Apr 29, 2009
Executives Bill Bayless- Chief Executive Officer Brian Nickel- Chief Information OfficerJonathan Graf- Chief Financial Officer Greg Dowell- Chief Operating Officer James Hopke- Executive Vice President Project ManagementGina Cowart- Vice President of Investor RelationsAnalysts David Doty- CitigroupJoe Dazio- J.P. MorganKarin Ford- Keybanc Capital MarketsAndy McCullough- Green Street AdvisorsPaula Poskon- Robert W.
BairdOperator Good day ladies and gentlemen and welcome to the First Quarter 2009 American Campus Communities Inc. Earnings Conference Call.
My name is Lacey and I’ll be your coordinator for today.(Operator Instructions) I would now like to turn the presentation over to your host for today’s call Miss Gina Cowart, Vice President of Investor Relations. Please proceed.Gina Cowart Thank you Lacey.
Good morning and thank you for joining the American Campus Communities First Quarter 2009 Conference Call. The press release is furnished in Form 8K provide access to the widest possible audience.
In the release the company has reconciled the non-GAAP financial measures to those directly comparable GAAP measures in accordance with Reg. G requirements.
If you do not have a copy of the release it is available on the company’s website at www.studenthousing.com in the Investor Relations section under Press Releases.Also posted on the company website in the Investor Relations sections under Supplemental Information you will find a supplemental financial package. Additionally we are hosting a live webcast for today’s call, which you can access on the website with replay available for one month.Our supplemental analyst package and our webcast presentation are one in the same.
Webcast slides may be advanced by you to facilitate following along. Management will be making forward-looking statements today; the references to the disclosure in the press release on the website with the slides as well as 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 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934 as amended by the Private Securities Litigation Reform Act of 1995.Although the company believes the expectations reflected in any forward-looking statement are based on reasonable assumptions they are subject to economic risk and uncertainties. The company can provide no assurance that its expectations will be achieved and actual results may vary.Factors and risks that could cause actual results to differ materially from expectations are detailed in a press release and from time to time in the company’s periodic filings with the SEC.
The company undertakes no obligation to advise or update any forward looking statements to reflect events or circumstances after the date of this release.Now I’d like to introduce the members of management with us today; Bill Bayless, Chief Executive Officer, Brian Nickel, Chief Investment Officer and John Graf, Chief Financial Officer. We also have Greg Dowell, Chief Operating Officer and Jim Hopke, Executive Vice President Project Management with us today.
Now I’ll turn the call over to Mr. Bayless for his opening remarks.Bill Bayless Thanks Gina.
Good morning and thank you all for joining us as we review our results for the First Quarter of 2009. As we talked about on our Q4 call our two main objectives for 2009 are to continue to achieve net asset value appreciation in our core business especially through the improved performance of the GMH portfolio and to make ACE our top investment priority given the lower risk, higher yield profile of these transactions.
As you can see from our press release and supplemental we’ve made excellent progress on both of these objectives.While these two initiatives focus on future value creation we’re also pleased to report that the first quarter results met our internal expectations. We continue to see our industry as being more resilient than many real estate sectors in the current economic environment.If you turn to Page Five of the supplemental package you’ll see that our first quarter NOI for our same store property grouping increased by 2.1% over Q1 of 2008.
This was the result of a 2.9% increase in revenue and a 3.9% increase in operating expenses. On Page Six of the supplemental you will note that we have included a quarterly seasonality breakdown of revenue, expenses and NOI for each of the last two calendar years for the respective same store property groupings.
The purpose of this chart is to assist investors and analysts in understanding the quarterly seasonality of NOI over a calendar year.While the operating margins and trends illustrated in this analysis should be indicative of the operating performance of our legacy assets it is important to note that the GMH properties will operate at a higher expense margin until the occupancy levels at those assets are stabilized.If you’ll now turn to Page Eight of the supplemental you can see occupancy at our same story wholly owned ACC legacy properties as of March 31st was 96.4% compared to 95.5% for the same date prior year. As of March 31st the GMH portfolio had occupancy of 89.1%.
Occupancy for our combined wholly owned portfolio of legacy and GMH assets was 92.9%.If you turn to Page Nine we’d now like to review the leasing status for the upcoming 2009-2010 academic year. As of Friday, April 24th our combined GMH and ACC legacy same store wholly owned portfolio was 76.3% applied for and 72.9% leased.
This compares to 74.7% applied for and 71.9% leased for the approximate date one year ago. The GMH portfolio was 73.5% applied for and 71.5% leased compared to 62.8% applied for and leased for the approximate date one year ago.We are currently projecting a final rental rate increase of 0.7% for the GMH portfolio based on current market pricing trends with substantial revenue growth expected to come in the form of increased occupancy.
