Q3 2021 American Campus Communities Inc Earnings Call
Good morning, ladies and gentlemen, thank you for standing by welcome to the American campus communities incorporated 2021 third quarter earnings Conference call.
Today's call is being recorded.
At this time all participants are in a listen only mode.
Following the presentation, we will conduct a question and answer session and instructions will be provided at that time for you to queue up for questions.
I would like to remind everyone that this conference is being recorded I would now like to turn the conference over to Ryan Dennison Senior Vice President of capital markets and Investor Relations for American campus communities. Please go ahead.
Okay.
Thank you good morning, and thank you for joining the American campus communities 2021 third quarter Conference call.
Press release was furnished on form 8-K to provide access to the widest possible audience.
In the release the company has reconciled the non-GAAP financial measures to those directly comparable GAAP measures in accordance with Reg G requirements.
Also posted on the company website in the Investor Relations section you will find an earnings materials package, which includes both the press release and assembled supplemental financial package.
We are hosting a live webcast for today's call, which you can access on the website with the replay available for one month, our supplemental analyst package and our webcast presentation are one and the same webcast slides may be advanced by you to facilitate following along.
Management will be making forward looking statements today as referenced in the disclosure in the press release in the supplemental financial package and in SEC filings.
Management would like to inform you that certain statements made during this conference call, which are not historical fact may be deemed forward looking statements within the meaning of section 27, a of the securities acts of 1933 and section 21 E of the Securities and Exchange Act from 19 to 34.
And as amended by the private Securities Litigation Reform Act of 1995, although the company believes the expectations reflected in any forward looking statement are based on reasonable assumptions. They are subject to economic risks and uncertainties. The company can provide no assurance that its expectations will be achieved and actual results may vary.
Factors and risks that could cause actual results to differ materially from expectations are detailed in the press release and from time to time in the Companys periodic filings with the SEC. The company undertakes no obligation to advise or update any forward looking statements to reflect events or circumstances. After the date of this release.
He said that our Chief Executive Officer, Bill Bayless will be we'll be providing our opening comments today. He's joined by the following members of senior management for the call Jennifer Beese, President and Chief Operating Officer, William Talbot, Chief Investment Officer, Daniel Perry, Chief Financial Officer, Kim Voss, Chief Accounting Officer, and Brian winger.
<unk> General counsel with that I will now turn the call over to Bill for his remarks Bill.
Thank you Ryan good morning, and thank all of you for joining us as we discuss our 2021 Q3 results and the current operating environment.
As you May recall on our Q2 call in July we were still somewhat apprehensive as we adjust surpassed last year's COVID-19 impacted leasing velocity in the emerging Delta variant was creating uncertainty around University. These plans to move forward with in person classes and a return of campus social activities.
At that time based on historical leasing velocity data, we continue to believe that the industry's COVID-19 recovery would not fully materialize until the fall of 2022.
Today, just three months later, we are extremely pleased to report that students all across the nation continue to block back to their college towns and leased well into the months of August and September and University has continued to press forward with their plans to return to in person activities, including <unk>.
Attendance at college football stadiums across America.
The result.
<unk> housing industry has emerged from the Covid pandemic and the fall of 2021 with its investment thesis fully intact and with the sector, having tailwind the like of which we haven't seen in many years.
As outlined in our interim update earlier. This month, we're pleased that the execution of our fall 'twenty one lease up produced an opening fall occupancy of 95, 8% for our total portfolio and rental rate growth of 330 to 380 basis points for our 2021.
In 2022 same store property grouping respectively.
All of these metrics are above the assumptions in the high end of our prior lease up guidance.
In addition to the extreme to the extremely successful lease up our operational and financial results also exceeded our expectations in the third quarter with ancillary income and operating expenses, beating our forecast.
In addition, the ongoing development and commencement of operations at Flamingo crossing village our community serving the Disney College program are also going quite well.
During the quarter, we delivered the fifth phase of development and have now achieved 85% occupancy in line with our expectations for this fall, notably since the DCP program recommenced only five months ago, we have already executed leases with and moved in more than 4500.
Residents demonstrating the continued vibrant demand for the Disney College program.
Our lease up results and recent operational outperformance allowed us to increase the midpoint of our financial guidance by 4% to $2 eight per share which is above the high end of our prior guidance range.
Based on the progress we've made this year total property NOI return to pre pandemic levels. This quarter, a full year earlier than we previously anticipated.
And more impressively rental revenue is expected to exceed pre pandemic levels in the fourth quarter for our same store properties from 2019.
We now expect to grow earnings by 3% to 7% over 2020.
