American Campus Communities, Inc. Q2 2010 Earnings Call Transcript

Jul.28.10 | About: American Campus (ACC)

American Campus Communities, Inc. (NYSE:ACC)

Q2 2010 Earnings Conference Call

July 28, 2010 11:00 AM ET

Executives

Gina Cowart – VP, IR

Bill Bayless – CEO

Greg Dowell – COO

William Talbot – SVP, Investments

James Wilhelm – EVP, Public-Private Transactions

John Graf – EVP and CFO

Daniel Perry – SVP, Capital Markets

Analysts

Alexander Goldfarb – Sandler O’Neill

Eric Wolfe (ph) – Citi

Dave Brag – ISI Group

Karin Ford – Keybanc

Michelle Ko – Bank of America

Paula Poskon – Robert W. Baird

Ross Nussbaum – UBS

Andrew McCulloch – Green Street Advisors

Operator

Good day ladies and gentlemen and welcome to the second quarter 2010 American Campus Communities Inc. earnings conference call. At this time all participants are in listen-only mode. (Operators Instructions)

I would now like to turn the conference over to your host for today Ms. Gina Cowart, Vice President of Investor Relations. Please proceed.

Gina Cowart

Good morning and thank you for joining the American Campus Communities 2010 second quarter conference call. The press release is furnished on Form 8-K to provide access to the widest possible audience.

In the release the company has reconciled the non-GAAP financial measures to those directly comparable GAAP measures, in accordance with Reg D requirements. If you do not have a copy of the release, it’s available on the company’s website at www.americancampus.com in the Investor Relations section under Press Releases.

Also posted on the company website in the Investor Relations section, you will find a supplemental financial package. We are also hosting a live webcast for today’s call which you can access on the website with the replay available for one month.

Our supplemental analyst package and our webcast presentation are one and the same. Webcast slides may be advanced by you to follow along. Management will be making forward-looking statements today, the references to the disclosure in the press release on the website, with the slides and SEC filings.

Management would like to inform you that certain statements made during this conference call which are not deemed historical facts may be deemed forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934 as amended by the Private Securities Litigation Reform Act of 1995.

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

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

Having said all that, I would now like to turn the call over to Bill Bayless, Chief Executive Officer, for his opening remarks.

Bill Bayless

Thank you Gina. Good morning and thank you all for joining us as we discuss our Q2 2010 results.

Let me address the format of our presentation. Greg will address operational results and the leasing status for the upcoming academic year; William Talbot will discuss our investment activities; Jamie Wilhelm will provide an update on our on-campus development activities and Jon will discuss financial results and also give you an update on our guidance. Daniel Perry and I will then lead the Q&A.

Before turning it over to Greg, let me first congratulate the American Campus Corporate and Property staff on a truly exception quarter. Their hard work in efforts this quarter resulted in more than $400 million in external growth via acquisitions, off-campus development and ace. It also produced solid internal growth and net asset value creation in our core and also meaningful activity in our third-party services segment. Our team’s delivering in every area and we want to take this opportunity to thank them publicly.

With that, I will turn it over to Greg.

Greg Dowell

Thanks, Bill. The hard work and dedication of our people have yielded a great quarter.

If you turn to page five of the supplemental package, you will see that our second quarter same store NOI increased by 8.2% over Q2 of 2009. This was the result of a 3% increase in revenue, and a decrease in operating expenses of 2.4%. This decrease in operating expenses was largely attributable to a reduction in marketing costs for the quarter of $1.1 million compared to Q2 of the prior year.

Utilizing the sophisticated analysis provided by our proprietary lands platform, we were able to significantly reduce our marketing expenses back to historical levels while actually improving our leasing velocity.

As you can see on page eight of the supplemental, June 30, 2010 occupancy at our same store wholly owned properties with 93%, compared to 89.1% for the same day in the prior year. As of June 30, occupancy for the totally wholly owned portfolio was 89.6%.

If you turn to page nine, we can review the leasing status of the 2010-2011 academic year. As of Friday, July 23, our same-store wholly owned portfolio was 95.1% leased compared to 92.3% leased for the approximate date in the prior year. The same store ACC legacy portfolio was 94.4% leased compared to 92.3% leased for the same date one year ago, while the GMH same store portfolio was 95.9% leased compared to 92.3% leased for the same date prior year. With the current leasing progress, we now expect final fall 2010 same store occupancy to be in the range of 97% to 98%. This compares to a final occupancy of 95.9% in fall 2009.

We are also currently projecting an overall rental rate increase of 1.9% for the wholly owned same store portfolio. Based on the current leasing velocity and projected rental rates, we would anticipate same store NOI growth of 3% to 6% for the academic year 2010-2011.

