American Campus Communities (ACC) CEO Bill Bayless Discusses Q2 2014 Results - Earnings Call Transcript

Jul.23.14 | About: American Campus (ACC)

American Campus Communities, Inc. (NYSE:ACC)

Q2 2014 Results Earnings Conference Call

July 23, 2014; 11:00 a.m. ET

Executives

Bill Bayless - Chief Executive Officer

John Graf - Chief Financial Officer

William Talbot - Chief Investment Officer

Greg Dowell - Outgoing Chief Operating Officer

Jim Hopke - Incoming Chief Operating Officer

Jamie Wilhelm - EVP of Public Private Partnerships

Daniel Perry - EVP of Corporate Finance & Capital Markets

Ryan Dennison - Vice President of Corporate Finance & Investors Relations

Analysts

Nick Joseph - Citigroup

Andrew Schaffer - Sandler O’Neill

Karin Ford - KeyBanc Capital Markets

Dave Bragg - Green Street Advisors

Operator

Good morning and welcome to the American Campus Communities, Second Quarter, 2014 Earnings Release Conference Call. All participants will be in listen-only mode. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to Ryan Dennison. Please go ahead.

Ryan Dennison

Thank you, Betty. Good morning and thank you for joining the American Campus Communities, 2014 second quarter conference call. The press release was 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 the Reg G requirements. If you do not 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 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. The webcast slides may be advanced by you to facilitate following along.

Management will be making forward-looking statements today as referenced in the disclosure in the Press Release and the supplemental financial package and in 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 statement to reflect events or circumstances after the date of this release.

Having said that, I would now like to introduce the members of senior management joining us for the call. Bill Bayless, our Chief Executive Officer; John Graf, our Chief Financial Officer; William Talbot, our Chief Investment Officer; Greg Dowell, our outgoing Chief Operating Officer; Jim Hopke, our incoming Chief Operating Officer; Jamie Wilhelm, our EVP of Public Private Partnerships; and Daniel Perry, our EVP of Corporate Finance and Capital Markets.

With that, I’ll turn the call over to Bill for his opening remarks. Bill.

Bill Bayless

Thank you, Ryan. Good morning and thank you all for joining us as we discuss our second quarter 2014 results. As you saw in our press release last night, it was another solid quarter in advancing our 2014 initiatives related to expense control and asset management, our fall 2014 lease up and prudent balance sheet management via the solid execution on our second unsecured bond issuance.

With that said, we are going to jump right in. I’ll turn it over to Greg Dowell to discuss our operational results and our current pre-leasing status.

Greg Dowell

Thanks Bill. We are pleased to announce that 2014 continues to be a solid year operationally. Quarterly FFOM per share increased by 9.4%, leasing velocity continues to be on a pace that’s consistent with our longer-term historical trends, and our expense savings and asset management initiatives are delivering results.

If you turn to page five of the supplemental package, you’ll see that second quarter same store NOI increased by 2.3% over Q2, 2013. This was the result of a 0.8% increase in revenue and a decrease in operating expenses of 0.9%. We are pleased that we were able to achieve reductions over the prior year in all major controllable line items, including substantial savings in marketing costs.

These reductions in controllable costs were somewhat offset by increases in real estate taxes and utilities. Our same store marketing spend in Q2 2014 was $41 per bed as compared to $63 per bed in Q2 2013, which resulted in a same store savings of $1.8 million over the prior year.

Our historical Q2 marketing spend from 2010 to 2012 was in the range of $40 to $47 per bed. With these results, we are well positioned to fully return our annual marketing spend to an inflation adjusted historical norm of approximately $170 per bed in 2014, one year earlier than originally budgeted and is compared to an original 2014 budgeted spend of $187 per bed at our same store properties and $183 per bed on our total portfolio.

With these savings over the prior year, we are confident in our ability to achieve the $5 million targeted expense reductions for 2014 that we outlined on previous calls, with the opportunity to outperform.

