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American Campus Communities Inc. (NYSE:ACC)

Q3 2010 Earnings Call

October 27, 2010 11:00 am ET

Executives

Gina Cowart - VP of IR and Corporate Marketing

Bill Bayless - President & CEO

Greg Dowell - SVP & COO

William Talbot - SVP, Investments

Jamie Wilhelm - EVP, Public and Private Partnerships

Jon Graf - EVP, Treasurer & CFO

Analysts

Eric Wolfe - Citigroup

Michelle Ko - Bank of America

Dustin Pizzo - UBS

Paula Poskon - Robert W. Baird

Andrew McCulloch - Green Street Advisors

Eric Wolfe - Citigroup

Karin Ford - KeyBanc

Haendel St. Juste - KBW

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2010 American Campus Communities Earnings Conference Call. My name is Tawanda and I will be your coordinator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is been recorded for replay purposes.

I would now like to turn the conference over to Ms. Gina Cowart, Vice President of Investor Relations. You may proceed.

Gina Cowart

Thank you, Tawanda. Good morning and thank you for joining the American Campus Communities third 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 non-GAAP financial measures to those directly comparable GAAP measures in accordance with regulatory requirements. If you don’t have a copy of the release, it’s available on the company’s website at americancampus.com in the Investor Relations section under Press Releases.

Also posted on the website in the Investor Relations section you’ll find a supplemental financial package. We’re 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 facilitate following 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 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 advise or update any forward-looking statements to reflect events or circumstances after the date of this release.

Having said all that, I’d 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 Q3 2010 results. As you may have surmised from our press release last night, we’re very pleased with our operational results, our growth activities and the capital market activities that occurred during the quarter. With that, let me address the format of our presentation.

Greg Dowell will address our operational leasing results; William Talbot, our investment activities; Jamie Wilhelm will discuss ACE and third-party development services; and Jon Graf will discuss the financial results and our updated guidance. Daniel Perry and I will then lead the Q&A.

With that, I’ll turn it over to Greg Dow.

Greg Dowell

Thanks, Bill. Our third quarter operating results exceeded our internal expectations. We closed out a great 2009-2010 academic year and delivered a strong start to the 2010-2011 academic year with gains and occupancy and rental rates setting the stage for meaningful core growth in 2011.

If you turn to page 5 of the supplemental package, you will see that our third quarter same-store NOI increased by 7.3% over Q3 of 2009.

This was the result of a 4.5% increase in revenue and an increase in operating expenses of only 2.3%. This increase in operating expenses was largely attributable to variable expenses related to increased occupancy over the prior year. You will also see that on a year-to-date basis, our same-store NOI growth was a healthy 6.9%.

As you can see on page 8 of the supplemental, September 30, 2010 occupancy at our same-store wholly-owned properties was 98.4% compared to 95.9% for the same date in the prior year. This represents an increase of 250 basis points in occupancy over the prior year with an average rental rate increase of 1.9%.

With these increases, we anticipate same-store rental revenue growth to be in the area of 4.5% during the 2010-2011 academic year. As of September 30, occupancy for our total wholly-owned portfolio was 98.1%. Based on the final fall occupancies and rental rates, we would anticipate same-store NOI growth of 3.5 to 6% for the remainder of the 2010-2011 academic year dependent upon our ability to continue to control expenses.

We are also pleased that we were able to lease the previously announced acquisition portfolio of 14 joint venture properties to a September 30 occupancy of 97.2% which is an occupancy increase of 280 basis points over the prior year while achieving our rental rate increase at 2.4%.

We have set our initial rental rates for the 2011-2012 academic year. The initial same-store rental rate increase for the entire portfolio is 2.7%. The initial rental rate increase for the same-store ACC legacy assets is 2.4% while the same-store GMH increase is 3.2%.

With the successful integration of the GMH portfolio having been accomplished, we will cease providing separate GMH and ACC legacy breakdowns in future quarters’ results. From this point forward, they will be consolidated as our same-store asset. The third quarter is the most operationally intense in our business, and we would like to thank our hardworking and dedicated employees of ACC for delivering these stellar results.

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

William Talbot

Thanks, Greg. On September 1, we completed the acquisition of 11 of the 14 properties from our joint venture partner, totaling 6,806 beds for the total estimated value of $282.5 million. For the remaining three properties totaling 1,728 beds, we are actively working with the property level lenders to receive final consent and our targeting a mid fourth quarter 2010 close.

As part of the $66.4 million transaction, we will be assuming $46.7 million in mortgage loan debt at a weighted average interest rate of 5.5%. Based on the considerable improvement of final leasing results for the overall JV portfolio, which Greg discussed, our expected returns for the 14 property, 8,534 bed acquisition, have improved to a going in nominal cap rate of 7.3% and a 6.7% fully loaded economic cap rate, and an improvement of 20 basis points from our original pro forma returns and announcements.

During the quarter, we have also completed the acquisition out of foreclosure of the Sanctuary Lofts apartments in San Marcos, Texas, located adjacent to Texas State University, a 487-bed student housing asset was developed in 2006 and includes a 504-space parking garage.

