American Campus Communities' (ACC) CEO Bill Bayless on Q1 2016 Results - Earnings Call Transcript

| About: American Campus (ACC)

American Campus Communities, Inc. (NYSE:ACC)

Q1 2016 Results Earnings Conference Call

April 26, 2016, 10 AM ET

Executives

Ryan Dennison - VP Corporate Finance and Investor Relations

Bill Bayless - President, Chief Executive Officer

James Hopke - EVP, Chief Operating Officer

William Talbot - Chief Investment Officer/EVP

Jonathan Graf - EVP, Chief Financial Officer, Treasurer

Jamie Wilhelm - EVP of Public-Private Partnerships

Daniel Perry - EVP, Capital Markets

Analysts

Nick Joseph - Citigroup

Ryan Meliker - Canaccord Genuity

Austin Wurschmidt - KeyBanc Capital Markets

Jeffrey Pehl - Goldman Sachs

Alexander Goldfarb - Sandler O’Neill & Partners

Ryan Burke - Green Street Advisors

Jana Galan - Bank of America Merrill Lynch

Drew Babin - Robert W. Baird & Company

Carol Kemple - Hilliard Lyons

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the American Campus Communities, Inc. 2016 First Quarter Earnings Conference Call. Today’s call is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions.

I would now like to turn the conference over to Ryan Dennison, Vice President of Corporate Finance and Investor Relations for American Campus Communities. Please go ahead.

Ryan Dennison

Thank you. Good morning and thank you for joining the American Campus Communities’ 2016 first quarter conference call. The press release is furnished on form 8-K to provide access to the widest possible audience.

In the release, the company has reconciled the non-GAAP financial measures to those directly comparable GAAP measures in accordance with Reg 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. 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, in 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 meanings 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 statement 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 revise or update any forward-looking statements 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; Jim Hopke, our Chief Operating Officer; William Talbot, our Chief Investment Officer; Jon Graf, our Chief Financial 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 to discuss our first quarter 2016 financial and operating results. As you read in last night’s release and will hear from the team today, it was solid quarter for the company, marked by continued value creation via same-store growth in our core portfolio and strong pre-leasing for the upcoming 2016/2017 academic year.

We also continued to make strides with regard to external growth in the areas of core off-campus development and on-campus ACE development opportunities, continuing to build our pipeline of unprecedented high quality growth for the foreseeable future.

Also, as you can see when reviewing our credit metrics and financial ratios at the quarter end, we significantly strengthened our balance sheet. The $708 million equity offering completed during the quarter, along with the strategic disposition of non-core and older communities planned during 2016 puts us in an excellent position to be able to execute on our expanding high-yielding development opportunities, while continuing to refine the quality of our portfolio and the corresponding income stream.

While these activities have a dilutive impact on our near-term earnings, they set the stage for meaningful value creation and long-term earnings per share growth and net asset value creation moving into 2017 and beyond.

With that, I’ll turn it over to Jim Hopke to discuss our operational results for the quarter and to provide an update on our 2016/2017 lease up.

James Hopke

Thanks, Bill. We’re pleased to announce that our overall 2016 operating results were in line with our internal expectations. First quarter same-store property NOI increased by 2.5% over Q1 of 2015, on a 2.3% increase in revenue and an increase in operating expenses of 2.1%.

The 2.3% revenue growth was impacted by a 40 basis point decline in occupancy compared to Q1 of 2015. Properties targeted for disposition accounted for 37 basis points of the 40 basis points. When looking at the 40 basis point decline from the fourth quarter 2015, in addition to the decline in occupancy at properties targeted for sale, December ending leases throughout the balance of the portfolio also partially contributed to the decrease.

The 2.1% expense growth was positively influenced by progress on our asset management initiatives. In addition to milder 2016 winter conditions and improved commodity pricing, our energy contract management initiatives and deregulated markets and utility initiatives associated with LED lighting upgrades at select properties led to an actual reduction in utilities expenses year over year.

Our insurance premiums were also positively impacted by our risk management profile and a positive pricing environment currently in place. The performance of these two areas was offset by higher growth in both marketing and maintenance, which were higher than Q1 2015, but are timing related and expected to trend to inflationary growth for the full year.