The same store ACC legacy portfolio was 80.1% applied for and 75.2% leased compared to 87.6% applied for and 82% leased one year ago. We are projecting a final rental rate increase of approximately 1.6% based on current individual market pricing trends.While it’s not our standard practice to provide rental rate growth information on a per property basis given the current economic environment we believe it’s prudent to include this information to demonstrate the overall resiliency of the student housing sector in our portfolio.As you’ll note, 32 of our 39 ACC legacy assets are projected to have rental rate growth ranging from just above flat to 4.7% with an average of 3%.
We’re currently projecting only seven of our legacy assets to have negative rental rate growth with two of those seven assets having a strong possibility for revenue growth via occupancy improvement. As of April 24th only 6 of our 39 legacy assets were behind their multi-year leasing velocity trend.When looking at the GMH portfolio 27 of the 40 properties have rental rate increases ranging from 0.4% to 5% with an average of 2.5%.
While we’re currently projecting 13 of 40 to have negative rental rate growth 8 of the 13 properties have a strong probability for substantial revenue growth via meaningful occupancy improvement.Our second ACE development, the Barrett Honors College at ASU is 81.6% pre-leased with current and incoming Barrett Honors College students. Remaining beds will now be made available to first time freshman who are required to live on campus as part of the university’s new housing policy, which goes into effect this fall.
With that, I’d now like to turn it over to Brian to discuss our investment activities.Brian Nickel During the first quarter of 2009 we were pleased to announce that American Campus was selected for three new ACE transactions through competitive procurement processes. We are very pleased about each of these rewards as they demonstrate increasing interest from universities in our ACE program.
Although each transaction is in the early stages of predevelopment we want to go through some of the specifics in order to assist investors with understanding the growth potential of ACE and our expected timing for construction and delivery of these additional projects.In February, ACC was selected as the preferred development partner for a large-scale development on the campus of the University of New Mexico in Albuquerque. At the state flagship institution UNM has recently experienced significant growth with enrollment now over 26,000.
Their administration is addressing its currently noncompetitive to competitive housing options as a top priority. Likewise, limited debt capacity and tightening state budgets caused the university to look to the private sector as a delivery option.Phase One of this transaction will be targeted to a combination of freshman as well as upper class students and will contain approximately 1300 beds with a significant portion of these beds replacing older product being taken offline and demolished.
At this time the anticipated delivery date is for Fall 2011.ACC is currently in the process of refining conceptual design and negotiating the transaction with the university. Pending a successful first phase the award also contains development rights on additional phases containing 1600 beds bringing the total potential development on the campus to 2900 beds.
Also this quarter ACC was selected by Portland State University to begin negotiation on a potential ACE relationship. Portland State is currently the largest higher education institution in the state of Oregon with enrollment of over 25,000 students.
Over the last decade the university made the transition from a commuter campus to a residential campus. The university’s goal is to provide housing for 15% of its student body in on-campus housing.
Last fall, the university made the decision to turn to the private sector as a delivery method for the next phase of housing, which is slated to contain between 600 and 1000 beds. This mixed use development will most likely be targeted to upper class students and will contain amenities such as university office space, academic space and student oriented retail.
The targeted delivery date is currently Fall 2012 as the project is subject to an extensive predevelopment design and entitlement process.ACC was also selected as the preferred development partner by Arizona State University on their West campus. ASU West is one of Arizona State’s four Phoenix area campuses with enrollment of over 9000 students.
Already experiencing significant growth West has grown enrollment by 44% since 2002 and is expected to increase enrollment to over 15,000 by 2020.ACC was selected through a qualifications process and we are currently working through the feasibility and master planning with the housing committee. A definitive schedule has not been developed at this time.We are also continuing to make progress at Washington State University and expect to be in a position to give additional clarity on the timing and size of this development on our next call.Our Boise State University project is currently scheduled for submittal to the Idaho Board of Education next month.
The first phase of development is scheduled to be delivered over two academic cycles with Phase 1A containing approximately 860 beds for Fall 2011 and Phase 1B containing an additional approximately 150 beds targeted for Fall 2012.As you can see from the activity this quarter the interest in ACE continues to grow with ACC now having been selected by six universities with the potential to develop as many as 10,000 additional beds beyond ASU. Given the status of state budget crises and continued interest in private sector delivery we believe that we’ve only scratched the surface on the potential of ACE.Turning to our third party business segment we have seen significant growth in third party management revenues.
On the third party development front existing projects under construction remain on time and on budget but our ability to commence construction and start recognizing fee income on Cleveland State, the College of Staten Island and the Edinburgh University projects are being impacted by financing delays and the taxes in bond markets.We remain optimistic on our ability to ultimately deliver these projects as we are starting to see financing activity in this sector for the first time in several quarters.This quarter we also announced the purchase of a 24-acre parcel of land directly adjacent to the University of Texas at San Antonio offering pedestrian and bicycle access to the campus. The purchase price of the land was $4.5 million paid for in a consideration mix of cash and operating partnership units.
At this time we are not planning on starting construction during this development cycle but believe that the land cost was attractive enough to land bait the parcel for future development. Prior to closing we received all entitlements necessary to develop the student housing on the side.
