we add another $45 million piece to the pie? Help us understand why that was important

Ted Rollins

Hey, Michael, it’s Ted. But that 20% your referenced in the sub, that was just a hanging footnote. We corrected that and reposted. It was a hangover from something else when we PDFed it, so apologies about that.

Rob Dann

And on your question Michael it's a fair point. I think the reason we decided to move forward on that project was because we were planning to sell additional assets and rotate that into this portfolio. It does not address your concern about execution risks.

At the time we looked at it, we have purchased the land. We had gone through entitlements. W we had gotten the property price up to built. We've started down that road and so we made the decision to build it and that would be a project that would rotate let's say core asset in a primary location and primary school. And we feel that rotating out some properties and sales in 2014 and putting it into that property would be a good migration for the portfolio that was the logic behind it.

Michael Bilerman - Citigroup

Okay. Thank you.

Operator

Our next question comes from Michael Salinsky. Please proceed with your question.

Michael Salinsky - RBC Capital Markets

Good morning, guys. Not to beat a dead horse, but just going back to the bad debt situation there. Can you talk about how you are able to backfill those and then what kind of rate we should expect? And then as we think about ‘14 your peers gave same store kind of forecast what they are thinking for revenue growth, occupancy, expenses. Can you give us a sense of what you are expecting for ‘14 and what’s embedded in that same store guidance, I mean in that NOI guidance?

Rob Dann

Hey Mike, it's Rob. Let me take the bad debt piece of that. Actually in the fall we actually found pleasantly that there was some lease still hanging out there which was nice and we've got like I said big chunk of those refilled. As far as rate concerned, it did not put pressure on a rate, we've got some high quality leases in there.

And I'm sure you heard me say at many times we're work on a multi-tier strategy when we do sales so we actually, we're able to convert at the higher tier rate. So it actually was a little bit of positive when it came to the rate piece of that. As far as the guidance and occupancies in the growth properties for calendar year, we're looking at 91% to 93%, 1% to 2% rate and then academic year ‘14, ‘15, ‘92 to ‘94.

Donnie Bobbitt

Hey Mike, it's Donnie. For the other piece the academic ‘13, ‘14 for the balance in the school year, those same-store properties are in the range of 91% to 91.5% occupancy. And that different from where we were in the fourth quarter is primarily because of the residents that were lost due to the bad debts.

Michael Salinsky - RBC Capital Markets

Okay. That is helpful. Second question you alluded to a couple of times in terms of assets sales potentially funding some of the development -- what are you actively marketing right now? I know it’s not guidance, but what realistically should we be expecting there? Can you give us a sense of what you are thinking on the disposition front for ‘14?

Ted Rollins

I would say there is a handful. It would be between Grove and Copper Beech as we've talked about in the past, Kalamazoo market that we think is not a long-term market for us. We believe that there is a couple of assets and joint ventures with Harrison Street that we’ll sell. And we believe that there is a Conway, Arkansas as a market but I think overtime probably isn’t the best grower for us. So you'll see that.

I mean that’s really, I mean what we're -- I think overall focus is just to take those lower performing markets as we've gone through it and evaluated them, start rotating out of those and into the newer product and into markets where we think there are a better growth prospects.

Michael Salinsky - RBC Capital Markets

Just as Copper Beech is not included in guidance that is not included in guidance either, the dilution from the sales (inaudible), correct?

Ted Rollins

That's correct. That would only be on it time that we could give guidance for that would be as we look at the transaction and that’s something we will talk about.

Michael Salinsky - RBC Capital Markets

Okay. Final question. As you started pruning the portfolio the occupancy guidance the 91% and 93% for ‘14, is there anything structurally in the portfolio that would keep you from getting that kind of 95%, 96% that some of your peers have targeted?

Rob Dann

Hey Mike, it's Rob. Certainly what we feel that core 32 properties as what I will talk about little beyond the 28. The properties that we have added in the last couple of years are extremely strong that performed well as you were talking. I was just looking at some numbers, Flagstaff, Pullman, Montey Fort Collins, Orno really strong markets performing really well and you're right it should pull up for sure.

I feel pretty comfortable with the range that we are in. I think the last five months obviously next academic year, I think we'll do better than we have in the past just because we have a strong third quarter. Those four assets that we disposed which we really haven't talked about, I will use Jacksonville as an example, got to 95% occupancy, but we really struggled there with demographic.

Our delinquency guide is highest double-digits at times, we spent enormous amount of time in resources to try to go in and mitigate those issues. And I think been able to spread demand power in the field are more evenly and having those drag should really help us. So the answer your question, yes I think we can do better in that core wholly-owned group.

Michael Salinsky - RBC Capital Markets

Okay. Thanks so much.

Operator

(Operator Instructions) We have a follow-up question from Paula Poskon with Robert W. Baird. Please proceed with your question.

Paula Poskon - Robert W. Baird

Thanks. Your stock is off more than 8% today. As you know in this business perception is reality. This is your kind of second go around of serious street disappointment. How are you think about trying to get back on track not just around the individual issues which clearly have embedded on debts on the call today but from more broadly around investor skepticism around managements' credibility?

Ted Rollins

Well, Paula, I think our focus over the next 12 or 18 months is really on several things. Number one is managing our core portfolio and eliminating variability. And I think that you'll see that prove out over the next few quarters. There is a high degree of focus on it. Then, second thing is being very careful with capital allocation and how we pursue different opportunities or don't pursue different opportunities. The third is to continue to evaluate option such as stock buybacks and other ways of managing our financial side which is part of that.