Turning to leasing, as of Friday, April 22, our 2017 same-store wholly owned portfolio was 83.3% applied for and 77.4% leased compared to 82.4% applied and 75.7% leased for the same date in 2015. This pace is 170 basis points ahead of the 2015/2016 lease up. We are still projecting an overall rental rate increase of 3% for the 2017 same-store portfolio. Once again, excluding properties targeted for disposition, our core portfolio is 80% leased, 330 basis points ahead of last year’s Q1 pace.

Our fall 2016 development and pre-sell deliveries are 67.2% pre-leased for academic year 2016/2017. These metrics are impacted by the second phase Stanworth faculty housing asset at Princeton which has not yet commenced leasing, will not follow the cyclical lease up process of a purpose-built student property and is expected to lease up over the first year of operation similar to the first phase. Excluding Stanworth, the remaining development properties are 76.3% pre-leased.

With that, I’ll turn the call over to William to discuss our investment activity.

William Talbot

Thanks, Jim. Turning first to development, we continue to grow our highly accretive development pipeline of core pedestrian assets serving tier 1 universities. For 2016, our seven development and pre-sale assets totaling $307 million dollars are on time and on budget.

For 2017, we have begun construction on two additional owned developments, with a $26.8 million eight-phase on-campus project at Prairie View A&M University and our $25 million pedestrian off-campus development Suites at 3rd serving the University of Illinois.

During the second quarter, we anticipate completing pre-development activities and commencing construction on our $53 million pedestrian tunnel development serving students at SUNY Binghamton, which, upon completion will operate as one property with the adjacent university plaza we acquired last year. Our developments for fall 2017 now total $470 million of communities that are either located on or the walking distance to campus and there is still small window of time to expand the 2017 development pipeline.

We have also made progress with our fall 2018 owned development pipeline. During the quarter, we executed a pre-development and risk sharing agreement with Virginia Commonwealth University for our previously announced ACE development. The community is intended to serve first year students at VCU and will include 1,524 beds.

As part of the development, we will demolish and permanently remove over 800 existing beds of functionally obsolete product. Currently, our firm pipeline of owned on and off-campus developments for 2016 through 2019 totals 13,000 beds and approximately $1.2 billion of development cost.

We are targeting between a 6.5% and 7% stabilized nominal yield for these developments, with the exception of our ACE development on the campus of the University of California at Berkeley which is targeting a 6.25% stabilized yield, representing an accretive spread over market cap rates in the Bay Area.

We’ve also made significant progress on our strategy of disposing of older and [dry] properties remaining in our portfolio. During the quarter, we completed the sale of two assets for a total of $73.8 million. The properties had an average age of 21 years, were in need of significant future capital reinvestment and were located at an average distance to campus of 0.6 miles. They were sold at an average economic cap rate of 5.6% based on in-place rental revenue, escalated trailing 12 operating expenses and historical average capital expenditures.

As previously discussed, we intend to dispose up to $600 million of assets in 2016 or early 2017. We have engaged intermediaries and begun discussions with leading domestic and foreign institutional capital and are targeting between 6% to 6.25% economic cap rate on the portfolio.

As part of this strategic approach to maximize value, ease integration of the portfolio and develop future strategic relationships, we’re also offering to remain as the manager of the assets for the new buyer. This unique package provides a buyer of a significant value add opportunity of scale coupled with the best in class management platform to execute on their investment. We intend to recycle the proceeds from the sale of those assets and our high-yielding development pipeline further improving the value of our owned portfolio.

There continues to be significant demand for investment in student housing in both core and value add opportunities. During last week’s Interface Student Housing Conference, one of the largest networking conferences in our sector, there was record attendance of numerous domestic and foreign capital sources attending for the first time and they were interested in entering or expanding their investments in the student housing sector.

Finally, we’re excited to announce our continued success with on-campus public-private partnerships. During the quarter, we signed a pre-development agreement for a third party fee development on the campus of Texas A&M San Antonio expected to deliver in fall 2017 or 2018, representing our 13th project in partnership with the Texas A&M University system.

In addition, ACC has been awarded our 17th on-campus award for public-private partnership since January 2015, with the selection of ACC for an on-campus third party housing development at La Salle University in Philadelphia that is expected to deliver in 2019.

