Q4 2021 American Campus Communities Inc Earnings Call
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Good day and welcome to the American campus communities Keith for 2021 earnings call. My name is breaker and I'll be today's event specialist you'll have an opportunity to ask a question did you say please press star one on your telephone keypad.
I'd like to hand, the call over to Brian to begin.
Yes.
Yeah.
Thank you good morning, and thank you for joining the American campus communities full year, 2021, and fourth quarter Conference call.
Press release was furnished on form 8-K to provide access to the widest possible audience.
In the release the company has reconciled the non-GAAP financial measures to those directly comparable GAAP measures in accordance with Reg G requirements also posted on the company website in 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 and our webcast presentation are one and the same.
Slides may be advanced by you to facilitate following along.
Management will be making forward looking statements today as referenced in the disclosure in the press release and the supplemental financial package and in SEC filings.
Management would like to inform you that certain statements made during this conference call, which are not historical fact may be deemed forward looking statements within the meaning of section 27, a of the Securities Act of 1933 and section 21 E of the Securities and Exchange Act 1934 as amended by the private Securities Litigation Reform Act 1995.
Although the company believes the expectations reflected in any forward looking statements are based on reasonable assumptions. They are subject to economic risks and uncertainties. The company can provide no assurance that its expectations will be achieved and actual results may vary fact.
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 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.
We've 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, President and Chief Operating Officer, William Talbot, Chief Investment Officer, Daniel Perry, Chief Financial Officer, Kim Voss, Chief Accounting Officer, Brian winger General Couch.
And Jamie Wilhelm EVP of public private partnerships.
With that I'll turn the call over to Bill for his opening remarks Bill.
Thank you Ryan good morning, and thank all of you for joining us as we discuss our Q4 and full year 2021 financial and operating results.
2021 was an outstanding year for the company and our shareholders the ACC team executed.
Excessively advanced our long term strategy on many fronts.
We signed more spring and summer term leases than any prior period in our history.
Employing the enhanced capabilities of our Nextgen operational systems.
We also outperformed the high end of our expectations for fall leasing achieving 95, 8% opening occupancy and three 8% average rental rate growth.
We delivered nearly 4000 beds at our development, serving the Disney College program.
On schedule and within budget, despite the national labor shortage and widespread supply chain constraints, bringing our total beds delivered at Disney to more than 6000.
We expect to achieve originally targeted yields beginning in 2022 and to hit our six 8% stabilized yield in 2023.
With regard to our current portfolio the Companys performance eclipsed expectations. In addition to our total portfolio's NOI returning to pre pandemic levels.
During the fourth quarter property NOI for our 2021 same store property grouping.
<unk> surpassed pre pandemic levels.
Both of which occurred a full year earlier than expected.
With regard to capital allocation activities, we successfully executed a well timed $400 million bond offering issuing seven year senior unsecured notes at a yield of 226 and.
And to cap the year off we formed a joint venture with Harrison Street, social infrastructure platform to recapitalize, a 45% interest in our existing eight property, Arizona State University student housing portfolio.
The transaction represented a 375 economic cap rate based on in place rental revenue escalated trailing operating expenses, including ground rent and historic average capital expenditures.
Transaction produced an unlevered IRR of approximately 16%.
It also provided price discovery for our on campus Ace portfolio and demonstrates that on campus assets.
V a properly structured public private partnerships can be valued on par with private off campus assets that reflects comparable market and product attributes.
Importantly, the transaction exemplifies our ability to capitalize on our ace investments, while simultaneously maintaining the spirit of our university partnerships illustrating the net asset value creation opportunity in both our existing <unk> portfolio and our future pipeline of on campus transactions.
The two phase closing of the transaction is also beneficial as it mitigates earnings dilution satisfies our 2022 capital needs and provides additional proceeds moving into 2023.
So they're positioning us to execute on our value enhancing development pipeline.
Our solid operational execution and prudent capital allocation activities resulted in earnings per share cumulatively exceeding quarterly expectations throughout the year by <unk> 18 per share or almost 10%.
And full year <unk> per share of $2 14.
We exceeded the high end of our most recent guidance by <unk>.
In addition, our stock ended the year at an all time closing high of $57 29.
As we look forward our optimism continues given our current momentum and strong fundamentals the sector is experiencing.
In Stark contrast to the media headlines pointing out the college enrollment has been decreasing with regard to the broadest universe of institutions of higher education.
Student demand to attend Americas tier one flagship universities. The ones. We currently serve and targets do business continues to experience growth and to set record levels of enrollment. This includes first year student enrollment growth at the highest levels in over 30 years.