All in all the company's recovery in financial performance. This year has certainly exceeded our expectations as cumulatively, we've exceeded our original guidance for the first three quarters of the year by <unk> 12 per share or almost 10% as students continue to return to college campuses throughout the year.
<unk>.
I'd like to now turn to the fundamentals of our industry is.
As reported by owners and operators attending the N M. A C student housing conference earlier, this month occupancy and supply demand fundamentals of the sector are strong and again the industry is experiencing some of the most substantial tailwind we've seen in many years.
The broader comparable sector represented by the real page axial metrics 175 return to pre pandemic occupancy levels of approximately 94%.
While also producing attractive rent growth of two 5%.
We saw robust admission applications at four year public and private universities, we serve and target.
The strength in admission applications appear ship directly led to the highest level of first year student enrollment growth we've seen in.
In the 48 of 68 University markets for which we are able to collect first year enrollment data. There was an increase of seven 4% over fall 2020, and six 4% above pre pandemic fall 2019.
For perspective for four year public institutions and the prior 30 year period average first year enrollment growth was approximately 2%.
This level of significant growth in first year students occurring this year indicates the emerging post COVID-19 era demand from students wanting to attend high quality universities in person and should provide significant recurring housing demand in the years to come.
The record number of first year students the reinstatement of on campus housing policies and the resumption of in person campus activities will once again allow us to implement our in person and exclusive sports marketing program activities in the 2022 leasing season.
Historically these programs have been an integral part of our early leasing season velocity outperformance and our final fall occupancy outperformance as compared to our peers.
The significant increase in first year students led to the highest level of total enrollment growth in recent years up over one 5% versus academic year 2020, and pre pandemic academic year 2019.
In 62, or 60 of the 68 ACC markets for which we've been able to collect total enrollment data. This represents the addition of over 30000 students.
Dr. <unk> also include a reduction in national New supply continuing at least through the 2022 2023 academic year.
This includes a projected decrease of over 25% in ACC markets and represents the lowest level of new supply we have seen in over a decade.
In total we are tracking new supply of only 15500 beds with only one third of our NOI being produced and market's seeing new supply. This.
This compares to 55% to 67% of NOI being produced in new supply markets over the last three years.
We're also seeing significant demand from universities seeking to modernize their on campus housing.
During the quarter, we were awarded New third party developments at Emory University, and the University of Texas.
And this month, we started a new third party development on the campus of Princeton University.
In all we're tracking more than 60 universities that are evaluating privatize residential projects are continuing increase compared to pre pandemic levels.
And summing it up we're extremely pleased with the progress that we and the sector have made in managing through the global pandemic.
Finally, with our sectors resiliency and investment thesis fully intact as we emerge from Covid.
Institutional capital is once again, focusing on the sector with several notable transactions recently occurring in this space.
We are highly confident in our ability to fund our business through strategic capital recycling and free cash flow generation, while producing attractive earnings growth for our shareholders.
With the sectors Covid recovery now largely complete we believe the current transaction environment affords us the opportunity to Accretively fund recent and ongoing development activity and further strengthen our balance sheet in 2022.
As such we intend to accelerate 200 million to $400 million of disposition activity, which fully satisfies our projected funding needs.
Including the strategic capital recycling, we believe that <unk> per share growth in the range of 12% to 15% is achievable in 2022.
Based on the positive fundamentals in the student housing industry and the accretive contribution from our ongoing development program. We are excited about the prospects for continued growth beyond 2022.
We believe we are now well positioned to produce long term earnings growth.
Net asset value creation and superior returns for our investors in the years ahead.
With that I'd like to turn it back to the operator to start the question and answer portion of the call.
Thank you we will now begin the question and answer this question to ask a question you May Press Star then one on your Touchtone phone.
Youre using a speakerphone please pick up your handset before pressing the teams.
John Your question. Please press star two.
At this time, we will pause momentarily to assemble our roster.
Okay question comes from Sam <unk> with Evercore. Please go ahead.
Thank you everybody and good morning, So bill or Daniel can you provide further color around the <unk>.
The 12% to 15% growth for next year I mean, maybe.
Maybe walk us through kind of what are the assumptions behind that range.
And also just curious if you do end up doing better than that range of 12% to 15% where do you think the upside would come from.
Yeah. Samir this is Daniel I'll take that and obviously, we're not ready at this point to give too much additional detail in terms of guidance for 2022, we did want to put that 12% to 15% out there for folks as we do have some poor side, obviously through the remainder of the current.
Academic year that we just completed the lease up which takes us into the third quarter of next year and in the really attractive revenue growth that we will be able to deliver from that.
When you look at it.
Kind of inflationary expense growth that we assume are probably in the three maybe 3% to 4% range, we should be able to deliver same store NOI.
That compares very well to other sectors.
