Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Campus Crest Communities Inc (NYSE:CCG)

Q2 2014 Earnings Conference Call

July 31, 2014 09:00 AM ET

Executives

Ted Rollins - CEO

Rob Dann - COO

Donnie Bobbitt - CFO

Aaron Halfacre - Head of Capital Markets

Analysts

Michael Salinsky - RBC Capital Markets

Michael Bilerman - Citigroup

Ryan Meliker - MLV & Company

Dave Bragg - Green Street Advisors

Jana Galan - Bank of America

Buck Horne - Raymond James

Operator

Greetings, and welcome to the Campus Crest Communities 2014 Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

I’d now like to turn the conference over to Campus Crest Communities. Please go ahead.

Unidentified Company Representation

Thank you, Operator. Good morning and welcome to the Campus Crest second quarter 2014 conference call. On the call this morning are Ted Rollins, CEO; Rob Dann, COO; Donnie Bobbitt, CFO; and our newly hired head of Capital Markets, Aaron Halfacre. We would like to remind you that management’s remarks in today’s call may include statements that are not historical facts and are considered forward-looking within the meaning of applicable securities laws, including statements regarding projections, plans or future expectations.

These forward looking statements reflect current views and expectations which are based on currently available information and management’s assumptions. We assume no obligation to update these forward-looking statements and we can give no assurance that the expectations will be attained. Actual results may differ materially from those described in the forward-looking statements and will be affected by a variety of risks, including those set forth in our prospectus and as updated on our periodic reports filed with the SEC.

On this conference call we may refer to certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures are available in the 10-Q earnings release and supplemental analyst package, which can be accessed on the Investor Relations page of our Web site at campuscrest.com.

And now I will turn the call over to Ted Rollins.

Ted Rollins

Thank you, good morning and thank you for joining us this morning. Our call will cover two time frames, first we will discuss what we have done in the second quarter and then the balance of our time we’ll focus on what we are doing now, particularly in light of revised guidance. I would like to first hit a few highlights for the quarter and address Copper Beech. Let’s get started. We are pleased to have delivered stable second quarter result, we believe our existing portfolio provides a very solid base and real strength to deliver upside as we look ahead. We produced FFOA of $10.4 million resulting in $0.16 per diluted share. We delivered the same store NOI of $11.4 million at 90.1% occupancy and a 54.8% margin which reflects our vertically integrated business model. We’ve achieved an increase of nearly 400 basis points in leasing compared to this time last year for our 41 Grove properties and more than 200 basis points ahead for the entire portfolio of 69 assets. As it relates to Copper Beech I’d originally anticipated having something to tell you before the end of the second quarter, given that we are a little more than two weeks away from the August 19 deadline we are going to defer any announcement today. What I can say is that we’re working diligently with Dr. McWhirter, and our prior comments on the subject remain relevant. I will now turn it over to Donnie to discuss our financial results for the quarter.

Donnie Bobbitt

Thanks Ted. For the quarter ended June 30, 2014 the company reported FFOA of $10.4 million resulting in $0.16 per diluted share. These results are fractionally below consensus but in line with a large majority of published street estimates. We believe it is reasonable to consider this as a stable benchmark for 2014 upon which we seek to further improve. We continue to focus on the balance sheet and as such there was no new capital market activity during the quarter. With our share price materially below consensus NAV we have no intent to issue equity at these levels. As of June 30, 2014 we had cash balances of $17.6 million available for investment and $84.1 million available under our revolving credit facility. The company has nearly funded its entire share of equity capital for our 2014 deliveries. Our debt-to-total market capitalization was approximately 42.3% at the end of the quarter. Rob will now provide color on our operations.

