Q2 2019 Earnings Call
To the American campus communities 2019 second quarter earnings conference call and webcast.
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I would now to turn the conference call over to Mr., Ryan Dennison Senior Vice President of capital markets and Investor Relations.
Mr. Dennis it the floor is yours Sir.
Thank you.
Good morning, and thank you for joining the American campus communities 2019 second 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 website in the Investor Relations section you will find an earnings materials package, which includes both the press release and the 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 of 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 fact may be deemed forward looking statements within the meaning of section 27, a of the Securities Act of 933 and section 20 Onee of the Securities Exchange Act of 1934 as amended by the private Securities Litigation Reform Act 90 95.
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 advise or update any forward looking statements to reflect events or circumstances. After the date of this release.
Having said that I'd now like to introduce the members of senior management, joining us for the call.
Bill Bayless, Chief Executive Officer.
Jim Hockey President.
Jennifer Beese, Chief operating Officer, William Talbot, Chief Investment Officer, Daniel Perry, Chief Financial Officer, and Kim Buss Chief Accounting Officer.
With that I will turn the call over to bill for his opening remarks.
Thank you Ryan.
Good morning, and thank all of you for joining us to discuss our second quarter 2019 financial and operating results.
As you saw in last nights release.
It was another strong quarter for the company with 8% earnings per share growth over the same quarter prior year.
Let me provide a high level overview of what the team will cover today.
Our operational financial results slightly exceeded our internal expectations with solid same store NOI growth of 3.5% over the same quarter of the prior year.
We're pleased with our core operating performance year to date, and we remain focused on several important operational initiatives in front of us.
Including executing through the important final stages of our fall lease up.
Administering our annual turn Makeready process and ultimately in welcoming over 133000 students who will move into an owned or managed American campus community. During the months of August and September .
Pre leasing for fall continues to be on track within our stated guidance range and we're especially pleased with the year one stabilization of our 2019 development pipeline.
Also we will provide an initial outlook for the fall 2020, new supply, which is projected to decrease both on a national level and within our own markets.
In addition, we continue to see a vibrant P. Three environment fostering both ace and third party development opportunities.
We also see significant continued global institutional investment interest, giving us a high degree of confidence in our ability to execute on the modest 100 to 150 million needed annually to fund our growth and execute on our highly accretive development pipeline, while minimizing dilution to earnings with that I'll turn it over to Jennifer to get Us started.
Thanks, Bill as Bill mentioned, our second quarter 2019 same store operational results slightly exceeded our budgeted in July for the quarter.
As seen on page five of the supplemental quarterly same store property in NOI increased by 3.5% with strong revenue growth of 3.2%.
We were pleased with the revenue results for the quarter as we saw good summer leasing success at our apartment communities as well as solid levels of summer camps in conferences at our Rosenthal properties.
Same store expenses for the quarter came in at 2.9% with double digit growth in repairs and maintenance category, which was which was in line with our expectations as we communicated on our Q1 call. We had a tough expense comp in this category from one time items that benefited the prior year's quarter.
Excluding those one time items. This category would have reflected expense savings of approximately 2% for the quarter.
Utilities expense came in slightly below plan.
As the category continues to benefit from renegotiated cable the internet agreements as well as favorable electricity cost due to recently executed energy contracts and lower usage from our Elie de installs.
Marketing expenses, one of our smallest categories from a not nominal dollar standpoint had an elevated expense growth. This quarter, we expect to finish the year at close to 10% growth in this category as we ramp up our digital and social marketing efforts as well as our University sports marketing activities.
Well, we continue to explore eliminating some of the more traditional marketing efforts.
Turning to our portfolios leasing activity our projection for openings same store rental revenue growth is trending within our guidance range as always the last five to 10 weeks of the leasing season is the most critical.
And as of today, we would estimate a final leasing result that is near or slightly below the midpoint of our guidance. We also continue to be pleased with the lease up progress for fall 2019 developments with this group of properties currently pre leased at 96% achieving first your stabilization at her anticipated yield.
As always we want to thank both our field and corporate teams, who remain focused on completing our lease up managing your annual turn cycle No show process and preparing our properties for a move in and welcoming each resident to their new home.
I will now turn the call over to William to discuss our investment activity.
Thanks, Jennifer turning first to and development. We are completing construction on our 2019 pipeline of developments in Presales, which totaled five projects approximately 3150 beds and $404 million in development cost and look forward to opening the projects in the fall developments are currently on time and on budget and will fully stabilized at opening.