Year-to-date, we have saved $2.6 million in marketing and experienced a net savings of $1.9 million in integration and maintenance costs, resulting in $4.5 million towards our $5 million goal of targeted expense reductions.

If you turn to page eight, we can review the leasing status for the 2014, 2015 academic year. As of Friday, July 18, our same-store wholly-owned portfolio was 92.8% leased, compared to 90.8% leased for the same date in the prior year. We are exceptionally pleased with our leasing velocity and are well-positioned to fall within our guidance occupancy range of 96% to 98%. We are currently projecting an overall rental rate increase of 2.1%.

As I said earlier in the call, this has been a really solid operational quarter and I’d like to take this opportunity to thank Jim Hopke, Jennifer Beese, Jim Sholders and the entire operations, marketing, leasing and asset management teams for their hard work and a job well done.

And now I’ll turn the call over to Jamie to discuss our ACE investments and on campus activities.

Jamie Wilhelm

Thanks Greg. Good morning. As you can see on page 14 of the supplemental, our fall 2014 and 2015 ACE delivery pipeline remains on schedule. Our owned on-campus projects at Northern Arizona University, Texas A&M, Drexel University and both phases of our faculty and staff project at Princeton University account for $304 million of development, encompassing 2,428 beds of student housing and 325 units of faculty and staff housing.

Looking forward to our 2016 and beyond ACE deliveries, the company executed a closing agreement with USC on a proposed 460 bed investment on the University of Southern California Health Sciences campus. The agreement contains all of the final terms and documents necessary to commence construction during the fourth quarter of this year. Construction commencement is contingent upon successfully completing all final predevelopment activities, and including receiving certain final approvals from the city of Los Angeles.

Turning now to our third party fee developments, our project at West Virginia University and the Princeton University graduate housing project are proceeding for fall 2014 deliveries. With regard to our fall 2015 third party deliveries, our 492 bed honors residence hall at the University of Toledo and our 482 bed Texas A&M University Corpus Christi, apartment community transactions both closed and construction has commenced. ACC expects to earn a total of $3.6 million in development fees for these projects.

Subsequent to quarter end, the company executed an interim services agreement with Butler University in Indianapolis, Indiana. The ISA provides for ACC and the university to proceed with an approximate 630 bed, first phase of the University’s 1,200 to 1,500 bed on-campus student housing initiative. The first phase of the program is targeted for fall 2016 delivery. A variety of financing and ownership structures are being evaluated by ACC and the University and we expect a final decision on structure by the end of this year.

And finally, we have substantially completed pre-development activities relating to the Northern Arizona University, student and academic services building. We expect the project financing to close during the third quarter of this year, at which time ACC will be paid approximately $600,000 predevelopment services fee.

We continue to experience strong demand for university public-private partnerships and are optimistic we’ll be able to grow our on-campus development pipeline. We are currently involved in 13 university procurements and are tracking a substantial number of additional on-campus opportunities.

Having summarized our on-campus activities, I’d like to turn the presentation over to William to discuss our overall investment activity.

William Talbot

Thanks Jamie. During the quarter we made great progress on executing our investment strategy. Let's turn first to development.

For fall 2014, we continue to make progress on our five owned off and on-campus deliveries that total 3573 beds and $261 million in total development costs, including the presale asset in Knoxville.

Our fall 2014 student housing owned deliveries are leased 99.7% for the upcoming academic year. Our fall 2015 owned ACE and off-campus developments consist of five core pedestrian projects totaling 3,567 beds and $356 million in development.

Our total owned and mezzanine developments for fall 2014 and fall 2015 total 11 projects, 7,140 beds and over $617 million in development costs to be placed into service within the next 13 months at a 6.75% to 7% nominal yield. These core pedestrian assets are highly accretive to net asset value, representing over 10% of our total market capitalization, assuming current market cap rates of 5% to 5.5%.

Let's now turn to acquisition. The overall transaction market remains strong for student housing product. Based on C.B. Richard Ellis’s midyear market review, 52 transactions totaling over $900 million closed during the first half of 2014, consistent with the first half of the past three years. We still expect a significant amount of acquisition opportunities to become available during the remainder of the year.