The community is currently over 97% occupied for the 2010-2011 academic year with an average rent of $593 per occupied bed. The purchase price of $21.4 million represents the price per bed of $44,000 for the pedestrian assets and a pro forma nominal cap rate of 7.3% and an economic cap rate of 6.8% including $1.6 million in upfront capital to improve amenities and return the asset to Class A condition.

As anticipated, we have seen a significant increase in acquisition pipeline for student housing product. Since the beginning of the third quarter, over $1.4 billion worth of the student housing product was offered for sale. Early indications from sellers and brokers is that demand is substantial for close-in Class A products with cap rates for such assets compressing below 5, below 6% range. We continue to be active and competitive on the assets that meet our acquisition criteria and offer strong NOI growth potential through rental rate growth and occupancy upsides.

Turning to off-campus development, we have commenced construction on Villas on Sycamore, a 680-bed devolvement located within the walking distance from Sam Houston State University in Huntsville, Texas. The product features a unique townhome floor plan that should compete well with the existing product offered in the market and is offered as an affordable rental rate in the mid $400 range. We anticipate a fall 2011 opening and are targeting an 8% going in nominal yield.

In addition to our off-campus development under construction in Huntsville and San Antonio, we continue to actively pursue sights for future development. We have recently purchased parcels in two markets for future development, bringing our total to five parcels currently in our land bank. We are aggressively working land procurement, entitlement processes and pre-development activities to advance our owned development starts that will commence in 2011.

Moving now to dispositions, during the quarter we have solicited interest on a seven property, 4,266-bed portfolio through CB Richard Ellis. Call for offers will be in the second week of November and we expect multiple offers on each asset, as well as a select number of portfolio level offers. We also are marketing an 851-bed asset in Ann Arbor, Michigan through Hendricks & Partners out of Detroit. We will evaluate all the offers once received and make sales decisions in the coming weeks. We will update the market as to our progress on the next earnings call.

I will now turn it over to Jamie to discuss on-campus development.

Jamie Wilhelm

Thank you, William. During the quarter, we continued to make progress in our efforts related to both ACE and third-party on-campus developments. With regard to our ACE program, construction on our 39.2 million 864-bed community at the University of New Mexico is proceeding according to plan.

Pre-leasing has begun and the project is on schedule for an occupancy in fall 2011. We also continue to make progress with transaction structuring and pre-development activities in our ACE pipeline transactions. Presently, we are targeting going in yields of 7% to 8% on our ACE investment.

With regard to our Boise State University engagement, we have received reimbursement of our expenses and have received a net to have approximately $250,000 for our pre-development services. Boise State is expected to build a portion of the proposed project financed by other traditional university debt.

Turning now to third-party development, the Edinburgh University and Cleveland State University Phase II projects remained under construction and are on budget and on time for fall 2011 deliveries. Our projects at Illinois State and Northern Illinois are both in pre-development and we expect to commence construction for both projects in spring 2011 for fall 2012 deliveries.

During the quarter, we executed a pre-development agreement with Princeton University under which ACC is assisting the university and assembling a project team, facilitating program and design activities, completing feasibility and financial analysis and evaluating transaction structures, financing alternatives and delivery schedules. At the discretion of Princeton, ACC’s role may extend beyond pre-development activities based upon the university’s ultimate decisions related to transaction structure and financing.

During the quarter, we also received a new on-campus award. We are very pleased to announce that ACC has been selected by the University of Wyoming to provide pre-development services for a 350-bed undergraduate apartment style student housing project on the university’s main campus in Laramie. The project is expected to commence in the fall of 2011, for a fall 2012 delivery. ACC and the University of Wyoming are currently in the process of negotiating our pre-development agreement.

In summary, we continue to advance our current awards and 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.

With that, I’ll turn it over to Jon.

Jon Graf

Thanks, Jamie. For the third quarter of 2010, we reported total FFOM of 20.7 million or $0.34 per fully diluted share compared to FFOM of 13.7 million or $0.25 per fully diluted share for the comparable quarter in 2009.

As compared to the third quarter 2009, the 2010 third quarter results include the impact on the weighted average share count related to the 13.8 million shares issued in conjunction with the August 2010 equity offering, the final results of our 2010-2011 lease-up, increased third-party service income and the operating results related to the 11 property portfolio acquired out of one of our joint ventures with Fidelity during the third quarter of 2010.

Third quarter 2010 FFOM excluded a non-cash gain of 3.9 million related to our 10% interest in the previously mentioned joint venture. It should also be noted that the third quarter is historically seasonal in nature as compared with the other quarters, as we experienced the impact of higher operating costs associated with the annual term.

Total third-party revenues were 8.3 million for the third quarter of 2010 as compared to 4 million for the third quarter of last year. Total third-party revenues consisted of 6 million in development-related fees and 2.3 million in management fees. During the third quarter of 2010, we earned revenues of 4.7 million related to construction savings on a recently completed third-party contract project.

Management fees for the third quarter of 2010 included 253,000 from the 11 joint venture properties acquired during the quarter, which will discontinue. Annual 2010 management fee revenue from all 14 joint venture properties is approximately 1.3 million.