At quarter end we were carrying $18.2 million in land held for development. The purchase of this parcel brings the total value of land held for development to $22.6 million.During February ACC authorized C.V.
Richard Ellis to begin the solicitation of interest on a package of disposition properties. To date, over 180 packages have been requested.
The portfolio contains seven assets in six university markets with the combination of stable properties as well as properties with turn around potential.We are scheduled to make our first call for offers during the first week of May and we’ll update the market on the status of these dispositions on the next call. The ultimate decision on sale for the individual assets will be based on the attractiveness of offers received.
With that, I’d like to turn it over to John to discuss our financial results, capital structure and outlook for 2009.Jonathan Graf Thanks Brian. For the first quarter of 2009 we reported total FFOM of $18.5 million or $0.42 per fully diluted share, which was in line with internal expectations and consistent with our guidance projections.
This compares to FFOM of $11.2 million or $0.38 per fully diluted share for the comparable quarter in 2008. As compared to the first quarter of 2008 the 2009 first quarter results include the GMH operations acquired June 11th of 2008, the impact on the weighted average share count related to the 5.4 million shares issued to GMH shareholders and the 9.2 million shares issued in conjunction with the April 23rd 2008 equity offering as well as the operating results related to the Vista Del Sol and Chestnut Ridge development delivered in the fall of 2008.Total third party revenues were $3.3 million for the first quarter of 2009 and were up $716,000 for the quarter when compared to the prior year.
Total third party revenues consisted of $1.1 million in development fees and $2.2 million in management fees, which included $1.1 million from GMH third party management contracts and management fee income on the Fidelity joint ventures.Third party revenues were in line with internal expectations for the quarter. Corporate G&A for the quarter was also in line with internal expectations at $2.7 million.
We continue to expect to be within the previously provided guidance range of $12 million to $13 million for 2009.As of March 31st 2009 our total market capitalization was approximately $2 billion consisting of point-eight billion of equity market value and $1.2 billion in total debt excluding our on-campus participating properties and our share of debt from our unconsolidated joint ventures with Fidelity.Variable rate debt represented approximately 17% of our total indebtedness at the end of the quarter. The company’s outstanding debt is at a weighted average interest rate of 5.02% and has an average remaining term to maturity of four years.
Fixed rate debt maturities for the rest of 2009 are $51.1 million or 4.2% of our total indebtedness. Our $160 million revolving credit facility and the variable rate construction loans on Vista Del Sol and Chestnut Ridge also have maturity dates in 2009.
However, we have a one-year extension option on the revolver and Chestnut Ridge loans and two one-year extension options on the Vista Del Sol loan, all of which we currently expect to qualify for.We have executed the term sheet with Keybanc and are currently in the process of working with our bank group to renew our revolving credit facility for another three years and increase it from $160 million to $200 million. In addition, we recently executed a term sheet with P&C as the servicer for a Freddie Mac facility for up to $125 million, which we anticipate closing in June or July.
The proceeds from the Freddie Mac credit facility will primarily be used to repay the remaining $51 million in fixed rate mortgage debt that is scheduled to mature in 2009 as well as the $30 million balance on the Chestnut Ridge construction loan.As of March 31, 2009 the company’s debt to total market capitalization was 61.6%. Our total interest expense for the quarter excluding the on campus participating properties was $14.3 million compared to $5.4 million in the first quarter of 2008, an $8.9 million increase.
This increase was primarily due to $7.7 million in interest expense on approximately $600 million of debt assumed from GMH and point-seven million in interest expense under the $100 million senior secure term loan entered into to finance the GMH acquisition.Due to the GMH acquisition the company’s interest coverage ratio for the last 12 months decreased to 2.04 times compared to 2.75 times as of one year ago. Interest expense as net of approximately one million in capitalized interested for the quarter related to own projects in development.As of March 31st we had recorded $89.5 million in construction in progress related to the ongoing own development projects.Turning now to 2009 guidance; the financial results for the quarter were in line with internal expectations and consistent with our original guidance projections.
We continue to believe that the FSOM guidance range of $1.52 to $1.70 per fully diluted share for 2009 is achievable. For the balance of the year the most significant factors that may impact our FSOM guidance range are as follows.
Lease up exposure; we previously communicated wholly owned property NOI of $143.1 million to $149.2 million, which consists of $89.9 million to $92.2 million in NOI for ACC legacy properties and a range of $53.2 million to $57 million in NOI for the GMH properties.NOI will be contingent upon the final rental rate and occupancy achieved for our 2009-2010 lease up and the related marketing expenditures, which may fluctuate depending on the velocity of the lease up. Based on the current projected rental rates for the 2009-2010 lease up and the slower velocity of our ACC legacy assets in certain markets as compared to the prior year we believe that we are currently trending to the mid to the lower end of the NOI ranges previously discussed.Interest expense; we had previously communicated that interest expense excluding the on campus participating properties would be $63 million to $64 million.
