Q4 2020 American Campus Communities Inc Earnings Call
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Good morning, ladies and gentlemen, and thank you for standing by welcome to the American campus communities incorporated 2024th quarter and year end earnings Conference call.
At this time all participants are in a listen only mode.
Following the presentation, we will conduct a question and answer session and instructions will be provided at that time for you to queue up for questions.
I would like to remind everyone that this conference is being recorded and I would now like to turn the conference over to Ryan Dennison Senior Vice President of capital markets and Investor Relations for American campus communities. Please go ahead.
Thank you good morning, and thank you for joining the American campus communities, 2024th quarter and year end 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 also posted on the company website in the.
The Investor Relations section you will find an earnings materials package, which includes both the press release and a supplemental financial package. We are 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 on our webcast presentation are one on the same webcast slides may be advanced by you to facilitate following along.
On management will be making forward looking statements today as referenced in the disclosure in the press release in the supplemental financial package and in S E filings.
Management would like to inform you that certain statements made during this conference call, which are not historical fact may be deemed forward looking statements within the meaning of section 27 day of the Securities Act of $19 33, and section 21 E of the Securities and Exchange Act of 1934 as amended by the private Securities Litigation Reform Act 1995 on.
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.
We 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 on the Companys periodic filings with the SEC. The company undertakes no obligation to advise or update any forward looking statements to reflect events or circumstances. After the date of this release.
Having said that our chief Executive Officer, Bill Bayless, we'll be providing our opening comments today. He is joined by the following members of senior management for the call Jennifer Beese, Chief Operating Officer, William Talbot, Chief Investment Officer, Daniel Perry, Chief Financial Officer, Kim Voss, Chief Accounting Officer, and Jamie Wilhelm EVP of public private.
<unk> with that I'll turn the call over to Bill for his remarks Bill.
Thank you Ryan good morning, and thank all of you for joining us as we discuss our Q4 and full year 2020 financial and operating results. As you know this call is occurring six days later than originally scheduled due to the unprecedented widespread disruption in Texas last week caused by severe winter ice storms and related power.
Water outages are.
Our Hearts go out to those affected by these storms and we hope that everybody is recovering at this time now.
Now turning to our business.
In reviewing 2020 prior to the pandemic ACC was off to an excellent start.
After delivering nearly 5% earnings growth in 2019.
Q1 delivered NOI that exceeded our expectations for each of the three months.
Additionally, our velocity for fall 2020 lease up was over 3% ahead of the prior year with rental rate growth trending well relative to targets.
New supply for fall 2021 was also near decade lows.
Fundamentals in our sector were strong in all facets of our business, we're exceeding our internal expectations.
With COVID-19, being declared a pandemic the student housing sector like most businesses faced unprecedented and unanticipated disruptions.
The U S higher education system was dramatically impacted by the governmental shelter in place orders put in place across the country.
Over the last three quarters of 2020, we responded by attempting to do the right things on behalf of all of our stakeholders, while continuing to provide essential housing services to students all across America on.
All the while attempting to mitigate long term negative impacts to our business and providing thought leadership and action to help universities returned to a sense of normalcy.
Despite the negative financial impacts to our business in 2020.
We were encouraged by students strong desire to be physically present in their college environment.
Demonstrating that the desired educational experience is much more than simply attending a classroom lecture.
Ultimately fall 2020 enrollment levels at tier one universities, we serve remained relatively consistent with 2019 and most students returned to their college towns for the fall term, regardless of whether their university was holding in person classes or providing them online.
This was evidenced by the fact that our portfolio achieved approximately 90% occupancy for fall of 2020 with a sector as a whole being over 88% occupied.
As we look forward 2021 will be a year of transition on the path back to normalcy.
While the virus continues to have a lingering impact on the student housing sector, we are seeing signs of improvement.
During the fourth quarter, we saw an increase in collection rates a diminished necessity for on campus rent refunds and a reduction in request for rent relief under our resident hardship program.
We also had strong demand for spring leases signing over 3600, new leases commencing in the spring term, 50% more than the prior year.
While the current transition aerie environment causes us to believe there could be softness on our ability to backfill may ending leases at historical levels.