Rob Dann

Thanks Donnie. The key takeaway for the second quarter would be one of stability as operating results did not suffer any unforeseen swing. Our wholly owned second quarter occupancy was 90% of stable sequential result following a 90.2% occupancy in the first quarter. Additionally, we saw second quarter same store occupancy of 90.1%. We maintained an attractive second quarter same store NOI margin of 54.8% which was within approximately 20 basis points for the first quarter. We believe the opportunity for margin expansion exists. As we previously announced Angel Herrara was recently hired to strengthen our operational platform and help drive expense manager initiative. By way of example, we successfully limited expenses to less than 15 basis point increase year over year. Our JV Copper Beech portfolio performed in line with historic performance for the quarter. Occupancy was 94.9% with NOI margins at 63.7%. We continue to diligently monitor the progress of these properties. Our leasing for the 2014-15 academic year is well ahead of where we were this time last year for operating properties. As Ted mentioned across all 69 operating properties, we have seen a 210 basis point increase over the prior year resulting in 87.9% of our available beds being preleased. Specific results include our 32 wholly owned Grove properties are 89.1% preleased representing a 390 basis point increase year over year and is the highest preleasing level we have ever achieved in the history of the company at this point in our cycle. Our nine joint venture operating properties which are up 350 basis points year over year are 76.2% leased. Our total Grove operating group is 86.2% preleased, which is a 390 basis points increase year-over-year. Our 2014 Grove and Copper Beech deliveries are leasing slower than historically new deliveries have been in previous years and break out as follows. Our six Grove deliveries representing 3703 beds are 68.2% preleased. Of note Grand Forks, North Dakota is fully leased and we hold comfortable expectations that Slippery Rock, PA will also be leased up shortly. Our one Copper Beech delivery representing 660 beds in Ames, Iowa is 52.7% preleased. We anticipate greater leasing as the Grove asset at Ames is already a 100% leased and is referring students to this property. Our JV Copper Beech portfolio was 90.8% leased compared to 91.8% the prior year representing only a 100 basis point gap year-over-year markedly better than previously reported. We remain focused on helping them with their leasing efforts and continue to see an opportunity for improvement. Seven property deferred Copper Beech portfolio was 85% leased, a material improvement compared to the 65.1% the prior year. As is now clearly evident our evo projects are well below everyone’s expectations and are the primary driver in our decision to revise guidance which Ted will discuss momentarily. We attribute the slower leasing activity to a variety of factors which include the following: First, a new product experience. The introduction of highly amenitized high rise assets into the Montreal and Philadelphia student housing markets is quite simply a new experience for the student population. It’s a new choice but it’s also a different choice and we’re experiencing a steeper adoption curve than we have experienced in the past. Leasing decisions for these new products are proving to be experiential and necessitate students really exploring the properties in ways that differ from how they evaluate the traditional housing supply. The ability to walk the assets and visit fellow students who live at the properties is key to accelerate leasing activity. Today, the ability for students to have those experiences have been impacted by construction activity and weather related impact. For example, evo Philly welcomes its first residents tomorrow and we expect to see more inquiry and activity as students are able to physically experience the property. Second, a more dynamic leasing population; whereas in the past our projects have been linked with a single dominant university in a non urban location the leasing population for our evo projects are fed from multiple universities both graduate and undergraduate with varying academic start dates. As such marketing initiatives have to be differentiated and targeted in ways that are more dynamic than prior marketing campaigns. By way of example in Montreal an extremely number of out of town students storm into Montreal immediately prior to school start date and then hurriedly establish bank accounts and identify a place to live in a whirlwind of last minute activity. We’ve adapted for this market dynamic by establishing joint marketing campaigns with RBC and other financial, local financial institutions whereby we’ll have a presence inside their branches during the onslaught of arrivals. Clearly those students have not yet arrived in town, so we do not know the final result but we believe we can see a non-linear jump in leases being signed. Third - a lack of clarity. We recognize that we experience a steep learning curve with these projects. We accept constructive criticism that our prior experiences may have made us optimistically biased. We also believe we have acted nimbly and diligently as each unknown has appeared. That said, we see the biggest challenge we face this very day is of the known unknown. Said differently, we know we are poised for non-linear leasing activity as a wave of students arrive and students begin to physically explore the properties in August and September. However, we simply have no clarity at this point in time to realistically project how large that step function will be. We’re in a position where the outcome will be a bit binary - underwhelming results or impressive progress. We will not have the clarity to know how well these assets perform until late in the third quarter. All of our efforts and attention are on the operations for this quarter. We have an all consuming focus on delivering the strongest possible results we can for both our existing portfolio and the new deliveries we have committed to. I’ll hand it back over to Ted.

Ted Rollins

Thanks Rob. As Rob said our evo projects are below everyone’s expectations. We are working hard to remedy the situation and are acutely focuses on bringing the best results we can on these projects. We know we’ll end the leasing cycle better than we are today but we just don’t have the clarity today to say by how much. Therefore, we are revising our guidance. We remain confident that longer term upon stabilization these assets will be highly desirable. Today at this point in time prudence and pragmatism necessitate our lowering near term expectations. However, revising guidance is obviously more than just an effort to provide investors good near term direction and transparency. It is also about letting you know that we are taking a strategic not just tactical shift in how we operate the business and that you should expect to see more change from us going forward. The particular factors Rob described that contributed to the less predictable leasing activity for evo are temporary and it is highly unlikely that we will be challenged by these factors next year or thereafter. Even if we were reporting very strong evo results today we recognize that our increased development activity this year with 10 new deliveries in total along with introducing the evo concept has been a primary contributor to our current situation. We acknowledge that our past focus on outside development activity has placed an increased strain on our balance sheet, our ongoing operations and our ability to execute. It would be disingenuous for us to not address this issue. So in addition to reviving guidance given the lack of near term clarity on our evo projects we are also reviving guidance to reflect our decision to materially reduce development activity. In 2015, we will have just four new deliveries. Not only is this a 60% reduction compared to 2014 but also the lowest amount of new projects we have ever delivered as a public company and given the size of our entire portfolio the smallest ever percentage of new development activity. In combination, these two elements bring down our guidance for the balance of the year to reflect lower initial expected yields on our evo projects and the loss of development fees. We have made a very realistic assessment and purposely avoided any optimistic bias. That said we do see the potential for upside should leasing activity improve.

Looking further ahead, we fundamentally believe that we can achieve healthy NOI margin expansion by increasing our focus on our operational platform continuing to implement sustainable expense management initiatives and achieving greater efficiencies now that our portfolio has achieved sufficient scale particularly with the Copper Beech resolution. I’ll let Donnie spend a moment behind our revised guidance.