As a result of entering into an interest rate swap at the beginning of the year to fix the LIBOR rate on our secured term loans and lower than anticipated LIBOR rates so far this year we believe that we will be at the lower end of this expense range.For deferred financing amortization we had previously communicated that the amortization for 2009 would be approximately $3 million. Depending on the timing and final terms of the new Freddie Mac credit facility and the renewal of our bank revolver this could increase by $400,000 to $500,000.Third party service revenue and expenses; our 2009 guidance projections assumed $14.7 million to $16.3 million in third party services based on development fees outlined and anticipated commencement dates scheduled on Page 14 of the supplemental.
As previously mentioned this guidance assumes that the CSI, Cleveland State and/or Edinburgh University Phase 2 third party development projects will close during 2009. While we are fully ready to begin construction on these projects the commencement continues to be dependent upon the availability of project financing, which is being affected by the current capital market conditions that Brian discussed.
If closing of all these projects does not occur during 2009 approximately $4 million in related fee income included in the mid point of our guidance range would move into 2010.In addition, as we have discussed in the past, the pursuit and negotiation of ACE projects is coordinated out of this department in our company. It is important to note that with the growing velocity of ACE efforts we could experience some increases in predevelopment expenses.
With that, I’ll turn it back to Bill.William Bayless Thanks John. In closing, we’re pleased with our financial and operational performance this quarter.
Our strategic turnaround of the GMH portfolio is beginning to take hold as evidenced by the strong preleasing being 10% ahead of last year at this time. We’re also thrilled with the momentum of our ACE program having now been selected by six universities to deliver housing under that program.
We hope this is the beginning of ACE becoming a mainstream alternative for universities desiring to modernize their housing stock.We’ll remain focused throughout the leasing season insuring we have the velocity necessary to fill our properties to a level that achieves NOI growth moving into the 2009-2010 academic year. Bottom line; we remain confident in the resiliency of our sector.
With that, we’ll go ahead and answer any questions you may have.Question-and-Answer Session Operator (Operator Instructions) Our first question will come from the line of David Doty with Citigroup, please proceed.David Doty - Citigroup A couple of questions around the line of credit. Have you had active discussions yet and are there any change to terms that you could discuss?William Bayless We’ve entered into a term sheet with Keybanc and existing bank group we’re working through the details of it.
It’s expected to look very similar from a covenant perspective to the existing revolver, 65% LTV but we are expecting some expansion of the rate by as much as 100 to 200 basis points to different parts of the grid.The main change in the revolver is that we’re moving from an unsecured facility to a secure facility but as to any impact on the company or anything else it’s very similar.Michael Bilerman - Citigroup This is Michael Bilerman speaking; how many assets are you pledging by moving to a secure facility?William Bayless There’s eight assets that are in the revolver.Michael Bilerman - Citigroup What sort of value book basis?William Bayless Basis; are you talking about the cap rate in the revolver?Michael Bilerman -Citigroup Yes or just book basis of the assets just to get a sense of…William Bayless Sixty-five percent LTV and as far as access to it we should have access to pretty close to the $200 million. As to whether or not that’s a market value well that depends on cap rate assumptions and existing pricing of assets, which is a separate discussion.David Doty - Citigroup Then just a couple of questions; given the growing pipeline of ACE projects how are you thinking about how you’re matching up your increased leverage capacity relative to essentially increasing equity components, things like given the timing of the pre-design and the new facility potentially?
Can you just share with us your thoughts about the need for equity potentially?William Bayless As it relates to equity we talked about this in the past but we always monitor all available capital opportunities; debt, equity, sale of assets, joint venture assets and we’re looking at different parts of that in terms of improving the balance sheet, reduction of risk or as it relates to ACE positioning the company for future growth opportunities. We can say that the fact that companies are out there accessing both the debt and equity markets is an extremely positive event and does indicate some improvement in the overall capital environment.
But as far as it relates to any equity we can’t speak specifically to that.David Doty - Citigroup Lastly, along the lines of the assets that you’re marketing are you able to share your pricing expectations, the buyer profile and if there is any associated funding from the agency or from yourselves along with those assets?William Bayless As far as the buyer profile we’re seeing a little bit different. It’s not the traditional student housing buyer.
It’s regional buyers teaming up with operators, pension funds, different groups like that that have taken the package. Until we get the call for offers though we’re not going to really have a clear picture as to who truly is interested and how diverse that group’s going to be and we also can’t speak specifically to pricing.As far as funding of the assets it depends on which asset.
There’s $80 million of debt on those assets that are in the portfolio that have a variety of different kinds of debt between the seven properties. We would look at the entire portfolio or any pieces of the portfolio to the extent that we thought that it was a better opportunity to break the portfolio up.David Doty - Citigroup I think that’s it; thanks for the detail.Operator Our next question will come from the line of Anthony Paolone with J.P.