And that we may not return our summer camp and conference business to normal levels. We are cautiously optimistic regarding the 2021 'twenty two academic year commencing this fall.
In discussions with our University partners. The vast majority are indicating that admission applications are up over the last year and many are projecting strong enrollment growth for fall 2021.
There is also incrementally positive news in terms of universities planning to return to in person classes for fall of 'twenty one.
As exemplified by the recent announcements by both the University of California, and Cal State systems as well as several other major universities, who have been fully online in the current academic year.
With regard to their statements they will be returning to in person classes.
Also Arizona State University, our largest university partner recently announced plans for full availability of in person classes in fall of 2021 and encourage students to register early.
And at this time, they expect to reinstate their on campus housing expectation for first year students.
Although we cannot yet give you a reasonably accurate estimate of fall 'twenty one occupancy levels. These are certainly encouraging signs.
As we fully expected and consistent with what has been reported by our private peers and third party market research across the industry pre leasing for the 'twenty one 'twenty two academic year is tracking behind the traditional historical pace.
Beyond the general disruption of Covid, the extended winter breaks at many universities that in many cases lasted from Thanksgiving through late January appear to have specifically contributed to a delay in students securing housing early for next fall as compared to the normal leasing activity that we would see during that period of time.
We did see accelerating leasing velocity in the weeks. After students returned from winter break and we believe there will be significant acceleration in April may and June, which we expect to compare favorably relative to those months last year when leasing activity dramatically dropped off during the height of the pandemic.
Finally, the new supply picture continues to provide tailwind for the sector as a whole as fall 2021 deliveries are flat compared to 2020, which as I mentioned earlier was that the lowest amount of new supply in the past decade.
Turning to our ongoing development at Walt Disney World as we discussed last quarter with the current suspension of the Disney College program, we did commence in earnest marketing and leasing of the project to Disney cast members and employees of operating partners in late Q4.
With the holiday season on the start of the new year being a slow leasing period for conventional multifamily. We have signed 88 leases to date and anticipate the velocity will accelerate through the remainder of the year as cast members current leases expire.
The original pre Covid pro forma projected the Disney College program to deliver approximately $14 million in operating income after ground rent in 2021.
However, based on our standard multifamily leasing stabilization trend of 25 to 100 leases per month. We now expect 2021 to have a net operating loss after ground rent between two seven and $5 4 million.
As Disney brings the DCP intern program back on line occupancy will increase more rapidly than the current conventional market leasing velocity.
Disney continues to be fully committed to the full reopening of Walt Disney World as soon as possible.
Evidenced by their continued investment in the parks and resorts, including the continued construction of Flamingo village crossing Town Center, a 200000 square foot mixed use Entertainment center set to open in fall of 'twenty 'twenty, one across the street from our community.
And as Disney discussed on their recent earnings call. They have significant demand for attendance at the parks and are very pleased with future bookings and as they stated at this point, it's only a matter of the rate of public vaccination that will allow them to start to see a return to normal levels of operations at the parks.
With corresponding increases in cash members and ultimately DCP participants.
Although the timing and velocity of the reinstatement of the Disney College program continues to be influx. At this time. We currently expect the completed project to be fully stabilized at pro forma occupancy and rents within 12 to 24 months of the originally anticipated date of May 2023.
At its originally targeted stabilized yield of six 8%.
Now looking to transactional activity in the student housing sector as with many sectors 2020 volumes were down significantly with CBRE reporting student housing transactions decreasing approximately 20% versus 2019.
Deep interest from capital sources looking to invest in this sector held cap rates in line with pre COVID-19 levels pricing has been lower as valuations have been impacted by COVID-19 disruption to historical revenues and NOI.
Just on our discussions with the investment community, we expect transaction volume to remain low in the first three quarters of 2021 with potential improvement later in the year as lease ups are finalized for the upcoming 2021 2022 academic year.
As it relates to our capital recycling plans for 'twenty. One we will continue to monitor the market to assess the optimal timing to maximize our own asset valuations and will update the market at the appropriate time.
Turning to on campus public private partnership P. Three opportunities as universities are expecting a return to normalcy in the fall. There are now beginning to refocus their efforts to modernize all on campus housing we started to see progress with regard to our projects awarded pre Covid that are in pre development as well as <unk>.
