American Campus Communities, Inc.
Q1 2019 Earnings Call Transcript

Published: 23 Apr 2019

[Operator:]

Good day and welcome to the American Campus Communities 2019 First Quarter Earnings Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Ryan Dennison, Senior Vice President of Capital Markets and Investor Relations. Please go ahead, sir.

[Ryan Dennison:]

Thank you. Good morning and thank you for joining the American Campus Communities 2019 first quarter conference call. The press release is 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’ll find an earnings materials package which includes both the press release and a supplemental financial package. We are hosting a live webcast for today’s call which you can access on the website with the replay available for one month. Our supplemental analyst package and our webcast presentation are one and the same. Webcast slides may be advanced by you to facilitate following along. Management will be making forward-looking statements today as referenced in the disclosure in the press release, in the supplemental financial package, and in SEC filings. Management would like to inform you that certain statements made during this conference call which are not historical facts may be deemed forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act of 1995. Although the company believes the expectations reflected in any forward-looking statement are based on reasonable assumptions, they are subject to economic risks and uncertainties. The company can provide no assurance that its expectations will be achieved and actual results may vary. Factors and risks that could cause actual results to differ materially from expectations are detailed in the press release and from time-to-time and 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 would now like to introduce the members of senior management joining us for the call. Bill Bayless, Chief Executive Officer; Jim Hopke, President; Jennifer Beese, Chief Operating Officer; William Talbot, Chief Investment Officer; Daniel Perry, Chief Financial Officer; Kim Voss, Chief Accounting Officer; and Jamie Wilhelm, our EVP of Public-Private Partnerships. With that, I’ll turn the call over to Bill for his opening remarks. Bill?

[Bill Bayless:]

Thank you, Ryan. Good morning and thank you all of you for joining us to discuss our first quarter 2019 financial and operating results. As you saw on last night's press release, it was an excellent quarter for the company, one marked by strong core performance with over 11% earnings per share growth and same-store NOI growth of 5.1% over the same quarter prior year. We were also delighted to announce yet another prominent on-campus award, having been selected by Cal Berkeley to serve as their student housing master plan development partner, via highly competitive RFQ process. As William will discuss, this initiative is expected to provide in excess of 6,000 new beds on their campus over multiple phases, potentially utilizing a variety of transaction structures. We believe this award from the world's number one public university, further substantiates our position as the world's best-in-class Student Housing Company. With that, we'll go ahead and jump right in, and I'll turn it over to Jennifer Beese to discuss our operating results.

[Jennifer Beese:]

Thanks, Bill. We are pleased that our first quarter 2019 same-store operational results exceeded expectations, coming in at 5.1% NOI growth, our highest growth quarter since 2015. Our 3.1% revenue growth consisted of 3.4% rental revenue growth, which was partially offset by year-over-year decline in other income. The decrease in other income was in part due to reduce utility reimbursements correlated to the reduction and utilities expense this quarter. As we discussed on our last call, we expect our rental revenue growth to moderate in Q2 and Q3 as a result of May ending leases at our res hall properties that contributed strong growth during the 2018-19 academic year and the backfilling of May ending leases at our apartment communities. We are very pleased with the expense growth profiles reported in the first quarter. Coming in with a total growth of only 0.5%, excluding property taxes and insurance, quarterly expenses were 0.7% below the prior year quarter. Our utilities category benefited from our continuing efforts to renegotiate expiring cable and internet agreements at lower rates, as well as lower electricity costs from favorable weather patterns and savings at properties that have recently undergone LED replacements. We are pleased with our savings in the marketing category for the quarter. However, some of the savings are timing related and we expect the categories growth in 2019 to trend towards slightly greater than inflationary growth. Payroll expenses benefited from lower healthcare costs for the quarter and continuing benefits from our internal employee development programs. Over the year, we expect the category to trend more towards inflationary growth. Looking forward to Q2, one specific item we want to point out is that we expect double-digit growth in RNM, as we have a particularly tough expense comp in this category from one-time items that benefited the prior year quarter. Turning to our portfolios leasing activity, we continue to trend within our historical and expected leasing trajectory. And at this time, we are reaffirming our projection for opening same-store rental revenue growth of 1.5% to 3% for the 2019, 2020 lease up. Additionally, we are pleased with our preleasing progress for development properties opening in the fall. With this grouping of properties currently prelease to 93% and trending towards year one stabilization. We look forward to updating the market as we progress through the remainder of the year. I will now turn the call over to William to discuss our investment activity.