Morgan; please proceed.Joe Dazio - J.P. Morgan Joe Dazio here for Tony.
I have a question about on Page 10 of the supplemental the legacy ACC preleasing; a couple of the assets in the bottom seven. There’s one in Orlando, one in Tallahassee, one in Gainesville and those same markets also appear among the other 32, which I guess are leasing better.
Do those three have just asset-specific issues because it would seem like it’s not necessarily a market issue if you’ve got other properties in that same area doing well?William Bayless Joe, this really speaks to what we talk about all the time as it relates to submarkets and various [inaudible] in submarkets and product positioning. I think undisputedly every operator would say Gainesville is in the bottom five markets in the country right now in terms of oversupply.
You can see one of our highest decliners in rental growth, negative 8% at The Estates while our biggest gain this year is at Royal Gainesville. So while the entire market is down and I think most companies are experiencing rental rate decreases across the board this really speaks to the strong asset characteristics of that Royal property, which is pedestrian at a great price point.
This is actually the third straight year of plus 4% rental rate growth for that asset in what has been a declining market over those three years.The market overall is down. There is significant oversupply.
Many submarkets in The Estate is on the other side of campus in a slightly different submarket, which is more impacted and so it really does speak to the asset fundamentals. To our knowledge I would say Royal Gainesville is one of the few and maybe the only that has actually experienced positive rent growth in that market.Joe Dazio - J.P.
Morgan Just a question on the third party management; it looked like you lost one small contract this quarter and I think two more the prior quarter. I know the fee contributions are pretty small but do you think it’s a trend where the owners are just looking for ways to maybe save money and not have to pay the management fee to guys like you to run it for them?William Bayless No.
That’s an instance where the asset was sold and as part of our contract they had another operator and it’s not a trend. We’ve seen the rolling office of some assets over time but if you look at the growth in the overall third party business segment it’s obviously significantly larger than it was two or three years ago.
We would expect for certain contracts to roll over time but we continue to see that business grow. In that instance on that asset they wanted to self-operate it after the purchase.Operator Our next question will come from the line of Karin Ford with Keybanc Capital Markets; please proceed.Karin Ford - Keybanc Capital Markets Can you tell us some of the terms on the new Freddie facility?William Bayless Understand that we’re underneath the confidentiality agreement as it relates to pricing but we expect it to be between $120 million and $125 million facility, five to seven years, 65% LTV, also a 1.6 times debt service coverage and it also is a revolving facility.Karin Ford - Keybanc Capital Markets Can you talk about secured financing that may or may not be available for ACE project construction financing on those?William Bayless For the ACE projects?Karin Ford - Keybanc Capital Markets Yes.William Bayless We’ve talked about this.
There is available financing that’s out there and the profile of those assets could potentially fit into financing with Fannie and Freddie debt in the future. That’s not really the plan.
I mean, we’ve talked in the past about moving to more corporate debt. As far as the specifics on any of the new projects we’re very preliminary on the most recent awards and working through feasibility and terms with the universities.
We will obviously as we move along give more clarity on how we plan on financing them.Karin Ford - Keybanc Capital Markets One of your competitors mentioned they were seeing a trend on delays between applications signed and actually getting leases signed. Are you guys seeing any of the same trends?William Bayless No Karen and I listened to the EDR call yesterday and I think that was more directly related as they discussed to a policy that they put in place related to credit checks on guarantors, which was slowing down the processing of that internally.
So I don’t think it’s necessarily a more general market trend in terms of the turn from a parent executing that guarantor.Karin Ford - Keybanc Capital Markets Are you seeing any price point differentials on performance in your lease-up between the higher end and the lower end properties?William Bayless It continues to be fairly consistent. When you look at the breakdown we gave a couple quarters ago our ten most expensive properties overall are currently 76.6% leased and that’s AFN leases so it’s an Applied For Number and one year ago it was 78% so a very nominal negative 1.4%.
Now, our ten least expensive properties are currently 73.9% where a year ago they were 54.1% so you do see a substantial increase in the lower price point and all other properties more or less that commodity price point across the board; 76.5% compared to 77.7% so again a nominal drop off so you don’t see that.Interesting, in that same vein, if you look on Page Ten, which is the ACC legacy chart and if you look at Properties 1 through 17 ending with U Club Tallahassee and you look at the break point there where those are properties that have rental rate growth of 3.1% to 4.7%. Interestingly that group of properties, that subset of properties is 90% preleased for the fall.
So where you have pricing power and rental rate growth you continue to have the highest demand and velocity.Karin Ford - Keybanc Capital Markets Just a final question back to the balance sheet and given sort of capital plans for development and other future growth can you just talk about what leverage level management feels comfortable running the company at, talk about it from either a debt to EBITDA basis or fixed charge coverage basis and have you guys considered a continuous equity program? William Bayless A couple of question in there; as it relates to overall leverage in the company we’ve talked about 50% being a tolerance but with a building pipeline obviously we’d like to bring that leverage down over time, which is the purpose behind the disposition portfolio.