Corporate G&A for the quarter included 897,000 of acquisition-related costs, which under current accounting rules is required to be expensed rather than capitalized as part of the acquisition. Excluding this acquisition costs, corporate G&A was 2.8 million, a slight increase from 2.7 million incurred in the third quarter of 2009.

We continue to expect G&A, excluding acquisition-related expenses, to be within our guidance range of 11.4 to 12 million for 2010. As of September 30, 2010, the company’s debt to total market capitalization was 36.7%. During the quarter we assume 201 million of fixed rate mortgage loans at a weighted average interest rate of 6% in connection with the 11 joint venture properties acquired.

We paid off 58.8 million of maturing fixed rate debt during the quarter and have no remaining 2010 fixed rate debt maturities. Our variable rate construction loan on Vista Del Sol has a December 2010 maturity date. However, we have one remaining one-year extension option which we currently qualify for and plan to exercise.

Fixed rate debt maturities for 2011 are 154 million or 12.7% of our total indebtedness of which three loans totaling 71 million have two one-year extension options for which we currently expect to qualify.

On August 20th, we raised 357 million in net proceeds with the issuance of 13.8 million shares of common stock at a per share price of $27. These funds were used in part to fund the 76 million cash portion of the 11 joint venture properties acquired during the quarter to pay down the 54.8 million outstanding balance on our revolving credit facility, to payoff maturing mortgage debt and to fund the construction of our three owned development projects. As of September 30, we have approximately 185 million in remaining proceeds from the offering. Our total interest expense for the quarter, excluding the on-campus participating properties, was 13.7 million compared to 13.6 million in the third quarter of 2009.

The company’s interest coverage ratio for the last 12 months increased 2.65 times compared to 2.19 times as of one year ago, primarily due to the turnaround of the GMH portfolio, our recent equity offering and the beneficial interest rate environment. Interest expense is net of approximately 251,000 in capitalized interest for the quarter related to the three owned projects in development.

As of September 30, we have reported 19.4 million of construction and progress related to the development of these three projects. As a result of the joined venture portfolio purchases, the August 2010 equity offering and our 2010-2011 leased up results, we are updating our 2010 guidance. Updated 2010 guidance for FFO is expected to be in the range of a $1.57 to $1.61 per fully diluted share; in 2010 FFOM in the range of $1.54 to $1.58 per fully diluted share.

Some of the major updated guidance assumptions are as follows. For total owned property NOI, excluding the on-campus participating properties, our updated guidance includes the range of 159.2 to 160.4 million compared to our previous guidance range of 145.7 to 152.1 million.

The updated range includes the contribution from all current owned properties and the three remaining joint venture properties. It also assumes no other property acquisitions or dispositions during 2010.

Included in the updated 2010 NOI guidance range is an NOI contribution from the 14 joint venture properties of 8 to 8.3 million. For interest expense, excluding the on-campus participating properties, we are projecting an updated guidance range of 55 to 55.5 million compared to our previous guidance range of 56 to 57 million.

Total capitalized interest from our projects under development during 2010 is still expected to be approximately 1.1 million. The guidance reduction in interest expense is primarily due to the repayment of debt from the proceeds of the 2010 equity offering, offset slightly by the 247 million of assumed debt from the 14 joint venture properties.

As a result of the joint venture properties, amortization of deferred financing costs, excluding our on-campus participating properties, is now projected to be approximately 4.3 million in 2010. The third-party services we are projecting an updated guidance range of 17.1 to 18.6 million compared to our previous guidance range of 17.5 to 20 million for 2010. The high end of this updated guidance assumes that the CSI third-party development project will commence construction during the fourth quarter of 2010. If closing of CSI does not occur during 2010, the related fee income included in our 2010 guidance would move into 2011.

Our previous 2010 guidance range is also impacted by the loss of approximately 0.6 million in management fees from the purchase of the 14 joint venture properties.

As a result of the timing of the 13.8 million share equity offering in August 2010, we are currently assuming a weighted average share account for 2010 of approximately 59.5 million fully diluted shares. A summary of these and other assumptions and our updated guidance range is provided in table 4 of the earnings release.

With that, I’ll turn it back to Bill.

Bill Bayless

Thank you, Jon. In closing, we once again want to thank our employees for their tireless efforts in delivering these results. With meaningful core growth baked in for the next four quarters is the result of our lease up and external growth opportunities and acquisitions, off-campus development, ACE and third-party services, our projects for substantial growth and value creation remain as strong as ever.

With that, we’d like to open it up for Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Eric Wolfe with Citigroup. Please proceed.

Eric Wolfe - Citigroup

Just as far as the portfolio of assets you’re selling in Georgia, Texas and Arizona as well as the other asset in Michigan, why are you looking to sell these specific assets and have you identified the use of the potential proceeds yet?

Bill Bayless

As it relates to our asset disposition program, Eric, we go through every year in extensive valuation. In some cases those maybe strategic sales, for example, the property we’re selling at Arizona. We look at our investments there with the university and where we want to focus our efforts there. That’s a great asset, pedestrian to campus, should be a fantastic purchase for whoever the buyer may be.