Donnie Bobbitt

Thanks Ted. Our revised full-year 2014 FFO range is now $0.66 to $0.68 per fully diluted share. Further we have assumed $0.16 for the low end range for the third quarter. Our reduction in guidance reflects a lower initial expected yield on our evo projects as well as reduction in development and construction fees commensurate with only four new deliveries in 2015. We continue to assume the base case for Copper Beech which contemplates no further investment. Our FFOA guidance also excludes non-recurring and non-cash items such as any severance related charges, the write off of deferred financing costs as a result of the early pay off in financings, potential impairments, transaction costs associated with the Copper Beech investment and other acquisitions in the mark to market adjustment of the Copper Beech debt. Additionally, it excludes the potential impact of any asset dispositions or capital raises, back to you Ted.

Ted Rollins

Thanks Donnie. As I mentioned our revised guidance reflects a strategic shift not a temporary tactical maneuver. This is not about us reverting back to doing a bunch of deals as soon as we get past this academic year but once we have a good quarter we’ll raise new capital. This is a fundamental shift. Yes we believe in our vertically integrated development capability and value how it has allowed us to create the most modern student housing portfolio available today and yes we will continue to develop new assets. But we will do so only with a balanced and risk aware perspective. Today’s call is about you letting you know that we have heard you, that I personally have heard you. I know you are all frustrated and I know that we have to change things here at Campus Crest to end that frustration. I know you have asked for us to change how we operate, you want a change but I also know that many of you are skeptical that we will change.

Today’s call isn’t going to change your view by itself but it is the step of many-many successive steps towards regaining your belief. It won’t work to simply tell you we know have to show you. To that end I am pleased to introduce Aaron Halfacre to our team. Aaron joins us formally as executive office and head of our capital markets. But more importantly Aaron joins us in the capacity of a change agent. Many of you know Aaron and you know he’s a candid advocate for shareholders. He has spent his career in real estate, REIT land and the buy-side looking at business decisions through the lens of an investor. He is both qualified and disciplined and our team finds his energy and candor refreshing. He has already proven instrumental in our progress and we are excited to have him as a part of our team, with that I’ll turn the call over to Aaron.

Aaron Halfacre

Thanks Ted and thanks for the introduction. I too am excited to be a part of the team. However I was like many of you listening today initially skeptical. I spoke to many of you as part of my due diligence. You shared with me your frustration and your dismay, candidly many of you said, don’t even bother. You questioned management’s ability to change and you noted how they were tone deaf to investors. On the surface I couldn’t really disagree but as I digging deeper I saw a real opportunity for Campus Crest to improve. However, opportunity means nothing if it can’t become reality. I knew that if I were going to join, if I were going to lay my personal career credibility on the line then I had to be absolutely convinced that not only could they change but they really wanted to change. The whole team, Ted and Donnie in particular can attest that I probed and challenged them. This went on for a bit as I kept asking the hard questions. I feel it’s easy for someone to say they can change or that they’re willing to change but I’ve always found it much harder to do so. To ensure that they would hold to a long-term consistent change I requested a seat at the table. I knew if they couldn’t stomach that request better yet if they couldn’t openly embrace it then it was very unlikely in my assessment that they could change. In the end I became convinced that they were on board with turning the tide and I hope you see today as a glimpse of that. As you would likely agree and I don’t want to sound too cliché here, but running a student housing REIT isn’t rocket science. We’re not building a electric car or launching a sub orbital spaceship. Our goal at the public REIT is pretty straightforward. We need to maximize our economic occupancy, control our expenses, delever our balance sheet and derisk our business model. We’re not student housing developers, we’re financial stewards and capital allocators just like all of you. Every dollar we spend, invest or return needs to be viewed in that framework. If we do that well then we close our value gap and improve our cost to capital. Obviously this isn’t going to happen in a few quarters, we have to execute quarter in, quarter out, day in, day out in a real disciplined focused manner. It’s going to take some time. I’m encouraged as I see a lot of low hanging fruit. There is real opportunity here. Clearly lowering guidance is never desirable, however I hope you can see the silver lining. Today’s actions are designed to establish firm ground and bring about positive change.

In the weeks ahead I have two immediate objectives; first I want to conclude my exhaustive review of our business which include me visiting properties in our JV partners, and second I’d like to personally meet with each and every one of you, to listen to your concerns and fully understand your perspective. Looking further ahead after we complete the leasing cycle for this academic year you can expect from us a clear articulation of what actions we intend to take to close our value gap.

Ted Rollins

Thanks Aaron and thanks to all of you on the call. Given today’s news we’ve run over a bit on the time we allocate before taking questions. Being respectful of your time and the fact that today is a busy day for earnings, we apologize in advance if we can’t get to all of your questions. With that we’d like to open the call for Q&A, operator.

Question-and-Answer Session

Operator

Thank you, (Operator Instructions) our first question comes from Michael Salinsky with RBC Capital Markets, please proceed with your question.

Michael Salinsky - RBC Capital Markets

Good morning guys, Aaron good luck and just wanted first of all dive into the evo projects. Are there any guarantees, waterfalls, preferred returns that could further challenge those projects? And also when you think about -- I realize you guys doubted a large range. What is embedded in the guidance in terms of occupancy?

Donnie Bobbitt

Hey Mike it’s Donnie. On the first question there - no there’s not any guarantees or any waterfalls that would give anybody a preferential return. As far as the occupancy is, we’ll talk about that later this year, based on Rob’s comments we still don’t have the clarity right now, we have as you can appreciate run a range of scenarios and that’s what’s implied in our guidance.