[William Talbot:]

Thanks, Jennifer. Turning first to the overall transaction market, we recently attended the interface Student Housing Conference here in Austin, with nearly 1,400 attendees from all over the globe interested in investing in core, core plus and value add strategies within the sector. Cap rates for core pedestrian assets in Tier 1 markets continue to trade in the low to mid 4% cap rate range and are expected to remain at those levels in the near-term. The sector is solidified itself as an institutional Class A real estate investment for global and domestic investors, with a strong one runway for investment demand. Turning now to development, we are under construction and making great progress in our 2019 pipeline of own developments and presales, which total five projects of approximately 3,150 beds and $404 million in development costs. The developments are currently on time and on budget. And as Jennifer mentioned, pre-leasing is going well, indicating our continued ability to deliver assets fully stabilized in their first year. All developments are located either on campus or pedestrian to major Tier 1 universities and are targeting stabilized development yields between 6.25% and 6.8% and presale development yields between 5.7% to 6.25%, representing attractive spreads of 175 to 275 basis points over current valuations for stabilized assets for our own developments within these markets, and 100 to 200 basis points for our presale developments. Turning to our on campus partnerships, we are very excited to announce that American Campus was selected as a student housing master plan development partner for the recent high profile highly competitive UC Berkeley Student Housing Initiative. The initiative is part of UC Berkeley's plan to provide an excess of 6,000 new bids on several project sites. Currently, we're in exclusive negotiations for the first development site that is expected to provide 1,500 to 2,000 new beds on campus. The full scope, transaction structure, feasibility, fees and timing have yet to be determined. In addition during the quarter, we closed on a third party on campus redevelopment project with Drexel University. The 400 bed Honors College project began construction in late 2018 under 100% reimbursement agreement, and the residential portion is targeted to open for fall 2019, with the associated administrative and academic space to open in early 2020. ACC is expected to earn $1.8 million in development fees. Once complete, the primarily first year residence hall will be a natural feeder along with all on campus freshman housing, to our 3,200 ACE beds of housing, which serve sophomores and upper division students. Subsequent quarter end, we also close on the financing and commence construction on our ninth development on the campus of Prairie View A&M University. The 540 bed third party project is targeted to open in fall 2020 with ACC expected to earn $2.5 million in development fees. ACC will manage the community upon completion, bringing our total portfolio of developed and managed beds at Prairie View to 4,900. We're also making progress on pre-development of our third party developments at the University of California, Riverside, and the University of California, Berkeley Goldman School of PublicPolicy. Demands from universities for on campus P3 projects remained plentiful and ACC is pursuing a deep pipeline of opportunity. I'll now turn it over to Daniel to discuss our financial results for the quarter.

[Daniel Perry:]