Pickup in new pursuits.
We continue to believe that <unk> three opportunities on campus may will be greater in a post COVID-19 environment, given the significant financial impacts universities experienced related to the de Densification and consumer rejection of older community Bath residence halls, coupled with the funding and budget cuts.
University space in the post Covid environment.
As the recognized industry leader.
<unk> is uniquely positioned to capitalize on this expanding opportunity.
Currently we are tracking over 60 universities that are evaluating potential on campus projects.
With respect to guidance, while we believe the student housing sector has exhibited impressive resiliency.
Despite the significant disruption of the pandemic has had on the University students we serve.
And while we've seen many encouraging signs of a steady return to normalcy.
The range of potential financial results for 2021 is still too wide for us to provide full year earnings guidance with a reasonable and useful range instead, we'll be providing guidance for each forward quarter until we can provide an estimate further into the future that we can stand behind.
As such we are providing Q1 <unk> guidance in the range of 54 to 56 cents per share.
As we look beyond Q1, we would encourage everyone to review the normal quarterly seasonality of our business and further take into consideration. Some of my earlier comments regarding the fact that transition airing environment causes us to believe that there may be softness on our ability to backfill Mandy leases at.
Oracle levels and that we will likely not see a return to normal summer camp and conference business in 2021.
We also expect to see significantly higher same store operating expense growth levels than normal at 2020 presents a tough comparison year given that operating expenses were approximately 6% below our original 2020 guidance for expenses.
This will be especially notable in Q2 in Q3.
As we anticipate more normal expense levels that will be compared to the same periods in 2020, when many expense activities were halted.
This could lead to expense growth in the high single digits in Q2, and Q3 of this year.
In closing.
I'd like to convey our excitement related to the recent appointments up three new outstanding independent directors to the ACC Board.
As part of our commitment to continued board refreshment, we're thrilled to welcome Herman balls, Allison Hill and Craig Leopold.
These three new directors have extensive real estate and capital allocation experience and bring valuable diverse perspectives that will serve the interest of our shareholders well.
I'd also like to take this opportunity to express my gratitude on behalf of the entire board to our two departing directors Carla.
Karla Pena Arrow sublet, who left the board in concert with accepting an exciting new role as the Chief marketing officer of IBM made meaningful contributions during her short time as a director and we wish her all the best word.
We'd also like to thank Ed low involved who announced that he'll be retiring from the board in May after 16 years of service, including five as our board Chair Ed.
Ed has helped oversee our company's transformation from an owner of only 16 student housing properties at IPO to becoming the industry leader.
And we'd also like to congratulate Ms Sydney, Don <unk>, who will be assuming the role of board chair up on Ed's departure.
With that I'll turn it back to the operator to start the question and answer portion of our call.
We will now begin the question and answer session to.
To ask a question you May press Star then one on your telephone keypad.
If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Derek Johnston with Deutsche Bank. Please go ahead.
Hi, everybody good morning, and thank you and.
Good morning can.
Can you share some deeper thoughts on summer camp ancillary income from camps conferences or other historical tenants, meaning is 2021 summer likely to see some rebound in revenue and demand or is this another total wash year similar to 2020, certainly looking for a quarterly comp basis.
Yes.
Yeah, Hey, Derek this is Daniel.
As you May recall last year, we talked about typically we're able to generally generate about $4 $5 million in revenue during the summer off of the summer camps and conferences that we hold at the residence halls that of course are empty during the summer months.
It pretty equally split between Q2, and Q3 and of course last year, we did not have any.
Any summer summer came through conference businesses that was all suspended amidst the height of the pandemic.
Typically those those contracts are signed up throughout this spring semester as we go into the summer.
So we don't have a lot of insight into it yet but.
At the midpoint of our expectations as we thought about the year.
It was hard for us to think that that would be something that would be back to.
Normal levels certainly.
On this year and likely that we wouldn't have much of it.
Many of the schools are thinking that.
There's the risk that it could impact their ability to get back to normalcy for the fall, which is their primary focus at this point.
On the summer camps, or middle Schoolers, and high schoolers, and so to bring hundreds of kids on to their campus. When their primary focus is to return to normalcy as much as possible. This fall they don't want to interrupt that so it's hard for us to expect much we won't have a lot of insight into it until later this semester and so that's our expectation.