Also thinking about capital plans; the idea with the dispositions is we’re targeting yields on these ACE developments of between 8% and 8.5%. If you start looking at turning the portfolio over time we think that that could really improve the growth profile of the NOI of the company over time.As to any other specific covenants or objectives as it relates to debt to EBITDA we’ve never spoken about that publicly and I don’t know that we would.
But there is a desire to bring the overall leverage of the company down over time to put us in a position to grow.Karin Ford - Keybanc Capital Markets Have you guys looked at a continuous equity program?William Bayless As we said, we continue to look at all of the available ways of raising capital, debt and equity and can’t speak about anything specific as to what we would or wouldn’t do.Karin Ford - Keybanc Capital Markets Just finally did you guys mention; I know you haven’t gotten the offers yet but just generally can you give us a range and what you expect the proceeds from the asset sale to be?William Bayless We prefer not to talk about anything specific right now because it’s going to depend on pricing and considering we would potentially break the portfolio up depending on how the offers come in we’ve decided not to give anything specific on size or pricing as it relates to that portfolio.Operator Our next question will come from the line of Andy McCullough with Green Street Advisors; please proceed.Andy McCullough - Green Street Advisors First, thanks for the added disclosure; it’s helpful. Expanding on Karin’s question a little bit when you look out two, three, four years and your targeted leverage how do you guys envision that looking as far as the mix between secured and unsecured debt?William Bayless There has always been a desire by the company to move to more of an unsecured debt structure just obviously due to the flexibility that it has.
To the extent that the credit markets continue to improve and that becomes available at reasonable pricing then that’s the direction that we would obviously want to go as opposed to mortgage debt or property specific debt that’s less flexible.As to how that’s going to look in the future that’s going to be a crystal ball item in terms of where’s the economy going and where are the credit markets going. But to the extent that it does change and move back to where secured debt is more available that’s going to be the most attractive option.
Unsecured is going to be the most attractive option to us.Andy McCullough - Green Street Advisors On the ACE yield you just mentioned 8% to 8.5% that you’re targeting; that’s, from my understanding, above ASU. What’s driving that increase?William Bayless A couple of items; first of all just in terms of our thoughts on capital pricing.
The way that we’re looking at ACE transactions we’re coming at it from a couple different directions.If you look at it, in the past people have talked about…we’ve been asked a lot of questions about the spread to multi-family is the first one or the spread as it relates to development and acquisitions. When we compare any of the existing purchases that we have in terms of the profile of the NOI or especially the risk adjusted return aspects of it we think ACE is the best of all worlds.So, when we’re looking at it we think that an 8% to 8.5% yield going in obviously would be attractive.
When we then think about growth and revenue growth moving forward if we’re able to tie ourselves closer to university rent growth rates we could really see some out-performance in a lie over a long period of time.Obviously pitching on projects we’re going to try to maximize returns to the company but at some level if you drive the returns too high the projects just become infeasible regardless of what the university is willing to do.Andy McCullough - Green Street Advisors Then one housekeeping item; what’s the remaining Cap ex that you need to spend on the GMH assets of that original $40 million?William Bayless Right now, Andy, we’ve got a total of $28.4 million either completed or in process on current projects so you have a lagging of about $12 million to $13 million in future projects.Operator Our next question will come from the line of Paula Poskon with Robert W. Baird; please proceed.Paula Poskon - Robert W.
Baird Can you talk about…can you say you can provide some color on how leasing is going for next year on campus at the universities where you have presence versus what you’re seeing in the preleasing in your off campus properties?William Bayless Paula, most universities don’t release their leasing numbers or in many cases don’t begin starting their assignment processes until April and May. To our knowledge and in the markets that we’re located they’re going very well.
But again, as we talked about with ASU and ACE where we are on campus schools have the ability to fill their own beds. They have a captive audience.
It’s much easier for them whether it’s in an open market process or a housing required market so we don’t expect there to be shortfalls in the on campus world as a whole.Paula Poskon - Robert W. Baird Are you hearing any anomalies in ASU’s on campus lease-up?William Bayless No.
They’re doing very well. This year though there’s a little unique twist in that this is the first year that Arizona State is implementing a freshman housing requirement where previously freshmen had the opportunity to live off campus anywhere they wanted.
Now ASU is requiring them to live on campus and so there’s even more build-in demand at ASU than previous.Paula Poskon - Robert W. Baird Can you just talk a little bit about new supply in that market?William Bayless At Arizona State you do have some new supply coming on.
You have a very well located asset called The View immediately adjacent to the campus on Apache, which is a very nice mid [inaudible] product I think done by the Campus Acquisition folks out of Chicago. That’s actually doing very well, extremely high price point, actually about 125 to 150 price points over Vista Del Sol and they’re about 95% preleased, which again speaks to well located, high end accommodations even in this market are doing well.There is some development further from campus that I think may be struggling a little bit, again, getting into the submarkets, pedestrian versus further away; things of that nature.