The strong enrollment demographics, coupled with new supply for fall 'twenty, two being at the lowest levels in over a decade provides a highly attractive supply demand environment.
As Jennifer commented in our release Industrywide pre leasing is tracking in a manner more consistent with the sectors traditional pre pandemic fall leasing velocity and we are targeting normalized occupancy levels and attractive rent growth for the 2022 2023 academic year.
With our guidance, including same store rental revenue growth of three two to four 6% for the fourth quarter of 2022.
Touching briefly on our on campus public private partnership business. Our prior statements that opportunities for on campus transactions may will be greater in a post COVID-19 environment.
Appear to be coming to fruition.
Since the end of Q3, we have commenced the third party development or University projects.
Princeton, UC, Irvine and Drexel University.
And we were awarded a new development with Purdue Research Foundation.
As the recognized leader.
<unk> remains uniquely positioned to capitalize on this expanding opportunity.
As we moved into 2022 the company is firing on all cylinders with accelerating momentum as represented by our 2022 guidance, which represents earnings per share growth in the range of 12% to 16%.
This is even more impressive when considering that our guidance includes the effect of the $270 million first phase closing of the ASU transaction.
And the fact that this growth is coming off of earnings for 2021 that exceeded the high end of our expectations.
In closing I'd like to reiterate my remarks from the beginning of this call 2021 was an outstanding year for the company and its shareholders.
As we turn to the question and answer portion of today's call, we will not be answering any questions regarding our recent disclosures regarding land and buildings, but instead, we will focus on the strong performance of the company, our 2022 outlook industry fundamentals and our business strategy with that I will turn it back to the.
The operator to begin the Q&A.
Thank you.
As a reminder, if you would like to ask a question. Please press star followed by the number one on your kind of thank you Pat.
We now have our first question on the phone lines from.
Alexander Goldfarb with Piper Sandler.
Please go ahead.
Okay.
Good morning, good morning down there.
Bill maybe just focusing first on margins.
I think you guys had said that from 2014 to 2019, you improved margins by about 300 basis points.
I am guessing that some of that was given up in COVID-19 . So one how much margin degradation did you suffer with COVID-19 .
Where do you think that Youll end up do you think that you will return to the 300 point exceed and finally on that given that you guys are doing less external like youre not doing the big portfolio trades and all that that you used to do are there any savings corporately that could also be layered on top of.
The portfolio margin efficiencies.
Yeah, Alex and as you appropriately pointed out in our in vessels will recall, we had a significant initiatives starting in 2014 to improve margin.
From 2004 to 2019, we drove a 300 basis points from $52 7 million up $2 55 to eight we did have a diminishment last year due to COVID-19 , where it dipped down to $53 seven and when you look at our guidance for 'twenty, two and implies a margin of $55. Four so just about 40 bps off.
The improvement that we've gotten to in 2019 and of course, that's trending with only four months of what we expect to be an excellent lease up in fall of 2002, we won't get the full benefit of that margin improvement until we move into 2023, and so certainly our expectation is to surpass the margin improvement.
We had developed and achieved through 2019 and improve it going forward I'll, let Pete talk a little bit or Daniel talk about that a little more in regard to your follow up question on yes, Alex If you look at 2022 guidance really on the headline G&A number we are looking to experience about a 6% to 9% decrease in <unk>.
<unk> of our guided G&A now.
<unk> that does include in 2021.
What we would call not in the ordinary course of business charges specifically related to.
Jim Hockey's retirement, and divesting of his unvested shares.
And also some costs, we incurred as part of the activism work with Atlanta buildings.
You exclude those were still only increasing G&A in 2022 by 2% and so certainly we are seeing.
<unk>.
A slowdown in that growth that we've incurred here recently, but we also focus on G&A every year with the board, we do a lot of productivity studies.
Benchmarking studies to see where we are.
You look at our productivity statistics in terms of.
G&A as a percent of revenues as a percent of assets I think we rank very well with regard to that and then specifically when you consider the size of our company relative to other Reits.
And where our ratio sits relative to all of those routes.
Okay and then the second question is on the fee development guidance I think.
It's bigger than this.
Coming here I think bill you referenced the number of schools getting back into the normal scheme of third party development. So I guess again, sorry for the two parter, one give us a little color on if those were only third party considerations or if any of those were potential ace and then to the upside and the fee development.
That youre guiding for 'twenty, two is that sort of a one timer, meaning in 'twenty three it's going to go back down to some normal level or is <unk> 22, a return so im trying to figure out how many of these projects were pent up and now the schools are doing them, but in 'twenty three it would go back down or what you see in 'twenty two.