It is right now.
Okay got it thanks, and then the Disney lease up can you share some more details on the leasing velocity in future demand expectations and this has really given your talks with Disney management did they give any details about possible reopening dates or their current thinking or did they hire a 2000.
'twenty, one and turn class that you know.
Hey, this is William.
As it relates to return on the DCP, we're obviously in constant communication with Disney as it relates to that it is not our current expectation that that program will return in 2021, but it really as bill said in his opening remarks. It really is tied to the expanded capacity of the parks, which obviously Disney is monitoring very closely.
Once those parks expand capacity there is the ability for the DCP program to come on board and come on board at much larger volumes than the traditional cast member housing leasing velocity. So.
That's still in flux as Bill mentioned in the opening remarks, but something we are constantly in contact with them and optimistic to hopefully see that program return in 'twenty, two and then build up quickly thereafter.
The second part of your question on the Disney leasing velocity.
We're 88 leases to date, we've got an additional 11 applications in the process, we've kind of seen a trend of about right in line with that 50 leases on our trailing 30 day.
And so when we talk about that range of 25 to 100 leases volume. We certainly we saw that here earlier in the year and expect that accelerate and that also is directly tied to as you see the additional capacity at the parks brings on more cast members working at the parks.
Okay understood. Thanks, guys.
The next question is from Austin <unk> with Keybanc. Please go ahead.
Alright, Thanks, everybody just curious what you've seen at your properties in terms of how traffic has trended.
Whether it be in person virtually or however, you you track that data and then also could you share how many may ending leases on a backfill historically within the existing portfolio.
Yes. Good morning off this is bill I'll handle the first part and kick it over to Daniel for the May ending leases and as we mentioned in our comments and while online velocities have been good at from Thanksgiving through the end of January with the extended spring break we did see a lesser velocity than usual in terms of walk in to.
<unk>, which is something that we did fully expect and also as we mentioned once the students came back from that extended spring break we did indeed see a pickup in velocity more consistent with what you would see in terms of historical interest now obviously in Texas. The last week there was a major slowdown in velocity just in this particular state given the <unk>.
Weather conditions.
But as we did mentioned where we really were on.
Last call I put forth, where really knock on it really have the type of indication that we can give in terms of trajectory in making really sound projections until we get through April may and June where you had the inversion of the slowdown last year that we expect the acceleration to occur in velocity and so it will really be more.
Toward the end of the second quarter before we have comparable data on that Theres been an uptime pass in stabilizing what was normalized period last year that is currently slower versus in the April may and June when we will have an increased velocity over that period of time. So that's where we talk about transition area, it's going to be.
By the time, we have color color into that.
And then I'll jump in Austin on the May ending leases, so and of course just to make sure everybody is clear.
Talking about may ending leases with regards to our 12 month properties of course, we have our residence halls that have may ending leases as well where we.
We're not doing a lot of backfill and in.
In many cases, what we're doing that summer camp and conference business in a normal environment.
But with regard to the 12 month properties, where we do sign some may ending leases. It's typically about a 1000 leases per year that are may in.
And we're able to backfill about 50% of that in a normal year, which is about $1 million in revenue.
About two thirds of that hits Q2, being the May and June months, and then the other third hitting July so.
That's really the area, where again a lot of those leases like the summer camp and conference business Arent signed until later in the spring semester and it's hard for us to have a lot of insight into it but just being still in the middle of Covid.
It's hard for us not to have some expectation that there could be some softness there.
That's helpful. You mentioned rates have been flattish to slightly up at this point in the year, but it seems when not if velocity will accelerate.
So how are you thinking about rate growth trending once you see the pace up.
Pace pick up.
Given what youre seeing just in terms of applications and admissions data.
Yes, it's going to be a delicate balance is something obviously that we're going to be utilizing our internal systems to manage.
There is significant upside as everyone's aware in occupancy this year at day 93 that we ended up last fall in terms of however, much progress we can make from that point more toward.
Normalized operations and so we're certainly going to make sure that under all circumstances, we do not jeopardize velocity to maximize occupancy in terms of being overly aggressive with rate on.