Leading brokers in our sector are expecting to close transactions during the second half of 2014 within the student housing sector to total $2 billion or more, consistent with last year, and we will selectively pursue core pedestrian properties that meet our stringent investment criteria.

With regard to strategic dispositions, we are on track for the previously announced $100 million to $200 million of disposition guidance to occur in the fourth quarter and have awarded a significant sales pipeline to national brokers with marketing targeted to begin within the next month.

As we have previously stated, we may elect to increase our disposition volume of non-core assets to match fund any identified core pedestrian acquisition opportunities and we will update the market as we make progress in both areas.

With that, I will now turn it over to John to discuss our financial results.

John Graf

Thanks William. For the second quarter of 2014 we reported total FFOM of $62.3 million or $0.58 per fully diluted share that slightly exceeded our internal expectations. This compares to FFOM of $56.3 million or $0.53 per fully diluted share for the comparable quarter in 2013.

As compared to the second quarter of 2013, the 2014 second quarter results benefited from the continuing expense control and asset management efforts, the 13 growth properties placed into service during 2013, and the timing of payoffs of maturing property mortgage loans. This was partially offset by the timing of six dispositions in 2013 in which the FFOM contribution from these properties is $3.3 million during the second quarter of 2013.

Additionally, corporate level interest expense increased primarily as a result of the timing of various capital market activities, including our recent $250 million term loan and our $400 million bond offering in June of this year.

Total third-party revenues were $3.6 million for the second quarter of 2014, which was $1.1 million greater than the second quarter of the prior year. This increase was primarily due to the commencement and related fee recognition at the University of Toledo, third party development project during the second quarter of 2014, while we did not commence any new projects this quarter last year.

As of June 30, 2014, the company's debt to total asset value was 44.7% and the net debt to run rate EBITDA was 7.9 times, which we expect to normalize around 7.5 times once the fall 2014 developments become operational next quarter.

As a result of completing our $400 million bond offering this quarter, of 10-year unsecured notes at an effective yield of 4.27%, we increased our average term to maturity to 5.8 years from 5.1 years.

During the quarter we exercised one of the two one-year extension options available to us under our $45 million variable rate construction loan at LIBOR plus 1.45%. Management believes the capacity on our fully available credit facility, along with remaining cash from our recent bond offering, cash generated from operations and property dispositions and the ability to match fund under our ATM share offering program provides ample capital for our wholly-owned development projects being delivered in both 2014 and 2015. As of quarter end we had approximately $3.8 billion in unencumbered asset value, which was 59% of the company's total asset value.

Our total interest expense for the quarter, excluding $1.1 million from the on-campus participating properties was $19.9 million, compared to $18 million in the second quarter of 2013 and the company's interest coverage ratio for the last 12 months was 2.9 times.

Interest expenses net of approximately $3.2 million and debt premium amortization and $2.3 million in capitalized interest related to owned projects and development. Primarily taking into consideration our expense control and asset management efforts through the first six months of 2014, the timing and final rate on our recent $400 million bond offering and property tax expectations for the last half of 2014, management is raising our 2014 FFOM guidance range to $2.29 to $2.37 per fully diluted share.

We are updating our previous guidance assumptions that have materially changed as follows: Property NOI for our wholly-owned portfolio is expected to be in the range of $356.8 million to $364 million. This increase is driven by the actual results through the first six months of 2014, which is slightly offset by anticipated increases in property taxes during the second half of 2014. No changes have been made to our previous guidance assumptions regarding fall 2014 occupancy and rental rate growth, as well as the timing and amount of dispositions for 2014.

The NOI ultimately produced for the year will be contingent upon final occupancy and rental rates obtained for the 2014, 2015 lease up, managing no-shows, maintaining operating expenses including turn costs at anticipated levels, final property tax assessments and disposition activity.