Yields within our anticipated range, we expect to close on the two presale developments during the third quarter.
With regards to our on campus partnerships. We are very excited announce that we closed and commence construction in July on our third party on campus development project with the University of California, Riverside, marking our seventh successful closing within the University of California system.
The 1500 bed apartment project is our second project as part of the Multiphase Award anticipated to ultimately deliver up to 6000 beds on campus.
The project is targeting a full 2021 opening in HCC will manage the community upon completion.
With the first two projects HCC is anticipated to earn a $11.7 million and development fees and $1 million in annual ongoing management fees.
Overall, we continue to track a vibrant and expanding pipeline of on campus pithree opportunities with colleges and universities continuing to turn to the private sector to address their housing needs.
Finally, turning to new supply for the 20 2021 academic year Realpage Axiometrics is tracking 30000 beds currently under construction nationally with potential additional 12000 beds planned, but not yet under construction.
Based on how many projects ultimately start construction for 2020 delivery.
New supply could range from 30000 to 42000 beds down from a total of 48000 beds delivering nationally this fall representing a decline of 13% to 38% in new supply nationally that has tracked by realpage.
Within HCC 68 own markets, we're tracking 21000 beds currently under construction for 2020 with a potential additional 1100 beds planned, but not yet under construction.
Based on how many projects hopefully start construction for 2020 delivery new supply could range from 21000 to 22000 beds down from a total of 29200 beds delivering this fall in those markets, representing a decline of 24% to 28% and new supply.
We will update the market respect to these potential deliveries on our third quarter call.
I'll now turn it over to Daniel to discuss our financial results for the quarter.
Thanks William.
Last night, we reported the company's financial results for the second quarter of 2019, which at 56 cents of AFFO M. per fully diluted share grew 7.7% over the second quarter of 2018.
As Jenniffer discussed overall, this was slightly better than our expectations.
Primarily due to property operations as we saw higher than expected same store revenue, resulting from outperformance in Backfilling short term leases this year and hire some summer camp in conference business at our residence Hall properties.
We also continued to see some outperformance in utilities from our asset management initiatives.
As you heard from Bill we are pleased with the outperformance we have achieved in the quarter. So far this year.
But we're not making any updates to our 2019 earnings guidance at this time as many of the traditional risk to earnings still exist in the completion of the fall 2019 lease up.
Continued operating expense management throughout the year and the successful closing still to occur on one of the third party development projects included in the midpoint of guidance.
Further as implied by the 1.5% to 3.4% same store NOI growth and growth guidance, we are maintaining for the year.
We anticipate the remaining quarters of the year to experience less same store NOI growth than the 4.3% achieved year to date.
This is due to the slower reis seasonal revenue growth in the summer months, and the 1.5% to 3% targeted rental revenue growth from the fall 2019 lease up.
As well as tougher operating expense comps in the remaining quarters.
Also as we talked about on the last call, we will be transitioning to an outsourced solution for online resident payments starting this fall.
As a reminder, historically these payments were initiated through our portal, which required us to record a portion of the online payment as other income with an offsetting expense for the payment to the processor.
With a fully outsourced online payment solution, both the required revenue and expense entries will be eliminated.
Well this will be neutral to an ally during the initial 12 months of implementation comparable quarters quarterly same store revenue and expense increases will be reduced by 700 to $800000 and revenue growth rates will be reduced by approximately 40 basis points and expense growth rates by 80 basis points.
Again this change does not impact our in Hawaii and is already reflected in our guidance figures for 2019.
But we will continue to remind you of the temporary effect. It will have on same store revenue and expense growth figures later this year and into the first three quarters of 2020.
With that being said you can refer to pages 16, and 17 of the earnings supplemental to get complete details on each of the components of our 2019 guidance.
As usual, we will update our 2019 gone guidance on the third quarter call for the final results of our lease up and our expectations for the remainder of the year.
Moving to capital structure as of June Thirtyth, the Companys debt to enterprise value was 33.7% debt to total asset value was 38.3% and the net debt to run rate EBITDA was 6.7 times.
During the quarter, we took advantage of the attractive conditions in the markets and completed a $400 million bond offering to term out a portion of the balance on our revolving credit facility.
As you will see in our capital allocation and long term funding plan on page S. 15, we have not made any significant changes to the growth in funding plan.
We continue to expect to meet our capital needs for the remainder of 2019, and then for 2020 and beyond through a funding mix of cash available for reinvestment additional debt and approximately $100 million to $150 million per year, and disposition joint venture and or equity capital.