Also when it comes to price in the one thing that we've been very pleased with throughout last year's lease up with Covid and this year's lease up is the owners market has been very patient in terms of realizing that the velocity is related to COVID-19 and not supply demand and people been very balanced in terms.
Their pricing policies, obviously, that's something that helps create stability that we're referencing in those rental rates and so as we move into the the period again of April May and June when we do expect those increased velocities will utilize our systems as we always have to maximize the combination of occupancy and rent.
Being very thoughtful that our greatest opportunities are indeed on occupancy.
And just one quick follow up to that Bill if I can in years, where you've kind of held back on rate where have you seen final occupancy range.
Across the portfolio.
It wouldn't be a generalization that you could transfer into what's taking place right now and also in the context of answering that question on a broader portfolio perspective. When you look at what is taking place and the disruption that COVID-19 has cost it is a market by market conditions on the ground.
That there may be great variation in terms of how we're implementing those policy. So I don't think theres anything that we can talk about on the broader historical trends of pricing velocity and the results that we could translate into this environment this year and draw conclusions.
Understood. Thank you.
The next question is from Neil Malkin with capital One Securities. Please go ahead.
Hi, Good morning, everyone. Thank August maybe William for you.
You had obviously the Berkeley you were chosen.
The eight.
Development or under you expect to start next year I just wanted to be clear are you.
Where do you feel like it to be the developer for the entire <unk>.
6000 bed master.
Masterplan and then are you could you maybe give any details on sort of the updated.
Three activity sort of where you are there any breakdown on ace versus third party developed.
Kind of how you see that playing out maybe over the next couple of years.
Yes for sure.
In particular with Cal Berkeley that failure, you saw that pre development that we announced this quarter that was related to our selection as the master developer of up to 6000 beds on their campus Berkeley does have other housing they are pursuing on their own, namely the People's Park project that but the 6000 bed Master developer. This is really the.
First project.
To be moved to pre development under on a structure and we're actually working with them on a number of other potential housing projects as well. So we're excited to see certainly in this COVID-19 environment. The projects moving forward and seeing that progress on University is really starting to focus on advanced their housing.
Now that they are starting to focus on campus returning to normal.
As it relates to the overall P. Three activity business as Bill mentioned in his prepared remarks, we're tracking over 60 current potential opportunities out there. We've really started to see momentum both on those projects that we had been awarded and pre development pre COVID-19 are starting to move forward and see progress where there was a slight pause and with the procurements and the universities.
Actively picking up activity to address these housing needs that really the weakness in the consumer demand was.
Aspirated and Covid and we believe the majority of those will be looking to P. Three solutions, but it's really too early to tell if that would be an equity a solution or a third party finance type solutions and again one of the big benefits, we bring to our University partners is we can offer all of those solutions and evaluate all of those with them as we go through the <unk>.
Yes.
The only thing I would add to that from a capital from a capital allocation perspective is while there is certainly a we believe a greater opportunity in the pizza and later on in the years ahead, obviously as it relates to ace it is going to enable us to even be more selective in terms of where we want to invest our equity on campus with a broader range of opportunities and we will.
To assess ace investment the same way, we do all investment decisions in terms of making sure that they meet our criteria.
Okay, and then just a follow up on that would you expect on at schools Youre in.
The your assets are off campus.
Would you expect maybe like over the next say one to three years, given the sort of hesitant about the dorms and the shared bathrooms.
Would you expect to see an uptick in occupancy for.
For your off campus product, maybe kids and parents are shipped away.
Or.
On a make choices that are.
With Covid in mind.
That depends on whether or not they have the opportunity to do so and let me explain what I mean by that many universities have housing requirements.
And so obviously through COVID-19 they realized that those properties as William mentioned are not conducive from a consumer perspective to what students and parents want in that type of an environment and it and it made them realize that if indeed, you know they need to prepare to have more modern products for all situations now.
Many schools will go back to their on campus housing requirement, where the students won't have a choice. They will have to continue to live in that product for as long as it remains on the campus and so it in and again, that's why we love our Ace transactions and when we build on campus housing is that we are covered by those housing guarantees on housing.