For interest expense excluding the on-campus participating properties, we are now projecting $85.2 million to $85.9 million. This $2.4 million to $4 million reduction from our previous range is primarily due to the timing and effective interest rate achieved on our recent second quarter unsecured bond offering. Interest expense could be impacted positively or negatively by the timing and amount of dispositions.

During the second half of 2014, we plan to opportunistically utilize our ATM share offering program to match fund a portion of our 2014 and 2015 development projects and are therefore projecting a 550,000 increase in our weighted average shares outstanding for the year.

With that, I’ll turn it back to Bill.

Bill Bayless

Thank you, John. In summary, we are very pleased with the results of the quarter and our year-to-date performance.

With that said, this is not a time to become complacent. We remain focused on the critical work that lies ahead in the next four to six weeks, in completing the fall lease up, and properly managing no-shows and waiting list, and also managing our turn process and in welcoming the more than 100,000 students who will call an American Campus Community home this fall.

We also look forward to external growth opportunities that lie ahead. As William stated, in the next 13 months, via development alone, we will place into service assets that have a fair market value in excess of 10% of our total enterprise value. This coupled with the opportunity to further improve our portfolio via recycling capital via the disposition of non-core assets and into the acquisition of newer core pedestrian assets, provides meaningful value creation opportunities.

I’d also like to close and this will be Greg Dowell's last earnings call and we want to thank him for all of his years of service and dedication to the company and on behalf of myself, the senior management team and all the employees of American Campus, wish him well in all of his future endeavors.

We also want to thank as Greg mentioned, Jim Hopke, Jennifer Beese and Jim Sholders who have reinvigorated the troops in 2014 and are driving solid execution in all areas of operations, leasing and asset management.

With that, we’ll open it up for Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And our first question comes from Nick Joseph of Citigroup. Please go ahead sir.

Nick Joseph – Citigroup

Thanks. With the stock price having recovered this year, how do you internally weigh the decision between ATM issuance versus increased dispositions?

Daniel Perry

Hey Nick, this is Daniel Perry. We look at both, we look at what the properties that we would consider for disposition look like on an NOI growth profile, compared to what we think the cost of our equity is and decide what we think would be the most accretive form of capital for our NAV. So we certainly will look at both as we move forward.

As we talked about in the prepared remarks, at this point we have included some usage or an assumption of some usage of our ATM throughout the remainder of the year, but we will certainly look at dispositions as a potential alternative or additional form of capital as growth opportunities come up.

Nick Joseph - Citigroup

Thanks. And then in terms of reentering the acquisition market, do you expect the acquisitions to be kind of one-off assets or do you have an appetite to maybe go after a portfolio?

Bill Bayless

At this point Nick, what we are hearing from the brokers who are compounding those packages and putting them together, it appears to be a season of more one-off property in small groupings and not a lot of larger portfolios. So we would expect as William said, to be looking at the selective purchase of one-off assets.

However, we do expect a lot of good product out there. As William said, the brokers are expecting another $2 billion in the second half. He also alluded to that we would look at perhaps increasing the size of our dispo package, if we indeed see that there is more product out there that is available for that accretive recycling.

Nick Joseph – Citigroup

Thanks. And then you mentioned that you had gotten back to your historical norm in terms of marketing spend. I remember last year the plan was to drive margin expansion in ‘13. Is that going to be the plan now in ’15, now that you are back to kind of a more run rate?

Bill Bayless

Absolutely. Jim and his team's focus going forward is absolutely on that margin improvement in all areas of expense management, expense control and asset management and so ‘15 and also of course looking into ‘16, we are having much quicker impact candidly in some of the areas like marketing expenses that we had hoped to, but however, there is some good midterm and long term initiatives within that, that over the next two years we think can get us moving closer and closer toward that goal that we have talked about, closer to 55.

Nick Joseph – Citigroup

Great, thanks.

Operator

And our next question comes from Andrew Schaffer of Sandler O'Neill. Please go ahead sir.

Andrew Schaffer - Sandler O’Neill

Thanks. In regard to the applied form metric in pre-leasing, where do you realistically see the ceiling for that number, where the margin cost to the traditional lease outweighs the margin benefit?