Lastly, we’ve entered into a consulting agreement with a not-for-profit foundation on the acquisition of a privately-owned 1,790-bed asset at Texas A&M Corpus Christi for the benefit of the university. Upon completion of the acquisition, ACC will receive a one-time $1.4 million consulting fee and we expect to be hired as manager of the project. The transaction is expected to close in the second quarter of this year.

With that, I’ll now turn it over to Jon to discuss our financial results.

Jonathan Graf

Thanks, William. FFOM results met our internal expectations for the first quarter of 2016, as we reported total FFOM of $78.2 million or $0.62 per fully diluted share as compared to FFOM of $76.1 million or $0.67 per fully diluted share for the comparable quarter in 2015. FFOM increased by $2.1 million, but per share amounts were impacted by an 11.2% increase in the weighted average shares outstanding, primarily from the 17.9 million common share offering during February 2016 to fund our development pipeline.

As compared to the first quarter of 2015, the 2016 first quarter results benefited from the previously discussed same-store operating results and the 11 growth properties placed into service since the first quarter of 2015. This was partially offset by lost FFOM from the sale of 20 disposition properties during 2015, whose FFOM contribution was $4.9 million less this quarter as compared to 2015 and additional corporate interest expense of $2.5 million, primarily from the timing of our $400 million bond offering in September of 2015.

In February of this year, we raised $708 million in net proceeds from the previously mentioned equity offering, using a portion of the proceeds to repay the outstanding balance on our revolving credit facility and our $250 million term loan scheduled to mature in March of 2019.

As of March 31, 2016, we have $387 million of cash available and $500 million available under our revolving credit facility, which should allow us to execute on the development pipeline that William discussed. As of March 31, 2016, the company’s debt to total asset value was 36% and the net debt to run rate EBITDA was 5.7 times. As disclosed in the supplemental, these future ratios are anticipated to range between 31% to 35% and 5 to 6 times.

As of quarter end, we had approximately $5.2 billion in unencumbered asset value, which was almost 72% of the company’s total asset value. Remaining fixed rate debt maturities for 2016 are $150 million or 5.8% of the company’s total indebtedness. And as of quarter end, we had no outstanding floating rate debt.

Turning now to 2016 guidance, we are maintaining our previously stated FFOM guidance range of $2.14 to $2.30 per fully diluted share. For the balance of the year, the most significant factors that will impact where we will be within this FFOM guidance range are as follows: for property NOI, we previously communicated total owned NOI of $384.2 million to $409.3 million, which includes the impact on NOI from property dispositions.

The NOI ultimately produced for the year will be contingent upon final occupancy and rental rates obtained for the 2016/2017 lease up, managing no-shows, maintaining operating expenses, including current costs at anticipated levels, final property tax assessments and the timing and amount of property dispositions.

With regard to dispositions, the low end of the NOI range assumes $600 million and at the high end assumes $200 million. To date, we have completed $73.8 million. Guidance assumptions as to the timing of dispositions are detailed in the company’s supplemental analyst package.

For interest expense, excluding the on-campus participating properties, we communicated a range of $70.5 million to $76 million, net of capitalized interest. The interest expense range is primarily driven by the elimination of property mortgage loans associated with related dispositions within the guidance range.

Concerning third party services revenue, the fee range is primarily dependent on obtaining additional third party management contracts and the finalization of documents and commencement of construction and/or completion of services to be provided. Our current assumptions for Texas A&M Corpus Christi and San Antonio projects are outlined on page 11 of the supplemental.

With that, I’ll turn it back to Bill.

Bill Bayless

Thanks, Jon. And again, thank you for joining us and hearing about our Q1 results. We’re extremely excited with the company’s current position and ability to execute on the highly accretive opportunities before us.

In closing, I’d like to thank the entire ACC team for their hard work and dedication and also to congratulate the team on winning an industry-leading five industry INNOVATOR awards at the recent Student Housing Business Conference, further cementing American Campus as the industry’s best in class company.

With that, we’ll open it up for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes today from Nick Joseph with Citigroup.

Nick Joseph

Could you give an update on where you stand with marketing the non-core dispositions and how the conversations are going in terms of the larger portfolio deal? And then when would you actually decide to abandon a larger portfolio sale and instead do the asset sales one-off?