On page 13, you will see that we have included the leasing status for the joint venture portfolio that we currently have under contract for acquisition. This portfolio is currently preleased to 93.4%, which is 200 basis points ahead of the prior year with a projected overall rental rate increase of 2.4%.

And now, I will turn the call over to William to discuss our investment activity.

William Talbot

Thanks, Greg. This quarter we made extensive progress in all areas of our investment strategies. Turning first to acquisitions, we continue to work towards closing the previously announced acquisition of full ownership interest in 14 student housing properties from our joint venture partner totaling 8534 beds of total estimated value of $349 million. We are actively working with the property level lenders to receive the appropriate consent and are targeting a third quarter 2010 close. Based on current leasing velocity of the JV portfolio, our expected returns have improved slightly to a going in nominal cap rate of 7.2% and 6.6% fully loaded economic cap rate.

Subsequent to quarter end in July, we closed on the acquisition of Sanctuary Lofts, a 487-bed foreclosed property located within the walking distance of Texas State University in San Marcos. The university has experienced over 16% enrollment growth from 2006 to a fall 2009 level of over 30,000 students. In addition the university has recently removed the softer (ph) housing requirement to make sufficient space for freshmen on campus. While the property is well monetized (ph) with 98% prelease for academic year 2010-2011, run rate diminution has occurred over the last several years due to a lack of consistent management or capital reinvestment. The purchase price of $21.4 million equates to pricing of $44,000 a bed including a 504 space attached parking garage. Factoring in the replacement cost of the parking garage at 7500 a space, the purchase price for the residential component is approximately 36,000 a bed, a significant discount to current replacement cost for similar products.

We are targeting a going-in nominal cap rate of 7.3% and 6.8% fully loaded economic cap rate, both cap rates included $1.6 million in upfront capital returning the asset to Class A condition.

Overall we continue to see improvement in the acquisition environment for student housing as we have discussed on the last earnings call. Since then we have seen eight Class A properties marketed for sale that are in core locations less than a half mile from the subject university of expected occupancies in excess of 95% for the upcoming fall. From discussions with brokers, these assets are seeing strong interest and a majority of these assets are anticipated to trade in the low to mid six cap rate range. We believe we will continue to see a strong pipeline of acquisition opportunities in the third and fourth quarter as leasing is finalized and turn (ph) is completed around the country. We believe cap rates will continue downward as better products continues to come to market and competition increases due to the improved access to debt and equity capital in the sector.

Turning to off campus development, we have commenced construction on our UT San Antonio development for a fall 2011 opening. We are targeting an initial nominal yield in the 8.5% to 8.75% range.

With regards to our 680-bed development across the street from Sam Houston University in Huntsville, Texas, we have completed all pre-development work and have an entitled site for our proposed $28 million development. We are seeking final permit and ACC Board approval to proceed with construction in the coming weeks for a fall 2011 opening. We’re targeting at going in nominal yield at 8% for this development. In addition to these developments we continue to work our land bank and pursue sites for future developments in other markets to take advantage of the favorable construction pricing environment.

Moving onto disposition, during the quarter we successfully closed the sale of Campus Walk – Oxford a wholly owned 432 bed project serving students at the University of Mississippi to university related foundation for $9.2 million.

The sale represented a 5.8% nominal cap rate and a 4.9% economic cap rate on our estimated over 12-month NOI.

We continue to evaluate our portfolio for future disposition candidates where we can maximize return on investment. Given the downward pressure on cap rates it is our intent to release the disposition package this fall. With that I will turn it over to Jamie to discuss on-campus developments.

James Wilhelm

Thanks William. This quarter marked excellent progress in our efforts related to both ACE and third-party development of on-campus housing with regard to our ACE program.

In May, we executed a ground lease and commenced construction on an 864 bed community at the University of New Mexico. Total development cost for the project is $39.2 million. Our target of going in yield is 7.5%. We expect to open the project for occupancy in fall of 2011.

We also continue to make progress with transaction structuring and free development activities on our six ACE pipeline transactions.

We are targeting going in yields of 7.5% to 8% on our ACE investment. We’re also pleased to report that we expect to receive full reimbursement of our expenses and to earn a fee related to our pre-development work at Boise State University. The University has decided to proceed and build a portion of our proposed project with traditional university debt.

Under the terms of our memorandum of understanding we will be paid a 3% fee when the University develops the project. We continue to have excellent relationship with Boise State and they remain at the top of our reference list.

Turning now to third-party development. We had an exceptional quarter. We closed the Tax Exempt Bond Financing for Edinboro University Phase II project and commenced construction; anticipated completion is fall 2011.

We remain optimistic for our college of Staten Island Project and are working with the college and university system to structure a feasible transaction with the hope of commencing development during late 2010 or early 2011. During the quarter, we also received three new on-campus awards.