Thanks, William. Last night, we reported the company's financial results for the first quarter of 2019, which at $0.69 of FFOM per fully diluted share grew 11.3% over the first quarter of 2018. Overall, this was in line with our expectations. However, diving into the components of the financial results, same store and new store net operating income were better than we projected, while third party fee income was lower primarily due to timing. With regards to property NOI, revenues were in line with our expectations, but as Jennifer discussed, operating expenses came in approximately $1.7 million lower than projected due to good cost controls in payroll, utilities, marketing and repairs and maintenance. This was offset by lower third party fee income as the closing of the UC Riverside development and associated fee recognition originally expected to occur in the first quarter is now expected to occur in the third quarter. This is certainly a good start to the year, but we are not making any updates to our 2019 earnings guidance at this time, as the traditional primary risk to earning still exist and the management of any summer vacancies, the completion of the fall 2019 lease up, continued operating expense management throughout the year, and the successful closing still to occur on two of the four third party development projects included in the midpoint of guidance. Further, as implied by the 1.5% to 3.4% same store NOI of the year, we anticipate the remaining quarters of the year to experience less same-store NOI growth than the 5.1% achieve this quarter. This is due to the slower seasonal revenue growth in the summer months, and the 2.25% targeted rental revenue growth from the fall 2019 lease-up, as well as tougher operating expense comps in the remaining quarters. On a separate note, like many residential REITs have done in recent years, the implementation of our next gen offering systems will allow us to outsource online resident payments to third party processors starting this fall for the 2019-2020 academic year. 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. This will be neutral to NOI. However, during the initial 12 months of implementation, we expect this to reduce our quarterly same-store revenues and the expenses by $700,000 to $800,000, and reduce revenue growth rates by approximately 40 basis points and expense growth rates by 80 basis points. Again, this does not impact our NOI, and is already reflected in guidance figures for 2019. But we wanted to highlight for everyone the temporary effect it will have later this year and into the first three quarters of 2020. With that being said, you can refer to pages S-15 and S-16 of the earning supplemental to get complete details on each of the components of our 2019 guidance. And as usual, this quarter we've added a column reflecting year-to-date actual results to facilitate reconciling each component of our guidance to the company's consolidated financial statements. While we are not making any changes to the earnings guidance range or the major components of it, I do want to point out that you will see we have adjusted our same-store guidance to reflect one property being moved to held for sale and re-categorize bad debt expense from operating expenses to revenues in accordance with FASB’s new lease accounting standards. This is a required change I'm sure you have already been hearing about from other REITs. Historically, we had included bad debt expense in our operating expenses and did not anticipate this change when we provided the same-store revenue and OpEx components of guidance at the beginning of the year. These reclassifications do not result in any change to our total NOI guidance. Moving to capital structure, as of March 31st, the company's debt to enterprise value was 32%, debt to total asset value was 37.3% and the net debt to run rate EBITDA was 6.5 times. As you will see in our capital allocation and long-term funding plan on page S-14, we have not made any significant changes to the growth and funding plan. At this point, our development pipeline for 2020 is pretty much set at $280 million. And we expect to meet our capital needs for 2019, 2020 and beyond through a funding mix of cash available for reinvestment, additional debt and approximately $100 million to $150 million per year in disposition, joint venture and or equity capital. This will allow the company to maintain a debt to total assets ratio in the mid-30s, and a net debt to EBITDA ratio in the high-5s to low-6s. Our current 2019 guidance includes approximately $100 million to $190 million in proceeds from disposition and or the sale of a minority joint venture interest in existing properties during the second half of the year. With that, I'll turn it back to the operator to start the question-and-answer portion of the call.

[Operator:]

[Operator Instructions] And our first question today comes from Shirley Wu with Bank of America Merrill Lynch. Please go ahead with your question.

[Shirley Wu:]

Good morning guys, thanks for taking the questions.

[Ryan Dennison:]

Good morning.

[Shirley Wu:]

Good morning. So my first question is on expenses. So given your 1Q 2019 expenses were less than expected and your guidance update as of this quarter was on the back of your accounting change. How comfortable are you with your expense guidance to 2.2% to 2.9% or hitting the midpoint or even the lower end of guidance?

[Daniel Perry:]

Yes, I mean, obviously we're off to a good start for the year the midpoint of our expense growth for the year was 2.7%. We expected that the cadence of that to be pretty consistent throughout the year, ranging from just below the mid-2.5 range to the upper 2.5% range or upper 2% range. Certainly we're happy with the first quarter, we outperformed our expectations, we still have to get property tax assessments in which obviously are less under our control. We do believe that we will see a deceleration in property tax expense growth versus last year. But, we're still subject to where those assessments come in. That aside, most of the areas where we saw outperformance in the first quarter were specific to the quarter, don't necessarily think it implies a trend of those lower expense growth rates throughout the year. And so that's why we're holding that range for the year, as we still have three quarters to go when all the normal risks associated with that.

[Shirley Wu:]

So it kind of sounds as if even on something like utilities the savings there was beyond the easier winter comps. How much of that, I guess, could you break out into energy efficiency savings versus just an easier winter?

[Bill Bayless:]

This is Bill. It's a bit of a mix, we had 46 properties where the LED initiatives were being felt in this quarter in terms of the sequencing power you rolled them up, 32 properties associated with renegotiation of cable and internet and those are -- will have some lingering benefits into the quarter. Obviously, the winter weather across the very broad geographic portfolio that we have nationally is something that's always subject to variation quarter-to-quarter, and so certainly can't speak to despite my love of the weather channel, and liking to watch it, can't give any perceptions into how the future may be. And certainly hurricane season comes upon this later in the year. And so hopefully we'll continue to have good fortune as it relates to that, but certainly nothing we can speak to in terms of having that continue throughout the year.

[Shirley Wu:]

Great, thanks for the color.

[Bill Bayless:]

Thank you.

[Operator:]

And our next question comes from Austin Wurschmidt with KeyBanc Capital Market. Please go ahead with your question.