Expectations, we mentioned in our comments, Arizona State University, where we have modernized. The housing has a first year housing expectation of the students unless you are commuting from a local community. They expect you to live on campus in and the only reason I don't required as they've historically don't have enough beds for the entire first year classes.
Uh huh.
That is something on campus that universities will still be able to.
Benefit from but as William mentioned, they realize that those antiquated facilities do need to be updated in many cases and will move forward with those activities, where there are open market choices universities, we could see a small.
Outflow in terms of students living off campus, but as we always talk about with regard to on the on campus.
Investments that we make university is really have great advantage in terms of locking up the first year students as they come in in terms of administering their own processes.
Okay, Great and then the other one from me as it related to the growth 2030.
Strategic investment.
Investment in development acquisitions in a JV partnership side.
And anything under contract or in the works maybe.
Maybe.
Are you waiting for the new board members and maybe that new.
Allocation committee to sort of.
Sort of get the low down on cross back on everything going on before I guess, when do you kind of see that starting to take off.
Yes.
Certainly we continue to make progress in terms of our selection of partners in that regard.
As William said on the call. It is a slow transit transaction aerie environment at the moment and we believe the bulk of activity will come as it relates to Q4 in terms of when Youll see an increase in an acquisition type opportunities and so certainly we are advancing those initiatives and of course, we will always involved.
The board in those processes, the new capital allocation Committee will help us in terms of prioritizing the numerous opportunities that will have a force in the future.
Thank you guys.
Thank you.
The next question is from Nick Joseph with Citi. Please go ahead.
Hey, it's Michael Bilerman here with Nick.
So I just want to come back fill on the board how do you sort of see the interaction relationship with this new capital allocation Committee and help us understand how the formalization of this committee compare to what the previous board oversight was an involvement in all of your capital allocation decisions I guess what has changed.
<unk> between now this formal committee and what you had for I don't know if there was a certain threshold that a real full board wasn't involved in your decisions and.
And just go through what in fact this capital allocation Committee is going to have oversight of all acquisition development disposition equity raises strategic alternatives, where does their mandate start and end.
Yeah.
Certainly as you went through the litany of.
Per view that they can't F insight into first of all historically the board has always been intimately involved in our capital allocation decisions equity raises all of those items and certainly.
We have had complete influence and control over that as we move into this capital allocation Committee and we're extremely excited.
About the caliber of the three individuals that are joining the board and the specific capital allocation expertise that they are bringing and also that it is very recent and fresh capital allocation expertise.
Certainly Craig is a known entity to to the real estate industry and highly regarded in terms of all the work that he has done throughout his career and Alison Hillhouse just exceptional.
Per view into the role that she has played at pro low just in their strategic capital platform and so on and Herman Bulls is vice chair of J L. L. Certainly intimately involved in terms of the real estate market and capital allocation, specifically in tuned to higher education, and so I think we're bringing in some a refreshed firepower that really has their <unk>.
Fingers on the pulse of the market in terms of what the opportunities are and how best to approach them and so the interaction will will continue to be.
At the board level as it always has been.
However, we're going to take advantage of that expertise and so that capital allocation Committee matter of fact from media today at three o'clock as part of our normal board meetings going in and that groups meeting in advance for a longer extended period of time.
And with the again, we're going to have a plethora of opportunities available to us as we go forward, giving the emerging market opportunities down the road and we do have limited capital and so as we do look at prioritizing and maximizing.
Value for our shareholders on all fronts draw.
Drawing off of their expertise and having their purview into the transactions on all fronts that were doing you know, we we really involve the board and we'll continue with this committee on all transactions that we do the you know the management team typically every quarter is taken every transactions the board regardless of size and whether its over or under any threshold and so we got a lot of it.
Good expertise in firepower coming in and certainly with Craig and Alison you combine that with the Sydney Don now on John Ripple from the private equity side that it is very very active still.
And his professional career of capital allocation, there's a lot of benefit there that theyre going to bring in terms of the purview of the shareholders into the intimacy of what we're doing and so we as management race. It. We're excited about it and we look forward to working with them intently on it.
Thats helpful color Bill.
What was done before and I think you just mentioned that everything was taken from the board was there a subcommittee previously on your capital allocation decisions, obviously are not.