And so obviously you also have the the accretive.
Contribution from Disney as additional phases come online and we get a full year's contribution from that ramp up that we're seeing at Disney.
We wanted to help people understand whether or not the recovery.
It was reflected appropriately in the numbers they put out and we felt like this that help to clarify that a bit.
Okay, and then I guess my second question is around I mean, you provided some color around dispositions of the $200 million to $400 million.
As part of your plan I'm just curious how are you just kind of selecting those assets that are you're looking at so I guess why does it not make your criteria and what is the cap rate, we should be applying to that bucket.
Part of what we're considering in conjunction with those dispositions in some cases, we're looking at in the analysis of an outright sale, but also selling into a 50 545 joint venture in terms of assets, where it's appropriate to harvest some of the value that we've created out there but.
But the growth rates are substantially where we still want to have that coupon clipping income going forward.
So certainly anything we would look to be selling would be in the low fours.
Consistent with where we are seeing market cap rates trade and accretively put that into the current and ongoing developments that we have.
That's it for me thanks, guys.
Thanks Samir.
Your next question comes from Neil Malkin with capital One Securities. Please go ahead.
Good morning, everyone.
Great job.
Very pleased with the pre leasing results, obviously, a testament to.
Everyone on the team and Jennifer as well from her operating abilities.
Ability so congrats on that.
First question and I think I've been asking this.
So you guys for a couple of quarters, but.
Can you give some updates.
Or any clarity on the growth 2030.
If your if youre close what does that look like size or has anything changed given the.
I guess, if you're on a call.
Pull forward of recovery or <unk>.
Elevated.
Okay.
Investment capital looking in student housing or potentially.
Lower supply environment, making you more active so if you can just maybe talk about your thoughts and plans there.
Yes.
Yes, certainly and in the first component of that is the $55 45 joint venture structure that we talked about in contemplation of this immediate $204 million of our own capital recycling and having that platform in place to be able to execute on it.
The additional effort continues to go well obviously the team has been very focused on the lease up and the delivery of this war.
Jim and his team are running that process and we are well down the road and do expect to have it contemplated by the end of the year and look forward to moving forward with it we think there's great opportunities for us as we go forward from a growth perspective in terms of bringing more assets onto the end of the portfolio that we can create outsized return.
For our investors in that joint venture structure.
Yes. Thanks, I just wanted to be clear on you said the 50 545.
That is what does that really didnt do because I thought the growth 2030, the JV was going to be like a 90 10 yeah.
There is new.
Broader component of pursue growth 2030 initiative is broader than just one JV of 90 10 and also we look at the existing JV structure, we have with the all the odds were we had already.
Transacted earlier in some of the Austin assets and we look at that as part of the strategic vehicle in terms of assets that I. Previously described where there is still good growth to continue to harvest, but theres also an opportunity in the current environment to sell into and take some of the chips off the table with the value that we've created.
Okay got you I appreciate that other one.
For me is related to development.
I think historically.
You guys have delivered around $300 million of developments.
Joey.
And I think if youre, obviously lower than that in the 100 range I guess over the next couple of years I think you might get to 202024 can you just talk about how you see that pace.
And when you expect to get to in probably past that 300 per year just.
Given again that the strong fundamentals and accelerating interest.
From a you know the universities for housing revitalization.
Yeah, and this will be a post COVID-19 ramp up of a little bit of a slower nature than you've seen in a non COVID-19 impacting environment.
One is you saw prior to Covid most of the transactions that we were developing on balance sheet were indeed on campus P. Three transactions and that that is where we see the best accretive yields. It's also in an environment like this with related to land cost and construction pricing, where you have better opportunity to structure transactions, where we can achieve our yield.
Certainly the colleges and universities, we mentioned over the last 18 months had a pause in moving forward with many of their processes as they dealt with COVID-19 and the reopening of the campuses Abbvie has mentioned and as you know see proof of on this call. The University has are now focusing beyond COVID-19 and youre seeing that activity ramp up but those develop.
Deals do take time to come to fruition and so the dip that you see at this moment in time is directly related to that little bit of pause, we see more demand than ever as we mentioned in the script in terms of the number of transactions that.
We see coming on that front and so it will be lots of opportunity, but when we look at the natural development cycle, putting assets into place. It's really two to three years out before you see those historical volumes start to come back into play.
Yes, I appreciate that thank you guys.
Quarter.
Our next question comes from Nick Joseph.
With Citi. Please go ahead.
Thanks.
As you look at your rent roll for this fall how many December leases are there versus a normal year and how do you think about back filling I guess for the second semester beginning in mid January.
Yeah, Nick we've got about 40 bps of additional December ending leases than we typically do.