Illinois State and Northern Illinois each selected ACC as their third-party developer to deliver new housing. Both projects will be financed by the issuance of project based tax exempt bonds and are scheduled to commence construction in the spring of 2011 for a fall of 2012 delivery.

Total fees from each project are expected to be a minimum of 2.5 million and 3.5 million respectively.

We’re also very pleased and honored to announce that ACC has been selected by Princeton University to provide free development services for graduate student housing project on the university’s campus. ACC and Princeton are currently in the process of documenting this pre-development arrangement.

Lastly, we continue to see an abundant pipeline of institutions expressing interest in utilizing public private partnerships to deliver new on-campus housing utilizing both equity based and project based debt structures.

From our perspective, this business segment is as vibrant as it has ever been during any time of our history. With that I’ll turn it over to John.

John Graf

Thanks Jamie. For the second quarter of 2010 we reported total FFOM of $20.3 million or $0.38 per fully diluted share, which was slightly better than internal expectations and consistent within our guidance range projections for the year. This compares to FSOM of $16.2 million or $0.33 per fully diluted share for the comparable quarter in 2009.

As compared to the second quarter of 2009, for 2010 first quarter results includes the impact on the weighted average share count related to the 9.8 million shares issued in conjunction with the May 2009 equity offering and the operating results related to the Barrett Honors College Development delivered in fall of 2009.

Second quarter 2010 FFOM excluded $632,000 of impairment charges from the preliminary allocation of ACC’s purchase price to the Fidelity joint venture properties. We believe the inclusion of such charges and FFO is inconsistent with the treatment of gains and losses on the disposition of real estate and that excluding such charges more appropriately presents the operating performance as the company’s real estate investment on a comparative basis.

Ultimately, we anticipate that the acquisition will result in an overall gain on sale for the joint venture that GAAP requires that we record an impairment charge for any property being valued below book value once the closing is being probable.

Total third-party revenues were $3.7 million for the second quarter of 2010 as compared to three million for the second quarter of last year. Total third-party revenues consisted of $1.6 million in development fees and $2.1 million in management fees.

Third-party revenues were below internal expectations for the second quarter as we anticipated at the outset of the year that CSI would close during the second quarter.

We are currently targeting commencement during the fourth quarter of 2010 for this project. Management fees for the second quarter of 2010 included $459,000 from the 14 joint venture properties being acquired.

After the closing of the acquisition, this management fee revenue will discontinue. Corporate G&A for the quarter for $2.6 million down from $2.8 million incurred in the second quarter of 2009.

We continue to expect to be within the previously provided guidance range of $11.4 million to $12 million for 2010.

As of June 30, 2010, the company’s debt to total market capitalization was 42.4%. We paid off $17.4 million of maturing fixed rate debt during the quarter and have $31.9 million of remaining 2010 fixed rate debt maturities or 2.9% of our total indebtedness.

A variable rate construction loan on (inaudible) has a December 2010 maturity date. However, we have one remaining one year expansion option, which we currently qualify for and plan to exercise.

We believe that we should have adequate funds from operations and availability under our outstanding credit facilities to cover our remaining 2010 debt maturities, our 2010 property development expenditures and the 14 property Fidelity asset purchase.

As previously mentioned, we anticipate closing the joint venture portfolio acquisition during the third quarter of 2010. We will assume $252.2 million in mortgage loan debt at a weighted average interest rate of 5.85% with only $4.5 million of this debt maturing in 2010. Please see our REIT Week June 2010 Supplemental Analyst Package posted on our website for more details concerning the transaction.

Our total interest expense for the quarter excluding the on-campus participating properties was $13.4 million compared to $13.3 million in the second quarter of 2009. The company’s interest coverage ratio for the last 12 months increased the 2.52 times compared to 2.03 times as of one year ago. As we continue to see improvements in this ratio resulting from the turnaround of the GMH portfolio.

Interest expense is net of approximately $232,000 in capitalized interest for the quarter related to owned projects in development. As of June 30th we had recorded $5.4 million in construction and progress related to own development projects.

Turning now to 2010 guidance; the financial results for the quarter and year-to-date were slightly better than internal expectations and within our guidance projection range. Considering our actual results for the first half of 2010 and expectations for the remainder of the year excluding the joint venture acquisition, we believe that we are trending between the mid to higher end of our 2010 FFOM guidance range of $1.44 to $1.62 for fully diluted share.

We intend to tighten and update our guidance range on the third quarter earnings call after we have closed the joint venture portfolio purchase finalize the 2010 2011 lease up and completed the annual turn profit.