Discounting the fact of trying to bring in this firepower to your board to improve capital allocation, but it's also the mission that something was wrong before and.
And I'm, just trying to get a little bit more color about how it got to that point what did you not have.
Appropriate people on the board do not have the right processes were did management have more influence.
This is a pretty major thing to go through an activist campaign and put.
New members on the board and form of capital allocation Committee I'm, just trying to get a perspective of what had happened before that led to it yeah and certainly we were forced to do nothing and let me say this is something that I on this management team embraces and and <unk>.
Very much helped to drive the what had been done previously it's not that anything was wrong. We always look to improve and you can always look to improve the processes you put in place in both this board refreshment and his capital allocation committee or an improvement in terms of advancing our initiatives in that area.
Alright, Thanks for your time Bill.
You bet.
The next question is from Alexander Goldfarb with Piper Sandler. Please go ahead.
Hey.
Good morning, good morning down there.
Good morning, Alex Scott.
Glad that you guys are getting your power back and.
From what it's worth the trains you for the intro Bill just having you speak and they get into Q&A definitely streamline things. So that's the go forward I don't know that you need to form a special Board Committee on earnings calls, but.
Definitely a very good.
On them.
Just going on to Michael's question.
It's a little puzzling actually the capital allocation review, one just the name which gets overused in REIT land, but to you guys made a concerted effort a few years ago to change your funding strategy, where youre selling sort of low four caps.
To deliver to recycle that capital into assets that basically are opening up.
Number one at 95, plus yielding six plus so you guys had actually transform your capital allocation overall, especially as you had sold out your legacy higher cap drive assets.
On one hand, you guys already seem to have addressed this and I think too you guys have also been pretty good at communicating that the growth of student housing. It doesn't have the highest multifamily but doesn't have the lowe's either it's sort of a steady Eddie plus 2% to 3% business year on year out so I guess from that perspective.
You know what I guess sort of from that approach what was sort of driving this to have because as I say I think that you guys had already remedied on the capital markets that was really just in finding.
The assets now that you don't the higher cap and you've found a sustainable development pipeline, if that $300 million range and then two on the earnings from you think that you guys had finally gotten that message through on the pace of earnings growth to be expected. So I guess from that perspective, what really caused you guys form this and what changes would we really.
C versus just having people like Craig et cetera on the board just to be a part of the discussion.
And Alex Thank you for pointing all that out and that you really hit on some key points on the we did.
With the we and the board together made the decision.
Really in 15, 16, 17 to undertake the massive refinement of the portfolio and to transform it from the more eclectic portfolio that existed from a valley.
Value add core portfolio into the Premier core portfolio that you see today that we were then able to shift our capital allocation strategy coming out of 2018.
In terms of better match funding with the sale of low cap rate, 4% to $4. One we transacted at and reinvesting that with a better match funding into the six on a quarter development opportunities that we had and so the and this speaks exactly to how I was answering Michael's question is there was nothing that was wrong before it is only a in terms of.
Continuing to strive to do better into better and enhance the processes related to that.
With that said again, we as a company and especially in the position that we're in is the only public company in our space and the opportunities that we have before us in the years ahead.
It's only prudent that most important thing that we do as a company is capital allocation and so to meet the expectation of the market in terms of utilizing the expertise that we have available to us and our board of directors and all that has been and continues to be as we continue to refresh.
Exceptional real estate and capital allocation expertise, we of course want to do everything we can to advance that moving forward and so performing that committee from our perspective.
We as a management team are going to continue to be very selective and very disciplined as we procure opportunities and always strive to undertake transactions that for the long term will create the most value for our shareholders and we will always rely upon the expertise of the board that we have whether it's in the confines of a committee or the full bore.
<unk> to help advance those initiatives I do thank you for pointing out.
<unk>, 5% earnings growth you start to see come in 2019 that we talked about on our comments on the tailwind from 2020 that we were very pleased with the the.
The shift that has taken place and we know just want to continue to advance that.
Okay, and then just two other questions.
So policies one day.
DP on on.
On the Opex you mentioned the <unk>.
<unk> impact from growth in Opex in the second and third quarters, but from a modeling perspective in aggregate on a gross portfolio not to the same store what how much more millions of Opex are we looking at.