Michael Salinsky - RBC Capital Markets

Okay, could I ask in a different way then? What occupancy do you need to get to, to cover the operating costs, real estate taxes and stuff of the property to generate positive cash flow?

Donnie Bobbitt

You know Mike, I think today we’re just not giving out that detailed guidance today and we are prepared to talk about the impact to our full year guidance.

Michael Salinsky - RBC Capital Markets

Okay. Second of all, just given the leasing progress you've had year-to-date on the same-store portfolio, can you give us the updated leasing targets for academic 2014-2015?

Rob Dann

Hey Mike it’s Rob. On the Grove portfolio you know on the calendar year we’re at 91-93 which is what we’ve been quoting all along and then on the academic year, 92-94 is the range we’ve been giving, we feel fairly bullish about it and I think we’ll be high end of that range.

Michael Salinsky - RBC Capital Markets

Okay.

Donnie Bobbitt

Hey Mike it’s Donnie. Let me follow up on your question, I didn’t give you enough detail. We’re comfortable that we’ll have the occupancy in place to cover all of the fixed costs through the evo projects.

Michael Salinsky - RBC Capital Markets

Okay. That's helpful. Third, just the decision to reduce the scope of -- reduce the size of the development pipeline, the plan is still to put those into joint ventures, correct? Just given the plan, can you talk about your CapEx needs, then, for -- not CapEx needs, but your capital needs for those projects, how you intend to fund those, and then also, just given that you've downsized the size of the pipeline, any impact, what the impact was both in terms of fees as well as capitalized overhead?

Donnie Bobbitt

Hey, Mike, the mix of the projects will be determined later this year, whether it's JV or wholly owned format, but being scaled back from our earlier discussion on the development pipeline, most of the costs, of our share of the costs, have been funded for the 2015 deliveries. We have a range of about $15 million to $20 million still to fund for this year's and next year's projects.

Operator

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

Michael Bilerman - Citigroup

It's Michael Bilerman here with Nick. And certainly I appreciate your sort of openness and comments, and I'm just curious, I guess, what was the come to Jesus moment now versus a lot of the issues over the last number of years? What was the trigger point to sort of come clean with everything?

Ted Rollins

Mike, it’s Ted, good morning. I think we took a long hard look at everything in the business and thought the most prudent thing to do was make this shift. One thing that’s been important has been adding Aaron to the team, having a fresh set of eyes looking at it and you want to add anything to that.

Aaron Halfacre

Hey Mike. I think not to be harsh on Ted, I think they’ll agree that they were a little, they were tone deaf, I mean what we just talked about today, I mean you’ve probably been saying for three years. Maybe it’s just the way I said to them the same things that you guys are saying, maybe I raised my voice a little bit, you know I have the benefit to look far further deeper into the operations than anyone does on the outside and I’ve just said that we have to do this. We're not playing any game here, this is real stuff. We’re not deal guys, we’re not just student housing guys, we’re running a REIT and there’s a certain way you run a REIT and we need to do that and let’s not do it next quarter, the quarter after or let’s not get around to doing it, and let’s not blow smoke because you guys are tired of that and so I think it’s just a confluence of things, you know there’s a really good fit here in the team, I think if, I don’t think we’ve had this element here before and I think that’s a large part about the -- about what you’ve changed today, but again you know hearing us today doesn’t mean anything if we go and disappoint you next quarter, right?

Michael Bilerman - Citigroup

Well, I'm curious just from the perspective of sort of Board oversight and senior management, I mean, to me, the stock price is always indicative. It doesn't matter what people say. People can bark and say different things. At the end of the day the market tells you something. And for the last number of years -- this is not just one thing that's occurred. I'm just curious whether there's going to be Board changes, whether there's -- you've obviously -- Aaron, you've joined the team, but is there contemplated other senior management changes? I mean, you can sort of, I agree, say things, but I guess help me understand a little bit about sort of the Board level and whether they get it.

Aaron Halfacre

Yes, two things, one is I think the message here near term was this is the first time I think you guys ever heard of change, but the bottom-line is these guys right now, everyone needs to be focused on evo, right. Let’s just be candid, that’s going to be all hands in getting the new deliveries on board and getting these things leased for the academic year. I think when we get ready to go out in the [indiscernible] you’re going to see a lot of the items that you’re raising, corporate governance is clearly one of those, right. If you look at any of your guys’ metrics our corporate governance score sucks, right. And we got to do better at that, we get that. So I think you should, till we get around that I don’t have any specifics to tell you today. And when I think of corporate governance it’s not just the board it’s a variety of things and so. But we understand those levers and we’re going to address those types of activities and we’re going to, I think we have to think further about derisking the balance sheet and clearly you know we’re in a penalty box in terms of not only the equity price but where we’re at a leverage perspective and so you know we’re going to be very mindful of those things. Resolving Copper Beech which I’m sure has been one of the next questions you have is important to us. You know we have been having active diligent dialogue and Ted, Donnie and I are actually going to Dr. McWhirter tomorrow. We’re close to the deadline, so we’re not going to openly negotiate on the call but we’re very close there, but getting that resolved is a huge thing, right, that’s an overhang, let’s clear that up, and I think the development activity was a huge overhang, I mean it was just like you know, people say why do you keep doing this, why do keep doing this, why you keep doing it and so you’re right, it’s been successive things in the past, not just one, the stock price is the clearest indication that people are taking their money elsewhere, and so have to address that and as you know and you’re going to pound on this quarter after quarter, it takes time. You go back and look at DBR or Kimco these guys, you can’t turn this on a dime.