Bill Bayless

When you look at that application number, you’ve got to break it down into a couple of categories and that when you look at all of the listings of the 165 properties that exist there, you have some properties that are already maximized in terms of 99% to 100% pre-leased that have applications that are in excess and that is the wait list. And so when we talk about the proper management of no-shows, it’s utilizing that portion of your application waiting list to back fill any no-shows that occur through the non-payments you may see on August 1 when the first payments are due.

When you then look at the waiting list or the application section related to properties that still have vacancies within unit types, there it is the turnover to administration of the application lease process. So there is really two different focuses that take place within those pools and with a large portion of it being waiting list, that really comes into play in the intensity of that last two weeks of lease up when you determine the handful of students at each property that aren't coming.

So that’s why we talk about this as not a time to be complacent. That over applied number is one of the critical tools that we utilize in maximizing occupancy at the end, in backfilling no-shows.

Andrew Schaffer - Sandler O’Neill

Okay, so staying on the topic of leasing, have you already started the process managing no-shows and do you have kind of rough expectations for the upcoming year?

Bill Bayless

We start managing the no-show process candidly about June 1 and have an ongoing process in doing that. However, when you typically see, not typically, when you do see real purview into what the no-show picture is going to be, its payments are due August 1 and occupancy typically are not until the 18 or the 25 and so that gives us a three to four week window.

On August 2 we are taking people that didn't pay and we are tenaciously contacting them, giving them a very short deadline of 24 to 48 hours and working the application list, and so it does come into play in the last two to three weeks of your lease up.

This is one of the reasons candidly folks that we think why you see American Campus with that historical occupancy average of 97% versus other industry. Certainly on the private side you hear occupancies more in the 93 to 95, we’ll tell you, a lot of that has to do with no-show, wait list, application management.

Andrew Schaffer - Sandler O’Neill

Okay. Then finally, can you talk about the thought process and negotiations that went on to having Vista Del Sol on a master lease back to the school and if we should expect that type of structure going forward on future ACE deals?

Bill Bayless

Yes, and this is one where we always weigh the open market risk and Vista Del Sol as you all remember is an on-campus property; its upperclassman apartments that completely compete with the open market. And so it is not a situation like a Barrett where it’s part of the Honors College where they are assigned.

And so the opportunity to take 1,000 beds out of the mix of having open market risk certainly opportunities and saving marketing dollars and also some efficiencies and operations in the way the university interjects in for example, some of the residence life aspects.

It creates all kinds of benefits just beyond the headline number of occupancy, but also some operational efficiencies and so it’s something that we always look at. In this case it makes great sense. Also it provides an opportunity at Vista Del Sol to perhaps expand that project.

I think the University strategically would love to master lease more of those beds on an ongoing basis and we will always evaluate what the best way for us to approach it is.

Andrew Schaffer - Sandler O’Neill & Partners

All right thanks. That’s it for me.

Operator

And our next question comes from Karin Ford of KeyBanc Capital Markets. Please go ahead.

Karin Ford - KeyBanc Capital Markets

Hi, good morning. Just, first a question on the guidance. I know in your prepared remarks you mentioned interest expense and operating expense savings is the primary drivers. Can you just talk about what drove the 10 basis point increase in your same store revenue guidance for the year?

Daniel Perry

This is Daniel, Karin. Primarily that was driven by outperformance in the first six months of the year on the revenue side. We did maintain our occupancy and rental rate assumptions for the lease up for the ‘14, ‘15 academic year. However, in the first half of the year we’ve seen some outperformance primarily driven by more other income than we originally expected, but also a little bit on the rental revenue side, so all coming from the first half of the year.

Karin Ford - KeyBanc Capital Markets

Okay, that’s helpful. Can you just talk about what you’re seeing in terms of the supply pipeline in your markets for 2015? Has there been any change and where does it stand, do you think today relative to what you are seeing being completed in 2014?