This will allow the company to maintain a debt to total asset ratio in the mid Thirtys and a net debt to EBITDA ratio and the high fives to low sixes.
Consistent with our stated strategy of trying not trying to better match time capital raising with the delivery of our development pipeline each year to create less disruption in earnings growth.
Our current 2019 guidance includes approximately $100 million to $190 million in proceeds from dispositions and or the sale of a minority joint venture interest in existing properties. During the second half of this year.
With that I will turn it back to the operator to start the question and answer portion of the call.
Thank you Sir.
We will now begin the question and answer session.
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At this time, we will just pause momentarily to assemble roster.
That's the first question, we have will come from Austin Wurschmidt of Keybanc capital markets. Please go ahead.
Hi, Good morning, everybody I'm, Joe you mentioned in your prepared remarks that supply or start I mean that pre leasing is tracking below or at the midpoint of your expectations. At this point do you think supplies, having a greater impact than you originally projected and what markets are you seeing the most softness relative to.
Your initial expectations.
Sure and if you take Jennifers prepared remarks, where you talked about at this moment current trending has us near or just slightly below the midpoint.
With five to 10 weeks left in the leasing season, our projection models. We have best case scenarios that have a still performing above the mid point and we have worst case scenarios that have is performing slightly below the mid point and so we take the at this moment in time in the most recent training were just slightly below the midpoint in those projections and so I would say largely relatively on track with expectation on leasing.
When you look at the the markets Austin is a market we continue to focus on in terms of the impacts of new supply.
Taking Austin out of the equation the other high supply markets, we talked about earlier in the year, we've continued to do well in.
In in San Marcus and some of the others and for the most regard to date leasing is on tracking you know we always talk about this time of year. It's the power of the ones in the twos with five to 10 weeks left in the leasing season, the things that we're looking at as we close out that have the impact of the can be significant swing positive negative or the late market demand in the next five to 10 weeks as compared to the historical trend our execution on Backfilling late Cancelations or what you saw in our main numbers are backfilling efforts, there were significantly better than in years past and you saw about a 20% improvement from the historical diminishment in Backfilling largely due to Lams Nexgen initiatives also the no show management and late season leasing opportunities and so as Jennifer said the guidance range is still in play we have opportunities to still exceed the midpoint and to be slightly below the midpoint based upon those.
Those variables that I just went through.
So again, just like market, you mentioned UTI Austin, I mean tennis Allstates when I think you've mentioned in the past, Texas State has come up and in the past.
As well as Tallahassee any of those markets.
That have continued to see softness or that are underperforming a little access point.
Yes, you can us all we saw softness about eight weeks ago and the team has actually done incredible there. We've had a very strong lease up finishing out through the last weeks I've given up a little bit on rape have done very well, they're also San Marcus is tracking to not be a diminishment on this year's lease up in terms of its revenue growth and so overall, we've done very well in Tallahassee is I mentioned.
The team is just absolutely knocked the cover off the ball in terms of our.
Improvement in that market and so in the new supply markets. Austin is the only one that we continue to track cautiously.
Appreciate that and then just one more for me appreciate the early detail on the supply figures.
Just curious looking back what what probability.
Would you place on on those numbers being kind of good final supply figures for 2020, and then can you point to some markets next year, where you see the heaviest level of deliveries.
Yeah, and I got to tell you. This is the positive headline of this call and that is the the new supply dynamics moving into 2020.
As William talked about in our range, where we see a decrease of 24% to 28% that 24% is based upon projects, where there has actually been a shovel in the ground and they are underway for construction and the 28% as 1100 other potential beds that are planned, but not yet a shovel in the ground and we have to see whether or not they truly get underway to be delivered next year and so those numbers are fairly solid and just about any way you slice and dice. The data. It is a positive story in terms of the new supply in our portfolio.
Total new supply as a percent of enrollment of portfolio is only a 1% which is the lowest number and about six years.
When you look at the impact of an NOI at our largest top 10 markets, it's down to 14% versus 18% this year.
And with only five of the top 10 markets, having new supply and so overall and again I would make the statement that in Axiometrics number nationally Realpage Axiometrics was down 13% that decreases in no way due to a lack of interest or desire to do development in the space, but rather it is the natural barriers to entry that exist in the markets that makes new development difficult and new supply difficult and so those numbers are very.
Encouraging and also consistent with the trend that we have seen over the last two to three years. When you look at the markets, where we see repeating supply in 2020, where it also occurred in 2019 those markets, our Champagne Austin, Auburn and San Marcus.