Michael Bilerman - Citigroup

Last question for me for now, just in terms of the guidance, and, Donnie, you talked about the quarter's results, the $0.16, being sort of in line with the Street. I guess, there's nine estimates out there for the quarter. Four were at $0.18, two were at $0.17 and three were at $0.16, an average of $0.17. So it would appear that you missed. I don't know how that's in line. That's one. Number two, you sort of lowered guidance top end and bottom end by $0.06, $4 million of FFO. Can you reconcile the change in that $4 million? You had development fees and management fees of about $5 million in original guidance. Clearly that's going to come in some. But I don't know how much, if it's $1 million, $2 million. And then the balance should be the evo projects, which -- but I don't know if there's other things going on in those numbers. So if you can just be specific about what caused a $0.06 decline between the two buckets, or if there's other things.

Aaron Halfacre

Sure Michael, so in your first question about the analysts, we have nine covering us, and the way we looked at it and we reconcile core FFOA when you eliminate the noise of the debt mark-to-market or anything else that’s non-cash, five of our nine analysts are at $0.16 including you guys I believe. So when we made that statement we felt like the majority of our covering analysts when you peel it back our core FFO is $0.16 a share, so that’s how we were looking at, that was the reason for that comment.

Michael Bilerman - Citigroup

Okay.

Ted Rollins

On the next question, the $0.06 difference in guidance is split $0.03 to each of those items. $0.03 related to fees in the fourth quarter and the other $0.03 is for the evo projects spread across the remainder of the year.

Aaron Halfacre

And Mike I’d say we haven’t -- I think Salinsky asked about the portfolio occupancy, clearly the reason why we’re lowering the guidance is for the evo, we feel comfortable that the ranges on the others are in line and I think you could probably get to the math fairly straightforward on the fees. I think the wild card there is we’re at in September for the evos and how that spreads out and we also, we don’t think it’s going to be static and we guess I think we’re going to still see leasing activity following September, but how you ramp it up and we looked at various scenarios really can cause a little bit of variability on that and the impact quarter over quarter.

Michael Bilerman - Citigroup

Okay, thank you.

Operator

Our next question comes from Ryan Meliker with MLV & Company, please proceed with your question.

Ryan Meliker - MLV & Company

I had two things I was hoping you could tell me. First of all, with regards to Copper Beech, given that you guys are now, I guess, looking at things in a different light than you had in the past, is there any interest in walking away from Copper Beech all together, potentially even trying to sell the portion that you've already acquired back to Jack? Just looking at -- obviously you don't want to throw good money after bad. I'm not saying that any resolution would be bad money at it. But given that things don't seem to have transpired as you had expected when you announced this deal 15 months ago, how are you guys thinking about that?

Ted Rollins

Ryan it’s Ted. I think our focus is on resolving it first and then evaluating the other alternatives if we can’t resolve it, and we’ve got a period here that we’re diligently working on.

Ryan Meliker - MLV & Company

I guess what does resolution look like, given that lease-up has been slower, there have been certain properties that haven't performed well, your stock price is down north of 30% versus where it was when you announced the deal? I mean, help us understand what resolution might look like.

Aaron Halfacre

Hey Ryan this is Aaron, I think we’re going to hold our guns and tell you we’re not going to openly negotiate this, I think if you go back to our transcripts and you look at kind of the things we thought about, we talked about discounts, we talked about OP units at different levels, I think all that stuff remains relevant and germane to our negotiations. We didn’t go into this without a desire to get it done but it’s not prudent use of our capital to do it, so it’s dilutive and certainly not further dilutive and it doesn’t make sense for us to just do it because we wanted it, right. We’re not -- we can’t be deal junkies and so we’re being really rational about it, but I think it makes sense for where we’re at in the operations, how we know the assets, sort of the expectations why we raise capital in the first place is to try to get this solved, but all options have to be on the table because we’re making financial decisions not emotional ones.

Ryan Meliker - MLV & Company

Okay, fair enough. The second thing I was hoping you guys might be able to answer for me is that with your guidance now at $0.66 to $0.68 and FFO for 14 and a reduction in development spend out to 15, you factor in CapEx it doesn't look like the common dividend's going to be covered by operating cash flow, at least this year. How are you guys looking at and how is the Board evaluating the dividend? Is there a possibility of cutting the dividend any time soon?

Donnie Bobbitt

Hey Ryan it’s Donnie. No, no plans to cut the dividend. The way we’re looking at it is we put out a realistic plan to cover the dividend through FFO for the remainder of this year and we’re confident in the full support of it.

Ryan Meliker - MLV & Company

So you're willing to use the balance sheet to help cover it after taking into account maintenance CapEx?