Bill Bayless

Yes, Karin, right now and we will give final color on this on the call in November and at that point in time everything has been shored up as to who actually got construction started in the ground, what deals at the last minute got approved, didn't get approved and so this is a number in progress, so note that it could change by November.

We’ve got roughly 43,000 to 44,000 that are coming in this fall 2014. Next year all of our research data coupled with Axiometrics that we are working with in providing our data to them and vice versa.

Right now we’re seeing about 33,000 beds. And so as Axiometrics has talked about, I know Randy has talked about also in his remarks to the media that they are seeing a drop off next year. It appears that way in our markets also, but there is still a couple of months left where people may get giddy and attempt to get construction underway and in the late stages that they could increase that and so as of this moment it looks favorable, but we will report back in November when it’s really finalized.

Karin Ford - KeyBanc Capital Markets

What do you think is the primary reason for the drop, what’s driving it?

Bill Bayless

Our opinion here at American Campus, we have talked about there has been a transformation appropriately from say five to 10 years ago when the industry was much more in its infancy and people were developing much further from campus, that the products that are getting developed now are better products.

People see that your evaluation of core pedestrian are much more worthwhile and much more stable in long-term NOI growth than drive properties and so more people are focused on that core pedestrian development and these are tough infield markets that are hard to get into and make deals work, and so some of the natural barriers entering the marketplace causes the barrier, which is appropriate.

Karin Ford - KeyBanc Capital Markets

Thanks for the color. Last question is just on development. Can you just talk about your efforts to back-fill the 2016 pipeline and are you getting concerned that since you haven't put any projects really in there yet, this will be hard to duplicate the volume that you’ve achieved in 2014, 2015?

Bill Bayless

When you look at that historical volume always being in the area of about $300 million, 2016 at this moment when you look at the pipeline, it looks a little light. We've got a really good shadow pipeline and a lot of good work there related to 2016 and beyond. There are several deals that can fall from ‘16 to ’17, all depending upon some of the critical stages those are in.

Also the other real opportunity that we have in backstopping ‘16 between, we still have another, call it six to nine months of 2016 pipeline activity for our own efforts, but also this is where the mezzanine program which has really seemed to catch headwinds over the last couple of years, also can help us back-fill that.

So we see excellent opportunity in the overall shadow pipeline for 2016 and beyond and we are working diligently to put as many of those in the 2016 box as possible. To the extent that doesn't occur, 2017 could end up being a banner year.

Karin Ford - KeyBanc Capital Markets

And how many projects are in the shadow pipeline for 2016 right now?

Greg Dowell

Right now we’ve talked about Butler and we’ve talked about or our Boulder that’s on there, there’s a potential risk, the four – I’m sorry, and USC a potential of another three to four that could fall into it, but it is really too early to count those as ‘16. And then in the pre-sales are ones that could be discovered between now and then that may not even be in the thought pipeline that could be added to ‘16.

Karin Ford - KeyBanc Capital Markets

Great. Thanks very much.

Operator

And our next question comes from Dave Bragg of Green Street Advisors. Please go ahead.

Dave Bragg - Green Street Advisors

Thank you. Good morning. Daniel, can you please review for us where your leverage stands today, where your targets are and the time horizon over which you plan to get there?

Daniel Perry

Yes, so as we reported this quarter, debt to gross asset value stands at 44.7% today. If you assumed that we build out the development pipeline through the end of ‘14 , or through August ‘14 and had the spin that we expect on the 2015 developments during 2014 and you funded that with all debt and no dispositions, you’d be about 46%, with the $150 million midpoint of our disposition plans, you’d be about 45% and then if you did assume that we either upsized dispositions by $100 million or we did some ATM activity of about $100 million, you’d be at about 43.5%.

So hovering around that 44% that we are currently at, certainly our plan to start to take that leverage back down over the next 18 to 24 months comes through funding our growth with dispositions and/or some opportunistic use of our ATM, and bringing down leverage back closer towards the high 30s or mid-30% range.