Or third party, that's actually what a normal run rate should be.
Sure. So first let's talk about the the increase in the third party aspect of those transactions and we look at the four transactions we talked about.
Commencing development on <unk>.
Drexel and UC, Irvine, which are long term clients.
Have always been UC Irvine has always been a third party client that's been the financing mechanism debut since 2002 and Drexel. The protocol has been we utilize asos Upper Division housing and third party on first year residence halls, which they want to have a more vested interest in which both of those products are when you then look at Princeton and.
And this is a little trend that we're seeing that we think is a positive for third party revenue moving forward that we hope will begin to be able to build a profile in years to come that will be above the prior levels and that as you look both at Princeton and <unk> and then also look at the announcements to move a previously on the award at UT and Emory.
<unk>.
All four of those transactions are graduate housing.
And in part what we believe is happening when you look at those particular institutions Boston Austin Atlanta.
The cost of housing in Metropolitan America is forcing universities to look at graduate housing and having to provide solutions and graduate housing has always been the most price sensitive student housing market typically you've lost the support of mom and dad, you are more price conscious and so in those particular.
Transactions the university's always want to use the lowest cost of capital available and so in that case, there is a pretty good differentiation in terms of the cost of capital. They can float bonds at <unk> that you can do credit enhancement on the project base that enable to get much lower rents for the graduates Ut Princeton MIP are all AAA enbridge double H.
Two.
So we do see a trend of more graduate projects coming.
And what the pre Covid expectation was and those tend to be third party and so as it relates to what the trend becomes post this year.
We hope that you will see an escalation that continues to create a new stable bar, but that has to be proven out as we go.
Thank you.
Thank you.
We now have from next question from Neil Malkin from capital one sorry, Neil. Please go ahead when you're ready.
Thank you.
Hello, everyone.
Great quarter, Great guide well done.
First one.
You had some success you called out.
In your in your sort of full full fourth quarter occupancy obviously subsequent to the start of the year at 95, eight and you were at 96.
So I was just wondering.
Alex is a two parter alive.
One what are some of the things that you did to achieve those those.
Those occupancies and then can you apply that especially with your sort of next gen operating platform and techniques can you apply that to future lease ups and fourth quarters.
Maybe get a sort of new highs in occupancy.
Yes, Neil and you just answered the first part of your question with a second by bringing up Nextgen.
One of the things that you are seeing in terms of incremental a little bit of a paradigm shift from our history that last year. We thought may just be a COVID-19 blip, but now having now two years of outperformance related to <unk>.
Maintaining that fall occupancy and driving spring occupancy is a direct result of nexgen and as those of you that have followed the story long term Joe Nextgen originally was assist or I'm, sorry lamps was originally a system that was solely focused on the very intense lease up for the fall each year and part of the development of next Gen was too.
Improve the current period leasing the interim back billing of properties throughout the fall the spring lease up the may back billing with the same level of business intelligence and corporate support that went into the annual fall lease ups and so we've now seen two years of improvement in terms of.
Historically, we've been running at about a 50% success rate of backfill in December ending leases. This.
This year that was a 91% economic backfill.
Last year, we saw May leases go from 50 to 85, we haven't we to go through spring to see if we have that level of success again, and then also you've seen no shows improved by about 10 bps and so you really look theres been about $6 million of incremental revenue enhancement through the intensity of Nextgen.
<unk> systems, which create significant value for us in that regard, but also to add a little bit in the DP talking about Daniel talking about.
G&A and that a lot of that G&A investment over the last several years has been in that next gen system and now youre starting to see some of the benefits of that come to bear.
Okay.
No that's great. Thank you bill the other one.
You talked about.
Growth initiatives.
Obviously, we're successful at the.
10% to 45% interest rate and you also talked about.
Will you be at 10%.
Partner and sort of like.
A fund like structure that someone like <unk> does and that was something that you wanted to grow.
And just to sort of take advantage of your skills.
Your skill set and the fact that.
Asset pricing is very aggressive.
I was wondering if you could maybe talk about how that's trended.
If anything has changed in your mind and do you expect.
To announce anything.
From that.
Fund or a line of investments.
And sort of the sort of the tier one schools.
Power five schools.
In 2022.
Yes, and we certainly that initiatives has moved forward at full speed.
Have final partners selected in that regard. We're currently we're now starting to see some of the acquisition activity come to the market.
So we are beginning to actively underwrite transactions again and any updates related to that particular venture we would expect to announce when we have real transactions to talk about.
Okay, well listen thanks for the time and I look forward to seeing you at our Flamingo crossing event in Orlando on March 23.