And that we've done well in those markets again Austin is one were watching this you'll probably continue to watch for the next couple of years, given the potential supply horizon, there Champagne, which had been a challenging market. A couple of years ago. This year has gone extremely well for us we're already full and had significant revenue growth one of our better ones about 6%. So we feel we're well positioned there and also with our current price point in the market compared to new supply and so on the new supply front overall it is a very positive picture in the fundamentals moving into 2020, both nationally for the industry and specifically to our portfolio.
Great I appreciate the thoughts thanks Bill.
Thanks.
Nick Joseph.
Thanks, maybe just staying on same store revenue the made to the midpoint of guidance assumes a deceleration in the back half of the year to 1.9%.
Is that 1.9% a good run rate.
2020 as well.
2.3% growth for academic.
20 lease up the 40 basis point drag from the outsourcing of the online rights and payment processing that you mentioned.
Yes, Nick this is Daniel Thats right with the just from an optical standpoint, you'll see that that impact of the portal fee elimination.
On revenue with an offsetting reduction in expense is about 40 bips on the revenue growth statistics in about 80 Bips on.
On the expense side.
Obviously as we've talked about going into this year the variable to the total revenues total same store revenue growth.
Can be other income and what we're able to.
Project there in terms of any growth that we might see in other income and whether that's a positive or negative negative contributor to overall revenue growth.
We will give guidance on that on our fourth quarter call but.
In terms of rental revenue growth.
Taking 40 bips off of that two and a quarter would be.
Midpoint.
That's where we end up would be the right assumption.
Okay. Thanks, and then just on development.
Albert development now looks like a deliberate in August versus July previously located.
A year and that is there any impact for being a little bit later than expected on final numbers versus.
You assume to guide initially.
No not at all and Thats, just candidly in administer you'll clean up in terms of when we actually expect revenue generation to occur.
We have a handful of July move ins, but you all should be modeling that property and it's a 100% preleased everything is going great. Their developments on time on budget and fully leased we will stabilize in year, one as anticipated, but just from a modeling perspective revenue should begin consistent with the commencement of the academic year in August we just have a handful of July early movements.
Great. Thank you.
And next we have Alexander Goldfarb of Sandler O'neill.
Hey, good morning, good morning down there.
Just a few questions.
First.
On the pre leasing Bill and you guys have talked about this on prior calls based on various industry conferences, but yes.
Overall the trends for this year in general are pretty favorable and I understand that the private companies have the benefit of being private so they don't have ft, because they don't have date.
For you guys.
You are still sort of within the range, you're a touch below but obviously.
Yes, it sounds a little bit different from the from the narrative that we've been hearing over the past few months. So maybe you can just provide a little bit more color and maybe it's just perspective on sort of.
You guys running your portfolio at 96 97 versus the private guys running.
95, plus and maybe that's where the delta is but it does come as little bit of a surprise that you guys are a touch below the mid point given the commentary to date.
Yes, and Alex I would say, it's actually consistent from our commentary in that again, we still have projections above the range and below the range and would say the right now based on this moment projection with five to 10 weeks left were just slightly below the midpoint and you hit on exactly the case in point as to what the differentiation is between us and the private company competitors and that we typically operate at an occupancy.
Improvement over our competitive base between they're typically at 95 or slightly below and we're typically at 97 and slightly above and so when you look at the positive tailwinds in the fundamentals that the sector does have at this moment in time other folks have opportunity to start to close the gap between their own portfolios and our best in class portfolio from an oxforty perspective, whereas this year our growth drivers a little more limited in that the occupancy provides less upside for us, it's largely driven by the rate.
And so I don't think Theres any change whatsoever in terms of the industry fundamentals and the positive messaging that you have heard.
At the past conferences, and we have a good solid comp up the occupancy last fall coming in at the 97 that were working off of the does doesn't give us quite as much upside as some of the other privates that are out there.
Okay, and then a question for DP. If you look at guidance and you look at where you guys had been trending you've been you've been having a good year. So far it seems like you know.
Internally you guys have been buttoning up all the issues you are better at the dropouts in the Backfills.
And yet you know it would seem like your number should be towards the high end. So maybe you can just go through the variables because obviously in your guidance. Originally you knew that you know the back half would be a little tougher you knew that you have to wait for that Berkeley deal to come in you have the timing of the JV or or outright sales like those items Havent really changed. So maybe you could just talk about what would prevent you from being towards the high end based on where you are in that you already know how your preleasing is coming in and certainly your preleasing is not at the low end, which again suggests that it's pretty much on track. So what are the things that would prevent you from getting towards the high end of earnings guidance.