The other metric that we do watch closely when it comes to leverage is debt to EBITDA. As many folks may have noted, our debt to EBITDA at this quarter is at 7.9 times. This is always the maximum debt to EBITDA quarter for us, because you have most of the debt funded for your 2014 developments and you've started building your 2015s and you have no EBITDA coming on. So next quarter you will see that number drop down more toward the mid to low 7s.

If you were to exclude the outstanding debt related to your development portfolio, you’d be at about 7-times right now. Our goal over time will be to return that stabilized debt to EBITDA back towards the low 6s.

Dave Bragg - Green Street Advisors

That’s very helpful, thank you. And when you say over time, you are looking to get to the mid 30s to high 30s and down below 7-times, what time horizon are you thinking about there?

Daniel Perry

We look at it on an 18 to 24 month basis. You are able to look at your full build out of your in-hand development pipeline, the sources of capital that you would need for that and so we really look through the full play out of that capital plan.

Dave Bragg - Green Street Advisors

That’s helpful, thank you. And a question for you Bill; over the past couple of years rent growth in this sector has been in the 1.5% to 2.25% range. What do you see out on the horizon over the next several years that will allow student housing rent growth to get back to the 3% and over range that we’ve seen in the past?

Bill Bayless

Yes, and David, in looking at that question and especially as we move into ‘15 and how we approach this and whenever we talk about rental rate, we’ll always also with the same breath talk about occupancy and the combination of rental rate and occupancy. And as you look at the opportunity, unlike apartments where everybody strives to have that stabilized 95% and it’s all off of the rental growth, we focus on the maximization of rental revenue at each and every year to drive that growth.

When you look at the breakdown in the supplemental of the totals on pages 10, 11 and 12, which are the property categories of 98% and above, 95% to 98%, and below 95% and you look at how we think about escalation of rental revenue to drive NOI growth, you will see that first category that’s above 98%.

Our velocity is currently about 20 bips behind, our rental rate is 2.9% ahead and so you are targeting rental revenue growth and again this is a little bit of a – it was a mediocre year in terms of rate growth, you’re at 2.7.

When you go to the next page and you look at the properties between 95% and 98%, we are tracking 1.3% ahead in occupancy velocity; rate 1.4 once again up at 2.7. When you then look at the category of 95% and below, we are tracking 790 bips ahead in occupancy and rental rate of about 0.6 and so you are looking there at about 850 bips.

Now you combine those together you end up at about three, and so rental rate growth people get hung up on without looking at the big picture of rental revenue increase from one year to the next via those buckets. It is the driver of the revenue equation in the NOI and so when you look at the range of rental rates in those categories from flat to 7% to 8% in many cases, you really have to look at that picture.

So as we move into next year and finish out this lease up and talk about NOI growth moving into 2015 and beyond, where we’ve always talked about that historical 3% to 6% same store NOI, that has been driven by the rental revenue increase being in that area of 300 plus bips, not just the rate component alone.

So that’s what we’ll focus on. That is how we focus on the strategy and we’ll continue to talk to you all about what the objectives are in driving that side of the equation.

Dave Bragg - Green Street Advisors

Okay, thank you.

Bill Bayless

Thank you.

Operator

(Operator Instructions). As it appears there are no further questions, I would like to turn the conference back over to Mr. Bill Bayless for any closing remarks.

Bill Bayless

In closing, again we want to thank you for your interest in American Campus. We look forward to talking to you on the next earnings call when we certainly will have clear purview into the future, ‘15 and ‘16 value creation with the lease-up behind us.

In closing, we’d like to talk directly to the American Campus employees and that last September, we started this academic year with our manager leadership conference under the theme “It’s Game Time” and we are now in the final closeout of this year's game and so in a sports analogy, this is the fourth quarter. It’s the last two minutes of a basketball championship. It’s time for us to go out and close and close well.

So good luck to you and thank you for your efforts related to lease up, turn and move in and we will look forward as a whole to reporting back to the market on the completion of those efforts.

Operator

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

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