In the second and third quarters.
Well, if you look Alex at at 2020, and we reported on this as we went through the year in the second quarter. We came in about $8 million below our original expectations for the quarter about seven 6 million for the third quarter and so as we're looking at 2021.
At the property level, we are 90 plus percent occupied we're pretty much back to full <unk>.
Delivery of services and operations at the properties.
And so we expect those.
Expenses to materially return.
On top of the fact that we also will have some additional.
Covid cleaning costs as part of the operating our response to Covid that we've put into place and so when we look at 2021.
We would expect to see the return of where we came in under with a lot of the <unk>.
Expense activities that were halted and really that kind of.
Primary period initial period of Covid in Q2, and Q3 of last year to return to basically what were looking at.
Still some efficiency relative to what our original expenses would've been in 2020, but when you add the additional COVID-19 costs pretty much in line overall with those original expectations. If you go back and look at what we had provided from a guidance guidance standpoint on expenses last year.
Okay, So just to be clear.
So basically we're looking at $16 million.
Higher operating expenses, and then perhaps a little bit more for extra COVID-19 cleaning is that that's what we should expect spread out over the second and third quarters.
That's right and if you can.
Go back we talked to.
The end of last year third quarter call in October.
That our expectations are that COVID-19 cleaning costs will run upwards of $3 million.
Obviously, we're trying to control that as much as possible, but somewhere in that up to $3 million range is what we're expecting that to contribute.
Okay and then just finally on apologies for the third question, but bill in your opening comments you made a comment about.
Student housing valuations, having been diminished and just you know in our channel checks from the folks that we spoke to we have been hearing is that any asset that was impacted by NOI just wasn't trading in that otherwise.
<unk> and cap rates et cetera have been.
On impacted pre Covid to post COVID-19.
I misheard, you or maybe.
No.
And obviously Alex is if you have an asset that was unaffected and as you know 95% to 97% at its historical occupancy and you traded its valuation was not impacted but largely when you look at valuations of portfolios and <unk>.
And decisions of sellers to sell or not sell the decision to not sell the asset is based upon that impacted NOI and applying that cap rate to it and so the.
You see selective trading taking place in terms of what assets are.
<unk> not impacted and going out versus.
Those that are being held for sale for a later period when they improve.
Okay. Thank you.
Again, if you have a question. Please press Star then one day next question is from John Pawlowski with Green Street. Please go ahead.
Okay. Thanks, a lot.
For this upcoming fall do you have a sense yet with your conversations with the universities on how many of your beds could be potentially just offline due to day densification efforts on the on campus assets.
At this point in time, John It is still optimistic that there as it relates to our <unk> portfolio that there will not be.
<unk> Densification.
Of course, as we see you know universities in many cases not they do have to react to public health officials. If theres any concerns brought through on that we're in very good standing in that the large majority and we only have two products that we've developed that have community Bath bedrooms in terms VCU and Cal Berkeley caliber.
Please come out very positively in terms of their expectations currently to return to normal in the fall.
And so we are hopeful that day densification will not be a major impact to us in the fall.
Okay, and then I apologize if I missed it could you share what the occupancy assumption that underpins the first quarter revenue guidance.
Yeah. So if you'll recall, we came in and I think 90 point, obviously for the fall 93 four.
On a roll forward page, where we show the roll forward to the 2021 same store group on page S. 10 of our supplemental you can see fourth quarter was 95%, we typically see that drop in the range of 20 to 40 bps as you move into Q1.
Because you have some whether it's short term leases you have for seniors that were graduating or students who leave primarily on at the ace properties for spring co ops or internships.
As we mentioned we did sign.
More spring starting leases this year than we historically have so we think there will be some contribution of that they do start at different times throughout the spring semester.
Depending on the individual lease, but we do think there will be some offset to that 20 to 40 bps.
But still a little bit of a downtick relative to the fourth quarter 95 average.
Okay. Thank you.
This concludes our question and answer session I would like to turn the conference back over to Bill Bayless for any closing remarks.
Again, we'd like to thank you all for joining us I'd also like to as always thank the American campus team for their continued hard work and dedication we look forward to talking to you in the quarters ahead as we will we have more clarity as the year goes on thank you much the.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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