And then finally to continue to work on the Copper Beech integration and come up with a transaction that really reflects an alignment of interest between us and them as we move forward. And the basics of blocking and tackling from our standpoint is on the portfolio is looking at where we can cut expenses that impact the NOI such as these bad debt control. The way, we can past through incremental costs and make some money on the margin with respect to things like credit card fees, putting in our new system this year with tighter controls on items like payroll and things of that nature. It's a steady focus on those types of things to keep continuing to grow the NOI.

And then finally the focus on the occupancy and leasing, making sure that, like Mike Salinsky asking, why aren’t you or is there a way you can get to 95 and focusing on where the areas that we think are challenged and keeping us from getting at 95 and overcoming that and getting a run rate up in that mid-90s area.

And then finally, how we go about the integration and working with Copper Beach in those five or six markets, where we’re off a little bit and we are off leasing, and getting those back on track, so that we end up the year in the 96% range like we were at prior year in the 30 properties.

Paula Poskon - Robert W. Baird

Thanks.

Ted Rollins

Thank you.

Operator

Our next question comes from Buck Horne with Raymond James. Please proceed with your question.

Buck Horne - Raymond James

Hi, thanks guys. I don't want to belabor this too much. But I just wanted to try to better understand, can you give us any detail on how many debts you currently have that are still delinquent today versus how many delinquent debts that you had this time last year?

Rob Dann

Hey Buck, it's Rob. Are you talking about that are still in the system, or ones that were already cleaned out or..?

Buck Horne - Raymond James

Yes, that are in the system today, not excluding the ones that are cleaned out. But how many leases do you have in the system today that are delinquent versus what you had in the system last year?

Rob Dann

Interesting, you asked that question. I sit on a bad debt call every Wednesday now with the Senior Team and we go through person-by-person, property-by-property. It's a long laborious meeting. Our numbers much lower than it's ever been in the company's history now. We really -- I think did the right thing last quarter by doing what we did and we are in much better shape now.

I couldn't give you the number off the top of my head. But you always have people who are a month behind or so. And so it depends on where you draw the line, if you say, people that are in the 90-day category are higher, what I would say it's probably in the 30%, 40%, 50% range at this point. But probably, 80% to 90% of those people are on some sort of payment plan or are on financial aid. We're working with the school and make sure we're getting the right monies. We have a strong communication with them, that's for sure.

Buck Horne - Raymond James

We have no doubt that you have put in some procedures and tried to tighten things up and there is improvement. I guess, what we are trying to understand though is when exactly did you know you had a delinquency issue particularly last year when you were certainly reporting pre-leasing stats, but were those preleasing stats based off of faulty information with renewals that really weren't going to actually pay you particularly at the time you were raising capital to fund Copper Beech? So, I think that is an important question.

And then maybe quickly over to Donnie though. On the SG&A, you have SG&A guidance and we understand that. It is another number that we can focus on. If you look at the 2013 results, you’ve had another year where the final SG&A number comes in ahead of where you initial projected the SG&A range. How comfortable are you with this year's range, and when we think about incentive compensation hurdles, what do you have out there for targets this year and what’s included in the guidance in terms of the pay out of incentive comp?

Donnie Bobbitt

Hey Buck, good morning. As far as the G&A growth, we've had significant growth over the last three years and yes, our G&A has ramped in accordance with that growth. And 2013 and to a lesser extend in 2014, some of our G&A is starting to be push by some of the things that are off balance sheets, so some of these joint venture initiatives such as Copper Beach and our Montréal activity.

So that, I think there was a little bit of pressure on our G&A in 2013 because of that 2014. 2014, guidance implies about -- I think it's about a 10% increase over 2013 actual. We're very comfortable where that is. I think it's just kind of an outside target and we want to come in onto that, definitely added and need our G&A guidance, which we haven’t been able to do for the last couple of years.

Ted Rollins

And Buck, this is Ted. On the incentive pay, I think our focus with the Board this year is to relook at the way that's peg right now, it’s on a metrics paced on various performance objectives within each person’s control. And then there is a portion that's for global performance on a per share earning FFO basis, which is part of it. Obviously, it did not even hit it this year on the part with the FFO.

But I think, as we're talking through this, we're looking at a program that gets into the traditional more, breaking it out by your division performance but also by benchmarking on total shareholder return versus what our goal is total shareholder return versus our peer set on a relative basis, which is a fairly standard program. We are in discussions about that now with the Board and the Comp Committee, and they expect to come out with the plan here for '14 at the next Board Meeting.

Buck Horne - Raymond James

All right. Sounds good. Thank you, gentlemen.

Ted Rollins

Thank you, Buck.

Operator

There are no further questions in queue at this time. I would like to turn the call back over to management for closing comments.

Ted Rollins

Okay. We’d like to thank everybody for their attendance on this call today. Obviously, we need to focus on the three things that we outlined with respect to eliminating variability in our core being conservative good stores of the capital as well as continuing to work on the Copper Beech transaction. I can tell you the team around this table is committed to making sure these three things are top and focused on our lists. We look forward to the next call in the next quarter. Thanks for your time.

Operator

This concludes today's teleconference. You may disconnect your lines at this point and thank you for your participation.

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