In other cases, it looks at various exposure within a market, the number of beds we have and how we want to relate to our absorption. And in other cases, just where we have opportunities where we think to redeploy capital in a more accretive fashion in that market, whether it may be for future development or the like.

And so it’s a variety of answers on a case-by-case basis. As it relates to where we will deploy that capital, as you heard when William went through his script, there are extensive acquisition offerings in the marketplace. We’ve got a great development pipeline, both on-campus and off and we will look at redeploying that capital as efficiently as possible, and what we hope will be the most accretive manner in each case.

Eric Wolfe - Citigroup

Right. I’m just trying to get a sense for how you’re going to manage the FFO dilution because, obviously, with the portfolio I think what about, 200 or 250 million, the dilution from that next year is going to depend on whether you invest that in acquisitions versus development, so I’m just curious to see how you’re going to break down that investment?

Bill Bayless

And certainly the most accretive way to reinvest that capital would be into simultaneous acquisitions on the other side of the equation in markets we want to enter through that mode. Certainly there would be some level of dilution if that money were held on a longer period to reinvest, the construction starts taking place in 2011 for those properties coming online in 2011.

And so I think one of the most interesting questions for American Campus throughout the year, but we’ll just have to wait until we get to the end of the process, is whether or not with all the sales packages that are out there and our own packages on the street, whether we end up a net buyer or net seller for the year and that will dictate the impact of whether that’s going to be accretive or diluted.

Eric Wolfe - Citigroup

Okay. And what are your pricing expectations as far as the portfolio in terms of price per bed and potential cap rate?

Bill Bayless

It runs the full gamut in terms of price of bed based on market location and certainly knowing that we have probably potential buyers who are on this call. When William talked about acquisitions, we’ve got some great pedestrian access in core Tier 1 markets where we see cap rates in the low 5s to 6%. In other cases where we see products in Tier 1 institutions that are further from campus, not pedestrian, those get more into the 7s. And so we would expect pricing to be consistent on an asset by asset basis. Also, we think it may be a very attractive small portfolio for any companies looking to make a strategic play in terms of getting into the markets it could be a blending thereof.

Eric Wolfe - Citigroup

Okay. And then just last question, in terms of the 90 properties that you own, could you give us a sense for what percentage of those properties will be competing with new supply coming online for next school year, and how this would compare to the last couple of years?

Bill Bayless

Sure. And we go market by market and when you talk new supply, you also have to go submarket by submarket. In that when we have a close-in pedestrian property within a marketplace, if there is that development and supply activity taking place 2 to 3 miles from campus, it really doesn’t impact that particular submarket. Where we’re more impacted is when you do have direct competitive infill activity.

We have seen over the last two years and I think you’ve seen the benefit of this in our occupancy numbers and also continued rental rate growth in student housing, a bit of a slowdown in development. That’s been caused by two things. Over the last couple of years, it’s been more difficult to ascertain financing and mezzanine equity like you could three to four years ago.

But also, I think there has been a shift in the sophistication in the marketplace of developers in the market and we’re seeing less and less development further away from campus, and those infill markets are much tougher due to a lack of available parcels, expensive redevelopment sites and the like.

In this year, we continue to see, you’ve got a couple of markets where activity continues. Florida, it’s a market where we continue to see development. However, in that case, it does tend to be further from campus and not as directly competitive. We’ve seen the Texas market slow down a little bit with the exceptions of San Marcos, Texas, where there’s substantial beds coming in over the next two to three years. The good news there; there is offsetting enrollment growth.

Lubbock, Texas is a market where we’re now seeing demand coming into the market of about 1,700 beds over the next two years. In each case we watched that, we dissected by submarket and look at the impacts. And that certainly is one of the factors that does play into our disposition evaluation process.

Eric Wolfe - Citigroup

Great. I guess just from that answer, I mean it looks likes supply tensions on your markets will be picking up a little bit over what would be a bit of a depressed level over the last couple years, or is that a fair characterization?

Bill Bayless

I would say it’s going to be picking up slightly. The good news is, on the enrollment fronts, we’ve just gone through our market analysis and rate setting. For the most part we continue to see substantial enrollment growth, not a lot of decreasing. So I think we came away from our price-setting calls with more of a balance in the market this year rather than any concerns related to oversupply on a larger scale than just a couple markets.

Operator

And your next question comes from the line of Michelle Ko with Bank of America. Please proceed.

Michelle Ko - Bank of America

Hi. I was just wondering if you can talk a little bit about some of those markets that you are interested in doing more acquisitions in?

Daniel Perry

Sure. And Michelle, as William said, there’s 1.4 billion on the market since the beginning of the third quarter. And I think consistent as you have seen in our business strategy in the past, we’re not necessarily geographically focused in terms of a portion of the country. We do tend to focus on larger Tier I land grant institutions. But then also, we do look within each market at certain franchise/flagship assets that can make sense even in a mediocre market.

And so we tend to look at each of the offerings on a street on a case-by-case basis. We don’t preclude analyzing it just based on which market it is in, but rather look at all of those dynamics we just discussed and go on a case-by-case basis. I mean, if you look at the Company’s footprint, operating and developed in 41 states, we really do look asset by asset. Where do we believe there is NOI growth potential to pay up for value?