Bill Bayless

As William talked in his script, we have engaged appropriate intermediaries and have actually already began meeting with groups on the prospect of a larger portfolio transaction. I think the market for that is excellent. It would be another 30 to 45 days before we would have any indications if that would not be achievable, but our initial perspective is it is very achievable and the environment is very right.

We had the Interface Student Housing Conference here in Austin last week. There were about 1,200 participants and we saw significant attendance from a variety of sources of domestic and global institutional funds that are all interested in getting in the space with scale and so early indications are very positive in terms of being able to undertake a larger transaction.

Nick Joseph

And then was the occupancy decrease anticipated in guidance? And for that decrease at the non-core properties that you called out, is there something unique about those properties or markets that leads to a higher number of short-term leases?

Bill Bayless

No, it was anticipated and when you look at the sequential drop in occupancy from Q4 to Q1, as we covered in the same-store numbers, the drop from Q1 to Q1 of our prior year, 37 of the 40 is in the disposed. When you look sequentially at Q4 occupancy to the Q1, in Q4, the disposed were about a 20 bps drag on occupancy that increased to a 40 bps drag in Q1. So the other 20 basis points was spread throughout the portfolio, nothing really significant in terms of anything that would indicate trending of a negative fashion or anything material.

Nick Joseph

And then just finally, it looks like the scheduled completion for the Corbett Stadium Center in Tallahassee was pushed back about three months to August. What caused that? Is there a risk to that project not opening in time?

Bill Bayless

No, that is simply just accurately reflecting when that asset will be placed in for service. For occupancy, there’s been no change in the construction scheduling.

Operator

The next question comes from Ryan Meliker with Canaccord.

Ryan Meliker

I just wanted to talk a little bit about some of the third-party development deals on-campus. You guys announced three new on-campus development transactions, none of which were ACE projects. Can you give us just some color on where things stand regarding negotiations with universities for on-campus developments, if you are seeing a shift towards more of these development type transactions, or if we will see a pickup in ACE transactions going forward or this is just one-off?

Bill Bayless

The shift between third party and ACE continues to remain stable and if anything the emerging trend on a long term perspective is more geared toward ACE. When you look at the 15 awards that we talked about last year, 10 of those turned into ACE. To reference the development numbers that William went through, when you look at that development pipeline through 2019, it was a total of 19 projects, a total with 11 of them are ACE and so we see good pace there.

Some of the transactions that we announced candidly are institutions that may not have been candidates for us to invest ACE to where we actually drove them to more of a third party service model. And so what within that P3 sector, we see the university’s interest overall increasing.

We see ACE continuing to be the most popular alternative for schools that are looking for the most bullet proof way to long-term insulate their balance sheet from a credit perspective; however, we do always see the third party opportunity as one of the components going forward, but don’t see a paradigm shift in any form or fashion.

Ryan Meliker

And then just as a quick follow-up, you guys were able to sell a couple of assets in the quarter at a pretty attractive cap rate at around an economic 5.6%. You’ve outlined substantially more dispositions throughout the course of the year. I’m just wondering if you can give us some color on what you think the likelihood of executing on those dispositions are, what the timing might be, and if you might be able to see a cap rate similar to what you were able to sell those last two assets for.

Bill Bayless

As William talked about the cap rate on the 5.6%, those two assets averaged 0.6 a mile from campus, so they were more in that bicycle range. One of them was actually pedestrian, but a much older property, 38 years old conventional close to the Cal State Sacramento. And so I would say we’ve set the expectation that current market conditions warrant a 6% to 6.25% cap on the dry properties that we are warranting or that we’re selling.

As William mentioned, part of our discussions also open up the opportunity for us to continue on as manager that reduces integration cost, gives you the best in class management platform which we would hope would be impacted in the pricing and hopefully we get closer to that 6% and 6.25%.

Ryan Meliker

And then timing and likelihood, do you think anything might slip to next year? Do really feel confident you’re going to be able to execute this over the next few months?