Ted Rollins

We haven’t sort of detailed here, I think again we’re focused on leasing right now but one of the things that we’re diligently working on is accelerating our expense management initiatives, to make sure we can preserve and increase our cash, I think everyone would agree that this range puts us awfully close to the dividend and that makes no one comfortable but -- and I think it’s very uncharacteristic to come out with a base on the guidance for the third quarter but we’re doing that this time to help people, we’re not giving you all the parameters, we’re giving you enough. The whole point of this is we lack clarity so we’re trying to give as much clarity as we can in this environment where unfortunately we don’t have it and I know that just kills analysts and investors alike. We remain very committed to making the dividend and we are pretty confident we’re going to be okay in terms of the cash flow. We know we’re confident on the FFO and we’re going to get there but I think you know, I think we should have this conversation again next quarter because that would be really telling.

Ryan Meliker - MLV & Company

All right. Thanks.

Operator

Our next question comes from Dave Bragg with Green Street Advisors, please proceed with your question.

Dave Bragg - Green Street Advisors

Question for Ted, and we're hopping on a bit late here from the Sun call, so I apologize if we missed this, but in terms of the long-term potential outcomes here, how relevant is Aaron's experience at Cole that resulted in a maximization of shareholder value in the form of a sale?

Aaron Halfacre

Ah ah, I’m going to jump the curve on Ted there. I’ll leave you to your own machinations on that type of things. But the reason why I came on board, look I don’t want to come on board to just you know jump off board again, it’s really disruptive to me and my family, quite candidly when I was at Cole I went out there thinking I would have a nice cushy REIT job in Phoenix, I just had to sell my house there. I think universally no one had anticipated that merger getting done, I helped transition it I even was - for a time up in New York with the folks at ARCP, chose to leave to look for a long-term permanent home, I turned down other opportunities that were more along the lines of what you’re suggested, they thought they wanted someone as sort of a, put a lipstick on it and get it packaged up and move it on kind of thing, that’s not the intent here, it’s certainly not my intent and I asked that very question to Ted and Donnie and I got the answers that I needed, you know I think I look at this real -- there’s real -- again you guys can’t see everything I can see, I think there’s a real opportunity here, I think there’s a real chance to run a really lean business and sort of -- if you sort of take that sort of Deming approach on each quarter you’re fine tuning, you’re improving, you’re driving things, you’re rationalizing things. I think there’s room for improvement, this REIT and REITs in general should be a little bit like farming, you know we should be planting our crop every academic year and harvesting those, you know get up at dawn, go to bed at dusk and let’s not try to reinvent the wheel and so, our job is to do that, I think if we do that we know a sale becomes increasingly or a merger or any sort of activity like that becomes increasingly lower probability. If we keep dragging on the ground, all across the ground at 52 week lows, well I considered you know sort of egregious discount to NAV then people are going to circle but that’s not the intent of why I came on board. Ted, you want to answer that.

Ted Rollins

It was us looking for a change agent Dave, someone that we could add to the finance group that could really take the company and shift it into a more traditional format, to yield value of the assets that we had, and we still believe that we have value and can deliver value in the assets that we build, but a more measured approach to it, a more focused approach to it and shifting the business. And when we talked to Aaron he had a very clear and succinct plan that he laid out for us and we had long discussions about it and it made a lot of sense. And quite honestly after he was here doing his diligence we had a series of meeting talking about the best way to create value out of what we out there as far as our total assets and all the opportunity we had before us on the table, so everything that we had done in the last three years, we had a great group of assets but we weren’t reaching maximum potential for those assets because we were too growth focused and so for us it’s time to just pulling our horns a little bit, start focusing on the right things in the portfolio, continuing to press operations and get that to the next level, I mean there’ve been some solid improvements over the last 24 months as we continue to work internally with people, systems, training and doubling down on that focus and harvesting the value we have on the table is a very important step in what we’re doing next, so that’s why we brought Aaron on to have that focus and work with the team to make sure that we put together a plan for the future.

Dave Bragg - Green Street Advisors

Thank you for that.

Operator

(Operator Instructions) Our next question comes from Jana Galan with Bank of America, please proceed with your question.

Jana Galan - Bank of America

I just had a quick question on the transaction costs in the quarter. It looks like you had about $1.46 million, and that seems elevated. Maybe if you could speak to those.

Donnie Bobbitt

Hi Jana, it’s Donnie. As we continue to get consents related to our Copper Beech investment, it’s a rather lengthy process and we’re dealing with these special servicers and there’s been one tranche of those properties that was administrative, but still it had to be serviced and paid in transaction costs, that’s primarily what’s going through there in the second quarter.

Jana Galan - Bank of America

And the part related to the Montreal investments?

Donnie Bobbitt

The part related to the Montreal investments is related to some structuring, additional structuring that was done for the two acquisitions and repositioning of those assets in Montreal that are not operational related.

Jana Galan - Bank of America

Thanks Donnie.

Operator

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

Buck Horne - Raymond James

I wanted to talk a little bit, maybe switch gears to just the wholly owned deliveries for this coming year, just looking at properties like Gainesville and properties like Mount Pleasant. You've had a lot of practice developing core Grove projects and getting the lease-up done, but there's still a couple that seem like they're lagging. Is there something specific about these campuses, or what steps are you taking to help improve the lease-up at the core Grove properties and some of your wholly owned deliveries?