Michelle Ko - Bank of America

And can you just remind us about your acquisition criteria? And are you looking at it on a forward NOI basis?

Bill Bayless

Certainly. And when you look at our core criteria, we’ve always talked about for the last seven years proximity of the campus, ideally being pedestrian, bicycle, or a very short shuttle route. Product differentiation, we think it is very important to have some type of competitive advantage, whether its unit mix, product type, amenity offering. And then, most importantly, as we’ve been talking about here thus far this morning, submarkets with barriers to entry.

The one addition to that which we’ve talked about strategically over the last year due to the GMH transaction again, one of the biggest surprises in the GMH portfolio was a grouping of probably a half dozen to a dozen properties that did not meet that investment criteria, where we were able to produce significant double-digit NOI growth out of those GMH assets.

And so we also do look, at times, is there may be one-off assets or maybe smaller portfolios that don’t directly meet those criteria, but there is so much operational upside that we believe that we can unlock that we may undertake those acquisitions on a more short-term hold horizon than a long-term ownership perspective. And so we stay true to the fundamentals we’ve always talked about, but we also want to be opportunistic where we have now developed a track record of showing we can create value.

Michelle Ko - Bank of America

And just given some of the cap rates seem to be pretty low, are you still confident that you’ll be able to find some attractive acquisitions, or will you use the money maybe for some other type of projects?

Bill Bayless

And this is where we think it’s a core competency of American Campus, and that is in knowing when to pay up for value. We have extensive market research in each of the markets that we operate and we develop in. And we are constantly for example, the Sanctuary property that we purchased, I believe there was initially 73 packages, dozens of offers. If you talk to some of our competitors, they may feel that, wow, American Campus really paid up for that. And if they’re looking at the historical NOI, that would be a valid conclusion; however, that’s a market we have operated in for four years.

In this case, Cantelli my son, lived in the asset, a competitive asset. It’s that good that my wife put him there versus our own. And it’s one that we know very well that what we believe we can unlock an NOI growth profile is probably different than anyone else underwrote. And so we take our strategic evaluation process to knowing when it’s okay to pay a low 5 cap or a mid-5 cap, based on an NOI growth profile that’s not 3% to 4%, but what we believe is 5 to 7.

Michelle Ko - Bank of America

Okay, great. And did you happen to look at that property that EDR recently purchased?

Bill Bayless

Yes. Certainly the Virginia Commonwealth property or the GrandMarc property, great asset, pedestrian to the campus, core flagship, we certainly did look at that. And congratulate EDR on that acquisition. That’s a fine asset I think they’ll do real well with.

Michelle Ko - Bank of America

And I guess why did you participate in the bidding of that?

Bill Bayless

We did. In this case, we weren’t the successful bidder. And, again, our underwrite may have been somewhat different, and in that case, Randy and our friends over at EDR may have a plan that produces more NOI growth than we did, and it justified their offering.

Michelle Ko - Bank of America

Okay, great. And then just lastly, can you talk a little bit about some of the proprieties, whether it’s declining rental rate growth like Aztec Corner, Royal Village Apartments?

Bill Bayless

Sure. And when you look at pages 9, 10, 11 of the supplemental, and as you’ve seen, we have always given that breakdown in terms of property with rental rate growth over 3%, zero to 3%, and then the declining. And if you look at the sum of all of those pages, our goal each and every year of our lease-up is to maximize revenue through a combination of rental rate and occupancy.

And so when you look at the total of those pages, you can see page 1, we got a 110 basis point growth in occupancy and a 4.1% increase in rate, so 520 basis points of growth in that category. When you look at page 2, the zero to 3, we got 290 basis points in occupancy, 1.9% rental rate growth, 480 basis points in revenue growth. When you look at the page that you asked the question, in that case we got a 250 basis point increase, I’m sorry, a 510 basis increase in occupancy, a decline of 4.1% rental rate, but still 100 basis points of growth.

And so we are constantly utilizing our LAMS program to properly price and adapt the pricing throughout the season to make sure we never end up with negative revenue growth in any of those quarters.

Now, the Aztec Corner property that you pointed out, which specifically is very high with that negative 16.2%, the unique aspect of that there, when we purchased that property from GMH, it had been under I believe a three-year, it was a multiyear master lease from the university where the university was charging their on-campus standard rate, which was completely separate of an open-market valuation rate. And when that master lease rolled off in the second year, we had to return it to a more stabilized product positioning rate you could see in the open market. Now, the good news, as you can see, it’s 98.2% occupied and now has a basis in the off-campus market where we compete to be able to grow NOI moving forward.

And I will say, we bought that property under that master lease fully knowing we were going to have to make that adjustment, so that was not something that was a surprise to us, but something that was part of the strategic plan when we bought GCT, we were aware of in due diligence and had that plan all along.

Operator

And your next question comes from the line of Dustin Pizzo with UBS. Please proceed.

