American Campus Communities (ACC) Q4 2021 Earnings Call Transcript

American Campus Communities (ACC)
Q4 2021 Earnings Call
Feb 23, 2022, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the American Campus Communities Q4 2021 earnings call. My name is Rica, and I'll be today's event specialist. [Operator instructions] I would like to hand the call over to Ryan to begin.

Ryan Dennison -- Investor Relations

Thank you. Good morning, and thank you for joining the American Campus Communities full year 2021 and fourth-quarter conference call. The 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's 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. Webcast slides may be advanced by you to facilitate following along.

Management will be making forward-looking statements today as referenced in the disclosure in the press release, in the supplemental financial package, and in SEC filings. Management would like to inform you that certain statements made during this conference call which are not historical facts may be deemed forward-looking statements within the 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 risks and uncertainties. The company can provide no assurance that its expectations will be achieved, and actual results may vary.

Factors and risks that could cause actual results to differ materially from expectations are detailed in the press release and from time to time in the company's periodic filings with the SEC. The company undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this release. Having said that, our chief executive officer, Bill Bayless, will be providing our opening comments today. He's 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 counsel; and Jamie Wilhelm, EVP of public-private partnerships.

With that, I'll turn the call over to Bill for his opening remarks. Bill?

Bill Bayless -- Chief Executive Officer

Thank you, Ryan. Good morning, and thanks 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 and successfully 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 next-gen operational systems. We also outperformed the high end of our expectations for fall leasing, achieving 95.8% opening occupancy and 3.8% average rental rate growth. We delivered nearly 4,000 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 6,000. We expect to achieve originally targeted yields beginning in 2022 and to hit our 6.8% stabilized yield in 2023.

With regard to our current portfolio, the company's 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 also 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 2.26%. And to cap the year off, we formed a joint venture with Harrison Street's social infrastructure platform to recapitalize a 45% interest in our existing 8-property Arizona State University student housing portfolio.

The transaction represented a 3.75% economic cap rate based on in-place rental revenue; escalated trailing operating expenses, including ground rent; and historic average capital expenditures. The 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 developed via properly structured public-private partnerships can be valued on par with private off-campus assets that reflect 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 ACE 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, further 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 $0.18 per share or almost 10%, and full-year FFOM per share of $2.14 exceeded the high end of our most recent guidance by $0.02. 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 the strong fundamentals the sector is experiencing.

In stark contrast to the media's headlines pointing out that college enrollment has been decreasing with regard to the broadest universe of institutions of higher education, student demand to attend America's Tier 1 flagship universities, the ones we currently serve and target to 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. These strong enrollment demographics, coupled with new supply for fall '22 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 sector's 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 3.2% to 4.6% 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 well be greater in a post-COVID environment appear to be coming to fruition. Since the end of Q3, we have commenced the third-party development of four university projects: MIT, Princeton, UC Irvine, and Drexel University.

And we were awarded a new development with Purdue Research Foundation. As the recognized leader, ACC remains uniquely positioned to capitalize on this expanding opportunity. As we move 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'll not be answering any questions regarding our recent disclosures regarding land and buildings. But instead, we'll focus on the strong performance of the company, our 2022 outlook, industry fundamentals, and our business strategy.

With that, I'll turn it back to the operator to begin the Q&A.

Questions & Answers:

Operator

Thank you. [Operator instructions] We now have our first question from the phone lines from Alexander Goldfarb of Piper Sandler. Alexander, please go ahead.

Alexander Goldfarb -- Piper Sandler -- Analyst

Hey, 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'm guessing that some of that was given up in COVID.

So, one, how much margin degradation did you suffer with COVID? Two, where do you think that you'll end up? Do you think that you will return to this 300-point exceed? And finally on that, given that you guys are doing less external, like you're 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?

Bill Bayless -- Chief Executive Officer

Yeah, Alex. And as you appropriately pointed out and our investors will recall, we had a significant initiative starting in 2014 to improve margin. From 2014 to 2019, we drove 300 basis points from 52.7% up to 55.8%. We did have a diminishment last year due to COVID where it dipped down to 53.7%.

And when you look at our guidance for '22, it implies a margin of 55.4%, so just about 40 bps off of 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 '22. 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 that we had developed and achieved through 2019 and improve it going forward.

I'll let DP talk a little bit -- or Daniel talk about that a little more in regard to your follow-up question.