Actually it's about 30 bps looking at the numbers directly in most cases those leases are at markets that have not fully.
Recovered from Covid, and so there's still upside in occupancy and the ability to backfill.
I will note that on the interim leasing update that we did we did put a footnote in the leasing table taking into consideration two things, it's slightly elevated level. This year, but the bigger issue was how much leasing we continue to do last year as it related to Q1 and Q2 that we could see some tam.
Bring up given the success of the fall lease up and so we talked about we talked about the 8% in rental growth in Q4, we tempered that and said probably 60 75 to 775 in Q1 and 5% to 6% in Q2, taking that aggressive leasing that took place last fall there was a little abnormal.
And coupling it with that.
Thanks, that's helpful and then just on the asset sales.
We stopped complete where are you in terms of identifying and marketing the properties and when would you expect them to actually close either yeah, the sale or a JV.
And we are very excited that we have hit the point that the two things have occurred one day the re stabilization of our portfolio in the industry has taken place. The other thing and if you had been at the <unk> student housing conference a couple of weeks ago.
Student housing is not yet seen the compression that you've seen in multi family and it really cap rate stayed consistent throughout COVID-19, but we hadn't seen that benefit and so hopefully we will also see now with the institutional capital in the space with all the questions about the industry put to rest and the investment thesis and full tax.
And you're beginning to see some of those transactions take place and so we're very bullish on the ability to execute we do have properties identified within our portfolio as it relates to outright dispositions and or harvesting value in joint ventures, and that's something we think we can move along in the first two quarters of 2022.
Thank you.
Our next question comes from Alexander Goldfarb with Piper Sandler. Please go ahead.
Hey.
Good morning down there.
I feel like the kit sitting on the back of the class a little bit confused on what's going on in fact to raise my hand in that.
Professor you guys talked about accelerating 200 to 400 million of dispositions. You also have JV is outstanding that you want to execute but I would imagine the JV would be for more than just $400 million of assets because that would only be you know maybe four or five assets that mode. So.
Can you just walk through Big picture, what we're looking at there is the joint ventures as the accelerated $200 million to $400 million I don't know if that's going to be executed later this year or is that something for 'twenty two but just as we can conceptualize. These different components that are going on that you guys are thinking on the external side.
Sure Alex let me jump in on that I think what bill was trying to explain is how we think about both the capital recycling side of the equation and then the opportunity to deploy that capital into two to pursue growth platform opportunities and so what we're talking about in.
Terms of the $2 million to $400 million you should expect.
Back to see us do that in a similar fashion to what we did with the Austin portfolio, where we sold a 45% interest in the assets and that would represent the $2 million to $400 million in proceeds to us.
The pursue growth 2030 strategic capital platform that we've talked about where we would make a minority 10% investment into a larger joint venture platform to go out and buy assets.
We've said, we expect that to be about $1 billion.
Platform, where our investment would be about $100 million and we expect that too to commence next year potentially be in place by the end of this year with activity starting next year and we you know we do think it'll take a couple of two to three years to fully deploy the capital available.
That platform.
And so you know that.
That's how you should expect those two different.
Our initiatives to take place.
Okay. So it <unk> just thinking about that so the $200 million to $400 million. If we think about it basically a 50 50 JV. It's basically on a gross basis is double that amount and then separate you have this new JV.
Now now, we're all set and as far as modeling and thinking about timing you know as we think about our 2022 estimates that $2 million to $400 million DP you would you should we.
We think about that something later this year early next year.
Yeah that was something Bill commented on earlier that we would expect that to be in the first two quarters.
Of 2022, we're already.
Talking with different potential investors in that portfolio under a joint venture structure and so I'm just wanting to work through and get the best.
Terms for that partnership that we can get.
Okay and then the second question is in the opening comments I think bill referenced.
Supply is down 25% reduction in your markets at interface.
The main takeaway there was supply is going to be less than half of what it was back in 2013. So one the 25% is that the same base year as 2013, just trying to figure out if it is a different base years or if this is what the whole industry is doing which is everyone is gravitating towards the flagship schools. So it's really the <unk>.
Tertiary that are seeing the dramatic drop in supply and then as everyone shifts to the to the flagship schools, yes supply is still dropping so I'm just trying to figure out which is which if it's a base year thing or if it's a geographic thing on the changes in supply.
And certainly when we talk about the 25% is directly related to our portfolio versus the national numbers that axiom metrics get I would say there is a flight to the the.
The blue chip institutions, and certainly the power five conference schools.
I got to tell you the industry fundamentals that we talked about on the call are what we are really sitting here excited about.
When you take these things together one the increase in first year student enrollment.
Being at seven 5% over last year, and six 4% over 19 pre COVID-19.