We look forward to hosting you there.
We now have a question from.
Nick Joseph Great Sir.
Your line is open.
It's actually Michael Bilerman here with Nick.
So I was wondering if you can just go through you talked a little bit about starting to underwrite transactions again.
You obviously had the.
Significant transaction with Harrison Street towards the end of the year in selling assets I guess, how are you thinking about now that the stock has pulled off from that into your high.
How do you plan to close the gap to AAV versus using capacity to go out and deploy capital I guess, what is management and the board doing today to really get added that discount and what initiatives do you have going on to do that.
And certainly Michael and I would say that let me quote June you write up last night and it I think you said it perfectly and that his strong business execution is the best course of action to close the valuation gap.
So certainly we were very pleased in terms of the acceleration in momentum you saw in terms of the stock at the end of next year moving.
Very much close to NAV I think we're actually at a two 4% premium to your current NAV at the end of December and so certainly the geopolitical environment that has had an impact on the broader market and on the.
The U S. REIT index down about 11%, we certainly are there with them. Obviously, that's created a momentary disconnect.
Certainly with the announcement that we have today and the acceleration that we have and the industry fundamentals pending.
Pending the geopolitical environment.
Getting resolved the correcting itself, we would expect to pick up on the momentum we saw at the end of last year.
And expect to see the performance of the stock move in concert with that obviously every decision that we make from an individual capital allocation perspective, whether it's in our own development pipeline are in the joint venture structure will be handled in the context of how accretive SAR investors in the long term and the capital allocation Committee.
Is intimately involved in those reviews and processes.
I guess, how do you think about obviously executing Harrison Street gave us not only the mark on.
Campus assets, but it also provided two years of funding for all of our development and redevelopment. So it's secured both goals I would say now that your financials in the capacity liquidity is in place.
I guess are you interested at all on buying back stock to help narrow that discount or accelerating additional asset sales or joint ventures.
To continue down that path and provide continue to provide very strong.
Capital cost to your shareholders.
Yeah, I think the starting with the end of your question. The one thing that we have heard from shareholders consistently over the last several months. They have been very appreciative of the thoughts that we are taking towards our capital allocation plan in terms of accretively self funding, but at levels of prudent levels that.
Don't negatively impact the earnings per share growth profile that they have been waiting on for the last several years and so we feel as though we've been balancing that very well on the ASU transaction really gave us the opportunity to exemplify our ability to do that on the longer term.
I don't want to comment a little bit on on your point related to the ASU transaction and that we are very pleased.
That we were able to undertake that in a couple of notations about it.
The price discovery as it relates to the on campus Ace assets that we have first and foremost the comment that I made in my script. It demonstrates that a well structured on campus equity transaction can be priced on par with off campus, which you think was very important to demonstrate the other thing that I pointed out.
There's great diversity in the ASU products among those eight assets. There's two upperclassman apartments, there's two fully immersed academic living learning centers Theres, a 19 sixties high rise building redevelopment and renovation Theres a private off campus apartment complex and there is a Greek village.
And so it really demonstrated throughout the entire product range of student housing.
That price point that can be achieved on par and so we think there's a lot of.
A good discovery that took place in that as it relates to your question about how much or more of that would we undertake again at this point in time, our focus is on Accretively self funding and.
And maintaining zone and growth profile.
Okay.
The second topic.
Rent growth in student housing keep up if inflation stays elevated.
Is there a difference in practice and capturing higher rent growth for your on campus versus your on campus off campus assets.
Obviously, you want to be a good partner to the schools and so I wasn't sure if that imposed a restraint that may not exist for on campus or off campus for the properties you own.
And maybe just talk about the ability as you roll into the 'twenty three 'twenty four season, your ability to capture that excess rent growth at the multifamily landlords are certainly being able to capture today.
Yeah.
My question, Michael in the context of the inflationary environment the rent.
I would start by saying that the highest general level. The one thing we'd like to point out and certainly when you look at Covid <unk> impact on rents overall in the residential section as a whole and certainly you had geographic differences in product classification differences, but that's a whole multifamily was relatively flat for the couple of years during COVID-19 and now we're seeing that explosive growth.
Student housing and as we've always talked about which is the investment thesis is even through Covid, you saw 1% rate growth than three 8% rate growth and we are implied rate growth in the courts and in this guidance and so the thesis continues to be the same of the consistency of stability of cash flows without the volatility.
<unk> that you see in the revenue stream of multifamily, which you also saw through the great recession as you talk about your the inflation question.