Currently, the most significant factors that may impact our FFOM guidance range are as follows. The 2010 2011 academic year lease up; we previously communicated total owned property NOI of $145.7 million to $152.1 million, which did not assume any property acquisitions or dispositions during 2010.

NOI generated in the second half of 2010 will primarily be contentious upon the final occupancy achieved for 2010 2011 lease up.

Based on the current projective rental rates for such year and considering this year’s disposition and acquisition activity we believe that we are currently trending towards the mid to the high point of the NOI guidance range.

Third party service revenues. Our 2010 guidance projections assume $17.5 million to $20 million in third party service revenues. The high end of guidance assumes that the CSI third party development project will commence construction during 2010. The closing of CSI does not occur during 2010. Approximately $2.3 million in related fee income included in our 2010 guidance would move into 2011. Fidelity joint venture portfolio acquisition, as previously mentioned we will update our 2010 FFOM guidance range upon completion of this acquisition, and currently estimates that this transaction will be slightly accretive to 2010 FFOM. The impact to FFOM though will be dependent, among other items, on the timing of the closing, transaction cost, interest rate, and the valuation of the debt mark-to-market.

With that I will turn it back to Bill.

Bill Bayless

Thank you John, with that we will go ahead and open up the question-and-answer session.

Question-and-Answer Session

Operator

(Operator Instructions) And the first question comes from the line of Alexander Goldfarb from Sandler O’Neill. Please proceed.

Alexander Goldfarb – Sandler O’Neill

Yes, hi good morning. Just going to the Princeton deal for a minute, just want to get a sense if this is sort of a special opportunity or if this is an example of just given where investment returns are that perhaps graduate housing may be starting to be a – maybe it’s worth the risk and, you know, given the returns.

Bill Bayless

Any time you are talking about graduate housing along with underclass, it’s all market by market. And Princeton has a long history of a need for graduate housing, excellent demand for graduate housing, and it has always been well occupied. And in this case we are looking at a potential with them of redeveloping the existing facility there on site. So, it’s a market we are very comfortable with.

One of the things we think and Jenny alluded to this one in some of the prior calls. The fact that you have us announcing that Princeton is looking at privatized housing, or private sector assistant, you also heard EDR talk about UT. Both of those schools are in the Top 10 of the nation’s endowments. And so this really speaks to the emerging trend, you know, that would probably think ASU started with mainstream Tier 1 some of the most prominent institutions in America, now looking at private sector assistance of a way to deliver housing. And with that acceptance, that opens up the entire market at every level.

Alexander Goldfarb – Sandler O’Neill

But does that mean that you look at future and graduate housing is the risk worth it or is it just a special case.

Bill Bayless

Well, always market by market Alex. And you know we will look at graduate housing, where there are market dynamics that warrant the supply demand and the pricing and a proven history. What we never want to try to do is to create a graduate housing market where it does not historically exist.

Alexander Goldfarb – Sandler O’Neill

Okay that makes sense. Looking that the pre-leasing, it look like the bucket of negative growth properties increased. If you can just provide a little more color, you know, I saw one of the gains that once popped up there and that’s usually one of the trouble markets, but if you could just give some color on what is going on with some of those other properties?

Bill Bayless

And as you go through that list, and it has increased a little bit. Florida as a whole this year has been somewhat soft. While none of the properties in Orlando have fallen on to that list of negative growth, you’ve seen limited rental rate growth there and we’ve seen slower velocity even in last year, but again there’s no supply demand changes in that market of a substantive basis. So, we believe it’s velocity based on last year’s historical data we had in Orlando. In Gainesville, you have seen an oversupply in the market coupled with a decline in – a planned decline in University enrollment over a four-year period, of which we are, this fall, entering the third year of that, (1000) decrease in undergraduate.

And one of the properties you will see that it’s fallen on from Gainesville is Royal village. And in this case, and if you go back, Royal village, we talked about the last three years, as a property where we have filled up with 5% average rental rate growth for each of the last three years. And in this case, with the supply demand in that market, being stressed as it is, we have outpaced the market significantly in pricing in the last two to three years, and we are unable to maintain that spread. It’s now the peak of the downturn, rather the (valley) of the downturn. And so you saw that moving. In others, it’s cases (inaudible) a unique situation where you had a 1000 bed property coming into the market, which we believe is creating a one year absorption blip. Let us put that property on to that list at this point in time. And so in each case, and is as our goal always is, where we do have to drop rates in that group collectively as a whole, the negative 3.8% is somewhat misleading because it’s really so much by the Aztec Corner property at San Diego, which has a negative 16%. But if you will recall, that was coming off a university master lease that GMH had for a three to five year period that dragged that down. When you eliminate that, we are looking at nominal rental rate diminution in that group as a whole, more in the area of 1.5% to 2%, looking at maintaining or slightly increasing occupancies. So on the overall portfolio, not a drag. And you can see the numbers holding quite well, overall.