Daniel Perry -- Chief Financial Officer

Yeah, 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 terms of our guided G&A. Now granted that does include, in 2021 some, what we would call, not in the ordinary course of business charges specifically related to Jim Hopke's retirement and the vesting of his unvested shares and also some costs we incurred as part of the activism work with Atlanta buildings. If you exclude those, we're still only increasing G&A in 2022 by 2%.

And so, certainly, we are seeing 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, some benchmarking studies to see where we are. If 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 REITs.

Alexander Goldfarb -- Piper Sandler -- Analyst

OK. And then the second question is on the fee development guidance. I think it's bigger in this coming year. 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 two, the upside in the fee development that you're guiding for, for '22, is that sort of a one-timer, meaning in '23, it's going to go back down to some normal level? Or is '22 a return -- so I'm trying to figure out how many of these projects were pent up and now the schools are doing them, but in '23, it would go back down or what you see in '22 for third party, that's actually what a normal run rate should be.

Bill Bayless -- Chief Executive Officer

Sure. First, let's talk about the increase in the third-party aspect of those transactions. And when we look at the four transactions we talked about commencing development on, 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 they've used since 2002.

In Drexel, the protocol has been we utilize ACE on 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 MIT -- 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 build a profile in years to come that will be above the prior levels. And that is you look both at Princeton and MIT and then also look at the announcements that we made previously on the award at UT and Emory, 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're more price-conscious. And so, in those particular transactions, the universities always want to use the lowest cost of capital available.

And so, in that case, there's a pretty good differentiation in terms of the cost of capital that they can float bonds at and/or that you can do credit enhancement on the project base that enable to get much lower rents for the graduates. UT, Princeton, MIT are all AAA. Emory is AA2. And so, we do see a trend of more graduate projects coming beyond 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.

Alexander Goldfarb -- Piper Sandler -- Analyst

Thank you.

Operator

Thank you. We now have the next question from Neil Malkin from Capital One. Sir Neil, please go ahead when you're ready.

Neil Malkin -- Capital One Securities -- Analyst

Thank you. Hello, everyone. Great quarter, great guide, well done. First one, you had some success you called out in your sort of full fourth-quarter occupancy, obviously, subsequent to the start of the year at 95.8%, and you were at 96%.

So, I was just wondering, to keep Alex's two-parter alive, one, what are some of the things that you did to achieve 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 to sort of new highs in occupancy?

Bill Bayless -- Chief Executive Officer

Yeah, Neil. And you just answered the first part of your question with the second by bringing up next gen. And 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 blip. But now -- having now two years of outperformance related to maintaining that fall occupancy and driving spring occupancy is a direct result of next gen.

And those of you that have followed the story long term, next gen originally was a system -- sorry, LAMS 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 to improve the current-period leasing, the interim backfilling of properties throughout the fall, the spring lease-up, the May backfilling 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 about a 50% success rate of backfilling December-ending leases. This year, that was a 91% economic backfill.

Last year, we saw May leases go from 50% to 85%. We haven't -- we have to go through spring to see if we have that level of success again. And then also, you've seen no-shows improve by about 10 bps. And so, you really look, there's been about $6 million of incremental revenue enhancement through the intensity of next-gen system, which creates significant value for us in that regard.

But also tied a little bit into DP talking about -- Daniel talking about G&A, in that a lot of that G&A investment over the last several years has been in that next-gen system and now you're starting to see some of the benefits of that come to bear.

Neil Malkin -- Capital One Securities -- Analyst

No, that's great. Thank you, Bill. The other one, you talked about growth initiatives. Obviously, we're successful at the -- selling the 45% interest.

But you also talked about where you'd be a 10% partner in sort of like a fund-like structure that something like Prologis does and that was something that you wanted to grow and just to sort of take advantage of 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 if you expect to announce anything from that fund or line of investments in sort of the Tier 1 schools, the Power 5 schools in 2022.

Bill Bayless -- Chief Executive Officer

Yeah. And we certainly -- that initiative has moved forward at full speed. We 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.

And 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.

Neil Malkin -- Capital One Securities -- Analyst

OK. Well, listen, thanks for the time, and I look forward to seeing you at our Flamingo Crossings event in Orlando on March 23.

Bill Bayless -- Chief Executive Officer

We look forward to hosting you there.

Operator

We now have a question from Nick Joseph of Citigroup. Sir Nick, your line is open.

Mike Bilerman -- Citi -- Analyst

Hey, it's actually Mike Bilerman here with Nick. Bill, 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 during the year and selling assets. I guess how are you thinking about -- now that the stock is like pulled off from that into your high, how do you plan to close the gap to NAV versus using capacity to go out and deploy capital? I guess what is management and the board doing today to really get out of that discount? And what initiatives do you have going on to do that?

Bill Bayless -- Chief Executive Officer

Yeah. And certainly, Michael, I would say that -- let me quote you and your write-up last night, and I think you said it perfectly. And that is strong business execution is the best course of action to close the valuation gap. And so, certainly, we were very pleased in terms of the acceleration and 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 2.4% premium to your current NAV at the end of December. And so, certainly, the geopolitical environment has had an impact on the broader market and on 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 the geopolitical environment getting resolved and 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 or in the joint venture structure, will be handled in the context of how accretive it is to our investors in the long term. And the capital allocation committee is intimately involved in those reviews and processes.

Mike Bilerman -- Citi -- Analyst

I guess how do you think about -- obviously, executing Harrison Street gave you not only the mark on on-campus assets, but it also provided two years of funding for all the development and redevelopment. So, it secured both goals, I would say. Now that your financials and the capacity -- liquidity is in place, I guess, are you interested at all, A, on buying back stock to help narrow the discount or accelerating additional asset sales or joint ventures just to continue down that path and provide -- and continuing to provide very strong capital cost to your shareholders?

Bill Bayless -- Chief Executive Officer

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 toward our capital allocation plan in terms of accretively self-funding but at levels -- at 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, and the ASU transaction really gave us the opportunity to exemplify our ability to do that on the longer term.

I do want to comment a little bit on your point related to the ASU transaction and that we are very pleased that we were able to undertake that. And 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 we think was very important to demonstrate. The other thing that it pointed out, there's great diversity in the ASU products among those eight assets.

There's two upperclassmen apartments, there's two fully immersed academic living-learning centers, there's a 1960s high-rise building redevelopment and renovation, there's a private off-campus apartment complex, and there's a Greek village. And so, it really demonstrated throughout the entire product range of student housing that that price point can be achieved on par. And so, we think there's a lot of good discovery that took place in that. As it relates to your question about how much more of that would we undertake, again, at this point in time, our focus is on accretively self-funding and maintaining our earnings growth profile.

Mike Bilerman -- Citi -- Analyst

OK. Just as a second topic, can rent growth in student housing keep up if inflation stays elevated? And is there a difference in practice in capturing higher rent growth for your on-campus versus your 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 off-campus for the properties you own. And maybe just talk about the ability -- as you roll into the '23, '24 season, your ability to capture that excess rent growth that the multifamily landlords are certainly being able to capture today.

Bill Bayless -- Chief Executive Officer

Yeah. Excellent question, Michael, in the context of the inflationary environment that we're in. I'd start by saying at the highest general level, the one thing we'd like to point out, certainly, when you look at COVID's impact on rents overall in the residential section as a whole -- and certainly, you have geographic differences and product classification difference, but as a whole, multifamily was relatively flat for the couple of years during COVID, and now we're seeing that explosive growth. Student housing, as we've always talked about, which is the investment thesis, is even through COVID, you saw a 1% rate growth, then 3.8% rate growth.

And we have implied rate growth, of course, in this guidance. And so, the thesis continues to be the same, of the consistency, of stability of cash flows without the volatility that you see in the revenue stream of multifamily, which we 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, there's no pricing limitations.

We're able to price rents as we choose based on the economic environments. And even at institutions where they were concerned about pricing and there are some collars in terms of how much rates can raise, 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 will implement that if it comes into call will be market by market, assessing the ability to do so. But we do have the flexibility in how we structure the on-campus deals to treat them consistent with how we would off-campus.

Mike Bilerman -- Citi -- Analyst

Just -- you mentioned NAV a couple of times. Street NAV is at $59. We're using about a mid-4s cap rate. It would seem that your joint venture and certainly things going on in the industry would put 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 NAV is when you take into account your development and redevelopment, your existing assets, the ventures, the fees, the management platform, all the things that are embedded in the entity? I guess is your plan to sort of put out a little bit more detail about where you sort of see value overall of the enterprise?

Bill Bayless -- Chief Executive Officer

Obviously, that's 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 NAV, NAV 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 NAV and the trending.

Obviously, the market is impacted today. 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.

Mike Bilerman -- Citi -- Analyst

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 is accurate or not. So, I appreciate it. Thank you.

Bill Bayless -- Chief Executive Officer

Thank you, Michael.

Operator

Thank you, Michael. We now have another question on the line from Austin Wurschmidt from KeyBanc Capital Markets. Sir Austin, please go ahead when you're ready.

Austin Wurschmidt -- KeyBanc Capital Markets -- Analyst

Great. Good morning, everyone. As you guys set the fall 2022 rental revenue guidance range, how did you think about the varying components? Maybe the first-year residence halls in particular which I think were at 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 mid 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? 

Bill Bayless -- Chief Executive Officer

Sure. And 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 -- and the recovery you saw, that was largely driven by recovery of occupancy as the students on the 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, there's been stability as what you -- 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 in 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 -- in each case on a -- driven by our systems.

And so, we do see -- the one thing that we -- Jennifer commented in her remarks in the press release, that we do see the national trend in leasing has reverted to its pre-COVID 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're attending all the sporting events, they're having all the extracurricular activities, and they're also back to the normal cycle of when they're looking for off-campus housing. And so, with the return of 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 5% to 7%. And so, you can see that our guidance implies, I think, at the midpoint about a 3.9% rental revenue increase. And so, we would expect it to be a healthy year in that regard.

Austin Wurschmidt -- KeyBanc Capital Markets -- Analyst

Got it. That's helpful. And I wanted to switch over. So, when you guys last quarter provided the internal NAV, I think you said high 50s, low 60 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 you're seeing -- I think you said sort of off-campus trading in line with that at high qualities and good locations. Any change to kind of that internal estimate or range that you provided just last quarter?

Bill Bayless -- Chief Executive Officer

Yeah. As you know, Austin, we have always believed and always spoken that 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 -- remember years ago when you all would say, "How did you lose that deal? How did you lose that?" We always said because we never give on the premise of structuring these transactions so that they trade as real estate. Well, we demonstrated that with ASU.

And so, for us, that was proving up the value that we believe always existed. Now, when you look at that 3.75% cap rate and you look at ASU, it is a Power 5 institution, a Carnegie R1 institution, happens to also be U.S. News & World Report's No. 1 Most Innovative University in America.

It has been metropolitan area, and it is fully integrated into their on-campus programs. And so, that does not -- 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 NAV internally, how we've always looked at it, you certainly have the components that are trophy assets like an ASU, your best institutions. You then have to look at we certainly have products that once you move off-campus, that emulate Power 5 and Carnegie R1, but then we also have assets that are more rural college towns that aren't as well located as of the other.

And so, there's 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.

Austin Wurschmidt -- KeyBanc Capital Markets -- Analyst

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 two vehicles relative to the size of the wholly owned portfolio?

Daniel Perry -- Chief Financial Officer

Austin, this is Daniel. I'd say that there is certainly appetite with both joint venture partners to do more. And I wouldn't say that there's 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 $200 million to $400 million a year range. And so, of course, right now, we've got this year and 2023 addressed with the ASU transaction.

But as we look to the future, we'll look to do more with them. And we might look to even expand the base of partners that we're doing stuff with. But certainly, more appetite from them, and I wouldn't say there's a specific size or limit on size that we're targeting with them but more of an annual program.

Austin Wurschmidt -- KeyBanc Capital Markets -- Analyst

Understood. Thanks, Daniel.

Operator

Thank you. We now have Chandni Luthra from Goldman Sachs. Sir, please go ahead.

Chandni Luthra -- Goldman Sachs -- Analyst

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 that that's sort of toward the latter stages, how are you evaluating on-campus versus off-campus? What I'm trying to understand is, is off-campus -- is the appeal of off-campus perhaps a touch higher given inflationary environment and sort of just more room to perhaps raise rents there, looking out into 2023? How are you evaluating what the next leg of development could look like?

Bill Bayless -- Chief Executive Officer

Yeah. 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.

We have construction pricing pressures and, of course, entitlement costs. And as we've always said, when you're looking at the on-campus transactions, you have a vested 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, they're not looking to maximize the value of the parcel.

They also in most cases are the entitlement governance entity and control that process very cost-effectively. They also in 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 in helping accomplish the affordable rents and meeting feasibility. And so, the current environment, and as you also saw through the Great Recession when we were doing more on-campus based development than off, brings great benefit to being able to achieve our targeted yields, provide affordable student rents, and to meet the university's objectives.

There's 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.

Chandni Luthra -- Goldman Sachs -- Analyst

Got it. Understood. And in your previous question, you guys addressed how kind of you might be looking to see more opportunity with JV programs and there might be more appetite there. On your 3Q call, obviously, dispositions -- outright dispositions were also discussed.

Is that something that you guys are still evaluating? Or do you think that given you still have sort of the fee pipeline coming in from these JVs, outright dispositions are no longer on the table?

Daniel Perry -- Chief Financial Officer

I would say -- we wouldn't say it's no longer on the table. And certainly, there's going to be times when we think it's appropriate to monetize assets that we consider to be toward the lower end of the NOI growth profile or lower end of quality in 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 or scale with the management fees -- asset management fees that we can get off of that portion of a 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-Allianz joint venture and the ASU-Harrison Street joint venture.

Chandni Luthra -- Goldman Sachs -- Analyst

Great. Thank you so much.

Operator

Thank you. [Operator instructions] We now have our next question on the line from John Pawlowski from Green Street. Sir John, please go ahead.

John Pawlowski -- Green Street Advisors -- Analyst

Thanks very much. William, if you went out and sold the bottom tier of your portfolio, pick a number, bottom 10%, what kind of a cap rate do you think that would fetch at maybe a second-tier university, a little further away from campus?

William Talbot -- Chief Investment Officer

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're seeing investment across a wider -- a wide array at a couple of the large portfolios that you saw trade at -- that Harrison Street sold at the end of the fourth quarter where I would say had assets that were consistent with what I call our bottom 10%. But that -- we think that that range is probably compressed down to that mid-4% range. Obviously, a premium or a higher cap rate than what you're seeing for the core stuff but still has seen pretty significant compression.

And there's 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 on multifamily.

John Pawlowski -- Green Street Advisors -- Analyst

Sure. So, in terms of the buy-and-hold decision, I mean, if you give me a decision, I'd rather own ASU at a 3.75% versus the bottom 10% of the portfolio at a mid-four. So, why not use the bottom tier in your portfolio as a source of funds versus ASU, irrespective of the price discovery?

Bill Bayless -- Chief Executive Officer

Well, that price discovery, we feel, is critical. And obviously, as we go forward, we look at what you just said in terms of evaluating the alternatives. But we have spoken on this call for over a decade of people asking, "Can you trade ACE in equity and at what a cap rate?" 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 Olsen, 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 made sense.

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.

John Pawlowski -- Green Street Advisors -- Analyst

OK. Thank you. Final question for me, for Jennifer. Back to the inflation discussion.

So, enrollment is up, supply is down, and 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 5% to 7% to 8% on the off-campus portfolio versus the kind of 3% that's implied in the guidance.

Bill Bayless -- Chief Executive Officer

Yeah, John. And I actually answered that previously in the context of we can at certain assets in certain markets. And 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 2.5% 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 thing that we think about in terms of the long-term profile of those opportunities. You can achieve prolific IRRs 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 2.5% 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. But you got to protect --

John Pawlowski -- Green Street Advisors -- Analyst

Yeah. I guess my follow-up, why -- yes. I guess the follow-up. Again, supply across the portfolio is down.

Enrollment across the portfolio up. Why are -- and your portfolio is well located. Why have certain assets seen zero percent rate growth?

Bill Bayless -- Chief Executive Officer

If a property has zero percent rate growth, they are 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 as we -- the thesis of student housing, this 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 diminution and people were saying, "Why can't you? Why can't you?" And again, as we have always said, the benefit of student housing in a large, diverse portfolio such as ours is the consistent stability of rental rate growth and cash flows. But the one thing, the question that you're asking, that is not true, on an 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 the story of what that consistency of rental revenue equates to.

John Pawlowski -- Green Street Advisors -- Analyst

OK. Thank you for the time.

Bill Bayless -- Chief Executive Officer

You got it. Thank you.

Operator

Thank you, John. We now have a question on the line from -- a follow-up from Neil Malkin from Capital One. Sir Neil, please go ahead. I have you in your line.

Neil Malkin -- Capital One Securities -- Analyst

Yeah. Thanks. Just two quick ones. First, William, and I'm sorry if you answered this before, but after Disney, just wondering about the pipeline of actual ACE in that 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. And I know you talked about the schools as kind of shifting focus from COVID to sort of the core of their business. When do you think we're going to see that? And do you expect to announce some things near term to kind of build that pipeline? And that kind of leads into my next question.

William Talbot -- Chief Investment Officer

Yeah, sure. And Bill talked about this a little bit earlier. But yes, we've seen a lot of third-party projects that are 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 sheet, is there.

But we have no different change in what we believe the appetite is overall for P3, and that relates to both the equity ACE deals, as well as the third party. And so there's a vibrant pipeline. And if you look within our supplemental, Cal Berkeley, there's an ACE project within there. Northeastern is still targeted to be, and there's a number that are TBD that, based on what the goals of those universities and what the potential financing is, that could be ACE.

So, when you look at that large pipeline we've been talking about and you're 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 out to be ACE in equity and what becomes third party, it depends on the university, it depends on our investment criteria and the product. And so, that pipeline is as vibrant as it's been, and we'll continue to pursue it and hopefully win those projects. And you'll see more ACE projects come along.

Neil Malkin -- Capital One Securities -- Analyst

OK. And I assume that that pipeline has grown in terms of RFPs, right? It seems like every quarter, there's more.

William Talbot -- Chief Investment Officer

Yes, it continues to grow and be strong.

Neil Malkin -- Capital One Securities -- Analyst

OK. And then the last one, and I think this is kind of tying a lot of people's questions together. With rent growth obviously being less than multifamily, you talk about lower risk, reasonable cash flows. And I think the other part of it is the growth is going to come from external, right? It's the value of the oligopoly, so to speak, of the development and the on-campus revitalization that very few people have the skills to do.

So, maybe with that in mind, can you just talk about, as we look past COVID, how are you thinking about long-term capital allocation and value creation sort of over the next several years?

Bill Bayless -- Chief Executive Officer

Yeah. And certainly, we are not -- sorry, my mic was off. Certainly, we are in a position to really implement an accretive self-funding plan. And I want to point out, since you brought 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, it's 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 enhancement to where now it's all on-campus or pedestrian to campus with like 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 grew their enrollment by 840 bps over the markets we exited over the last five years. Also, the occupancies at the markets we exited were 600 basis points more impacted by COVID than we were in our own markets.

They were at 85% versus our 90.3%. 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 patient through those years as we were implementing that long-term strategy to reposition the portfolio. You're now seeing the benefits of that being reaped in the context of strong earnings per share. But also, what you saw with 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 3s, as William said, probably we had a couple that are mid-4s, but as you've seen that shore up, we now have the ability. We've got about 200 basis points of upside in net asset value accretion in the development pipeline that we have before us. As you mentioned, we are in the best competitive position as it relates to on-campus P3 than we have ever been in, in the company's history. And so, we see a very bright future and a lot of tailwinds and a lot of accelerating momentum for the company as we are able to move forward in taking advantage of the opportunities that are before the company.

Neil Malkin -- Capital One Securities -- Analyst

Appreciate that. Thank you.

Operator

Thank you. We have no further questions on the line. So, I'd like to hand it back to Bill.

Bill Bayless -- Chief Executive Officer

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 today's -- or last night's 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.

I've had COVID twice. I just had 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. And so, I would have loved to attend.

Daniel and William will be there, and they'll answer all of your questions to give you a good outlook of what's going on. Thank you all so much.

Operator

[Operator signoff]

Duration: 56 minutes

Call participants:

Ryan Dennison -- Investor Relations

Bill Bayless -- Chief Executive Officer

Alexander Goldfarb -- Piper Sandler -- Analyst

Daniel Perry -- Chief Financial Officer

Neil Malkin -- Capital One Securities -- Analyst

Mike Bilerman -- Citi -- Analyst

Austin Wurschmidt -- KeyBanc Capital Markets -- Analyst

Chandni Luthra -- Goldman Sachs -- Analyst

John Pawlowski -- Green Street Advisors -- Analyst

William Talbot -- Chief Investment Officer

More ACC analysis

All earnings call transcripts