The downside of student housing is that your rates are locked in for 12 months and so to the extent in the next three to six months you see excessive inflationary growth, we're not able to reset that month to month like apartments can as they slowly roll on 8% a month, we do however, and as you pointed out in the off campus.
Market, we have all of the same abilities for open market pricing that you do in any other sector of real estate and in the on campus one of the things and this is why you saw ASU trade at the price. It did in all of our on campus transactions, we always protect margin.
And so in the case of ASU Theres no pricing limitations, we're able to price rents as we choose based on the economic environment and even at institutions, where they were concerned about pricing and there are some callers in terms of how much rates can race in every one of those ground leases we have margin protection.
To where we have a 12 month look back on inflationary expenses and also a look forward on budgets and have the rights to raise rents to protect the margin equal to those increases and so in actuality, how we how we will implement that if it comes in the call we will be market by market assessing.
The ability to do so, but we do have the flexibility in how we structured the on campus deals to treat them consistent with how we would off campus.
Okay.
Mentioned in a couple of times.
Street NAV is at 59 Bucks.
Think about a mid fours cap rate it would seem that your joint venture certainly things going on the industry.
But that cap rate, probably on the higher end of where real market is.
And obviously you have a lot of other different pieces of the company other than just the asset value that could be attractive to others.
I guess is there any plans to sort of put out a very detailed look at what you believe.
Is when you take into account your development and redevelopment your existing assets to the ventures that feeds the management platform all of the things that are embedded in the entity. I guess is your plan to sort of put out a little bit more.
Tail about where you sort of see value overall of the enterprise.
Obviously, thats a board decision to what level we would.
Go through that process and have public disclosure.
But certainly it's something we're always looking at internally and again as we look at any beginning of the year is not something we think about at a moment in time.
And again I would point out to where we were at $12 31 in the context of anything in the trending obviously the market is impacted to date, we're always looking at the NAV of the company in the context of future value that we would expect to be reflected in the stock versus where we're trading.
Well, maybe there's some opportunities as we get to our conference in a couple of weeks to provide investors a little bit more granularity as to various values.
And whether the street accurate or not.
I appreciate it thank you.
Thank you Michael.
Thank you Michael we now have another question on the line from Austin <unk> from Keybanc capital markets.
Please go ahead when you're ready.
Great Good morning, everyone.
As you guys set the fall 2022 rental revenue guidance range.
How did you think about the varying components, maybe maybe the first year residence halls in particular, which I think kind of elevated.
Occupancy levels last fall relative to where you've been historically, so curious if you kind of assume those sustained at elevated levels or reverted back.
And then just sort of backing into then a.
Amid kind of 2% rate growth and occupancy around 97% can you just give us some of the components of that.
How you drew that up.
Sure.
As it relates to the on campus Ace.
Rental rate pricing was really unaffected by Covid and remains consistent this year and going forward.
And that in the recovery you saw there was largely driven recovery of occupancy.
As the students on a first year basis came back to campus.
Most universities that we serve have always operated near full capacity in those residence halls, and so we saw that with the first year increase in students maintained and we believe it will be consistent so theres been stability as what the returns you saw this year in terms of rate and occupancy.
On campus to pre Covid levels and now we expect it to continue on and normalcy as it relates to the off campus market that is all again as we always say.
Property by property unit type by unit type market to market and maximization of rent at the end.
In each case.
Driven by our systems and so we do see the one thing that we know Jennifer commented in her remarks in the press release that we do see the national trend in leasing has reverted to its pre COVID-19 velocity.
Part of that is being driven by the fact that those large first year classes that are on campus are now back to the normal cycle. They're all on campus. They are attending all the sporting events, they're having all the extra curricular activities and they're also back to the normal cycle of when Theyre looking for off campus housing and.
So with the return to that market that gives us the ability to utilize our systems off campus to drive rents to the maximum level, we can and you see that vary from inflationary to we always have several properties and markets, we're able to drive rates.
As much as you know 5% to 7%.
So you can see that our guidance implies I think at the midpoint about a three 9%.
Rental revenue increase.
So we would expect it to be a healthy year in that regard.
Okay, that's helpful and wanted to switch over.
When you guys last quarter provided the internal NAV.
I think you said high <unk> low <unk> range and then.
You completed the ASU transaction late last year.
I'm just curious if there's been any movement in terms of how you thought about the cap rate you apply to the portfolio based on the price discovery in that transaction or what Youre seeing I think you said sort of off campus trading in line with that at high quality and good locations any change to kind of that in.
<unk> estimate or a range that you provided.
Just last quarter.
As you know Austin, we have always believed and always spoken to we believe ace should trade on par with off campus assets in that vein and so the price discovery was to demonstrate to the broader investment community that the way that we structure our ace transaction.