Sure Alex Let me go through that and two components first in terms of in Hawaii, and then in terms of AFFO overall.
When you look at the first.
Two quarters of the year.
Produced 4.3% same store NOI growth and our midpoint is 2.5%. So certainly understand just trying to everybody trying to continue to get a better feel for how the second half of the year is expected to play out.
Our midpoint of rental revenue growth for the fall is two in a quarter.
If you just think about normal inflationary expense growth of 3%.
That would get you down into a range of underlying growth in the mid to low ones that would combine with that puts you closer to your same store NOI growth midpoint.
We talked a little bit about tough comps on the expense side and you know I mean, even though.
We're talking about 3% and that's not necessarily.
Significantly high operating expense growth.
You still have to consider that we've been able to drive below that.
When you look at 2000.
18 second half of the year, excluding repairs and maintenance, where you have incident response costs for hurricanes and things like that.
And property taxes, the expense growth was 1.7% so had very low growth last year.
We saw in the second half of last year, a lot of the benefits of the energy efficiency initiatives that are helping us drive those savings and utilities and so you start to lap those deployments in the second half of this year and we start seeing less benefit from those.
So we only have about 30% of our property taxes in and settled at this point.
It's hard for us to anticipate fully where that'll all finish out we're still holding our four four little over 4% projection and property tax growth, but it is a variable than it once was.
Yes requires us to.
To maintain a range there.
And then we're just entering hurricane season, and that is something we can't control. We don't know what we will have in terms of incident response costs.
There this year.
Last year was a very light year.
And so if we have anything on the heavy side of the equation that would lead to greater growth in repairs and maintenance.
So that that's where we get to maintaining that that mid twos.
Same store NOI growth target for the rest of the year and then in terms of overall FFO.
We do still have a third party fee deal to close that's $1.8 million in fees for for 2019 at U.C. Berkley.
As you've heard US talk about there is a lawsuit between the city in the University with regards to the fees that they'll have to pay as part of their environmental approval process.
We want to see where that settles out it could impact the timing of commencement of that project.
We think that they will ultimately come to agreement, but we just don't know when that will occur.
We didnt expect that project to start until Q4, so there's still time for them to come to agreement, but again another variable in the AFFO equation that makes us want to just continue to see things develop as we move through the third quarter.
Okay. Thank you.
Thank you.
And next we have Samir khanal of Evercore ISI.
Good morning, guys.
I guess.
In the past you've talked about the ongoing efforts to control operating expenses thrash it asset management initiatives.
Just how much is left to do on that front as it as it relates to controllable expenses at this point.
I mean, you know.
As we just as I just discussed we deployed a lot of our leidy initiatives.
And also peak billing our usage reductions throughout the portfolio last year, we are still continuing to deploy some of those this year.
But a lot of that started in the second half of last year, and so you're seeing it occur.
In the first half of this year, we'll get a little bit of help from it but it starts to roll off as you as you get into the second half of this year.
We continue to explore.
Opportunities on the multi asset efficiencies that we've talked about where we have multiple properties in a market and we look at strategies from a marketing standpoint from a staffing standpoint.
From a maintenance standpoint that will allow us to to control expenses there.
And then of course, we've talked about on the marketing side that we are really doubling up right now in terms of our traditional marketing efforts that have driven our marketing expenses, historically and a much bigger move into social and digital marketing and as we really start to.
Good are are.
Our process and our strategy.
Oriented around that digital and social media marketing and we can eliminate more of the traditional marketing efforts that will allow some some improvements over the growth levels that we're seeing right now in marketing.
And then of course, we were always scrubbing the portfolio for opportunities on national purchasing agreements contracts with vendors that we can use our footprint to take advantage of and.
In other types of asset management initiatives. So.
We will continue to try to control expenses as much as we can.
You always have the uncontrollables of property taxes.
But on some of the things that others have seen whether be on payroll.
Increases across the country. We our approach there has been able to allow our has allowed us to keep those expenses in check and we expect that to continue as well.
Okay. That's it from me guys. Thank you.
Thank you.
Next we will have drew babin of Baird.
Hey, good morning.
Quick question good morning.
Question on or you could be Austin.
Last year I think in the West campus market you saw some of the higher end more amenitized better located product kind of generally result faster and your product out of the block.