Bill Bayless

It’s always possible that some portion could slide into 2017; however, it is certainly our initiative to get these asset sales done in 2016. When we look at a broader larger transaction and if things stay on track for that, there are some we think is certainly consummated in 2016 versus 2017. However, based on Nick’s question, if you did end up having to break the portfolio up and do two more traditional brokered marketing packages, you could then have a higher probability that something could slide to 2017.

Operator

The next question is from Austin Wurschmidt with KeyBanc Capital Markets.

Austin Wurschmidt

Just a question, Bill, you mentioned that you’ve driven some candidates, some of the P3 candidates, toward third-party versus doing an ACE transaction. I was just curious, what were some of the parameters that you determine in ACE versus a third party deal? And does that in any way leave open an opening for a competitor to potentially win an on-campus equity award down the road?

Bill Bayless

No, when you look at our investment criteria, and again where we invest our equity from a real estate investment perspective is always based on the same parameters on-campus as off. And so when you get into some smaller institutions, smaller private as an example, something like La Salle, that may not be a direct candidate for our investment.

One of the approaches that we take not only do we offer the full plethora of what we’ll do in terms of third party and ACE, but we also tell our university clients, look, anyone else that you would hire that may be bringing equity to the table is usually third party equity. And so if that is still an alternative that you want to pursue, we can source third party equity as easily if not easier than anybody else. And so we make sure that we’re never eliminated on that perspective.

Austin Wurschmidt

Just given the comments on the competitive landscape for the core and value-add assets, are you seeing any of the particular, maybe the value-add buyers, turn back toward development and has it been more competitive in terms of sourcing land sites in more infill locations?

Bill Bayless

I can’t say that we’ve seen the value add directly turn more toward development, again most of the development taking place now is more focused on the core pedestrian aspects that are taking place. Now, certainly the competition for development sites in our space always has been and continues to be of a competitive nature.

But as you know, we have decades of experience and relationships in procuring those sites, our mezzanine capital program was specifically designed to find the local and regional players that control many of those development parcels near universities. And so it’s something while there is certainly a focus for folks in developing core pedestrian, we feel that we’re very well positioned, as you’ve seen in the development pipeline, in our ability to execute and take proper development sites through the entitlement process successfully.

Austin Wurschmidt

And then just the last one for me, I was curious if you would break out what the projected rental rate growth is for the core same-store portfolio or if you’ve backed out the assets that you are marking for disposition?

Bill Bayless

As Jim covered in his script, we’re looking at a projected rental rate increase for the upcoming year up 3%. I will comment, however, certainly when you do carve out the core, it puts that 3% in a much firmer position with opportunity, our guidance range at the midpoint was 3%, at the high end was 3.25%. And so to the extent that we execute on our disposition, it certainly gives us an opportunity to be towards the higher end of that guidance range of rental rate.

Jonathan Graf

The other thing I would comment also that when you look at the same-store core grouping moving forward, and really this call and I think certainly in reading some of the analysts’ report last night, you all are seeing what the real storyline is. This is a transitional year in terms of the dispositions, in the transformation, the final transformation of the portfolio.

And when you look at the core same-store property grouping that is going to continue moving into 2017, as your question pointed out, there is an increase in the profile as it relates to rental rate, also that same-store property grouping last fall had an occupancy of 97.1%.

And so when you look at our historical averages, there’s upside in that there and so the real story you’re starting to see take place here, obviously, we report what we own and so the quarterly numbers you see don’t reflect the full growth potential. But when you carve out that core, the revenue growth profile moving into 2017 is really going to be the attractive storyline as we move toward the end of the year and reporting on that go-forward same-store annual grouping going forward.

Austin Wurschmidt

And so then I guess one quick follow-up to that, based on the comments you had talked about on prior calls, do you still feel comfortable with achieving the high end of that long-term range of 3% to 6% on an NOI basis?

Jonathan Graf

So moving to 2017 and just what we talked about there, if all of a sudden in that same-store core portfolio going forward, we’re looking at rates between 3% and 3.25% and we’re looking at upside in occupancy from 97.1% to how we’ve historically performed. All of a sudden you’re looking at a revenue line of 3.5% to 4% potential. And so certainly then obviously operational expense is something we’ve been very proficient at. Moving into 2017, as we have said, we do believe we’re going to be re-entering that period of growth rate being towards the higher end of that 3% to 6% moving into 2017.