That is the pent up market most of those students have not yet benefited the private student housing market that is the group of students that are moving on campus. This year for the first time that will then migrate off campus over the next three years and so when you look at.
The <unk>.
Supply demand equation coming down to the level that it is you know typically if you look at our historical chart. Those of you that have sat in our meetings over the year. We have the pie chart that it's shown enrollment typically growing at one 2% or I'm, sorry, it's supply growing at one 2% enrollment in the area of that same one one to one three and really more of an equilibrium in the industry.
When you now look at those charts for the first time, you know in our own portfolio you see enrollment up one five supply 0.8, the biggest differential we've ever seen and then when you look at what was really driving most of that one five is a first year enrollment number of 700 bps that indicates what the future trend is and so this is this.
Is something we're most excited about is the trending of that differential and the decrease in supply with that first year enrollment as that evolves through over the next three to four years.
And bill just to confirm the 25% reduction in ACC markets.
That space also walk that 2013 peak year.
No that's vision last year to this year.
'twenty one perfect fall 'twenty two.
Excellent, Okay listen I got it.
Okay.
Our next question comes from Austin <unk> with Keybanc. Please go ahead.
Hey, good morning, everybody and thanks for the time I was curious with the increased competition in the sector whats kind of your view in terms of how all of that.
Changes the landscape our opportunity set to do off balance sheet deals and sort of that 40, 40, 45, 45 10 joint venture and then I was also curious if you could share what percent of the P. Three backlog could fit within you know within that joint venture is I know you've talked about expanding the opera.
<unk>.
In an off balance sheet structure in terms of the schools you'd be willing to do development deals at.
Yeah, let me start backwards as it relates to on campus Ace transactions.
Those particular transactions, we would not undertake.
In a 90 10 joint venture, where we are the minority partner and that kicking off those relationships and those transactions, it's critical for us to be in a.
Majority partner role in dealing with our universities, but rather when we look at the Ace portfolio that we have we look at the recapitalization of those being better suited in the context of a $55 45 joint venture, where we sell a minority interest we maintain that.
The majority partner position with the University and candidly, we think that can be a plus and university seem that that's how we monetize those investments and that theyre always hoping that ACC is going to be their long term partner versus selling out of those transactions.
First part of the question, yes, the other thing I want to make sure that there's not any confusion on Austin is anything we would do in our minority interest joint venture the 90 10 growth.
Opportunity joint venture that we talked about.
You referenced maybe going to schools, where we wouldn't do it on balance sheet that is not at all the investment strategy of that joint venture. We would continue to target universities that meet our core investment criteria. It's just that we want to reserve any capital that we raised from capital recycling.
Two four on balance sheet for.
Thank the most attractive capital allocation opportunity, we have right now being that Ace on campus development and we would then use that 90 10 off balance sheet joint venture to do more off campus development of our acquisition type opportunities that still meet our core <unk>.
<unk> strategy, but just from a capital restriction standpoint doesn't.
It doesn't make sense for us to do on our balance sheet right now.
And as it relates to <unk>.
As it relates to the competition for those transactions as you brought up there is indeed, a lot of capital in this space and it is competitive the other thing that has taken place, though and we've talked about this in the past and I think youre going to see it coming to fruition in the years ahead with.
With the influx of capital into the space.
<unk> seen that you know most of the transactions that have been done have been recapitalization of existing portfolios not direct sales and many of the folks that previously were merchant developers in the space are holding assets for the first time building their operating platforms for the first time in operating larger portfolios for the first time and so the merchant developers now have all.
Switch to where they are holders of three to five years seven years and then they will look to harvest value. This reminds us of the early days when we were public and you saw significant NOI growth from us in terms of the M&A deals that we were doing is that we still believe our greatest asset and creating value is the incremental value.
The we create in our operational platform and occupancy pricing sophistication and so as we pursue transaction that arena. That's what we're looking for we're looking for what are the assets that we can underwrite differently than anyone else because of the value that we can derive from our portfolio and more of the product that is being developed and held out there.
Is in the context of being able to pursue those type of opportunities.
Got it and I thought that just to be clear that you were looking at a broader set of more third party development opportunities that you would undertake within.
You know a minority with the minority interest to generate some additional data but okay.
Intermediary net up.
Yes, the nature of that I mean, what you're speaking to is really what we do on campus in the P. Three utilizing the bond financing structure, our university funding themselves, where we are the fee developer and there are more opportunities on campus for that business just as more schools are undertaking modernization.
Yeah.
So the next part.
Sort of the recovery in fundamentals quicker than you had originally anticipated and now sort of the plan to accelerate.
The dispositions to improve the balance sheet strength sort of what what's the appetite or need.
Our thoughts around equity today.