Rob Dann

Hey Buck, it’s Rob. We’re really pretty bullish about the core portfolio, to be honest with you I think we’ve done a really good job this year of getting ahead of the curve. On the operating group we you can see have we had more 100% than we’ve ever had and the core group has really done quite well. On the new lease-ups the two in particular that you pointed out as I said overall I’m not thrilled with where we’re at right now but Mount Pleasant for example is a good example. CB’s already in the market, they’re at a 100%, so they’ve done very well, we’re piggy backing off of that. We think we’ll get to a real solid number there that underwrote to. Gainesville, the other one you pointed out, you know we really-really like that market, it’s got a tremendous amount of purpose built student housing in it, they’ve all done exceptionally well, if you look at the historical trend of Gainesville they’ve all been at a 100%. We came out of the chute a little late in that particular market and that’s kind of where we’re at in Gainesville, I think it’s a good investment, solid market, I think we’ll do exceptionally well in that market. State College was a prime example last year if you remember we only got to 65% this year, this year we’re clearly going to be 100% and it’s a solid market just kind of like State College was. So we feel pretty good about those two.

Buck Horne - Raymond James

What's a realistic yield target for this group of properties now, now that you kind of know where your leases are going? And if we look out to the development pipeline for 2015, what's a realistic yield target for that group of properties?

Donnie Bobbitt

Hey Buck good morning, it’s Donnie. We’re not giving 2015 guidance on this call. For the 2014 deliveries we’ll update on where those yields are going to end up for the ’14-’15 school year with our next call later this year as we’ve typically done in the past.

Operator

Our next question is a follow-up from Nick Joseph with Citigroup, please proceed with your question.

Michael Bilerman - Citigroup

It’s Michael Bilerman again. I'm just curious, G&A, you've been running about $7 million year to date, original forecast was $12 million. It doesn't sound like you are cutting any management. If anything, Aaron, I assume you're not working for free. So I'm just curious sort of what the G&A is. And I may have missed this in your response earlier, but I assume with cutting the development there was probably a bunch of capitalized development personnel that you've now got to bring on to the P&L and expense. So can you just sort of update us overall on the G&A load for the Company?

Donnie Bobbitt

Hey Michael, it’s Donnie. Our G&A year to-date has run hard than we had planned for it to. Ted and I think Aaron mentioned earlier we’ve got some costs reduction strategies that we’re going to be putting in place for near term and long term, they’re sustainable. And the amount of expenses related to our development construction activities is reflected in our reduction in the guidance for the balance of this year.

Michael Bilerman - Citigroup

So those will just be netted into development? They won't roll into the G&A line?

Donnie Bobbitt

That’s correct.

Michael Bilerman - Citigroup

And so what is the forecast for G&A for the year? If it was $12 million before and you're running $14 million annualized, and that doesn't include much for Aaron, I assume, because I think you just joined --

Aaron Halfacre

I had worked for free until today, I’m very mindful of expenses.

Michael Bilerman - Citigroup

That's very kind of you. So what is the G&A forecast? What should we be thinking about? -

Donnie Bobbitt

Yes Michael, it’s -- we're not going to answer other than the guidance adjustment for development and construction fees and the yield on our evo projects, we’re not prepared to discuss any other guidance components today.

Aaron Halfacre

And I’d add to that, the reason is that I mentioned earlier I think something like that. We’re going through sort of a very active expense management initiative this quarter, you know you think about construction and development, none of that’s been touched right now as we’re still in that mold of getting things done. We’re looking, Donnie and Scott Roshon our Controller, sat down with them and we’re sort of going through line by line and we’ve already had couple of meetings with Rob and Brian and Ted and we’re -- my process of asking and probing and asking hard questions, what is this and why are we doing it and could we do it better. So I think what -- the reason is we’re not giving it out right now. Whatever forecast we have is going to change, and because we have to reduce expenses and increase economic occupancy if we’re going to increase our margins, those are the levers and so I think we’re going to have a lot more clarity on that. If I’d been here a quarter ago we’d probably have something in there I think going forward things we’d like to do is actually have a lot of this detailed out and presentations on earnings so we can answer your questions better. It’s great to have a lot of supplements but there’s not a lot of back up for some of these.

Michael Bilerman - Citigroup

Right, but I can appreciate it, so, but the guidance went down $0.06. Half of its development. Half of it was low leasing at evo, right? G&A forecast was $12 million, in that range. You're running $2 million annualized over before your hire and before any other expenses. So that's another $0.03. I'm just trying to understand whether the guidance can go even lower if not successful in terms of cutting G&A. And there's other ways. I don't know if there was added expenses in the first half of the year that won't redo. Right now you're on a trajectory of north of $14 million of G&A, again, before you were hired, and I've got to assume you're getting paid more than zero, that the G&A level's going to be meaningfully higher, which means FFO has the potential to be even lower, which is more pressure on the dividend. And so I'm just trying to get a piece of that. I mean, it is material numbers, a number of cents.

Donnie Bobbitt

Hey Michael, it’s Donnie. Our G&A will be lower on a run rate basis for the second half of the year. We can’t tell you that, I can’t tell you what the number or what the revised range is but yes definitely running over where we want it for six months and the reason I can’t give you more detail on that is there’s obviously other things in the income statement that are going the other way.

Michael Bilerman - Citigroup

Like what. What’s going the other way? What’s positive?

Donnie Bobbitt

We’re just not getting into the detailed guidance update today.

Michael Bilerman - Citigroup

Okay. Can we go to Copper Beech for a moment? April 30, on the last call, Ted, you said we're making good progress. We expect to be funded in our cash and OP units and you expected to announce it within 30 to 60 days, which would've been May 30 and June 30. At this point we feel pretty positive about the direction it's headed. What changed?