Operator

The question is from Jeffrey Pehl with Goldman Sachs.

Jeffrey Pehl

One quick question. Just on previous calls, you spoke about margin improvement. I’m just wondering if you can provide an update on the initiatives to achieve this, what the potential improvement could be in timing, and what margin improvement do you believe you can produce in 2016?

Bill Bayless

We talk about our long term target, again we started talking about our long term target about 18 months ago and we said a three to five-year horizon, so we’re really in more of a two to four-year horizon now. The margin improvement you saw, starting to take place last year, this year at the midpoint of our guidance, Dan, we were at 53.8%.

And again our true objective is to move toward that 55% in the next two academic cycles. And so that would speak more toward a fall of 2018 is when we would hope to be locking that in in place and so we see good progress. Jim talked about the initiatives in his script and we continue to be focused on it.

Also, we think some of the qualitative aspects of the portfolio going forward will also contribute and a lot of the growth right now you see in American Campus developed properties which have all of our expertise in terms of the programmatic design and operational efficiencies and so that too will be positive contributor as that growth profile comes into to service.

Jeffrey Pehl

And then just turning to your development pipeline, how much bigger do you think 2017 and 2018 could potentially get? And of your current development pipeline, how much of that is pre-funded and how long before you have to raise additional capital?

Bill Bayless

I’ll answer the first part of that and then I’ll let Daniel talk about some of the capital allocation page in there and our approach to it, I’ll give a little color. 2017 still has a small window and so some of the mezzanine type opportunities are pre-sale development site type opportunities and we’re still working some things there.

It’s not a fact that something else could fall in, but there’s still time. And so you could see a couple of more transactions sneak into 2017; 2018 is still wide open. I mean, there are still a good six to nine month of entitlement pre-development process to bring transaction to fruition. And so that has not closed.

At the highest level, the one point that I will make is that we do – the development opportunity that lies before us both on-campus and off-campus is the most accretive value creating opportunity we can possibly undertake for our shareholders. And so as those development pipeline opportunities expand over the years to come, we will continue even when we have sold all of the dry properties, we will continue to be a strategic recycler of what we feel is the lowest performers in our portfolio in harvesting future performers, in harvesting value to reinvest in that. And so the internal capital recycling will continue to be an ongoing aspect of that expanding development pipeline.

Dan, if want to comment any further?

Daniel Perry

If you look at our sources and uses page that we include in the supplemental page 15, we lay out the plan for funding that development pipeline. And as you can see with the larger amount of dispositions or the total amount of dispositions of the non-core that we anticipate transacting on, we would have a little over $1 billion of capital available to fund the development pipeline.

As you can see with all the developments that we feel like we’re committed enough on that we would commence construction this year, we’ve got $589 million left to fund. So just under $500 million of additional capital is available for developments that will come to fruition certainly as we move forward, so plenty of capacity right now to fund that development pipeline.

Operator

The next question is from Alexander Goldfarb of Sandler O’Neill.

Alexander Goldfarb

Just a few questions here, first, Bill, the fact that you guys may stay on as the manager, historically you guys really haven’t been much of a JV participant. I think the Fidelity one is the last one I can remember. So is this a prelude that you’re trying to seek out new relations and then we may see equity JVs going forward, or is this purely to stay on as third-party managers and we shouldn’t see a shift in your views on joint ventures going forward?

Bill Bayless

Right now and certainly as it relates to this particular dispo package, our intent is to attempt to undertake a full disposition, not a joint venture. And in staying on as the manager, we do think that may help valuation and also it diminishes integration risk for the buyer and also it’s no burden on the organization whatsoever because they’re already fully integrated into our system and no additional workload in that regard.

Given the level of institutional capital both domestically and global we see coming into the space, we do also see it as a qualitative strategic opportunity to form a relationship with what could be a source of equity for us down the road if we ever needed it. We’re not telegraphing it and don’t mean to telegraph in any form or fashion that that’s a definitive strategy, but we do think it is smart to develop those relationships when you don’t need them.

And so there is a strategic component to it. But I wouldn’t read in it there is anything imminent in terms of a change in strategy or focus as it relates to JVs other than establishing relationships that down the road you ever did need them you have the opportunity because you had the relationships in place.