I remember years ago. When you all would say how did you lose that deal how do you lose that Youll just said because we never give on the premise of structuring these transactions so that they trade as real estate.
We demonstrated that with ASU and so for us that was proving up the value that we believe always exist now when you look at that $3 75 cap rate and you look at ASU.
It is a power five institution.
Carnegie are one institution happens to also be U S News and World reports number one most innovative University in America. It is in the Metropolitan area.
And it is fully integrated into their on campus programs and so.
That does not trans that cap rate, obviously does not translate to every asset of ace nor in our portfolio and so when we look at breaking down the valuation of <unk> internally, how we've always looked at it you certainly have the components that are trophy assets like an ASU at your best institutions.
Then have to look at we certainly have products then once you move off campus.
<unk> emulate power five in Carnegie are one but then we also have assets that are more rural college towns that arent as well located some of the other and so theres a great diversification in terms of those product attributes that we go through asset by asset and I will tell you that for us the ASU transaction firmed up.
What we have always believed is the value of ace.
Got it and then just last one for me I mean with sort of the Harrison Street and Allianz.
Joint venture vehicles.
Available to you seemingly an attractive means of recycling capital how large should we think about those those two vehicles relative to the size of the wholly owned portfolio.
Austin This is Daniel I would say that.
There is certainly appetite with both joint venture partners to do more.
And I Wouldnt say that Theres, a specific size targeted but relative but more.
Looking at it in terms of our annual capital recycling program that we've talked about in that 2% to $400 million a year range.
So of course as right now we've got this year in 2023 addressed with the ASU transaction, but as we look to the future. We will look to do more with them than we might look.
To even expand.
The base of partners that we're doing stuff with but certainly more appetite from them and I Wouldnt say theres, a specific size or limit on size.
That we're targeting with them, but more of an annual program.
Understood. Thanks Daniel.
Yes.
Thank you.
We now have.
John Guinee Lasalle from Goldman Sachs.
Please go ahead.
Hi, good morning, congratulations on a strong quarter and thank you for taking my question.
As we start to think about the next leg of development looking beyond Disney now.
Yeah.
Towards the latter stages.
How are you evaluating on campus versus off campus, what Im trying to understand is you know is off campus.
Is the speed of off campus perhaps.
Higher given inflationary environment and sort of just more room to perhaps raise rents there.
Gout.
Into 2023, how do you evaluating what the next takeover development could look like.
Yes.
And certainly as we have previously communicated.
Our first priority from a capital allocation perspective, and certainly in this environment. It is appropriate is on campus ace transactions.
We still have some excellent pipeline of off campus development transactions, it's more competitive right now off campus you have construction pricing pressure pressures and of course.
Entitlement cost and as we've always said when youre looking at the on campus transactions you have invested partner in the University.
They are bringing the land to the table and that land value is determined by the University based on their criteria of wanting to provide affordable rents to students and so theyre not looking to maximize the value of the parcel. They also in most cases are the entitlement governance entity and control that process very calm.
Cost effectively.
They also many cases bring a real estate tax exemption given its use of benefit for higher education and so certainly in this environment. There is more and also they tend to be larger which gives you scale and helping accomplish the affordable rents and meeting feasibility and so the curve.
Current environment and as you also saw through the great recession. When we were doing more on campus Ace development then off bring.
Brings great benefit to being able to achieve our targeted yields provide affordable student rents and to meet the university's objectives. There are still some great opportunities off campus.
We're very selective in that arena and only look at the type of development that we referenced would be equal to an ASU type on campus transaction Trophy assets on legacy sites, where we can accomplish affordable rents and get our return.
And so there'll be fewer of those but it's not a situation where there won't be any.
Got it understood.
In your previous.
<unk> you guys addressed.
You might be looking to see more opportunity with JV programs and there might be more appetite there on your <unk>.
You can obviously either dispositions outright dispositions were also discussed.
Is that something that you.
You guys are still evaluating.
Do you think that.
Given you still have set us defeat by pipeline coming gain from <unk>.
Okay dispositions are no longer on the table.
I would say that.
But we wouldn't say, it's no longer on the table and certainly theres going to be times, when we think it's appropriate to monetize.
The assets that we consider to be towards the lower end of the NOI growth profile or lower into quality.
And our.
Longer term refinement of the portfolio, but right now we really like the idea of using joint ventures in terms of.
Monetizing a minority interest in assets.
And being able to replace any lost.
Efficiency of scale with the management fees asset management fees that we can get off of that that portion, but joint venture partner. So I think.