But as you can see on our assets there we’re done at Vista Del Sol; everything is great. Barrett is 81% preleased and the remaining people will be coming via an assignment process.
While you see Villas on Apache is about 60 behind that directly relates to the housing requirement in that last year they had 65 freshmen living there and so they’re trending fine related to the non-freshman market.Paula Poskon - Robert W. Baird Just to follow-up on an earlier question; have you made any changes at all in your guarantor policies or processes?William Bayless No.
When we look at the guarantor process it’s a foundation of what we do. We have not used credit checks on guarantors as a policy in that we just have not had collections issues.
We will if we have isolated collection issues at a particular property or a particular market look at instituting a credit check policy for that property.I think in the entire portfolio there may be two that we have that currently but typically the student lease with the guarantor has been sufficient to keep our bad debt expense consistent with multi-family standards.Paula Poskon- Robert W. BairdFinally can you apply a little color on what’s happening with the operating margin at both the ACC legacy and the GCTFS?
I think I read somewhere along the line that marketing costs were up a little bit given the focus on driving occupancy but can you talk about anything else?William Bayless Absolutely and two things; I think in the seasonality chart that we did include as we included in our script comments you would expect that to be a normalized ongoing operational expense margin, an NOI margin trend for the ACC legacy.GCT obviously and there are two things taking place as it relates to marketing costs, which marketing costs did erode slightly our NOI margin this quarter. In that last year at this point in time we had 18 of 39 of the assets that were fully leased and of those 18 assets right now there are 975 beds of our current shortfall and so we are having to spend marketing dollars this year in places we didn’t.
So that expense this quarter being 3.9% or 4% was a direct result of that. Also we talked about at GCT in the first year of taking over a property you do not have historical marketing experience and so you have to do everything.
You have to utilize every advertising medium, every mailing medium to determine what works and then in the future years you’re able to drive down those costs.The biggest part though of the GMH margin go ahead and turn to Page 11; I think this would be meaningful and the fact that we’ve put the data out there will help greatly. When you look at the NOI margin at GCT and the potential we’ve talked about we’ve never talked about it being really driven on the expense side but rather completely driven by the improvement of occupancy and revenue growth.If you go to Page 11 and look at the assets one through nine ending with Southview and draw a line across there.
You can see there we’ve got nine assets where we have projected revenue growth of 3% to 5%. Those assets are currently in the fall of 2008 when you look at the average were 97.6% occupied and we are trending 4.8% ahead of where they were last year.So what we’re showing there on the GCT portfolio their top nine properties that have been stellar performers even in this economy we’re driving an average of 4% rental rate growth with an opportunity for maybe even a little tweak a percent or two based on the trend on occupancy.When you go to the next group 10 through 27 and you look at the properties that are relatively flat to 2.9% increase, which averages 1.5% or a modest rental rate increase, there the average occupancy of that grouping is 89.7% and we’re trending 6.4% ahead.So when you look at that we’re trending to a more stabilized mid-90 occupancy with moderate rental rate of 1.5%.
Then the most exciting, which will result in an improvement of that expense ratio that you talk about when you go to the bottom and you look at the 13 properties where there have been decreases. Remember, many of those decreases are not reactionary to what’s happening in the market but rather are proactive based on the product repositioning that we talked about.In there where you see a minus 3.5% rental rate decrease the average occupancy at those properties are only 79% and we are trending 14.4% ahead on that category, again demonstrating a move into a more stable NOI stream.
So when you really break down that chart and look at the strategic nature of strong NOI growth and stabilized assets and significant NOI appreciation in the other categories that’s where you’re going to start to see that expense margin really come into line and make more sense moving forward trending more toward the normalized ACC.Paula Poskon - Robert W. Baird I appreciate that additional color, thank you.
One last question; are you seeing universities increase the cost for getting their enrollment lists as a way of generating incremental revenue given that they’re so cash strapped themselves?William Bayless No; pretty much we have seen the policy stay the same. In some places there have been glitches in the timing of getting those based on how they’re running their admissions processes.
In some cases there are new privacy rules evolving where universities are more protective of what they’re releasing but we haven’t seen a change based on economics in pricing.Operator Our next question is a follow-up question from the line of David Doty with Citigroup; please proceed.Michael Bilerman - Citigroup It’s Michael Bilerman speaking. If we go back to that Page Six in the presentation where you lay out the seasonality how would as we think about 2009 and even 2010; how does the GMH addition change that percentage of NOI?
I understand the operating margin in terms of being a lot lower GMH and that’s going to ramp up based on your recent comments. But I’m just trying to get a picture of how does the addition change these percentages as we think about 2009?William Bayless Let me speak in general and then Brian may have some more specific data or comments to add on.