Look let me, let me say this Austin right now.
Both if you look at the market over the last few months and honestly our own opinion of NAV has increased substantially we were in a very different place earlier. This summer before our leasing had surpassed the prior year's leasing levels in <unk>.
Terms of being confident about the recovery in the operating.
The environment in the business.
Now that we have seen that take place as Bill said in his opening remarks.
We've seen analysts' estimates of NAV move up in the 50 to 60 range with the upper half of that really being driven by people, making using assumptions that are based on a more normalized level of NOI, which we think is appropriate at this point in time.
We are basically there in terms of the amount of NOI, we're producing relative to 2019 and when you look it on a same property versus same property in 2019 basis, our rental revenue for <unk> of 19 is growing so our <unk> of 'twenty, one is growing and so we would tell you that.
Our belief is niv is up in the higher end of those ranges that are out there and so our board and management team are focused on returning to start to earn and in no way shape or form are we interested in issuing equity at these levels and that's why we gave the additional disclosure around our plan for increased.
In 2022.
That's great color. Thanks, Daniel.
Okay.
Our next question will come from Chandni Lutheran with Goldman Sachs. Please go ahead.
Thank you and thank you for taking my question I appreciate all the color around any V and you know strategic after platform and thank you for that.
My question is around these two new project awards that you talked about MLD and University of Texas could you, perhaps give some color and you know also understanding scale as we think about modeling them. I mean are we looking at say a princeton as a benchmark 6 million or are we looking at you know Concordia as $1 3 million.
How should we think about what the size of beds.
<unk> could be you know a broad strokes.
Yeah, Sean.
Obviously that is the difficult part when we announced these new third party transactions. They are at this point has been awarded to US and we're in a position in the process with the new University to announce those but we are still working on the ultimate project that we will develop for the University and so that's why you see those TBD is where we're not able yet to dish.
Close what the fee will be because it all depends on the ultimate size of the deal when you look at really though.
Average transaction for us, they're typically about $3 million in fees.
Recent one we announced you see on our pages 10 supplemental at Drexel University. That's a renovation that's a smaller project just under $2 million in fees.
Look at one of the larger ones I think at USC UCI.
Up in the $5 million range.
Those are kind of the end of the spectrum and and so your average transaction tends to be more in that $3 million range and so when we're when we're still working through the ultimate project size with University and not ready to disclose to you yet that that's what you should just assume that on average should work out.
And just an extension of that Princeton 3 million would be in fourth quarter and the rest through the construction process is that correct.
When you say the rest being through the Oh, yes, the rest of the fee being recognized through typically it's about 50% upfront recognized and then the remainder is recognized throughout the construction process.
Got it and then my follow up question is generally around inflation and supply chain headwinds that are sort of you know omni present across the economy right now I mean, you gave some color on it.
Inflation, but as you think about you know all of these projects.
That you are undertaking for growth I mean, how do you think about perhaps just be ability to get.
Product and how that feeds you know your own economic calculations.
You think about.
Just returns on these projects going ahead. Thank you okay. Yeah, no. So the supply chain challenges are certainly something that is factored into each and every transaction and we know one of the things that you have to do is maintain flexibility on the front end and we sit on both sides of the table times as an owner in contract and then also as a service provider to University.
And delivering those things and so the process you have to have in place and as an owner developers have flexibility as it relates to your requirements and specifications and knowing what you can get versus what you can get at its emerging you gotta be well.
Well in the end of the process in terms of maintaining debt from a fee provider perspective, we protect ourselves in terms of forced mature and making sure that we have the ability to implement those changes.
Specifications and as an owner as we design and think about it we take those into consideration how we approach the design of it.
The other thing Sean for you that I'll point out for you that we talk about quite often is why we like our on campus development transactions is it does give us the opportunity to work with University to help manage through increased construction costs worn in environments like this the universities at the end of the day.
They have a desire to deliver modern.
Housing for their students on their campus that make them competitive and one of the triggers that they can pull to help facilitate those projects is in terms of what they basically charged for their land through the ground rent payment that is applied to the transaction and so when we see an increase.
And construction costs, we know that we can work with the university to reduce that ground rent and make a transaction feasible to basically achieve what they're trying to accomplish which is deliver modern product at a price that is affordable and an acceptable to their students.
Thank you for the color and congrats on a great quarter.
Thank you.
Our next question will come from Derek Johnston of Deutsche Bank. Please go ahead.
Hi, everyone. Good morning.
Given the widely reported University endowment performance and growth in 2021 are you seeing increased interest in third party development with maybe lags in our University is considering deploying some excess returns into updating their on campus housing and how well positioned.
You feel ACC is to capitalize on this trend or any trend beyond the two recent wins.