[Austin Wurschmidt:]

Hi, good morning. You guys have talked about the awards from the UC system being more likely to go third-party. So just wondering what the probability that some portion of this UC Berkeley deal goes ACE. And then could you provide some additional detail just around the earliest timing for the 1,500 to 2,000 beds that William discussed the potential yield, et cetera?

[Bill Bayless:]

Yes, and certainly we're very pleased that that was a very high profile and highly sought after a competitive process. As you all know from looking at the current two transactions we have done with Cal Berkeley, the first one was ACE, the one we're currently in pre-development on is going to be third-party. Given the scale of these projects and the amount of total development taking place, I think the school is going to analyze all of the transactional structure alternatives that they have, ranging all the way from ACE and full privatization to perhaps the third-party, there maybe even some GEO where we're engage with developer in that regard to bring the core competencies to development. So, very much -- yes too early to tell in terms of how the overall transaction structure will come together, would expect it to be a variety versus any one particular. And whether or not those playing to ACE is yet to be seen too early for us to be including in our investment profile, but certainly we’ll keep you aware as we move forward on those. The first transaction and these are core urban sites and California has a fairly complicated environmental approval process and sequel [ph] and in that regard, we're probably at the earliest looking at breaking ground in 2021 for a 2023 delivery. And so the nice thing about this kind of fits, if it did ends up turning into ACE it fits nicely into the capital allocations it would be gearing up as Disney's rolling off. And so a nice flow to our sequencing, but way too early to announce any of it as ACE at this point in time, would love to invest obviously and that'd be some of the finest real estate in the company. But we're still too early in the process to see that play out.

[Daniel Perry:]

I think the other question -- this is Daniel, the other question you'd ask as part of that was, what were we thinking from a yield perspective? Obviously, during the RFP process, we're still talking very high level with universities. But we are still just in general targeting now our 6.25% to 6.75% development yield.

[Austin Wurschmidt:]

Got it. And then so when you from the initial UC system RFQ, how many beds have yet to be awarded and is there a potential for any of these to be owned on campus type deals?

[Bill Bayless:]

Most of the other UC system transactions have tended to go towards the third-party route and the system very much does like the UC Irvine model that we implemented there. The lion share of the UC awards, the biggest transactions have taken place, we're very pleased to won the biggest third-party when being UC Riverside, obviously, Berkeley being the crown jewel of the system in the public education in America was the most highly sought after in that and our work continues at UC Irvine. And so the lion share of that initiative is taken place, certainly the largest transactions have now been decided, and we're very pleased with our efforts and the results of our participation in that process.

[Austin Wurschmidt:]

Got it. And then just switching over to same-store revenue, with the up upcoming expiration of many of your 10 months leases, which you had previously talked about growing at an above average rate. If you were to put your meteorologist hat on, can you help us understand kind of the magnitude of the deceleration you expect into the second quarter?

[Bill Bayless:]

Yes, this year, we have right at about 3,000 May ending leases across the portfolio throughout our apartment properties, just not the first year on campus residence halls. And that is very consistent with where we were last year. And so we're right on par in terms of the number of May ending leases. And as I did mention, on the last call, one of the initiatives that we do have in place, is attempting to do some May to May leasing where we can that’s kind of different approach from stub filling the short period of summer with an interim lease is rather looking at doing some May to May conversion, which has some upside there. So, too early to talk about any potential results of that initiative that’s something the team is certainly focused on in terms of mitigating any diminishment in revenue that occurs from that.

[Austin Wurschmidt:]

But as far as kind of the deceleration, I mean, you talked about 10 to 20 basis points from fourth quarter to first quarter, how should we think about it from first quarter to second quarter?

[Bill Bayless:]

Yes, typically that historical diminishment has been 20 to 30 basis points. And so the 3.40% seeing rental revenue this period, typically in Q2, you would see that go to 3.1%, 3.2%.

[Austin Wurschmidt:]

And then there could be some additional, I guess, impact from other income growing at a below average pace. Is that fair?

[Bill Bayless:]

Yes.

[Daniel Perry:]

That's right, Austin. This is Daniel, what we talked about at the beginning of the year is that we expected other income for the year to come in, in the flat to up 1% range.

[Austin Wurschmidt:]

Got it, that's helpful. Thanks, guys.

[Operator:]

And our next question comes from Alex Goldfarb with Sandler O’Neill. Please go ahead with your question.