Aaron Halfacre

I think what changed for us Michael was just waiting the leasing cycle to kind of get more complete and full year baked. At the time we’re watching the leasing and that’s been a key metric for us and it had to do with the various outcomes and so for us the closer we got we had more clarity, that’s really the whole thing.

Michael Bilerman - Citigroup

And so can you walk us through -- you said the deadline's coming up. What happens if you don't reach an agreement? What is the -- just so the market's prepared? I know you don't want to be negotiating this yourself, but at least we need to understand what the -- what happens if that date gets missed?

Aaron Halfacre

So, I think there’s a couple of scenarios, one is we get a resolution, two we get close to a resolution but we don’t have it and we mutually agree to extend. Three is we don’t get a resolution, we hit the deadline, there is no extension and you know we have a choice and I think as you know in our model, I believe we’ve modeled 48.

Ted Rollins

So we modeled to the downside on that. Michael, the case that Aaron just laid out if there is a failure to resolve our transaction and it goes to 48 that’s already included in the model.

Michael Bilerman - Citigroup

No, I understand that, but then what happens after that? So you don't extend, it comes, and then you're just basically these partners and with no option to buy each other out? That's -

Ted Rollins

Well, no, you have governance documents that step through how you get out or you get in if you're partners. I think it's better to take offline, and we're happy to discuss with you. We just don't want to get into negotiating on conference calls.

Aaron Halfacre

I think if we don’t get a resolution, we don’t get extensioning for close to a resolution and we’re forced, right. We’ve modeled the 48% and then you’re in a situation where you’re saying look he’s got 52 you’ve got 48, so that’ll make you half pregnant, right. Anyone who would try to dispose of this certainly and we have to refuse his ability to dispose if he wanted to, right but it get’s messy, so I think the point of the matter is we really want to resolve this, it has to economically sensible, right. There has to be a form of discount on there just because you guys are demanding it, that’s what the share price is saying. I’m not an overly optimistic guy in general and this isn’t me being - spinning it nicely. We are very focused on getting it resolved. I think you’re generous if you guys should read the transcripts, Ted said 30-60 days twice, the quarter before that, so, stripping out the optimism bias and being realistic, realistically right now we have two weeks before we’re done. We’re meeting with him tomorrow, the relationship is strong, the dialogue has been good, the leasing activity has picked up, if we get to sort of a DEFCON 5 at our mutually sure destruction sort of scenario then we’re going to have to get on the phone with you guys and have a really serious call and let you know how we’re thinking but right now, we’re not concerned.

Michael Bilerman - Citigroup

In terms of the four developments you want to do next year, are those on balance sheet, or are those in joint ventures, and what would be the total gross cost of those?

Donnie Bobbitt

Hey Michael, it’s Donnie again. We’ll give more details on that on the third quarter call as we’ve typically done for our developments for the next year. But it will be four of our Grove branded projects that are very similar to our kind of meat and potatoes development pipeline.

Ted Rollins

We have JV capital available, we have funds on balance sheet available so we’re looking at the right mix, and so in terms of how we fund those projects, we have, there’re no funding needs for those projects.

Michael Bilerman - Citigroup

Well, there would be -- I mean, there's got to be some funding needs, right, because -

Ted Rollins

We’ve already identified all the capital we needed for funding, how’s that.

Aaron Halfacre

Mike if you look at, if you look at some of our responses on earlier call, mainly on the first quarter call we identified, we had already funded the majority of our capital that would be required in a typical JV format for those projects, so later this year we’ll give an update on if they’re JV holding to what the mix is.

Ted Rollins

And the reason that is we’re dialing down the numbers that we had originally done so that creates some capacity, and so we’re obviously you should expect good majority of that to be JV and we’re just working on the mix of those.

Michael Bilerman - Citigroup

And just last one on the evo projects, from a marketing expense perspective, I've got to assume, given where the leasing is at, specifically up in Montreal, you're going to have to spend a lot to ramp up leasing. How are those costs going to be treated? Are you going to capitalize those or are you going to expense those?

Aaron Halfacre

Yes, no, I think cost associated with getting the project up and running would be capitalized, Michael. We still have a budget for our planned marketing expenses, and once the property opens up anything that's spent for driving leases for that cycle or the next cycle gets expensed.

Rob Dann

Michael, it’s Rob, let me just add on to that a little bit, we’ve redeployed our core Grove portfolio has produced really good results to us at this point, so we’ve shipped in some of our human capital up there as well, I had a whole team that’s been up there from weeks as a matter of fact, matter of fact I've spent quite a bit of my own time up there as well. And dollars are already on our payroll so it's really no cost against it there. The RBC deal that we talked about on my opening statement alignment, there's no cost to us to what so ever in doing that. So we're trying to find some programs as well that generates buzz and obviously heads and beds that doesn’t have our capital cost tied to it.

Operator

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

Ted Rollins

I'd like to thank you for joining our call today and look forward to talking to you all as we move forward. Thank you.

Operator

Thank you. This does concludes today's teleconference. You may disconnect your lines at this time and have a great day.

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

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

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

Source: Campus Crest Communities' (CCG) CEO Ted Rollins on Q2 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts