Q3 2019 Earnings Call
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Oh, well like control for American campus communities.
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Thank you.
Used to compress providing us with the opportunity to generate significant value for our shareholders with reinvestment in our core development program with yields at the six in the quarter percent and above range.
As we look forward to the 2021 lease up we're excited about the healthy fundamental environment with lighter new supply for the fall of 2020.
Specifically, we forecast new supply in our markets to declined 20% to the lowest levels that we've seen in almost 10 years. Moreover, less of our NOI is produced in the largest new supply markets with that I'll turn it over to Jennifer Beese, Our chief operating officer to get Us started.
Thanks, Bill and looking at our 2019 same store operational results as seen on page six of the supplemental.
Quarterly same store property in NOI increased 5.4% on a 2.2% increase in revenue.
And an increase in operating expenses of 3.9%.
2.2% revenue increase reflects a combination of the 18 19 in 1920 academic years.
Turning to operating expenses marketing expenses increased as we continue to utilize both traditional mediums and enhanced digital and social channels in the final stages of the 1920 academic year Lisa.
Having advanced our digital and social platforms throughout the year, we anticipate reductions in certain traditional methods, allowing for an inflationary growth Paul profile moving into next year.
Our utilities expense on the other hand had continued a three year trend a flat to declining expense growth.
Asset management initiatives continue to drive significant benefit on several fronts, including energy efficient led the installations in renegotiating cable internet and utilities agreements over.
Over the past four years, we have completed 100 LCD projects and currently have an additional 30 underway with completion dates targeted through the first half of 2020 .
We also continue to see benefits from our ongoing efforts to renegotiate and execute cable and internet contracts.
In 2019 alone we will have completed approximately 30 of these contracts and have an additional 70 underway.
Targeting completion through 2020 aside from the financial benefit these contracts provide for better speeds in digital experiences for residents of our communities.
Turning to our leasing results as of September Thirtyth 2019, our 2020 same store portfolio was 97.4% occupied.
40 basis point increase over our results from last year with a 1.4% rental revenue growth.
This result in opening rental revenue growth of 1.7%.
Adjusted to include only the company's 55% share of the Austin portfolio. The effective same store rental revenue growth, which flows through FFO him is 2%.
Our 2019 development and presale communities came in at a very strong 98.1% above our underwritten occupancy in long term average of 97%.
We are pleased that the HCC team once again produced industry, leading occupancy levels continued our large long term track record of opening our new communities fully stabilized.
I will now turn the call over to William to discuss our investment activity.
Thanks, Jennifer turning first to development with regards to our 2019 own projects. We successfully delivered three communities totaling 20, 376 beds and $297 million in development costs. These projects were developed on time and on budget and are anticipated to exceed their targeted year one yield.
With regards to our two presale developments, we closed on the flips of Florida State University during the third quarter and we expect to close on nine Fivenine Franklin at the University of Oregon during the fourth quarter.
As Jennifer mentioned, our combined 2019 owned development and Presales open to the strong 98.1 parts in occupancy.
Turning to our on campus business, we delivered five third party development, bringing the total HCC deliveries for fall 2019 to eight projects 5400 beds and $650 million in development costs exemplifying our best in class development platform.
In addition, we're very excited announced that we have been awarded or in direct negotiation on three new on campus projects on the campuses at Georgetown University, Texas State University and northeastern University in Boston.
Or working with Georgetown University to third party to develop an 11 story 476 bed project at their capital campus in downtown Washington, DC. In addition, as part of a highly competitive RFP process HCC was selected as a third party developer for Texas State University to build up to 2800 beds on their campus we have begun.
Current services on the 900 bed first phase, which is anticipated to break ground in the first quarter 2024 2021 opening.
Finally, we are in Predevelopment on a second ace projects that northeastern University for our first Ace development opened this year at 100% occupancy was fully leased by February . The second project is targeting a 2021 start for fall 2023 delivery overall, we continue to track a vibrant and expanding pipeline of on camp.
C opportunities and we remain well positioned in these proceeds for continued success.
Turning now to our capital cycling react activities.
Currently under access agreement and then the final stages of due diligence on the disposition of landmark serving the University of Michigan, and and Arbor for $100 million in gross proceeds.
The sale represents a 4.1% economic cap rate on in place revenue and projected operating expenses.
The sales expected to close in the fourth quarter. In addition, we're in negotiations on approximately $150 million of additional dispositions expected to close in late fourth quarter that have rejected low 4% economic cap rate.
With regards to new supply within HCC 69 on markets. We're tracking 22500 beds for fall 2020 delivery, a decrease of 20% and new supply compared to 2019, and the lowest amount of supply since 2011.
Total supplies a person enrollment is only 1% the lowest amount nine years and 30 basis points below our long term average.
There are 42 markets experiencing no new supply in 2020 with new supply occurring in 27 of our 69 markets down from 38 markets of new supply in 2019.
Supply as a percent of enrollment in new supply markets is only 2.2% 40 basis points below our long term average in addition, only 17% of our annualized drive from assets within the top 10 supply markets down from 22% in 2019, when excluding our on campus assets at a issues is that do not compete with the off campus Mark.
Ill now turn it over the call to Daniels to discuss our financial results for the quarter.
Thanks, William as we reported last night total Fs OEM for the quarter of 2019 was $64.1 million or 46 cents per fully diluted share which was in line with our expectations for the quarter.
Compared to the to third quarter of 2018 total us OEM increased $3.5 million were 5.7% and FFO in per share increased two cents or 4.5% driven primarily by increased in ROI from owned properties, especially from our 2018 and.
2019, new developments and higher third party development and management fee income.
Last week, we published the final results of our fall 2019 lease up and updated our 2019 earnings guidance raising the midpoint two cents to $2.42 per share.
The increase in the midpoint of guidance was primarily due to an increase of 1.9 million and expected in ROI to be contributed by our new store properties and $400000 an increased FFO am contribution from same store properties net of our jumped joint venture partners share of NOI.
Third party fee income is expected to be $1.4 million lower as the <unk> you see Berkeley development project is now expected to commence in 2020.
Offset by lower overall interest expense for the year due to a better interest rate environment than anticipated.
We also updated the components of guidance affected by the plan to change in recycling activity, which William discussed, but this is net neutral to AFFO and guidance for the year.
With that being said you can refer to page assess 18, and as 19 of the earnings supplemental to get complete details on each of the components of our 2019 guidance update.
Moving to capital structure as of September Thirtyth, the company's debt to enterprise value was 33.6% debt to total asset value was 39.1% and the net debt to run rate EBITDA was 6.5 times as you will see in our supplemental on page 17, we've updated our capital allocation.
And long term funding plan to reflect the completion of the 2019 owned developments in the purchase of the presale development at Florida State University.
Including all developments now under construction for delivery through 2023, and all remain presell different development funding requirements. We have 690 million in remaining capital needs, which which we expect to fund through a mix of cash on hand.
Cash available for reinvestment and approximately $100 million to $150 million per year in disposition joint venture and or equity capital.
This will allow the company to targeted debt to total assets ratio in the mid Thirtys and a net debt to EBITDA ratio in the high fives to low sixes.
As discussed we are in various stages of negotiation on $250 million of the planned asset dispositions.
Pro forma for the completion of these dispositions debt to total asset value would be 37% and net debt to run rate EBITDA would be 6.2 times.
As always we will continue to monitor market conditions and access the most attractive sources of capital relative to our investment pipeline throughout the next four years.
With that I'll turn it back to the operator to start the question and answer portion of the call.
We will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
And our first question comes from Austin Wurschmidt of Keybanc. Please go ahead.
Hi, Good morning, everyone. Appreciate the time.
With good line of sight on the 250 million of disposition proceeds I guess I'm just curious if this in your view reduces any need for equity in sort of the near to medium term and to the extent that that private market pricing.
Coal at existing levels I guess.
Im curious if you'd consider strictly funding your development needs.
Over the next few years with dispositions.
At least for the foreseeable future.
Yes, Austin this is Daniel good morning, and yes, if you look at our capital.
Long term funding plan page.
We lay out there the planned funding.
The current development pipeline with the mix of 425 to 625 million in that equity type capital, whether be dispositions joint venture or otherwise.
And with the 250 million that we anticipate executing on in the fourth quarter that would leave us with about 70 million.
In needs per year, you should expect that we will probably be intermediate term be doing after this year that $100 million to $150 million and while we see this spread between.
The low four cap rates on dispositions and being able to recycle that into the six in the quarter development. So thats, what we really like.
Obviously, we're talking about a four year plan.
And the environment will.
The ever changing and so we will continue to watch all of the options and news what we think is the best for producing earnings growth and enhance the Navy.
I appreciate the thoughts there and then I was just curious.
One could you give us a little detail on the or thoughts around the decision of not providing.
Forward academic year revenue guidance and then as you do go through that process.
Any plan to tweak your model or your approach to forecasting as you think about 22021 school year.
Given what you saw in a market like Austin this year and you've seen in some other markets where supply is been a little bit more impactful than maybe originally anticipated.
Yes, Austin. This is good morning. This is bill.
Obviously as we looked at the first thing we did as we looked at the guidance practices of the other residential rights and realize that we were really one of the very few that we're giving color. This early on to the 2020 rental revenue guidance.
And so for US we felt like you know what we should take advantage of having the best data, we possibly can the guide the market, where we should and felt would be more appropriate to wait until that first quarter.
Where we give the do the Q4 call certainly we'll have more color and more insight as it relates to all markets and the reaction the new supply in the recovery of Austin as we do that and so I think it's probably the most prudent practice for us undertaken will resolve ultimately.
And perhaps having little better data points than we would is we're kicking off the year.
Got it appreciate the time thank you.
Thanks.
Our next question comes from Nick Joseph of Citi. Please go ahead.
Thanks, Nick following up on Austin's question, you talked about supply be down 20% next year, but there always seems to be a marketer to with elevated deliveries are that adversely impacts results with often being that market. This year.
Could you can keep an eye out over the next 12 months that are most at risk or underperformance.
Yes, as we talked about in in the prepared comments next year is new supply lines up very favorably for us on virtually all for us as we look at the metrics.
When you look at the top three markets this year, its Gainesville, Tempe and Champagne.
Tap the we'll just have basically eliminate from concern of that all of our AOS can't on campus Ace assets. There candidly do not compete in any way shape or form with the new supply and apartments coming online when you look at Gainesville.
We have a very small percent of our NOI. There are 1.64%. We have three assets that are very well positioned from a price perspective.
And that where we range between an average rate of 562 to 775, where new supply is coming in on average probably about 250 to $300 per bed in excess of that also in Gainesville, while its lead market with over 3200 beds surprisingly about 1600 of those beds are dr. fraud.
Recent SAR assets will also have a better product position.
Same type situation, we look at Champagne, which is the number three market on the list.
Oh just over.
1900.
And Im sorry, just over 1800 in in that regard our average rates ranged from a lower for 33.
Two six or 786, and so we're in really good position from a pricing perspective, and also from a concentration of our rental why overall were 17%.
Market at risk at all why versus 22 in the last several years. The one thing I do want to comment on Nick and in certainly Austin.
Had an impact on us in in terms of this year's numbers, but we would point out.
We truly believe that that is a one year absorption absorption issue.
When you break down and look at what did happen in the Austin marketplace. This year, there is actually quite a silver lining as it relates to the continued story of the absorption of modernization.
I'll take a few minutes to go through some of the data in as you all know.
Austin continues to represent the most mature purpose built student housing market in the country in the with the the UN only the zoning orders was passed in the old five or six range that really eliminated a lot of the barriers to entry there Austin. This fall has reached the point, where new purpose built supply equals.
48% of enrollment, which is more than doubled the 23% average for the remainder of our portfolio and it also has 34%.
Yes, three in beds as a first supply as a percent of enrollment nearly three times the average of the rest of our portfolio a 12%.
And it as everyone knows UTI hasn't enrollment cap enrollment typically fluctuates five to 700 beds up and down off of that 50000 and with all of that said Austin overall this year and this is based on our internal data, where we track 40 purpose built properties.
Apartment products 35 of them being same store from last year and surprisingly overall, the Austin market, including the AD of the additional 2000 beds overall apartment occupancy in the West campus sub market went up.
From 95, five last year to 96 to there were actually a total of 2029 more students living in the apartments pedestrian to campus than there were last year now when you look at the same store assets and how they perform 27 of the the apartment products are in West campus.
Same store nature.
Overall occupancy actually ticked up 20, Bips to 95 seven from 95 to now there were winners and losers in that same store is one as the gives US a short term absorption took place and we had a couple of properties when that negative category.
From our estimation there were a total of 16 properties that had some occupancy dimunition. We believe based on our tracking of lease up of rents that about 11.
Had negative rental revenue growth, but overall that same store market. We looked at we believe rents were flat and so the big loser in Austin, where the dry properties and the river such Submarket, where we saw occupancy dipped down to 83.2% and so when you look at the long term trending in Austin.
The facts continue to support the long term absorption of modernization continues to take place with students continue to migrate closer to campus and while you do have one year absorption issues, which this year. We saw the we were impacted by.
Last year last year, you had four properties that had one year absorption issues that ended up below 85% and each of those four properties Restabilize. This year at 96% and so overall the long term prognosis saw new supply and modernization continues to be positive even in Austin with some short to.
Diluted that you solve that we experienced some others did this year as those beds came in.
Thanks.
Thats very helpful and then.
Terms.
You talked in the past throughout the potential for maybe longer term basic holiday or within the space, What's your appetite today for acquisitions or pre sale.
Yes, obviously with where market cap rates are today on our cost of capital we continue to be out of the acquisitions game and continue to look at the high yielding new development as our immediate growth I will say when you look on a long term horizon. When you look over the next five to 15 years certainly we expect.
The American campus to be the long term consolidator.
And ultimately when you look at what has been a drag on internal growth rate over the last five years, a lot of that drag on our internal growth rate has been the fact that we are out of the acquisition game and we deliver our development assets as you saw this year there at 98% completely stabilize from occupancy and so that really only real.
Yes, we have on internal grocers is right and so when we think about the company's long term prospects for internal growth rate, we certainly see a time down the road when the cycles change in our cost of capital is more appropriate aligned when we get the benefits of growing and becoming and benefiting from the scale contribution again.
Coupled with the occupancy upsides that we continue to see in other companies portfolios. The one thing to remains constant.
If you were at the National Student housing Conference last week is that American campus continues to perform 200 to 300 basis points better in occupancy than all of our competitors and so we when we do get to a point when M&A and consolidation of getting makes sense for the company in the long run well see our internal growth rates continue to benefit.
Like they did in the past from both those improvements and others operations and from scale.
Thanks.
Our next question comes from Alexander Goldfarb of Sandler O'neil. Please go ahead.
Hey.
Good morning down there.
Just if you think.
First on the marketing expense.
Im sorry, if you if you it's been a busy morning. So sorry, if you addressed this upfront, but obviously it was a big jump this year and I think you guys had talked about more online or social media spending, which obviously these avid had been out there for a while maybe you could just talk about marketing spend what your thoughts are going forward, especially a number of years ago was elevated you guys brought.
It back down but it also seems like it was more prevalent in the existing assets versus the new development. Given when you look at total NOI growth was pretty strong versus the same store NOI growth. So maybe you could just bear where you think marketing expenses going and what was really the driver of this year.
That made it stand out versus previous years.
Yes, Alex and as you as we finish out this year, we would expect marketing expense for the calendar year to come in at about 185, a bad.
Versus last year 162, so about a 13% increase certainly in this quarter you saw the finish out of the lease up for this academic year and so while social media certainly has played a larger and larger role candidly over the last five years.
This year was really I would say a pivotal transformational year as we've talked about where we have become much more sophisticated in terms of the implementation of some of the digital and social media, which also candidly has much better metrics that we're able to evaluate in terms of what works versus what doesn't and we were able to start to eliminate quite a bit of our traditional mall.
Marketing expenses, while ramping up the social media and so for example in direct mail and newspaper advertising year to date were down about 700000, those categories, but that was offset by about 1 million to 1 million to in digital social media. So as we look at the next academic year, which begins in Q4 this year.
We think we have hit a point of stabilization.
Right at that 185, which is historically is below our historical run rate. When you look on the long term, we certainly got down low at the end of some of the traditional marketing years.
Back in 15, and 16, but that 185, a bed. We think now is a good run rate to think of in terms of inflationary growth call Unpleased with marketing inflation would say, 3% to 5% and I think we'll have better opportunities to hone our marketing costs over the next five years as we do switch more to the digital social media again you.
Have much better ability to measure the effectiveness of those than you do traditional mediums with some of the sophisticated software management tools that we have like sprinkler the team is employing.
But bill are you are you expecting it to be up again double digit next year no as I said, we would now expect the next academic year starting in Q4. This year through Q3 of next year to be inflationary, 3% to 5% increases in marketing expenses.
Okay and then the next question again goes back to the value creation that you guys have in the development versus your same store.
Thank you guys stand out in that your same store if im not mistaken includes.
Hey, these at 100%, whereas my understanding is that an apartment the same store excludes JV. So on a comparative basis would you guys look to adjust your same store definition to mimic what your multifamily peers have and then to provide sort of a pro rata.
And why growth because clearly it's what the developments are really driving whereas your same store is being weighed down by whether it's often this year or something else.
That's an issue at another year it sort of masks the.
Total growth that you guys provide so yes.
Yes, you guys thinking about making your same store definition closer to what the multifamily guys for comparison, and then to providing a pro rata.
No I growth. So we can really get the picture from an economic basis, what you guys are driving.
Yes, and I was at this point in time, the only joint venture that we have on the books is really that Austin property and for example last year auction Austin perform pretty close to the mean of the entire portfolio and so there's really no differentiation in the economic.
Growth rate. This year, we felt compelled obviously to pointed out given that there wasn't material difference in terms of backing out that JV economic interest in terms of the one seven voice versus the two low we obviously would have pointed that out did work. The inverse also fitted overstated as a headline number certainly as you know as our portfolio.
Grows and if jvs become a more prevalent part.
Of the portfolio that it makes sense to appropriately.
Separate and categorize that we would certainly do so certainly we will continue to do what we did this year and making sure if theres any differentiation in people understanding what the growth rate is we would continue to point that out as we did in demonstrating that the real growth rate. This year that hits EFO and our earnings in internally is the two well versed.
As the one set.
Okay. Thank you Bill.
Our next question comes from surely will.
Of America. Please go ahead.
Hey, good morning, guys and thanks for taking the question so for follow up on an earlier question about your.
Tony Tony one follow.
Guidance. So as you start to think about next year's guidance, how are you thinking about macro environment and potential assumption.
Slowdown recession.
Yes, and this is where is the one color we would provide as we kick off the 2020 leasing season is if you look back at our historical Supplementals.
And you look at what we released in terms of this year supplemental where we give the the final breakdown.
The portfolio as it relates to properties that are 98% in a both properties that are 98% to 95% and properties that are below 95%. If you look at did last 10 years and Supplementals and certainly folks on the last five years, which is more.
Relevant of the portfolio that we have today.
You will see us we kick off this year's leasing season, we have much better growth metrics based on our historical performance in the portfolio. This year than we did last year.
And that you're seeing kicking off this season.
Currently 64729 of our beds are at the category of 98% on above and in that category of properties. We have have excellent history of growing rental rate in terms of contributing to our growth I think the range has been Q2 to three one revenue growth over the last.
Five years net category also you can see we have a grow a little bit of a growth in the less than 95% category.
Going from 18.9% of our beds to 19.4 and in that category. We have always also produced historical growth ranging from 2% to 8% and having great contributors the occupancy and the the middle category of 95 to 98 is the only area that we've ever had any negative growth and that is.
Candidly also been a few and far between only think three the last 10 years and that part of our portfolio is down this year as we kick off the leasing seasonally 13% of our beds and so when you look at the historical context of our growth rate by category of property based on those occupancy. We just covered this year's portfolio lays out pretty well.
So in terms of pricing power in our best occupied properties and also occupancy upside in those below 95% with that middle category. That's always the hardest grow being smaller and so we would say overall when you couple that with the the supply picture that we talked about in the portfolio lays out candidly better this year than it did.
Last year.
Okay.
So also going back on to your Holly.
Yeah.
Were there any markets that are worth.
And whether that's on the rate growth side or on.
All in all in the other 66 collective markets things came in pretty much as expected certainly not all markets are positive, but we didnt expect all markets be positive. So overall Austin was really the only market, where we saw a material diminishment that was candidly, obviously, a little worse than we had anticipated and hope for but.
Based on my earlier comments that we believe is based on short term absorption as always we have properties that outperform and slightly underperformed for the most part of everything was when the margin of tolerance and Expectance.
Hi, Thanks.
Our next question comes from drew Babin of Baird. Please go ahead.
Hey, good morning.
And Andrew.
Development pipeline question.
Good development pipeline kind of 2021 and beyond is obviously very heavy I was curious kind of what the remaining opportunity set will cut or potential adds to the 21 pipeline and beyond obviously a lot of.
Third party opportunities coming your way on and it's good to see the announcement in northeastern brought on any other guidance there on the pipeline beyond what's currently present it.
Yes, and certainly in the numbers are somewhat down from historical years, and I would say first that's related to the fact, you know in in a constrained capital environment. We've obviously been very selective and so the off campus transactions, we have been very.
Very prudent on and put some of those transactions on hold.
Allocating in first the capital we have available toward those on campus Ace transactions that are excellent yields to six in quarter above with very low risk.
As we look at the 2021 pipeline, we're getting close to that being obviously fully baked in would be very unusual to have something come in from this point in time forward as we look at the and you look at the supplemental we have a large backlog of on campus awards. There are some defined third party deals in there, but you still have excellent opportunities for race track.
As action the Cal Berkeley transactions in the pipeline are yet to be determined what will be third party and what will be ace also the Princeton transaction and so you do have good opportunity of deals already awarded.
That that can still contribute to owned development. The other thing that we're looking at as we have the most vibrant Pete three shadow pipeline than we've ever had.
Right now transactions that were either in a direct negotiation are tracking upcoming procurements is close to four dozen.
And so we continue this to be one of the most vibrant.
Pthree pipelines available and we also do have some excellent land parcels off campus than when the time is right in the capital by winners right. We'll also choose to execute on those one is for.
Thanks, That's helpful. And then one question just on the or the final recent presentation on us mine or the supplemental.
Schools with occupancy below 95% I would assume.
It is in that category. So it could go back to some schools that have had some oversupply the last couple of years. Thanks. Thanks.
Industry.
What are some sort of in that that below 95% occupancy bucket currently.
Yes, it when we look at it and candidly, Texas Tech and Florida State are not in that most of those properties in much like we talked about Austin have any opportunity to recover.
Those markets have done quite well in terms of their short term absorption and now stabilization I would also point out that markets can cross over the bucket. For example, we have two properties in Austin that are in that below 95% to apartment products. We have three that are in the 95 denying the actually to $95.
97, one at the 98 and so the market's performance can't crossover.
Yes, some of the other we've got some assets, we got an asset in for do that has some significant upside University of Arizona, one it VC you.
Arlington one is.
Eugene, Oregon, so more and more of a smattering of one off assets in markets than any particular market in enough sell being categorized.
Okay. Appreciate the color and one last one for me.
Campus properties on the property tax environment Committee carbon reached six executing property tax assessments successfully appealed or millage rates and just curious kind of working out 2020.
Property tax growth could conceivably moderate given the cap rate that's kind of low for a couple of years now or do you expect kind of Texas, Florida property types heavy states continue to drive that.
Yes.
That's the real driver is Texas, and Florida drew and we're still in the process of finalizing.
The appeals and assessments in those states and so we really just need to see how that all shakes out before we have a real handle on what we think it will do next year.
As you recall our guidance for this year was in the 4% range.
We feel like we're coming in somewhere close to that.
So we did but we just need to see where it finishes out before we have a real fill for for what what next year should be.
Great that's helping me thank you.
Thank you.
Our next question comes from Derek Johnston of Deutsche Bank. Please go ahead.
Hi, everyone. Thanks for taking the question just a quick follow up to the pipeline how challenging hasn't been defined development opportunities that meet the six in the quarter plus target development yield.
Yes, first you have to bifurcate it by.
On campus and off campus in the on campus transactions, we have invested partner and so the the universities that are bringing the land of the table. Obviously their greatest concern is having adequate supply and affordability for their students and so they're viewing their land is contribution ended the transaction as to putting together a good transit.
Action that is a win win for all parties. Most importantly students and affordability and so you don't have the same type of pressures associated with the driving up cost from a land perspective also you have a vested interest partner with you in getting through what is typically a university controlled entitlement process versus very expensive off campus entitlement processes in the.
And so the environment on campus is quite different than off in the off campus market. Yeah. I mean, you have heavy competition for sites, you've seen land pricing tick up you still have and this is what we love about our space you have significant barriers to entry and you have what is typically cumbersome entitlement processes.
Is that we are very adept in and able to get through given our reputation with colleges and universities in the approach that we take toward building living learning environments that are usually viewed positively by.
The communities in which we attempt to develop off campus with that said as I mentioned earlier, you have seen a slowdown in our off campus pipeline, given the competitive environment and where we're choosing to allocate our capital based on the best risk adjusted opportunities.
Certainly we would expect in the years ahead to continue off campus development.
We've got you know numerous properties already in our land bank that are in the pre development stages for the future, but we'll execute on those when the time is right in our cost capital enables us to do so.
Excellent. Thank you and I guess, just a quick one on terrorists and maybe labor costs. So how much of an impact are they both having on development yields and are they fully or partially offset by the lower cost of capital environment, We're seeing today.
Yes, and obviously, the tariffs or something that we track in terms of not only new materials and construction, but also in our existing repairs and maintenance of existing assets that we have in place and the teams done a great job in terms of sourcing alternative products to where we haven't been majorly impacted in in that regard obviously as it relates to labor costs in the construction markets.
Its geographic in terms of where the greatest impacts are and we have.
Ben on campus, where the majority of our.
Owned development pipeline has been again, we tend to be isolated from some of the larger contributors that are driving up price largely land pricing and so we probably have a little better opportunity to whether that given the nature of our on campus transactions, where land is not the variable for us is pushing up cost as it is for others.
Thank you.
Our next question comes from Samir Khanal of Evercore. Please go ahead.
Good morning, guys. Most of my questions have been answered, but when one last one for me here when I, Daniel when I look at the.
Your expense forecast here and I mean, your year to date, you're tracking about two and a half.
Im just trying to dig in a little bit deeper here to see what gets you to the high into that range, which is kind of 2.6 to three so.
What gets you the upper end of that sort of 3% because it would kind of them.
Basically say that you'd have to have a ramp up in fourq you as a property taxes as it is in marketing sort of what are we missing here.
Yes, I think really when you're when you're getting your guidance for that last part of the year you're watching.
Yes, you are finishing out your tax appeals as we talked about earlier.
Seen if you feel like there any additional accruals to take there that would be appropriate.
We're still watching on the repairs and maintenance side, if we have onions incidents that occur that we have heavy incident response costs related to we always need to.
Maintain a contingency for that possibility and so.
So.
Obviously, you can have in other areas things that just come in higher than you're expecting and you really just maintaining the contingency for that.
Got it got it.
And I guess, so one more for bill it's been a year since you announced the Disney College program.
Thats what are the learnings kind of in on that side and maybe can you talk about sort of.
The opportunities that exist, maybe with other corporate so at this point.
Yes, and certainly we continue to just be thrilled with the partnership with Disney and development of construction there is going extremely well.
I also think Disney is very pleased in terms of the progress we've made and.
Their perspective of our development Pratt platform product development will be open in phase one in May of 2020, and everything is on schedule and on budget Theres virtually no stabilization risk in that project as we mentioned that the program is just moving over students from prior properties that were master lease.
And so that it will probably end up doing an investor day down there sometime next year to give people a look at that see a first hand, once that's up and running I certainly think that you know and what makes Disney so.
Unique for US is that fits right in the wheelhouse of the market that we've always served and that is the 18 to 22 year old College students and is right in the wheelhouse of all of our operational systems. It is however at the same time in essence of workforce housing project and so certainly I think that theres opportunities for other companies look at what we've done in partnership with Disney.
Who had the ability to bring land of the table to solve the affordability problem for their workers and so good that lead. It's certainly can serve as a model for other companies could at least other opportunities for us germ line.
We certainly like to structure of Disney in terms of the proved proven market and the low risk stabilization of the entire partnership.
Okay. Thanks for the code.
Our next question comes from Neil Malkin of capital One Securities. Please go ahead.
Good morning, guys. Thanks for taking the call.
First question.
Other revenue on a per occupied.
That basis.
Been down like one or 2%.
This year, what is causing that and then do you think thats going to revert to sort of a lower inflationary type growth.
Next year in and into 2021.
Yes. This is Daniel nil.
On the other income it it's always hard to drive just a straight consistent kind of inflationary growth in other income because what the primary driver of it is your app and admin fees.
Damage fees parking fees.
Your summer Camp and conference business does fall in there in the second and third quarters, and so you're not changing your app and have been fees by 2% every year.
It's more of it.
Every so often.
On a cycle basis, you might make a bigger increase to them.
I'll point out is in the fourth quarter, we are expecting a little bit of a lower growth in other income that's driving that number for the year.
Because in this state in New York, they are no longer allowing.
App and admin type fees and so immediately we have to route.
Eliminate those for the started this new academic year.
Well, we'll look for other ways to to replicate that as far as our total revenue overall, but and the immediate term. It is an elimination of of our fee that we received in the state in New York.
Okay. Thanks, and then could you maybe give some color on the next gen.
System, you talked about some.
Better than expected results in the seasonally less occupied summer months.
And then also can you use that are those types of systems to drive sustained.
Opex savings.
Yes to all of those and certainly the as we've been talking about next Gen for the last two to three years and the the biggest advancement in Nexgen that you solve pay dividends in the current year was the improvement in our historical attrition rate from fall to spring and then also spring to summer and that where were.
Originally lamps was developed as a future period leasing season next the Nexgen advancement brought all of the lamps sophistication into every aspect of leasing including throughout the current year and that coupled with the business intelligence and live market survey data that we have really just gave us better purview to be able to not only executing the.
But also corporately to have oversight of that entire process and so that is something that continues the but bring a level of advanced sophistication.
Everything that we're doing.
I'm sorry, the second part of the question.
Can you leverage those types of things.
You mentioned efficient.
He is a better.
Absolutely better Opex perform yes, absolutely although the one thing when we look at our VI initiative and we as any proven company. In America is today are obsessed with tracking every piece of data related to every aspect of our operations and so as we undertake our asset management initiatives.
And have the ability to track all points of data in our portfolio through the B, it's going to give us opportunities identify refine and implement all aspects of our operations to gain efficiency. We mentioned in leasing the very conversation, we had about leasing and utilizing the tools like sprinkler that we have to have that data continue to fine tune.
You can literally take through all major line items of your operating expenses.
Okay, Great and then.
Last one from me.
The third party developments that you guys have what's the likelihood of.
Converting that into a management contract like what's the retention I guess.
Very high.
The very high when you look at the the third party on campus, typically where 50% or better where if they hire us you'd development. They also engage us to do the ongoing management.
And those can be wonderful long term relationship or you see Irvine would be in May one that we would point to where we've done all that development since 2002 on campus and have been retained for all of it and so that is the best sourcing of third party management that is consistent to just continue on with the colleges and universities as a.
Service provider.
Thank you.
Our next question comes from Nikita Bailey of Jpmorgan. Please go ahead.
Good morning on its only a low supply also contains many 20 that you mentioned is there a trend in the private capital market pulling back was the slower supply primarily just a matter of mix for you in across your markets.
When you look to supply as Bill mentioned, it's really because as more and more developers are focusing on those pedestrian assets at these major tier one markets theres a lot of barriers to entry and so.
It's not a lack of capital willing to invest one of the space is a lack of opportunity to invest that capital with with those true corporate issuing type assets. So thats, what youre seeing really drive down the supply and the majority of our markets.
You're talking about operating costs, so a bunch on the call both fuel to put some numbers on broad could turn it on the controllable costs of your operating expenses.
How much more opportunities to drawn down and what do you think that number could be on basically everything other than taxes over the next few years liquidity thing that number's running.
Yes, I mean, Nikita, we're not going to get into giving guidance yet over the next couple of years, but what we will say is if you look at the last six years, our controllable costs has averaged 2.3% that's compared to total opex growth of 2.5%. So.
And I'm, not even including utilities there in the controllable costs, which of course, we have seen real benefits from our asset and emissions management initiatives. There were over the last four years, we've only grown.
No it pretty much been flat and over the last six years, 1.3% average growth and utilities.
Yes, as we move forward into 2020, Jennifer in her prepared remarks talked about that we have another 30 plus properties that were deploying our ltd conversion projects to.
We have another 70 plus.
Cable and Internet agreements that we are renegotiating.
And we continue also to convert in our apartments from.
From carpet to two vinyl flooring, which is helping us reduce repairs and maintenance costs, when we have to clean and repair carpet at turn.
Some capex savings in there as well and so all of those things are our asset management initiatives that we will continue to use to help.
Control the controllable expenses in the coming years, and and hopefully perform in line with with this lower growth that we've seen over the last six years.
Got it well I guess, maybe last one on the you've talked about the range for expenses something coming with one quarter left.
We'll get you to high on the low end over the full year guidance I mean at this point on the earnings side is it really just disposition timing search.
Yes.
Disposition timing isn't going to have a huge impact on it because it's so late in the year. The variability is just on the impact to earnings is just not that much.
No it will be a little bit on what what ultimately comes out in terms of the same store and new store in Hawaii.
And then also to the extent, we have any more or less in terms of.
Incentive fees on our management contracts.
And so just throughout the portfolio or throughout the company just little areas that you're allowing for.
Any contingencies that could occur through the remainder of the year.
Got it will take us.
Thank you.
Our next question comes from John Polaski Green Street Advisors. Please go ahead.
Thanks, Jennifer Bill I was hoping you could provide some commentary on what you're seeing in a shadow mom and pop Mark in terms of setting setting rents and how that can impact next year, regardless of what happens to purpose built supply because of the reason I ask if we went back to call. It 2014, our supply is real.
Hi, and you gave me a five year supply growth forecast ahead of time.
He told me you're going to sell at a lower quality schools and get more infill.
That supply on purpose built has come down, but we really haven't seen the organic growth you'd expect from that backdrop. So what are we seeing the shadow market.
Yes, and actually when you look at the growth in over the last five years versus the five years prior.
When you look at our internal growth profile say that the changing parameter rental rate growth has actually been stronger for us in the last five years than it was from 2005 to 2013 in the 2013 rental rate contribution to our internal growth rate was 213 bips from 2014 to too.
Sales in 18 rental rate growth was 260, bips. So rental rate growth has actually improved over that five year supply period, not diminished the slowing down on our growth rate was related the comments on a previously in the call is that and when we're in the high growth rate of acquisitions in M&A, We had about 100 910 basis.
Points of annual improvement in terms of occupancy growth from others that we were assimilating in and also from the benefits of scale as we were growing during those years and so the pricing power. The portfolio has actually increased over the five years that you're referencing again from the 210 basis point average.
Hundred 60, the shadow marking its hard to you know certainly you gotta look market by market to be able to offer specificity, but when you look at the larger global trends the mom and pop properties are the ones that are being candidly redevelopment redevelop and pushed out of the market and the typically those are absentee landlord.
Products that are lower quality gold offer a level of service and their pricing power has been diminished as you look at the higher quality new product coming online.
Certainly the example that we gave in Austin, where you have the most mature development that has taken place.
As I mentioned earlier on the call 2029 more students are living in the purpose built specific dynein design, new product, there's been no enrollment growth. So every bit of that migration has been from the shadow market that you're referencing.
So that is not something that we believe has been a driver to drawing down growth rate at all that continues to be the fleeing of that product the attractiveness to the growing occupancy in pricing power that we have had over the last five years.
Okay, but taking a step back from a forecasting basis, when we talk about new supply going on 20%.
Supply has been coming down on purpose built for awhile.
Candidly, you've missed full year and I'll address guidance five elas seven years. Despite these positive trends youre seeing so.
Should we be put in a lot of lot of confidence on the variable that purpose built supplies coming down 20% next year what are we missing.
Yes, well. The fact, you've had 14 straight years of same store NOI growth is what I would say is the first point that you're missing in the stability of cash flows while they are certainly maybe Mrs and there when you look at the lack of volatility in the range of those items.
It continues to be still when our perspective this the best risks the risk adjusted.
Real estate investment you can make over the long term.
Okay. Thank you.
Thank you.
Our next question is a follow up.
Of Citi. Please go ahead.
Hey, it's Michael Bilerman with Nick.
Bill or Daniel just a question about sort of asset sale process and.
Moving the route of doing a JV relative.
Now selling assets outright.
And if I remember last year's execution I think it started down the road of outright sales and then more than two doing the joint venture.
Just talk us through sort of what changed in this process. How you think about JV versus outright sales holding on to stakes in assets and getting fees versus selling the assets outright.
Yes, Michael this is Daniel.
Last year was a similar process to this year in that anytime we're looking at doing capital recycling.
We will run a dual track process. So at the same time, we're talking with potential joint venture partners about a portfolio that we would joint venture with them or or just.
Straight dispositions will take both to market, we want to make sure that we're looking at all options and we're using the best cost of capital in that that analysis is different for a joint venture portfolio, where the idea is to maintain and interest in those assets because we like the in Hawaii long term in July growth profile.
Those properties and one that want to continue to have an investment in them, where when we're selling out right. We may think that the longer term in Hawaii growth profile of those assets is not as good in our eyes, and so comparing that to the valuations that we're seeing on the different options last year, we elected to execute on both.
Because we were announcing or I would say that was in 2017. When we started the process. We are announcing the the joint venture or the the Disney transaction.
And so had the additional capital needs.
That we thought it made sense to go ahead and execute on both transactions. This year, we ran dual process again.
When we looked at it we thought the straight dispositions on the assets that we were looking at with buyers were what we've made the most sense given the long term in a wide growth profile forecast, we had to those properties and so we elected to execute on those.
You know part of the decision process is the fact that on a joint venture you are able to mitigate a little bit of the dilution of the capital recycling program. Because you are getting management fees and asset management fees that help on that scale side.
So we have a great relationship with all the onto we have the Austin portfolio with they want to do more transactions with us and we will continue to analyze portfolios with them.
And look to execute on on transactions in the future.
Well I guess, how should we think about the pool of assets you took to market in terms of size as well you have some from cells on how the process change because you're obviously generating.
More proceeds and you thought originally.
But if you're going to stick with the same sort of 40, 555% structure.
Which has led to a JV likely incorporating a greater.
Asset value or more assets in that versus selling assets out right am I reading that correctly.
I don't think that the size was a real real influence of it we were certainly looking at options with our joint venture partner that were four portfolios that would have produced even more proceeds to than the 90 to 180 million that we guide to for this year. It just so happens on the assets that we picked to take to market. This year.
That the total valuation of those was up towards at 250 million. So I don't know nothing really to read into it more just what we ended the picking with the with the the buyers.
And how should we think about what's remaining in the portfolio that would be sort of below targeted average or be viewed as non core my sense was.
In the prior years, you had really cold.
The bottom part of the portfolio.
As we think about future sales and going down this road of selling.
Stuff that you'd want to hold and interest in like how much more of the portfolios. It.
15, 20%.
Or something.
And this this this is bill Michael the we've talked about on an ongoing basis Theres always the the bottom 2% to 4% of your portfolio, where you believe you have slowing growth trends or potentially based on individual market conditions.
And allied growth trends that could be moving in opposite direction and so we continue every year to do a full assessment, a three year and a five year.
Oh I projection of every asset in the portfolio, we always look at that bottom.
They can be based on individual asset or dynamic changes in market conditions that drive when we think timing is appropriate for the most part when you look at the quality of the portfolio. The fine tuning has all been completed as it relates to the proximity to the campus and the true transformation of the portfolio that was.
Prejean, making those larger M&A deals, where we have the most part eliminated all drive properties and so now is just fine tuning the NOI, calling off the bottom and reinvesting that at the higher yield growth.
My second question, just on sort of leasing strategy between new leases and renewals, obviously being the student housing business was a very targeted.
Tenant base being the students some of the students graduate and therefore, not able to renew their leases, but you do have a good base of students during their college years that.
Review can you talk about sort of the strategy that you are employing on a renewal basis, where that renewal percentage is and how high you can try that overtime.
And this is something that you literally look at market by market, an asset by asset and that and while we certainly appreciate all of our existing tenants in view them as as the the person that we would love to continue on with US next year, we don't want to do it at a discount to market. If we don't have to add.
So in our strongest assets in our strongest markets, our renewal policy will be that everybody renews at market.
If we are in a market, where we believe that new supply may be an impact or there is a softness then we'll look at a preferred pricing structure for our renewal resident typically it's only a five to 10 dollar discount to the new market rates that we establish one of our main market messages, it's expensive to move and it's a great.
Inconvenience to move and so while again, we love our current residents and we always want to do right by them, we will price according to market conditions as to whether or not there should be any discounts.
I would say across the portfolio typically you'll see a five to 10 dollar renewal pricing differentiation between 25% to 40% of the portfolio with the remainder typically being at market rates.
What's your cost.
Yeah, I assume you're going to have to put some.
Capex into a term so from a just our return on but yet capital perspective aren't you better off renewing at a slight discount to market than having to repaying re carpet redo.
What I assume the students are very good in their apartment for taking gas care of everything.
Right right right now our renewal ratio this year's about 40%, which is excellent 39.6, historically always give a long term average at about 35, and certainly you do have the marketing costs given what we do these days is more of the social media and the what I'll say, a shotgun type marketing hit the masters.
The market, whether you're renewing 75% of Europe , or whether you're open market leasing 70 per cent of your property or 60% of your prop there's not really a direct variable in the marketing costs as it relates to the turn cost. Obviously there is some savings related to that retention now it's not ish straight hundred percent because.
As part of what we do in our businesses partial turns and you may have to students in a unit graduating in moving out into staying and you still have to turn the kitchen and living area or the bedroom area and as spruce up and clean so it's not a dollar for dollar.
Although and will also the I think I'll point out when you look at that 40%.
Renewal ratio.
In our off campus apartment products, which still make up 75% of the overall portfolio. When you factor and typically the warehousing sophomores juniors and seniors in about a third of those are graduating institution that 40% renewal was getting pretty darn close to your potential market of renewal and so it's.
Pretty darn high and we feel as though we are capturing at the appropriate levels and again its market by market and asset by asset whether we attempt to do that in any type of discount to encourage that renewal versus thinking we can push to open market.
Okay, Great that's helpful color Bill.
Actually the time.
Thank you.
This concludes my question and answer session I would like to turn the conference back over to Bill Bayless for any closing remarks.
We'd like to thank you all for taking the time to chat with us as we closed out the the lease up for this year and were able to refine our guidance. We look forward to seeing you all at the Navy Conference next month.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.