The reality is obviously given that the GCT portfolio is at such a lower average rate per bed right now. Going into the year I believe it was 533 versus 437 and so obviously in the expense margin you’re going to see an immediate erosion of the two combined and that is certainly going to continue in Q2 and in Q3 as it relates to the numbers.As we move into Q4 and you begin to see those occupancy numbers; in that quarter you should begin to see the two blended start to improve.
But you really won’t see the full benefit until we move into the next calendar year, the next cycle when we’re able then to start to drive down cost in a more efficient manner.But for it to fully materialize to the type of ACC margin that you see it’s probably a two-cycle process.Brian Nickel Another way to think about it and I understand why you’re asking the question. Basically what ends up happening is because the occupancy improves in the fourth quarter for the year 2009 GCT’s should be a couple hundred basis points more weighted towards the fourth quarter, which is coming from the additional NOI from the rate to occupancy.Moving forward on a stabilized NOI to the extent that we achieve our occupancy objectives it should start to look more; once again not speaking to the margin but to the spread of NOI it should start to look more like the ACC portfolio on a quarterly basis.Michael Bilerman -Citibank Then just thinking about it from the perspective of you had about $36 million of NOI in the first quarter so about $144 million annualized 1Q is a higher quarter than the rest it would appear as though the trend line at least for this year is going to be closer to the bottom end of your NOI guidance of 143 to 149.William Bayless What we’ve said is we think we’re trending from the mid-point to potentially the low end.
That’s going to depend upon a variety of factors, the most significant of which is we have to achieve our lease-up objectives. To the extent that we achieve our lease-up objectives then that’s obviously going to move us up higher into the range.Michael Bilerman -Citibank If 36 is going to come down the next two quarters pretty meaningfully right just based on the seasonality and then the fourth quarter really should be and hopefully in excess of the $36 million.
When you sort of do the math it’s hard to even get to the low end. Am I just not thinking about it the right way?William Bayless These margins are only for the current ACC portfolio.
What it does not show here is what the current margin on the GCT portfolio that’s included in those overall calculations you would make of the combined portfolios.Brian Nickel One thing; you’re asking a question which is…another way to say it well it depends on how much it comes down during the next two quarters. So obviously to the extent it doesn’t come down as much as you’re thinking then that’s going to have a positive impact.
Then there’s a significant pop that comes in the fourth quarter when the GCT portfolio goes up to 8% plus the rental rate growth.Michael Bilerman -Citigroup Right, much more meaningful occupancy…William Bayless One other thing also that is not included in that is Barrett Honors College comes online in the fourth quarter as well.Michael Bilerman - Citigroup Right so you’ll get a pop from the development perspective so a much more heavier weighted 4Q FSO expected.William Bayless Remember, that guidance we gave was on total NOI, not same store NOI. So when you look at it, when you add all those up management believes that right now to the extent that we achieve our leased-up objectives we should trend to the middle of the range and if we fall short of some of the expectations the low end of the range.Michael Bilerman - Citigroup Thinking about what’s happening on the debt side the facility, the $120 million and $125 million facility is that predominantly on existing secured assets or some of the unencumbered assets?William Bayless That’s mostly the $89 million worth of debt that’s coming due.Michael Bilerman - Citigroup And you’ll roll all those loans plus Chestnut into that facility?William Bayless Actually the basic answer is yes.
It’ll be most of those assets. One of the benefits that we have is that the financing availability to achieve the $125 million is only a subgroup of those assets so we don’t need all eight of them.
We are planning on rolling Chestnut into that at this point in time so that would move in but then it would be a subgroup of the other eight assets that are involved in the $89 million.Michael Bilerman - Citigroup So you’re able to take out a lot of excess proceeds out of your existing loans that are coming due?William Bayless Right. Remember, we talked in the past that on that $89 million we thought we had as much as $200 million, $220 million worth of value so we’re able to move a couple of those assets out and achieve our objectives.Michael Bilerman - Citigroup Two hundred million of value and then 65% so about $130 million sort of…William Bayless Well it depends on $200 million to $220 million and then it depends on how you value Chestnut.Michael Bilerman - Citigroup Just on your revolver is anything changing in the borrowing base in terms of the assets to get 160 going to 200?William Bayless There are two additional properties that are going into it.Michael Bilerman - Citigroup And those are currently unencumbered?William Bayless Yes.Michael Bilerman - Citigroup Which ones are those?William Bayless We are not giving information that is that specific as to assets because we are in a term sheet phase and at this point in time that may change.Michael Bilerman - Citigroup I guess just the perspective of if you didn’t include those assets would the 160 stay flat or would it be…?William Bayless Yes and then to achieve the 200 million we would have to get additional financing capacity.Operator I would like to turn the call back over to Mr.
Bill Bayless for closing remarks.William Bayless With that we’d like to thank you all for dialing in to hear our results. We are going to get back to work on leasing those properties and trying to get those third party deals closed and we look forward to talking with many of you at NAREIT and the rest of you on the next call, thank you.Operator Thank you for your participation in today’s conference.
This concludes your presentation. You may now disconnect.
Good day everyone.