Dustin Pizzo - UBS

Bill, just going back to your comments from the last call. The initial rate increases you guys were targeting, I think were about 50 basis points above the 1.9% you ultimately achieved, but obviously the occupancy was stronger. So, as we think about that 2.7% initial rate increase you’re targeting for next year, is there some level of added conservatism on your part or I guess if you got to 98.4% this year and the environment shouldn’t really only improve over the next 12 months, why not go after a higher level of rate increases initially than you did for that part?

Bill Bayless

Sure. First thing, going back to last year, I believe if you go back to our call this time last year, there was one little bit of an anomaly in that there were three to four properties we had not yet set rent. One of them was that Aztec Corner property. And so it was not -truly, the rental rates did not drop below what we set them, but rather, that Aztec Corner property got set after the call. And then when that got factored in, it created an artificial look as though we had not been able to hold on to rates through the season. And so that is just a little bit of a misperception created in that we did not have all the rental rates set at the time we had the call.

Now, certainly one of the things, when the market looks at that occupancy at 98.4% and it is absolutely a natural perception to say, okay, rental rates ought to be being pushed very aggressively in that case. As a general statement, absolutely true, and make no mistake, given where we are in occupancies, our goal throughout the year are to push those rental rates in each and every case as hard as we can, and certainly, internally, we do target getting up to 3%.

However, as we go through, and, again, as you look at that detail on pages 9, 10, 11, and 12, we go through a process market by market. We’ve done that over the last three weeks, where we set those initial rental rates, not just based on where we ended up, but also where each of our competitive properties that we compete with ended up, and set where we need to be priced in the market. We will then, through our LAMS program, monitor that velocity on a case-by-case basis and try to drive those rents wherever we can. And I think certainly, if you look again at the breakdown on those pages, the number of properties that ended up last year being driven above that 3%, we will do so.

Now, I will say, as a general economic feeling and I think our peers would probably agree with this, there did seem to be, throughout this leasing season, nowhere near as much price activity or concern over the past two economic cycles. And so I think you will see companies as a whole be more aggressive in holding rates and pushing rates, which should allow us to be able to be more aggressive wherever we can.

The other thing that we will balance and manipulate in that is, because you typically do offer your returning residents a little bit of a pricing discount to the market, it will cause us to make different decisions throughout the lease-up, perhaps maybe strategically at times cutting retention if we believe we can build beds with more new residents, which will also drive that.

The other thing that I would point out when you look at that breakdown in segmentation, if you go to page 8 of the supplemental, the average rental rate increase was 1.9% for the same-store portfolio. However, because some of our vacancies last year were at our higher-priced ACC legacy assets, when you look at the average rate per occupied bed for the year, it actually increased 2.2% versus the 1.9. If you drill down on that to the ACC legacy portfolio, you can see that while our average rental rate increased 2.2%, because of filling vacancies we had last year at higher-priced properties, the revenue per occupied bed actually increased 2.8%.

And so when you look at our rental rate increase, that’s always the face value of the rent. When you factor in the success of leasing at each property based on whether the rate is above the average rental rate for the portfolio or below, there can be an incremental positive or negative. And in this year, that 1.9% rental rate increase is actually producing a 2.2% increase in terms of revenue per occupied bed, and so a little better than the stated numbers leads to believe.

Dustin Pizzo - UBS

Okay. And then just turning to the ACE pipeline, I know there is a lot of moving pieces, but can you talk about the factors that contributed to the decrease in targeted bed count of the future ASU projects and then just conversely the increase in bed count.

Bill Bayless

Absolutely. And this is the work of collaboration with Arizona State that we believe is a wonderful partner. If anyone has followed the housing market in Phoenix and this includes the off-campus housing market, it is very soft and there are extensive vacancies.

Now being on campus, we have done very well. Our original component three projects can see it’s a beginning of our relationship with ASU five years ago anticipated that our third phase of development would be another 1,500 to 1,700 beds of more apartment style upperclassmen housing.

Now that particular market segment has become soft in the off-campus market. We sat down with our university partner about six months ago, went through that market analysis and we decided together that our next component three should include 800 beds of freshman housing in the refurbishment of one of their existing buildings, rolling that into ACE and a much smaller portion of upperclassmen apartment beds only in the area of 400 to 500.

And so this is a case where we can say we have a partner that is very astute in looking not at just what’s happened on-campus for the external environments and making sure that together we’re building on-campus those products that will lead to the greatest absorption, the highest occupancy in meeting both of our objectives.

Operator

(Operator Instructions)

Bill Bayless

Operator, we’re showing a few folks in the queue on our listing here.

Operator

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

Paula Poskon - Robert W. Baird

Bill or Jamie, just a question for you, among the new third-party awards that you’ve got for the on-campus project, any potential for those to turn into ACE deal?

Bill Bayless

As it relates specifically in the case of your Illinois State transactions, Illinois State and Northern Illinois, those procurement processes were done in light of recent legislation which limits the lease term in the state, and those are going to be 30-year leases. And so it’s very unlikely to be able to make an equity transaction work under a lease of that short of a duration.

Also, the universities are not, in that case, driven by balance sheet concerns as much as timely delivery to make sure that they’re able to hit the restrictions they have based on state mandates that are coming. And so those were third-party from the start.