Yeah, and while that's certainly a plus for many universities in terms of the performance of their and down but we are not seeing universities.
Typically earmark their capital for ancillary development, which housing is now falling into and they are preserving their capital for academic and research. There are exceptions. For example, Princeton is funding the transaction there and so you will have some schools that do have the wherewithal just to write the checks themselves, but that's not the norm.
And so most of the transactions that we are pursuing and those that are hitting the street are not university funded but rather off balance sheet for the university in the form of either project based revenue tax exempt bonds that we have done for decades or the equity model and as we talked about in our comments, we do see those numbers too.
Continuing to increase post Covid, we're now tracking more than 60, and we feel the company is better positioned than we have ever been in that space, especially being the only public company left pursuing that business that gives us a real alignment and transparency with the universities.
Okay, Great second question.
It looks like on the supplement page a few call for a return to pre pandemic leasing next summer.
So we expect youre, referring to summer camps conferences and revenue drivers along those lines. So what what's giving you confidence that summer 2022 can bring the camps back on campus and pretty much returned to pre pandemic activity at this time.
Many of those camps are tied to University athletic programs in many cases, they ran by the coaches and so they tend to go hand in hand with the campus activities that take place around sports band cheerleading, all those type of things and so with the return this fall of all those campus activities.
We're seeing a ramp up in plants for those conference camps and conferences to come back.
Yes.
Thank you.
Yeah.
Our next question comes from John Pawlowski with Green Street. Please go ahead.
Thank you William for the three development projects that are confirmed to be on the <unk>.
Mental M I T Berkeley in northeastern could you just share the latest thinking on stabilized yield assumptions.
Yes.
As we continue to work with those universities and again, it could potentially be third party or ace.
But we continue to target that 6%.
The development yield range.
As Bill said on a number of comments, we're able to still achieve those ranges because we're working with divested partner of the university through ground rent and other.
Other levers to hit those even when you've got an escalating development cost environment. So those those yield targets have not changed at this point.
Okay great.
Second question for Jennifer William just curious about your strategy for setting rents at Disney and in an environment, where traditional multifamily rents continue to spike in Orlando will you be increasing rents and market aggressively or should we expect kind of 2% to 3% rental rate bumps treated similar to traditional soon.
Yes.
This is bill and as we've talked about Disney was completely modeled the same as an on campus ace transaction and fits that structure and also and so in that regard it as a coupon clipping, 2% to 3% inflationary.
Rental revenue increase on an ongoing basis.
Yes.
Okay. Thank you.
Our next question comes from Joshua <unk> with Bank of America. Please go ahead.
Yes, good morning, everyone.
Just wanted maybe a follow up on the Disney project.
It looks like you hit about 85%, which I think was your forecast for this fall.
Is that something that you can continue pushing as we get to year end or is there something seasonal about the Disney insurance Chip program and wanted to insurance.
And to the facility.
Yes, no we will continue to work with Disney on increasing occupancy through year end, and then going into 'twenty, two and something were forecasted to if you go back to when we originally talked about the program. We expect that project to averaged 93% occupancy throughout the year it will ebb and flow as they have move in to move out, but that's certainly our expectation.
As we get into 'twenty, two and beyond and get to more normalized operation and occupancy.
Okay and is that 93% built into that.
12% to 15%.
<unk> growth for 2022.
Yes. This is Daniel Josh It is as.
As we've said on recent calls and continue to expect and probably or even more.
I'm confident in.
We expect Disney to basically be on pace with its original pro forma former underwrite for the full year 2022, and that is at that 93% average occupancy.
Okay Awesome, maybe one final one for me for the third Party Development Award that you got this quarter were those projects you started working on pre COVID-19 or something that kind of came up during her during COVID-19.
Yes. They were both projects that we were tracking pre COVID-19, but really those processes. The awards all occurred during COVID-19 really in the last call. It three to six months.
Okay.
Awesome. Thanks, guys.
Thank you.
So again, if you'd like to ask a question. Please press Star then one at this time.
Our next question comes from Nick Joseph with Citi. Please go ahead.
Hey, its Michael Bilerman here with Nick.
I just wanted to sort of follow up on equity even in AAV.
Just step back for a second.
Sure you look through.
Other REIT sectors, you sort of look at the self storage or industrial or.
H the gaming REIT, even from the apartment Reits that are trading at premium to NAV.
Obviously, you didn't have that extra cost of capital in their equity to drive is accretive external growth.
And Daniel from your comment on the call, saying that I think you said something like Theres, no way shape or form that we're interested in issuing equity at these levels.
Effectively targeting our NAV in the high Fifty's.
Yes.