Alexander Goldfarb

And next, obviously you have the Kayne portfolio out there, you have the Landmark portfolio, you guys have your portfolio. I’m guessing that there’s others. There are certainly a bunch of one-off assets out there. Is your view that all of the buyers are looking at everything, or your view is that the buyers have really self-selected and there’s one group looking at you guys, one at Landmark, one at Kayne? I’m just trying to get a sense for the buyer pool if everyone is looking at everything or if people are quickly pointing out in sort of what they’re looking at.

Bill Bayless

No, I don’t think that everybody is looking at everything, but I also don’t think you have one looking at each, but rather you have your core buyers, you have your value add, you have some that are more eclectic. And so the one thing that has occurred, the market is so deep right now with buyers as you’ve seen in the transaction volume, the compression of cap rates and also the industry participation and I’ll say in events that are looking at this. The one thing I think we’d be comfortable saying if you talk to the brokers directly, they’ll tell you there’s more participants looking at every deal that’s out there than there’s ever been.

Alexander Goldfarb

And then just finally, it seems to me that it’s been quite some time since, at these industry conferences, where people have talked about the price wars and rent cutting during the pre-leasing. Is your view that the industry has moved on beyond this and everyone now has discipline, or your view is that we are just in a lull right now and there’s always a chance that the price wars come back during the pre-leasing season?

Bill Bayless

One, I’ll say at the highest level at a 30,000 foot perspective, the industry over the last three years has greatly benefited by the transparency that is now in the space on a market by market basis. And so where we’re previously mom and pop and non-sophisticated operators worked off of a gut check in fear of what might be occurring in the market. Now, there’s good data to see what’s really happening on pricing and leasing trending that there is the opportunity for people to act rational, which has helped support the market overall which I think you’ve seen.

That’s not to say that an individual market or in a certain sub-market in an individual market or product type you don’t still see very aggressive pricing when it warrants so. And so I think the industry is behaving more and more as a mature sector with good data, but that doesn’t mean that at the every level, everything operates with the highest degree of sophistication and discipline.

Operator

The next question is from Ryan Burke with Green Street Advisors.

Ryan Burke

Bill, a bit of a clarifying question on acquisitions, you guys are clearly focused on development. But has your outlook on acquisitions changed at all since the first quarter call, I’m curious of your level of interest in the portfolios that Alex brought up?

Bill Bayless

At this point, we continue to be focused on developments almost exclusively. As it relates to acquisitions and again we have a limited amount of capital, when you look at the value creating opportunities for us, the developments right now absolutely make the most sense. For us to look at acquisitions, there has to be something unique about them in terms of being able to derive an NOI that starts to approach a development type yield with a less risk profile.

And so I think when you look at some of the package that are out there and what the pricing is, those particular portfolios that are out there right don’t present those opportunities. And so we are focused on development in lieu of them. Now, that’s not to say that we’re out of the acquisitions game completely forever in our strategic plan, we’re always going to look for opportunities where we can derive the best yields and value creation for our shareholders. But at this moment in time, the acquisition market in those portfolios do not compare to where we’re choosing to utilize our capital in the development pipeline.

Ryan Burke

And then on development, there’s been a lot of talk in recent years about increasing costs driving expected returns down. It’s been talked about on these calls. I think it’s a natural occurrence as we move through the cycle. Has the compression in expected returns on on-campus development been greater or less than that of off-campus development and why?

Bill Bayless

I would actually have to say I think the on-campus has been somewhat less, just in the – again, when a university is choosing a partner, it is more of a qualification based on your ability to be a long term, decades long partner in creating the intangible living and learning environment versus what’s the high bid. And so when you look at the compression, while there’s been similar compression for us both in terms of off-campus development yields and on-campus development yields, you see that on-campus yield of 6.5% and north being the norm.

William did mention in his script at Cal Berkeley, we went down to 6.25%. Now, it may have the greatest accretive spread to residual cap rates in the market than any deal that we’re doing, but I think overall the on-campus environment has always been a less competitive market than off-campus solely because of the qualitative barriers to entry from the limited amount of folks that can really compete in that sector.

Operator

The next question is from Jana Galan with Bank of America Merrill Lynch.