Alexander Goldfarb – Sandler O’Neill

Okay, then just the final question. On the (Blazey) deal is that a 501 (c)-3 and if it is, if you could just give us some color on how the credit enhancer conversations went?

Bill Bayless

No, this is going to be general obligation debt. One of the things I believe we may have commented on, at that Board of regions meeting where the regions made the decision not to move forward with an equity deal in part because they had just done a bond offering with an average rate of debt of 3.95%. And they were looking at that attractive cost to capital and the cash flow they could derive taking the impact of the credit made a business decision. So that will be issued as traditional general obligation bonds and therefore it will fully impact the credit.

Alexander Goldfarb – Sandler O’Neill

Okay. Thank you.

Operator

And the next question comes from the line of (Eric Wolfe) from Citi, please proceed.

(Eric Wolfe – Citi)

Thanks guys. Michael is also on the line with me. I guess with occupancy of the (inaudible) on 98%, looking at the next year, you probably won’t be able to get too much of improvement on this. So, how much are you looking to push rates for the 2011-2012 given this higher occupancy levels.

Bill Bayless

The two things that we will do is, on the same store property grouping indeed, if we are fortunate enough, you know Greg commented at the 97 to 98 which we now believe we can safely target, given where we are this point late in the leasing season, we will as we always do, be as aggressive as we can on a asset by asset basis. When you look at the breakdown that we give of our leasing status in the supplemental, and you see this year we were able to have (inaudible) 28 properties with an average rental rate increase of 4.1. You see in 34 properties in the 0-3%, and then as Alex just asked, you have 16 in that category. With the improving economy, what our hope is and after going through the market by market, asset by asset process we do at the end of the leasing season, is that we will see more properties fall into those first two categories, especially the first, where we will be able to push. It’s also the fulfillment, you know, we talked at the end of last year of getting now about extra 300 to 400 basis points in occupancy at GTT that’s now materialized. So our goal before going through the strategic process is always the target between 2% to 4% on the portfolio as a whole. Where it ends up in that range would be depended upon going through that final process.

As we looked also at integrating the Fidelity joint venture and the one-off acquisitions that William talked about, one of the thing the company has always benefited from as a whole is whenever we have that growth segment of coming into the portfolio, is being able to get that extra 200 to 300 basis points over the next two years also in occupancy. So, we think the internal growth prospects continue to look very promising for us.

(Eric Wolfe – Citi)

And just may be the (inaudible) I guess some numbers surrounding it, it looks like occupancy, I guess nearly 150 to 200 basis points higher than last fiscal year, rental rates initially about 2% higher, and I guess just with your expectation for next year’s school, I mean would you say that it’s reasonable to assume a 4% or higher kind of same store revenue growth for 2011?

Bill Bayless

It’s right comment. We actually would estimate between 3% to 6% throughout the 2010 academic year taking us through September of next year and then of course the last part of the year (inaudible). So 3-6% is what we are targeting internally based on the current status.

(Eric Wolfe – Citi)

Okay. And then just lastly on third party development, it’s obviously a good sign for your fee business that you are getting new projects, but do you think this indicates that universities and more inclined to finance these types of projects on balance sheet versus doing an equity type deal.

Bill Bayless

No, not necessarily. And don’t think there’s really been a shift on, a couple of calls ago, Jenny commented that at that point in time there were 13 after procurement process that taking in. 10 that we have submitted, three we are about to, and we made the comment at that point in time, that eight of those transactions we believe the RFPs were written in the way that indicated they would be 501 (c)-3 deals and five of them were written in a way that they were open to evaluating ACE. That has not changed at all over the last six months. When you look at those eight third-party awards, five of them have been awarded, two of them were of course are Illinois State transaction and Northern Illinois transaction, so we won our fair share of those.

Several of those are still in process, one has been discontinued and the five – would have equity potential still are evaluating all and so when you look overall at the numbers and we’ve always said, the main determination for an institution between third-party financing through a 501(c) (3) or equity really comes down more than anything else to their balance between the control they desire versus the favorable credit treatments they desire and for them to weigh that.

What we have seen historically in the last 12 to 18 months in the release of RFPs it’s typically between 25% and 30% who are open to an equity type structure and so we have not seen any ship that we can speak to at this point in time in that breakdown.

Operator

And the next question comes from the line of Dave Brag from ISI Group, please proceed.

Dave Brag – ISI Group

Hi, good morning.

Bill Bayless

Good morning, David.

Dave Brag – ISI Group

William, could you talk a little bit more about the disposition package that you mentioned in terms of size and timing that you would put this out?