[Alexander Goldfarb:]

Hey, good morning, morning down there.

[Daniel Perry:]

Good morning, Alex.

[Alexander Goldfarb:]

Hey, morning. You guys spoke a bit about the variability on expenses for why you're maintaining guidance, you talked about potential for move outs. But the other thing that is in here is that it looks like if I look at your first quarter your sub last night versus the sub that you put out with fourth quarter, it looks like you're now giving yourself a wider range on dispositions before everything was third quarter. Now you're saying at the low end the guidance, it would be third quarter at the high end, it would be late fourth quarter. So again, can you just go over some of the variabilities for why you have the strong beat, if your May expirations are the same as last year, and everything else looks in trend. And clearly at the interface conference, your peers were very bullish on how pre-leasing is going. So it doesn't sound like there's any slippage there. Just trying to figure out what are the other variables in here, because it looks like you guys have widened the disposition timing, which would sort of flatter your earnings. And yet you're keeping the range unchanged?

[Daniel Perry:]

Yes, so no update to the disposition/joint venture activity plan for the year, actually that reference to at the high end $90 million or -- %90 million of joint venture activity in the fourth quarter. Putting in the fourth quarter was just a clarification that we realized that we didn't have in there at the beginning of the year. We do every year if we have any kind of capital activity like that equity type of capital activity like that would range the timing, just to allow for any difference that occurs versus what we expect. We've also been asked about the amount being $100 million or $90 million to 180 million in joint venture proceeds. And what was driving that, was it a potential difference in pricing, or portfolio size, and it’s portfolio size. We may go out with a larger deal, which would obviously drive us towards the lower end of guidance and a smaller deal later in the year which would drive us towards the higher end. With regards to not updating guidance at this time, it's still early, we’re one quarter in. We've got, as I said in my prepared remarks all the normal risk of the year in terms of the management of summer vacancies, control of expenses throughout the year, obviously the impact of any uncontrollable expenses, the fall lease-up.

[Bill Bayless:]

Let me comment to the lease-up, Daniel. And Alex, you brought up the student housing comps. And certainly, the one thing we don't want to diminish is, the student housing industry remains an incredibly attractive sector. The industry is benefiting from a great cost of capital that relates to the interest in the space. As far as people's pre-leasing commentary. When we look at the National as Jennifer said in our results, our lease-up is in line with our historic on our expectations. When we look at the AXIOMetrics data for the national portfolio, we show that their March numbers, the same-store portfolio that they track in the top 175 markets is within 30 basis points of last year. So good news, but everything is on historical trend, no surprises there. But I wouldn't take commentary from individual developers as exuberance that we should be raising our guidance in any form or fashion. We're in the throes of the lease up as we always are. As you know, the very reason we quit giving leasing updates is so people wouldn't take a point in time piece of information of above and behind her comment and translate that into exuberance and changing numbers. And so we're in the middle of the lease up as Daniel said, we got a lot of work to do. We are pleased with the tailwinds that the sector continues to have in terms of fundamentals, but we don't want to get too far out ahead of ourselves, nor do we think the industry should.

[Alexander Goldfarb:]

Okay. And then the second question is on development. Again, at the conference, there was a lot of talk about how the supply has come down, I think 40,000 beds were delivered in 2018, down from like the 60,000 plus. A few years ago, you had developers talking about how it's more difficult, some developers even getting into the acquisition game versus given the inability to make development math work. But that said, developers always seem to find a way to develop. So what is your view on supply expectations for the coming year? And do you expect this 40,000 bed that they delivered last year to stay down there? Or is your expectation that this is going to rebound and all that money that you talked about is going to find its way into development that gives us sort of the oversupply that we had a few years ago?

[Bill Bayless:]

No, I think what's happening and the reason, again, real estate developers have never historically done a good job in tempering their own desires to develop everyone in real estate knows that. The reason you have seen the slowdown in this industry is because of the absolute natural barriers to entry that geographically exist in these college towns. And that these higher density urban areas and infill areas around the colleges are tough to develop in. And so the reason you have seen the slowdown and the reason we think that you'll see the level of development that currently exists continue to moderate in those levels, is the natural barriers to entry in the space. And so the development in the entitlement process is difficult to put together, the sites are fewer and further between. And it's a natural barrier to entry. It's the only way you would see an uptick in development and I don't think you'll see this and would be surprised if you did, is that the only way that you could see a significant uptick if the people went back to the old investment model of building dry properties further from campus. And everybody has already seen how that game is played out and you don't have the defensiveness and the stability of cash flows there. And so with the paradigm shift, with the industry all recognizing candidly that, that the American campus investment model with proximity of the campus walkable to class is now becoming the norm and following suit of what the business product needs to be. The natural barriers to entry are slowing that growth. And so it's geographically constraint driven more than anything else.