Most commonly you will see us using this minority joint venture partnership structure like we did with the Austin all of the <unk> joint venture and the ASU Harrison Street joint venture.
Great. Thank you so much.
As a reminder, if you'd like to ask any further questions. Today. Please press star followed by one when you would kind of think he packs now.
If you change your mind anytime Keith Wester future remains the question.
<unk> one for any questions.
We now have our next question on the line from John perhaps.
Green Street, Sorry Cheng. Please go ahead.
Thanks, very much William if you went out and sold the bottom tier of your portfolio they pick a number about 10%.
Type of cap rate do you think that will dispatch at a second tier University is a little further away from campus.
Obviously, you've seen a lot of the investment activity, primarily focused at the major universities core and that's where that's trading in that sub 4%, but you've still seen compression across student housing investment and you are seeing investment across a wider a wide array of couple of the large portfolios that you saw trade at the Harrison Street sold it.
The end of the.
Fourth quarter, where I would say probably.
Assets that were consistent with what I call, our bottom 10%, but.
We think that that range is probably compressed down to that mid 4% range.
We see a premium.
Higher cap rate than what youre seeing for the core stuff, but still seem pretty significant compression and theres, a pretty deep investor base for that because if you think about it it's a very relative attractive cap rate and return compared to the significant compression you've seen a multifamily.
Sure.
In terms of the buy and hold decision.
If you give me a decision I would rather own ASU at a 375 versus the bottom 10% of your portfolio.
At a mid four so why not why not use the bottom tier of your portfolio as a source of funds versus ASU irrespective of the price discovery.
Well.
That price discovery, we feel was critical.
And obviously as we go forward, we look at what you just said in terms of evaluating the alternatives, but we have spoke on this call for over a decade of people asking can you trade ace in equity and at what cap rate and so we felt that it was very important to put that out. The other thing I want to point out is I mean, we love Arizona State.
And they are a wonderful partner and there's probably more to do there and we also had a high degree of concentration one of the things Morgan Olson. Their CFO was excited about is that we talked about in diversifying and taking some of the risk of a single market off the table, we have the ability to invest more at ASU and so there were a lot of strategic reasons why that transaction may.
But certainly as we go forward John every whenever we're looking at our capital allocation plan, we're looking at our entire portfolio and what is the most accretive trade that we can make.
That also enhances long term sustainable cash flows.
Okay. Thank you our final question from me Jennifer.
Equation.
Discussion. So enrollment is up supply is down baseline inflation is well above recent history I guess.
I've never run a student housing portfolio, but I don't understand why you can't push rental rates, 578% on the off campus portfolio versus the kind of 3% that's implied in the guidance.
Yes, John and I actually answered that previously in the context of we can at certain assets in certain markets and you know we have a very eclectic geographically diverse portfolio and when you bring all the rental rate growth together you get that.
Average, we've always had over the years, 2.5% to 3%, but within that two 5% to 3% you have a range of flat growth to 8%, sometimes negative growth to get the occupancy. It's always about the revenue maximization every cycle and so this is also when you look at ace versus off campus. Another.
We think about in terms of the long term profile of those opportunities you can achieve prolific irr's off campus, where you have the ability at times take our Callaway house asset where our rate growth in the first five years was well in excess of 7% on average.
Versus the stability coupon clipping on campus that two 5% to 3% very little downside and so when you look at setting rates and stability of cash flows you absolutely have the opportunity off campus to have that type of prolific great growth, but not across the portfolio of.
170 assets in 32 different states and 92 different markets.
Would you guys follow a diverse y.
Yeah, I guess the follow up again supply across the portfolio is down enrollment across the portfolio up wire and your portfolio is well located.
Certain of that but we've seen zero percent rate growth.
If a property has zero percent rate growth there probably not in a market that has zero supply and the supply dynamics are different.
Again this is a very large diverse portfolio with different product types.
And is the thesis of student housing it just reminds me some of the conversations we're having today remind me of 2012 2013 when apartments were just starting to come off of the great recession, where they had had significant rental rate dimunition and people were saying why can't you why can't you and again as.
We have always said the benefit of student housing and a large diverse portfolio such as ours is the consistent stability of rental rate growth and cash flows.
But the one thing a question that youre asking that is not true.
Individual asset and investment basis, absolutely you can have years of 5% to 7% rate growth and it occurs within our portfolio all the time.
17 years in a row of never having negative growth is.
Is the story of what that consistency.
Rental revenue equates to.
Yes, thank you for the thoughts.
You got it thank you.
Thank you Joan we now have a question on the line from a follow up from Neil Malkin from capital. One. Please go ahead your line.