Bill Bayless

Yes at this time we are currently evaluating the properties as a hit final lease up. At that time we’ll trend where NOIs go and make a determination but at this time we have not determined a final package.

Greg Dowell

David certainly, it’s a great time to be taking advantage of the cap rate environment and as William did said and we’re very disciplined in how we go through and if we need – we have to finish the lease up in each market and we not only need to pay attention to how we’re doing but we also need to pay attention to how our competitors end up and if that’s where we derive what is the short-term and then revise long term projection of NOI trends and so we’re very disciplined in doing that asset by asset that may lead us to a very small disposition package or it may lead us to a little bit of a larger one and so the process will dictate but certainly we’re very focused on this year given the favorable cap rate environment.

Dave Brag – ISI Group

But you do going to sell those on a one off basis as well, right?

Bill Bayless

Yes absolutely.

Dave Brag – ISI Group

Okay, and then just going on the JV deal here, one piece of info there that would be helpful is, could you talk about the operating margin, how that compares to your level at the legacy portfolio and the GMH portfolio given the rent levels I’d have to assume it’s closer to the GMH level but it’ll be helpful to think about that in terms of the revenue and expense potential with the CO (ph).

Bill Bayless

It’s slightly between the ACC Legacy and the GMH portfolio; its right out about 50%. One of the things, you know, Daniel may elaborate on a little bit as a point after this. We’ve seen a decrease in that spread between the GMH portfolio and the ACC Legacy where we again we think the upside is in this joint venture portfolio getting full control of the asset management function decision making just as you’re now seeing the GMH portfolio has the potential to go to the 97% to 98% occupancy we believe we’ll have that opportunity next year with the joint venture portfolio with the opportunity to get a couple of 100 basis points and occupancy gain next year as well as the 2.4% rental rate increase. We expect that strong price to extent and so you’re looking at revenue growth in that portfolio in the area of what we’re targeting in the next weeks up to be 4% to 4.5% coupled with what it has been or if you look at the last sequential quarters on the ACC Legacy we’re trending expenses closer to – expenses of 45 operating margin 55, is we continue to make progress on both the JV Portfolio and the GMH.

We think we can continue to squeeze growth out of those margins.

Dave Brag – ISI Group

Got it, that helps. One final question probably for William. Can you help us think about external growth in terms of targeted IRR hurdles and probably on an unlevered basis, what are you targeting in terms of acquisitions of campus development and ACE deals today?

Daniel Perry

Yes Dave, this is Daniel. On our campus acquisitions we usually target unlevered IRRs in the 10% plus range. We feel like that, for the risk of investment that that drives a fairly good risk adjuster return above our cost-to-capital. We look in similar ranges maybe a little higher on the development projects just given the risk of delivery on a development project so typically target 10.5% to 11% plus on both ACE and off-campus development projects.

Dave Brag – ISI Group

Okay, thank you.

Bill Bayless

Thank you, Dave.

Operator

The next question comes from the line of Karin Ford from Keybanc, please proceed.

Karin Ford – Keybanc

Hi good morning. I wanted to ask a little more detail on the San Marcos acquisition, was that property owned by the bank and was it under managed and you mentioned that there might be some rental upside there. If you can manage it better where do you think that the 73 cap rate could be potentially a year from now?

Bill Bayless

We love this property and actually when we went down and did the final talk up, we used to go, we took Gina and Daniel and we said we want this to be an investor towards 12 months from now. This is just a great core asset, pedestrian to the campus, has a great little tweak through it and it was a former Baptist Church that got redeveloped as the amenity center into it.

We actually had offered to buy it over the years at a much higher price point before the operations had created which speaks to, what we believe the upside is. Where that cap rate materializes to Karin, we’ll give a little more color as we move forward.

One of the things that we can say over the years, this year alone it had rental rate diminution in the area of 4% to 5%. From our perspective solely based on under management and a complete lack of capital investment in the operations and the capital which provides significant upside.

This is one of those that we believe, we paid a 6.5 economic – fully loaded economic cap rate in that area. We think the NOI growth now is well north of the 3% to 4% that you typically see people targeting.

Karin Ford – Keybanc

Okay, it’s helpful. On the third-party side, is the only swing now in guidance the start of Staten Island is the construction phasing portion of that swing completely played out at this point?

Daniel Perry

Well, since we haven’t recognized the construction savings yet Karin, obviously not completely done but everything is on track there for what we included in guidance and then on CUNY-Staten Island we hope to get that started in the fourth quarter and recognize fee this year but in the event that we did not – that would certainly, or hopefully fall in early 2011 so it would just be a timing push.

Karin Ford – Keybanc

Okay, you mentioned you’re in structuring discussions with CUNY; what types of structuring are you guys looking at. Are you looking at a potentially ACC investment and say second mortgage or something like that to help get the financing across the finish line.