Those type of assets, maybe took a little longer to kind of fill in.
And is that what you are seeing once again this year and is there anything you're doing.
I think last year some of the.
They could still in demand I think was kind of converted out kind of block or do something good that was maybe strategically being done there.
You just talk a little more in depth about how that's coming together and Oscar.
Yes, and Austin continues to be over the last five years in this year and candid looking into the next two to three.
One of the most prolific new supply market in the country and that is unique in Austin at the city of Austin, because theres such an overall housing affordability crisis.
Did the University overlay district, which is one of the few pedestrian submarkets near a major University in America that is actually encouraging and eliminated the barriers to entry related to high density development.
So all of the development you see taking place given that land cost and also construction pricing.
Each year of the new products tend to be the highest priced product price points in the market.
And.
You don't see this in all markets nationally this somewhat unique to Austin you continue to see the new highest priced products lease first.
And so we continued this year to see the new deliveries that are at the highest price point that are at a significant premium to our block Texan Jefferson 26 properties for 26 West properties continue to lease first and so that did continue this year as we look at new supply coming in in the future. There is absolutely going to come a point to where you have an overbuilt situation at the absolute highest price point in the market, which at some point you put some pricing.
Diminishing ability on on some of the second third generation two to three year old and new supply, but thats, probably going to occur and 2021 2022.
We continue to have a good price point.
The block property for example, you can still lease there as low as 399 per accommodation.
And so really are.
Product positioning in that case in point is to compete with the drive submarket on Riverside in offering accommodation in price points, where students can still walk to class.
Versus having to drive Interstate 35, but we do see the upper socioeconomic properties continue to lease very quickly, but that is candidly where the invest the long term investment risk is in the market is at that higher price point and so Austin is a market that even with the new supply. We always continue to do well from a year over year revenue growth perspective. This year continues to be a little tougher than usual.
But overall, we like our product positioning and that with our strategy to build for the masses not the classes the longer term installation.
The we have from new supply is the more affordable price point in the spread that does still exist with our products, especially in the apartment sector.
To the the new apartment supply coming in.
'cause Stillion and Callaway house tend not to be as impacted by the new supply, which off campus has continued to be all new apartment supply and so they operate somewhat independently of that.
And don't directly correlate to the apartment development.
Okay. That's helpful. And then just one more for me.
The overhead related to third party businesses, if you look at kind of what.
What is cost year to date versus the full year guidance looks like there is some uptick in the rest of the year I know, there's some expense or some payroll reimbursement dynamics in that number is that back end loaded where you're going to see higher revenues and higher expenses.
In those segments or are the third party kind of.
Overhead costs, increasing in the second half of the year.
Yes, Andrew we did see a little bit of benefit in the second quarter relative to our expectations in terms of how that the third party expense trending has played out.
We're reserving.
Our expectations there as we continue to pursue third party projects and a lot of those expenses are in that line item.
And so just depending on the activity throughout the rest of the year.
And the cost associated with that whether or not the savings that we have occurred we've we've seen there will.
Ultimately materialize or turn out to be a timing thing. We just are withholding expectations on that for the time being.
Okay.
That's all from me thank you.
Yes.
And next we have John Polaski of Green Street Advisors.
Thanks, Bill or Jennifer are circling back to fall is being slightly below the midpoint I guess everybody's got a different definition of slightly so are we talking 10 basis points are we talking 50 basis points.
Yes, and again I would say first of all what Jennifer said, we're trending near the mid point I would take near as above or below the midpoint and we talk slightly typically when we talk slightly we're talking zero to 30 Bips.
Okay. Just so we get a sense for the breadth of strength or weakness what how much of the portfolio is trending below the 1.5% low end.
And this is where what we always talk about that.
At the end of every lease up.
Rather than focusing on particular properties. It really comes down to the execution of what we refer to as the ones and twos.
And then we'll have our employee call every after every earnings call each quarter, we do in employee wide call and the focus of Tomorrows call was the execution on the four variables that I talked about in terms of.
The execution and Backfilling of like cancellations, a no show management.
And that when you when you look at our leasing projections, you typically have more than half the portfolio 80 properties.
Where you have vacancies that exist with candidly in our projections about 40 properties that have between one and 10 beds being vacant and when you are within one to 10 beds being vacant.
It really comes down to execution on your back filling a no show process that can have a meaningful 30 to 40 basis point different in terms of execution of filling in the places that you can and so really for us the key the key to performance in terms of finishing at the midpoint or above or below the mid point isn't looking at the one or two or five to 10 properties, where you have.