Jana Galan

Just a quick one on expenses, it seemed that marketing and R&M were a bit high in the first quarter. I think that’s just timing, but if you could maybe talk a little bit more how you see that trending through the year.

Jonathan Graf

On marketing first, in our internal budgets we have marketing annually going up between 4% and 5% and so we think there’s a little shift in timing in that. The other thing that we’ll recalibrate in at the end of the year too is with the dispo properties coming out we will be recalibrating the same-store going forward as to what those benchmarks are in terms of future run rate. So we don’t see any paradigm shifts.

As it relates to marketing, last year we got down to that record low of $131 a bed, which we talked about candidly was lower than we had ever thought that we would get when we started the initiative three years ago. As it relates to R&M, also, we think there’s some timing there and we would expect it to return over the next quarters to more of an inflationary mode. So again nothing material in those categories.

Jana Galan

And then just for modeling purposes, the 2Q consulting agreement payment, is that in the guidance?

Daniel Perry

The Texas A&M – San Antonio and the Corpus Christi consulting agreement were both transactions that we were working and contemplated when we set our guidance. So those are in different levels from the low to high end, we didn’t fully assume that both of them get done at the low end and then at the high end we had them both being done. So they are in the range.

Operator

The next question is from Drew Babin with Robert W. Baird.

Drew Babin

A quick question going back to expense growth, this time specific to property taxes, I notice they were up 4% on the 1Q after being up about 3.1% for full-year 2015. I’m just curious whether there’s anything in that number that’s kind of – other than timing related, whether it’s a trend or whether it’s property assessors maybe waking up and realizing the value of these properties as more properties transact. Is there any read-through there or is that just a timing issue?

Bill Bayless

No, not really. I mean, obviously we have to see how property taxes come in for the rest of the year or how assessments come in for the rest of the year before we fully know where that’s going to fall out. But so far what we’re seeing with that first quarter growth is basically in line with our expectations.

Drew Babin

And quickly, just more of a housekeeping question on the 1Q disposition, what was the nominal cap rate on that sale?

Bill Bayless

Low [6%, around 6.1%]. Typically, you see about a 20 to 30 basis point spread between an economic cap rate and a nominal cap rate, obviously due to the CapEx that you’re assuming in the economic cap rate. With these, as Bill mentioned, there were older properties, you had the one property in California that was 38 years old and it was actually an old conventional apartment complex that is being converted to student housing. And there was a significant amount of capital associated with that and the project in Florida also had a higher CapEx spend. So we saw a little higher spread between the economic cap rate and the nominal cap rate, which certainly was one of the reasons that we looked at those assets for disposition.

Operator

[Operator Instructions] The next question comes from Carol Kemple with Hilliard Lyons.

Carol Kemple

In your low end of guidance, it assumes that you close on the $526 million of remaining disposition in the second quarter. As of today, how likely do you think that is that those could close by the end of June?

Daniel Perry

It’s certainly still a possibility, obviously it’s a process that we want to make sure we maximize value on those assets and so we’re going to take our time and make sure that we do that. We are not afraid to let that time slide if that’s something that makes sense to go out and give us the time to get the best value we can get for the asset.

As you can imagine that increases FFO for 2016 and doesn’t create as much of an upside in terms of growth for 2017, but that’s a short term concern. We think the best thing to do is make sure we get the best value for those assets.

Carol Kemple

And then once those assets are sold, either how many properties or what percent of your NOI will be from non-core drive to campus properties?

Daniel Perry

It pretty much takes that outside of a mile down to almost zero percent.

Operator

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Bill Bayless for any closing remarks.

Bill Bayless

We want to thank you for joining us. As we summarized on the call, the real story right now here at American Campus from a value creation perspective focuses on where we’re going to end up at the end of 2016 as it relates to our going forward portfolio and the corresponding growth rate associated to it. 2016 will continue to be a transitional year.

The quarterly reporting will be a little bit impacted, of course, by the transactional nature of what is taking place and so we look forward to executing throughout this year and talking with you certainly on the next call, but really moving toward the fall when we complete this lease up and talk about the go forward profile and the value creating opportunity it represents for all of us. Thank you very much

Operator

Thank you, sir. The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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