Bill Bayless

Karin, doing a couple of things there. In this transaction – in the 501(c)(3) market which is still challenging and difficult with the credit enhancing situation, many institutions are finding their having to put some type of guarantee on the line in terms of getting that done and so one of the options that we’re working with the school based on what’s being asked to them is maybe looking at downscaling it just a little bit in terms of the number of beds. We’re also looking at a little bit of a redesign to save construction methodology dollars.

As it relates to all the reforms of finance we certainly and again, one of the benefits of school hiring American campuses we have the ability to do those other types of things and so we will always talk with universities about whether or not we’re interested in investing equity or taking a secured position in the form of a mortgage and so we analyze all those things on an ongoing basis with them.

Karin Ford – Keybanc

Okay, finally, just on financing; do you guys have enough cash, ATM availability in line to fund all the investment activity today?

Daniel Perry

Yes Karin, this is Daniel again. We do – we have about $190 million to $200 million capacity between the cash on the balance sheet, the revolver availability and the availability that we have left out there on the Freddie Mac Facility and then when you look at our – the financing capacity that we have on the assets that are unencumbered or coming down unencumbered over the next year and a half, we have an additional $470 million plus of finance capacity there.

So obviously, we would need to go out and raise that debt capital but, we continue to look at all options everything from different sources of debt to disposition capacities or disposition portfolios and the like for what is the most accretive way that we can finance the growth profile for shareholders.

Karin Ford – Keybanc

Thank you.

Operator

The next question comes from the line of Michelle Ko from Bank of America, please proceed.

Michelle Ko – Bank of America

Thanks, good quarter. I was just wondering for the BSU project we were glad to see that, you were able to keep the project and you turned it into a third-party development. I was wondering if you would also be negotiating a long-term management contract and if just in general for those third-party developments that you have if you usually try to follow-up to try to get a long-term management contract.

Bill Bayless

We always try to follow-up to get that contract. In this case BSU will likely be managing and giving the – doing the general obligation debt. So in this case I do not believe there will be an ongoing management contract, but we always try.

Michelle Ko – Bank of America

Also I was just wondering if you could talk a little bit more about your underwriting standards for acquisitions and what kind of first year cap rate you require.

Bill Bayless

We’ve been fairly consistent on how we answer this and for us the cap rate is absolutely a function of what is the NOI growth profile. We absolutely will pay in the low to mid 6s when the NOI growth power hits the type of IRRs that Danny was talking about. To the contrary there’s other assets we wouldn’t go below seven on. And so it is very much based on what is our long-term return opportunities based on the asset profile. As we now move into this cap rate environment, you will see us pay up for value where we think there’s especially growth that we can unlock which we demonstrated to the market in assets such as GCT, Procter and the others that we bought. And so for us it’s going to be not saying that we’re willing to pay X cap rate across the board, but based upon the NOI growth profile and what we believe we can unlock in value what we’re willing to pay to make sense based on our return requirement that Daniel talked through.

Michelle Ko – Bank of America

Then just lastly, I was wondering, sounds like you’re pretty optimistic on acquisitions and you talked about eight that you were looking at. I was just wondering are you seeing this more product come to market from the banks or just more people selling, are these off market type deals. If you could just elaborate a little bit more about the environment out there.

William Talbot

Yes, this is William. You’re seeing a lot more of the sellers – all your conventional sellers and developers not as much from the banks has historically, and they’re looking at cap rate and the compression on cap rates is causing them to come and bring these assets out to market.

Operator

(Operator Instructions) The next question comes from the line of Paula Poskon from Robert W. Baird.

Paula Poskon – Robert W. Baird

On the disposition front, are you currently marketing any properties for sales and what do you think the opportunity is to sell assets to university entities similar to what you did with Campus Log.

Bill Bayless

We currently are not actively marketing any for sale but we thought we are going through the valuation process to determine what should be marketed in the fall. Anytime we can sell a property to the university versus the private sector we aggressively pursue that. Typically, they have the benefit of being more aggressive in underwriting filling beds and more aggressive in terms of the elimination of real estate taxes. And so it should translate into better pricing and so that is an alternative we always look at if we believe that it exits.

Paula Poskon – Robert W. Baird

In your portfolio in particular, do you have any sense of where you think those opportunities are most prevalent?

Bill Bayless

Oh, we always evaluate where we think we’re most profit. And over the years there’s certainly been offers we made to schools to buy something that had been turned down you never heard about. So we always work those things when we think it is prudent.

Paula Poskon – Robert W. Baird

Okay and it looks like the projected rental rate increase at Vista Del Sol is substantially better than the last preleasing update and I remember from the last earnings call you had mentioned that you were working with the university I think it was to limit the number of freshmen that were living there or some change like that. Can you just elaborate on what’s happening there?