Double digit vacancies that you hope to excel, but it's really in the execution.
Each and every asset of those ones and twos.
And so thats the focus of the company and candidly and Alex asked his question previously where we have always outperformed our competition. The reason that we operated that 150 to 200 basis points better the competitors and what ultimately makes the difference in our final numbers as it relates to whether we're slightly above or slightly below the midpoint.
As in the execution of those 80 to 90 properties, where we can make those incremental differences, where you have the best opportunity to do just one or two better versus just focusing on the properties where you have.
More significant diminishment of your original projections.
No I understand it's an execution game.
Im talking extreme so at this point 10 weeks out how much of the portfolios trending below the low end not slightly below the midpoint below the 1.5% low end.
Yes, we're not going to give that statistic in terms of property by property in terms of again, it's a combination of the roll up.
Each and every year you have a handful of properties five to 10 to where you have somewhat you know said what I would say is material diminishment to your.
Midpoint projections that you have at the beginning of the year and you also have five agenda. It significantly outperform your midpoint projections, so tends to be a.
Fairly balanced pro and con to each of those categories.
Okay.
One longer term question for me I guess, what inning are we in on the portfolio transformation.
Is the current school list pretty steady state or.
Alright additional school exits on the horizon.
You know I would say were probably in the seventh inning stretch on the portfolio refinement. The my favorite statistic and this really gets into one Daniel was talking about the operational efficiencies I believe the portfolio today, while our growth over the company's history.
Has been largely 65% acquisition and M&A.
Because of our dispositions typically being properties that we bought in larger M&A portfolios that did not meet our investment criteria.
56% of the portfolio today consist of American campus program designed to develop communities.
And so it's a much higher quality base. When we believe we can put all of our expertise into design in the operations of properties, which then does translate into better operating costs better capital cost and the like.
When you look at the remaining portfolio and as Daniel talked about our capital needs in his script, our recycling of about $100 million to $150 million a year over the horizon over the next.
Through 2023, and we look to finding out of Disney and then we have always said historically that we're looking at 2.5% to 3% of our portfolio on a long term ongoing basis to continue to refine.
And you'll see that refinement continue certainly as you look at the evolution of market selection, we have more thoroughly defined over the last three to five years that our investment we prefer to be in power five conference in Carnegie. Our one institutions, we still do have a handful of markets left probably five to seven where we had done M&A transactions, where we ended up at schools that don't meet that criteria that over the long term, we would expect through our disposition to exit out and we would expect the large majority of our investment activity to take place in those more targeted power five conference and our one institutions and so again I would say at this point in time looking at the current portfolio.
Middle of a seventh maybe even top of the eight in that regard, but that will be over time.
And as we get you know I think the greatest opportunity for the company going forward over the long term horizon of three to 10 years.
His win.
All this global capital that has come into the space and is now in the new development stage in three years or so there is going to be a lot of good M&A acquisition opportunities for us that we intend to be positioned to continue to be the industry consolidator.
And as we get back to expanding our portfolio beyond just our own development, then thats going to foster different recycling opportunities on the long term.
Based on those initiatives.
So it's an ongoing process.
Understood. Thank you.
Again as a reminder, if you like to participate into those today. Please press Star then one of a touchtone phone again I will start running round to ask your question.
And the next question, we have will come from Sherli woo.
Good morning America. Please go ahead.
Hey, guys. Thanks for taking the question.
So.
Revenues came in high active with.
Celebration of same store revenue, which is slightly different than your usual deceleration from Q to Q.
How should we think about that contribution or from the short term lease.
And how should we expect that to flow into threeq.
Yes, one of the initiatives that we've talked about as part of our Nexgen initiatives is having better interact better corporate controls and oversight over what we refer to as current period leasing.
If you follow the company historically in the people that it always had come in for investor towards the scene lamps demonstration labs was originally designed as a future period leasing season for the next academic year, where we had all of our business intelligence and sophistication and what Nexgen has done is has evolved labs into.
Having a major impact and full purview into the current period leasing season, which is your December backfilling leases. Your summer Backfilling leases also something we refer to as a made a major initiative, where you undertake 12 month leases commencing in may versus doing a stub summer period, and then in August and so as the company has advanced its nexgen initiatives. This year you started to see improvement in both that December diminishment between Q4, and Q1 and you're seeing it again.
From Q1 to Q2, and so we would say that that is something that we have seen continued improvement as we continue to.