As it relates and as Jamie did in his script with Princeton, our work there is currently related to predevelopment, all very early in the process. Princeton is assessing everything that they could do in the future. They could end up doing a GO and ultimately building the community. Could be looking at some type of other project-based debt. They could look at an equity structure, but it is very early in the evaluation process for that.

With regard to the Wyoming award, that is one that, again, will go through the process. ACE is on the table, 501(c)3 deal is on the table, and we will work through those.

I will say, as we continue to see RFPs, equity transactions are still very highly desirable by those schools that are looking for the most friendly credit structure. Again, the most recent award being the one that EDR has got here at the University of Texas, which speaks to prominence of institutions who like equity. And so we see it as a very viable alternative, although none of our current true third-party deals are likely to switch to it at this time.

Paula Poskon - Robert W. Baird

Thanks. I appreciate that. And are you seeing among the RFPs that you’re saying, is there an increasing proportion of financially strapped institutions or is the composition of the institutions is not really changed very much?

Bill Bayless

You know it is not changed. And I think when you look at that there is certainly a segment of institutions who are financially strapped that may look at privatization out of desperation. But when you do have names of institution like Princeton University, like the University of Texas, like Harvard University, I think you see very prominent well capitalized institutions that are saying there may really be a benefit, and the efficiency and effectiveness of private sector delivery and use of their balance sheet. And so I think that it is a full mix that being financially strapped is only one motivation that might lead you to looking for private sector assistance.

Operator

(Operator Instructions) Your next question comes from the line of Andrew McCulloch with Green Street Advisors. Please proceed.

Andrew McCulloch - Green Street Advisors

Hi. Good morning. Can you give us an update on the process for ACC that have gone on an unsecured rating and what’s the timing on that is?

Daniel Perry

Yes, Andrew this is Daniel. We are still really in the process of over the next solid 18 months paying off mortgage loans if they come due to grow the unencumbered NOI ratio up close to a 50% level. Our timing expectation for that is still early to mid-2012, and so we’re really just waiting on that to naturally occur and then we will move forward with that getting the rating at the appropriate time.

Andrew McCulloch - Green Street Advisors

Great, thanks. Do you have any plan on taking out the final Fidelity JV assets and can you remind me again why you had not purchased those up to this point, or try to?

Daniel Perry

Sure. The two assets that are in fund two, I mean that’s why that acquisition is taking a little longer, just its an individual asset-by-asset assumption process and that always takes longer than when you’re doing an entire portfolio entity type purchase.

The two properties that are staying behind, we were just not able to come to an agreement on a price. And so they will remain in the portfolio either until they’re sold or we come to some other agreement with Fidelity.

Andrew McCulloch - Green Street Advisors

Okay, thanks. And just one last question, what are your plans for the ATM going forward and sorry if I missed this, but what are your plans for the ATM given your recent equity issuance?

Daniel Perry

Sure. Certainly with the $200 million of cash on the balance sheet right now we have plenty of cap before the growth that we have in hand. And so we would use the ATM more for match funding additional opportunities that come up whether it would be on the acquisition side or additional development opportunities that come to fruition. So, not currently using it, but we will keep it there and then it becomes necessary.

Operator

And your next question is a follow-up from the line of Eric Wolfe with Citigroup. Please proceed.

Eric Wolfe - Citigroup

Just one follow-up on the University of Wyoming deal, there was a report or two suggesting that it was going to be an ACE deal. So, I’m just wondering whether the university backtracked from that and it strictly decided to do 501(c)3 deal and what the reasons may have been?

Bill Bayless

Not at all. No backtracking, and as with every transaction, whenever a university engages us, whether they initially put out an RFP thinking absolutely they want to do equity or they put out an RFP thinking they absolutely want to do a 501(c)3, the first meeting we have with an institution, we put out on the table what all the alternatives are that they should consider. We also approach each transaction as we’re qualifying the university and the transaction as to whether or not we want to invest our equity there.

And so we put all those models on the table so that the university understands their alternatives, so that we can evaluate the strength of the institution deal to ensure that we would want to invest our equity. And then the university makes the decision what they would like, and we have to concur that it’s one we would want to invest in ACE. And so Wyoming is following more just the traditional process. One of the benefits of hiring American Campus is that we can deliver all of the financial structures there and work to the right conclusion through the process.

Operator

Your next question comes from the line of Karin Ford with KeyBanc. Please proceed.

Karin Ford - KeyBanc

Just a question on the higher occupancy levels for 2010-2011, does that create any sort of differential operating environment for you guys? I noticed you said you had higher expense growth this quarter as a result. Should we expect that to continue going forward? And when we’re looking at your preleasing comparisons this year, should we not be concerned if we see you’re a little bit slower than you were last year?

Bill Bayless

No, Karin. As it relates to the operating increase and differential and again, the expense was only 2.3%. And when you drill down and say, okay, in that small increase, what were the larger components of it, it was related to the third-quarter occupancy, which is still the tail of the year prior, coupled with the increased lease-up here. And so it’s just nominal, so we do not think that it’s anything to look at that we would view as a threat to being able to maintain expenses moving forward.