Yes. Thanks.
Just two quick ones first.
I'm sorry.
<unk> answered this before but.
After a Disney.
Just wondering about the pipeline of actual as not third party I know you said off campus land values are increasing but just.
Obviously most of these things went to third party and not ace.
I know you talked about the school is kind of shifting focus from Covid.
The core of their of their business.
When do you think we're going to see that and.
Do you expect to announce some things.
Near term kind of build that pipeline.
That leads into my next question.
Yes, sure and Bill talked about this a little bit earlier.
But yes, we've seen a lot of third party projects that theyre very specifically related to the goals of those universities and the type of housing a lot of focus on Grad, where affordability is the key and finding that lowest cost of capital, which usually is through those universities balance sheets.
Is there, but we have no different change in what we believe the appetite is overall for <unk> III and that relates to both the equity deals as well as the third party and so there is a vibrant pipeline and if you look within our supplemental Cal Berkeley, Theres, a nice project within their.
Northeastern is still targeted to be and there is a number of that are TBD that based on what the goals of those universities and what the potential financing is that could be as so when you look at that large pipeline, we've been talking about and youre seeing the fruition of that come with these recent closings and announcements that still includes a large mix of both ace and third party and what ultimately turns.
The ace and equity and what becomes third party depends on the University depends on our investment criteria and the product and so that pipeline is as vibrant head as it has been.
And we will continue to pursue it and hopefully win those projects and Youll see more as projects come along.
Okay, and I assume that that pipeline is growing in terms of rfps right. It seems like every quarter it's more.
Yes, it continues to grow and be strong.
Okay, and then last one and I think this is kind of tying a lot of people's questions together.
With rent growth, obviously being less in multifamily.
Talk about the lower risk renewable cash flows and I think the other part of it is the growth is going to come from external right.
The value of the yogurt gobbling, so to speak of the development in the on campus.
Revitalization that very few people have the skill to do maybe with that in mind can you just talk about.
As we look past COVID-19 .
How are you thinking about long term capital allocation value creation.
Over the next.
Several years.
Yes.
And certainly we are not well served by Microsoft certainly we are in a position to really implement and accretive self funding plan and I want to I want to point out since you brought up the recovery from Covid.
One of the Untold stories that we put in our investor presentation at NAREIT, if you actually pull up that presentation page 28 of our NAREIT presentation, but we.
In 16, and 17, we did a lot of asset sales, where we've refined the portfolio. We exited a lot of markets. We made the portfolio enhance it to where now it's all on campus or pedestrian to campus.
Rare exception and as we track the markets that we exited prior during that period of time, one thing that we saw is that the markets that we continue to be in.
Through their enrollment by 840 bps over the marketed markets. We exited over the last five years also the occupancies at the markets. We exited were 600 basis points more impacted by Covid.
And we were in our own markets they were at 85% versus our 93.
And the bottom line is we have now repositioned this company and the shareholders are now and we really appreciate the long term shareholders that were patients through those years as we were implementing that long term strategy to reposition the portfolio. You are now seeing the benefits that being reaped in the context of strong earnings per share, but also what you saw.
ASU and what we will continue to do with our portfolio is to very Accretively self fund.
With cap rates now being proven up in all aspects of our portfolio.
On an asset by asset basis in the threes as William said, probably we had a couple that are mid fours.
But as you've seen that shore up we now have the ability we've got about 200 basis points of upside.
Net asset value accretion in the development pipeline that we have before us as you mentioned.
We are in the best competitive position <unk>.
As it relates to on campus P. Three than we have ever been in in the Companys history.
And so we see a very bright future and a lot of tailwind and a lot of accelerating momentum for the company as we are able to move forward.
Taking advantage of the opportunities that are before the company.
Yes.
I appreciate that thank you.
Sure.
Thank you.
Yeah, Nathan the questions on the line I would like to hand, it back to Dan.
I want to thank all of you for joining us and I really want to thank the American campus communities team.
And what you saw in todays last nights release.
Is the cumulative effort and collaboration of the industry's most dedicated hard working team and so I want to give a big shout out to them I also want to for those of you that are attending the upcoming Citi conference. Unfortunately, I won't be able to attend because of their vaccination policy.
Had COVID-19 twice, so just add omicron and I've got a very high level of antibodies and my Doctor has told me not to get the vaccine at this time.
So I would have loved to have 10, Daniel and William will be there and.
They will answer all of your questions that gives you a good outlook with whats going on thank you all so much.
Thank you.
That concludes today's call. Thank you for joining you may now disconnect your line.