Add sophistication to our next Gen systems and something we hope over the next two to three years, we'll continue derive benefit and you see some of those historical trends and seasonality that may be better now the one thing that we do always point out, though and we started this point out about three or four years ago, a lot of the the new development does tend to be in the on campus Ace transactions in residence Hall style products and so from a seasonality perspective as those on campus assets tend to be more academic year, you may see a little bit of difference in the seasonality trend, but we're hoping to do better in terms of the year over year quarter to quarter diminishment from each quarter to the sequential.
Great that's good color.
Moving on to your marketing expenses, you mentioned that you're moving on to more social and digital.
Give us a little bit more color on what you're actually doing and maybe a little bit on the sports initiative you mentioned briefly.
Yes, and and this is something that for the.
When we survey very.
Sophisticated demographic in terms of the 18 to 22 year old student that is the power user of social media digital media and technology.
And so there has certainly been an evolution in our marketing program over the years in terms of you know you go back even five years ago. The largest expenses in our marketing programs were direct mailings in more traditional promotions on campus, where today those efforts are very much Facebook Instagram.
I am not equipped to sale all the ones that the our marketing team that is very much in touch and much younger than I am and understand these things.
Into our day to day interaction, the where you see the duplication between traditional marketing efforts in social and digital media really goes as the year progresses.
When you look at our most likely target markets early in the leasing season. It's the students who are living on campus. It's the students who were in the market and when you develop your social media strategy, it's much easier to implement that and know where those students are and what their behaviors are very sophisticated social and digital social media and digital marketing tools that we have as you get later in the leasing season and some of your target markets become students who are transfer students and first year incoming students that are not currently in the market the social and digital media becomes a little bit more complex and that's where we tend to still fall back on some of the more traditional direct mailings mailings to parents and also on camps direct interaction promotional activities through the.
The orientation programs and the like and so Thats, where when Daniel refers to we're still doing some of the double implementation you tend to see that later in the leasing season.
Having a little more of the cost impact versus the overage. The other area, where we continue to see and this goes hand in hand with our strategy of multi asset markets is that once we build scale in a market. We have found that our most effective marketing activity or through the University Athletic sports marketing programs and we also continue to refine those and so those are the three components of the evolution of our marketing strategies in the marketing spend and why you see a little bit of the uptick over last year's cost as we balance those initiatives out.
Great. Thanks for the color guys.
Yeah. It looks like we do have a question that thatll come from Derrick Johnson outdoors to bank.
Hey, everyone. Good morning, I'm, sorry, if I missed this but can you just give us an update on the targeted stabilized development yield you know I see you know today you are at six and a quarter to 6.8.
Last year in to Q, you guys were six in a quarter at the low end and 7%. So you know is the low end save here and any just update you know given all the info, we've heard about rising costs and labor shortage and stuff like that and I apologize if I missed this thank you.
Yes, Hey, this is William Talbot as we stated stated in the prepared remarks, we do anticipate for the 19 deliveries to deliver within that stated range of six in the quarter to six.
<unk>, 0.8% they are already fully pre leased at 96%.
So yes, our targets are still very much in line with as we have previously stated and I would comment this continues to be a long into the new supply outlook that we talked about which is very positive on this call.
The real investment thesis for American campus in the sector today.
Is the spread between current market cap rates being at the four to four and a quarter for class a pedestrian to the development yields of the six in the quarter North that we're producing and that you know it's amazing from our perspective that 15 years after going public we have the widest spread we have ever had between our development investment opportunities and current market cap rates.
And Mr. Johnston any further question Sir.
That will do thank you very much yes, sir.
Oh looks like a we're showing no further questions. At this time, we will go ahead and conclude our question and answer session.
I would like to turn the conference call back over to Mr. Bolis CEO for any closing remarks Sir.
Yes, we'd like to thank all of you for joining us today as we talked about and we want to thank the team. We're very pleased with our performance year to date with both our financial and operational results at this point in time through Q2 slightly exceeding our expectations. We are pleased with our pre leasing it as Jennifer mentioned.
Do you expect to be near the mid point, we still have the opportunity to be above or below.
Also we want to talk about and close we continue to see a vibrant pre pthree market as William discussed and a really positive outlook as it relates to 2020 supply and with that we'd like to thank the American campus team members and thank them in advance.
For the hard work that they're going to do to to finish out this lease up and create value for you. Thank you very much.
And we thank you Sir and again for the rest of management team also for your time today again. The conference call is now concluded at this time remote disconnect. Your lines. Thank you take care and have a great day everyone.