Bill Bayless

Absolutely, the university was bombarded with freshman applications, had significant overflow. We are housing some freshman and that market is starting to get a little soft as we were leasing apartment beds in the open season. The acknowledgement between the two of us that we were going to have some freshman that they were better in Vista Del Sol versus being forced off campus enabled us to maximize rent.

Paula Poskon – Robert W. Baird

I might have missed this but I think campus trail fell off the leasing list of just the property listing. What happened to that?

Bill Bayless

That’s a property with a GMH acquisition that had a fire in two of the residential buildings, took about 15% of the beds offline. So that’s currently being redeveloped through insurance proceeds and it’s in that category until it’s back on with an equal number of beds, so it doesn’t confuse the same store numbers.

Operator

Your next question comes from the line of Dustin Pizzo from UBS.

Ross Nussbaum – UBS

Hi, this is Ross Nussbaum here with Dustin. I joined the call late, so I thought if you covered this. Where are your current marketed rents on the availability that you’ve got left versus where it was say six months ago and how does that compare to the historic difference?

Bill Bayless

No, rather than trying to answer that on a global basis, we do provide the detail in the supplemental on pages 10, 11, 12 and 13 that actually show asset by asset, a breakdown of the leasing status and the rental rate increase percentages. And so you can actually go through property by property, determine if a property still has bed leasing and see where those rental rates are. And so that detail is provided on an asset by asset basis, don’t have that number calculated on a global basis to be able to tell you an average.

Ross Nussbaum – UBS

Do you feel as though you may have left some rent on the table given where the occupancy rate is? I would understand given what was going on in the economy, it might stay a little more for occupancy but how do you feel in hindsight that you balance that rent versus that occupancy?

Bill Bayless

Again I would point you to those same charts and we show on a property by property basis, where is velocity tracking in every quarter to the prior year, and if the initial rental rate increase being adjusted upward and downward. And what you will see as you go through that is that there is an extreme amount of movement on a property by property basis in that rental rate increase. Our corporate marketing leasing staff are looking at that daily, we’re looking at it on every two week basis at Greg and (inaudible) level and we are always adjusting that.

Now certainly, there’s always the potential to leave 10 to 15 basis points on the table though we always want to make sure that we’re maximizing revenue through the combination of occupancy and rent.

Operator

(Operator Instructions) The next question comes from the line of Andrew McCulloch from Green Street Advisors.

Andrew McCulloch – Green Street Advisors

Just a clarification, the 3% to 6% guidance for the 2010-2011 academic year, is that revenue or NOI?

Bill Bayless

That’s NOI Andy.

Andrew McCulloch – Green Street Advisors

On your ATM, you did about $10 million I think for the first part of the year. How aggressive you expect to get with that through the remainder of the year?

Daniel Perry

Like I said when we’re doing any kind of capital raises, we always look at what we think is going to be the most accretive to NAV and to the stock price for shareholders. So we will certainly watch how we think the stock is being valued and when we believe it’s appropriate we’ll continue to match funds, the growth that you guys know we are doing and try to keep leverage in check as much as possible, but we certainly wouldn’t want to talk to any kind of exact amounts as far as how aggressive or unaggressive we expect to be.

Andrew McCulloch – Green Street Advisors

Just on the secured financing front, what type of rates are out there right now for 10-year financing both from the agencies and balance sheet lenders?

Daniel Perry

Well, when you look at Fannie & Freddie right now on a 10-year loan, it obviously depends a little bit on what kind of leverage you’re looking at putting on it, so will do anywhere from 65% to 80% leverage. We tend to be more in the 65% range which would drive rates in actually low fives to potentially even below five. Right now if you’re leveraging up a little bit you can get rates around 5.25%, so obviously pretty attractive on that front.

I would say that the balance sheet lenders, the true commercial banks are at similar levels. Where you do see a difference a little bit is when you go to the life companies, they are really coming back strong and providing good financing terms. However, they’re not completely back to the rates that you see from Freddie & Fannie right now.

Operator

We have no further questions. I would now like to turn the call back over to Mr. Bill Bayless.

Bill Bayless

With that we would like to thank all of you again for joining us on what we felt was a great quarter. This is the crunch time of the year in student housing. Our property staffs are out there finishing up the last two to three, four weeks of lease up. They’re turning all the beds in our portfolio. We want to thank them for the hard work again that they put forth and thank them in advance for the hard work they’re going to do in the next two to three weeks to help to create that long-term value, and we look forward to speaking with you next call.

Operator

This concludes the presentation for today, ladies and gentlemen, you may now disconnect. Have a wonderful day.

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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.

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