And you're selling assets doing joint ventures to take advantage of the price of the assets relative to the price of your stock.
Guess, what point do you sort of step back and say if the market is not willing to give us his cost of capital that the market's giving to other specialty asset classes.
I guess right.
What's the endgame.
Is this a six month process, a 12 month process, just sort of help me reconcile those.
And those things.
Yeah, and certainly I'd say, we're pleased to be at a point in time.
There are questions about the industry's.
Emergence from Covid are finally being cleared up and as I mentioned, we have not yet seen the cap rate compression to some of these other sections are seeing certainly multifamily and we think that with some of the overhang from the initial response University has had to COVID-19. It creates some misperceptions on the investment thesis with those being put to bed and the.
The recovery, taking place quicker than people anticipated all the positive training, we're seeing with the <unk>. We would expect people look the current discount to NAV and think it's a great opportunity to own the stock and certainly now it's time for us to execute as we go forward as Daniel said, we're going to sell into this market now to harvest the value on that $2 million to $400 million.
Attempt to drive the stock to anything and implement.
Let's see how everything plays out.
So basically and then timing of asset sales do you think are.
Yes.
If we're sitting here next June you start to reevaluate I'm just trying to understand what the next decision point processes and I know youre focused it trades at an AAV, but it hasnt been there pre COVID-19 right. I mean, this is not a new phenomenon for ACC at the same time that you see all these other.
Specialty asset classes.
Continuing to trade at a premium so yes, it's early as a disconnect somewhere yes, yeah, the differentiating factor Michaels and earnings growth.
When you look at that you know that pre Covid. It was 2019 that we came out and had the 5% earnings growth return after the last round of capital recycling, which again was the core noncore drive assets now we're coming out of Coke with a excellent earnings growth profile.
So with the tailwind, we talk about and that change in earnings growth profile.
A lot of the investors our earnings per share driven and now they see the the performance coming out of Covid related to it and.
We would expect that that would be a key driver for the stock going forward.
And then just in terms of that earnings growth that 12% to 15% can you just sort of just breakdown broad strokes, how much of that internally driven versus externally driven versus balance sheet driven.
Just in terms of the different components.
Yeah, I know everything is reopened I assume youre going to get more camps next summer and all the other rental income that comes with that I don't know, if thats, adding 100 or 200 basis points, but just give a little sense of breakeven laid down that 12% to 15% growth.
Yeah I think.
I'd say, there's three components that are really the driver of that growth one is when.
And I'd say, it's about half of it is coming from internal same store growth.
And then the remainder coming from a combination of the accretive contribution from the Disney.
Phases that have been delivered because you got to think about we're getting a lot of extra accretion there from phases that were delivered in originally supposed to.
Contribute oh.
In 2021 that are really just now ramping up as that program has come back here in the last few months now contributing a full year in 2022. The other area that we have some significant upside as in <unk>.
Development fee income when you look at our awards that we have including both the New awards, we got this quarter at Emory and U T. But also in place awards that we have that we expect to start in 2022, we expect to be back towards that record level of third party fee income we were delivering in 2000.
19.
In 2022, and so those are really the three components with about half of it coming from just internal core NOI growth and the remainder coming from the other two.
Got it thanks David.
Thank you.
Our next question comes from John Pawlowski with Green Street. Please go ahead.
Thank you for taking the follow up Bill if the floodgates. So suddenly opened up with ace opportunities. What is the maximum concentration to on campus housing we'd be comfortable with in the portfolio.
Okay.
John we have always talked about typically 30% to 40% being kind of you.
Upper limit on our thought pre COVID-19.
You know I think it is going to be interesting to play out and it's so much of the development that we see being contemplated on campus is pure replacement housing in terms of modernization and not.
New supply.
And so that is a trend that's very interesting in terms of the captive audience that comes with that first year residence Hall housing.
Continues to make it very attractive, but ultimately over the long term typically we have seen that be about a third to a little over a third of our portfolio and I would expect the opportunities over the long haul over the next decade or two to be consistent in that regard of the ratio of two thirds off a third on but certainly something we want to play close.
Attaching too given the training what our capabilities are in that area.
Okay understood. Thank you.
This concludes our question and answer session I would like to turn the conference back over to Bill Bayless for any closing remarks.
And certainly want to thank you all again this was an excellent quarter for the company in terms of and the industry in terms of its emergence from COVID-19 with the investment thesis and the resiliency of the sector. Once again proving out I'd like to close by thanking the ACC team not just for this the lease up results in the incredible financial performance, but.
They conducted themselves over the last 18 months throughout this pandemic and how they have served their customer our University partners and all of our stakeholders, we're very proud of their efforts.
Thank you and we'll look forward to talking with you at NAREIT.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.