As it relates to the leasing velocity, we will continue to manage that, and one of the things I think we learned you go back two years, when was the first time we had faced a leasing velocity that was much slower in prior years. And at that time, we did not have the LAMS data in a slower-velocity trend to make strategic decisions. We now have the benefit of two years of that.

The thing that I think we showed the best discipline this year that we have as an organization at this point in time is, while we increased the occupancy more than 300 basis points, increased rental rates, we cut marketing expenses in the four quarters related to that lease-up by $1.5 million.

And so we will continue to manage those velocities on a market-by-market basis, looking at the historical velocity. And ultimately, at the end of the day, what the market should look at and one of the reasons we provide all that detail on those leasing pages is whether or not the strategic pricing decisions we make on rental rates are negatively impacting that velocity trend. So we would not feel anything abnormal.

The other thing that I would point out, and one of the things I want to make sure we alleviate any concerns or misperceptions investor habit. One of the questions is, wow, you’re at 98.4%. What now? Well, in fall of 2006, we were at 98.8%. In fall of 2007, we were at 98.5%.

It is normal, ordinary, and customary that we have always been able to stabilize and integrate those assets to that level. We now have the Fidelity JV coming in. We have the acquisitions that we have brought in. We have growth opportunities in every segment of our external growth than we had before. We would continue to implement the same plan that we always had to prudently grow externally and to continually create that core value.

And so you look at where we are. While we’re very pleased and they’re great numbers, we have been here several times throughout our history as a public company, and we have always demonstrated that we can create above-market value as related through our peers in other sectors of real estate, and that continues to be our focus.

Karin Ford - KeyBanc

That’s helpful. I know you said for your initial rent setting for next year, the Legacy was at 2.4, GMH is at 3.2, where do you expect the former Fidelity JV property rent growth to be for next year?

Bill Bayless

Yes, ma’am. We currently have that initially set at 2.5 for all 14.

Karin Ford - KeyBanc

Okay. Just wanted to switch over to the acquisition front. Do you guys have anything under contract today, and we have been hearing from a pricing standpoint that there was some compression on cap rates between Class A and Class B assets. Are you seeing that as well and does that impact your acquisition strategy?

Bill Bayless

Certainly, first dealing with the cap rate compression, and we have I think been a broken record in terms of this answer. We look at cap rate as an inversion to what the NOI growth profile prospects are. And so is it possible you’ll hear American Campus, in terms of this buying cycle, announce we’ve done a deal with the 5 caps? Absolutely it’s possible, but it’s going to be when we believe the NOI growth profile justifies that, where we can still hit double-digit long-term IRRs. And so we will pay up for value when it makes sense.

Karin Ford - KeyBanc

Okay. And anything under contract?

Bill Bayless

Yes. Well, nothing that we have announced of a material nature of the market we do have some things under contract at this time.

Operator

And your next question comes from the line of Haendel St. Juste with KBW. Please proceed.

Haendel St. Juste - KBW

Hey, guys. Like Karin, too, I was dropped from the call, so I apologize if this question is redundant, but I wanted to go back to the cash on the balance sheet today. I guess I’m a bit surprised at the amount, and I’m assuming some of this is timing-related pertaining to the offering and reinvestment. But I’m also wondering if you might’ve raised too much cash and having difficulty putting it to use. And also, would you talk about the planned uses and timing of the uses for that cash?

Daniel Perry

Sure. Haendel, this is Daniel. Of the 203 million that’s currently on the balance sheet, about 185 million of it is related to the offering. The other 18 million or so is, call it flow at the property-level operating account. But if you go from the 185 million, we expect to have used all of that cash or deployed it in some way, shape, or form by second quarter of 2011, so just a couple of quarters from now.

We’ve got 18.2 million that we’re going to spend on the equity piece of the Fund II acquisition, in addition to the loans we’re assuming; 30 million of debt maturities in the first quarter; and then another 95 million of debt maturities in the second quarter. And with the development 75 million of development cost expenditures left on the three developments that we’re going to be delivering in 2011, we would’ve already used all of the proceeds from the equity offering at that point. So we do not think that by any means that the amount of capital we raised in the offering was too much. We’ve got lots of uses for it, so we’re pretty happy with where we are at this point in time.

Operator

And with no further questions in the queue, I’d now like to turn the call over to Mr. Bill Bayless for closing remarks.

Bill Bayless

Thank you. Karin Ford asked the question related to the rent increase on the 14 JV properties, I said 2.5. Joseph Hughes here just slipped me a note that that is actually 2.6, so understated that by 10 basis points, to give you the correct answer there.

We would love, again, to thank all of you for joining us. We could not be more pleased here with the efforts of the American Campus staff, corporate in the field for what they have delivered this year. We’re more excited than we have ever been about the opportunities before us, and we look forward to updating you on the next call on some of the items we talked about here about the acquisition pipelines that are out there and the growth prospects and how those things maybe materialize. Thank you.

Operator

Thank you for joining today’s conference. That concludes the presentation. You may now disconnect and have a wonderful day.

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