[Alexander Goldfarb:]

Okay. Thank you, Bill.

[Bill Bayless:]

Thank you, Alex.

[Operator:]

And our next question comes from Nick Joseph with Citi. Please go ahead with your question.

[Nick Joseph:]

Thanks. For the anticipated minority JV later this year, are you broadly marketing the deal or is it going to be with your existing JV partner?

[William Talbot:]

Hey Nick, this is William. Right now the strategy would be to potentially expand our current JV with our partner, but also be ready if they are not in position to execute or come to terms. We could look at it in a further way than that. But right now, when we formed the joint venture of Allianz the idea was it would be a true partnership of which we could use as another bucket in a cost of capital.

[Bill Bayless:]

Nick, shortly -- certainly no shortage of interest whatsoever. The litany of JV partners, that one in this space is more voluminous than it's ever been obviously, as Willie said, we'd give a first look to our existing partnership, and it's been a good relationship for us. But under no circumstance does the environment give us any concern about the ability to execute with the current partner or others.

[Nick Joseph:]

Thanks. And then it sounds like the number of assets mix shift will they be all off campus assets, or could you include some ACE assets in this JV?

[Bill Bayless:]

We always and we've talked about this in the past we never say never. But certainly the decision to joint venture any ACE assets would have to be something we do very thoughtful and concert with the university partners that might be impacted, if we did that. We're really looking at a small amount of joint venture right now activity. When you look at the amount of funding, we need it’s just not that great, your ACE transactions relationship tend to be much larger in that regard. I would say most likely it would not be in our campus portfolio, but we never say never.

[Michael Bilerman:]

Hey Bill, it’s Michael Bilerman here with Nick, I don’t know if Bill or Dan, once Daniel has answered. But how are you thinking about, I guess, raising additional capital today before the adding additional things to the pipeline from a development or acquisition perspective. Recognizing of the joint venture you can do at the end of the year, but do you feel that you'd want to delever the balance sheet more meaningfully and outside of doing asset sales or joint ventures, what's your current sort of take on issuing equity either through the ATM or in a marketed deal, given the stock has moved back to the high-40s? Do you feel the need that you want to get this balance sheet in a place where you have more flexibility to continue to add to the future pipeline?

[Bill Bayless:]

Yes, let me first address some of the opportunity and then I'll let Daniel go ahead and get into the capital allocation strategy in terms of timing of the balance sheet needs. Obviously, we've been out of the acquisition game for a while, given where our cost of capital is versus the cap rate environment that’s out there. And in the near-term don’t see that changing for us. And so we continue to be out of the acquisitions game at this moment in time. The other thing is William talked about and this is certainly I think one of the most attractive aspects of the student housing industry today, is the development yields that William was mentioning now being 175 to 275 basis points above where our current market cap rates are. When we went public, Michael, that spread was 100 to 175 basis points above market cap rates. And so we're one of the few sectors that has seen that development yield to market rate grow exponentially, which gives us a great amount of comfort and cushion in terms of where open market conditions are, as it relates to capital recycling to where our yields are. The other thing as we talked about, a lot of -- most of our development at this moment in time also continues to be on campus, as you hear in the awards, in the -- what we commented in Alex with the environment off campus, is those sites are few and further between. And so, we've got really good long-term per view into those development pipelines, and how they may materialize and also the fact that they're very low risk in terms of delivering stabilization given the environment on campus and how those come together from a delivery and stabilization perspective. And so with that said, we've got a long runway of opportunity to evaluate. And when we look at the 270, up to 275 basis points of accretion that we can put into play through a prudent and well-timed capital to recycling is how we evaluate that balance sheet, now go ahead and take it over to Daniel to…

[Daniel Perry:]

Yes, I mean, I don't know, Michael, that I have a lot to add to what we've put out there as our plan. I mean, we've talked about that we want to going forward better match time, our capital events to the delivery of the NOI, we do want to drive a better earnings growth profile trajectory going forward. So, right now we've got $280 million in pipeline for 2020. At this point, we don't have anything else that we're showing you that we have coming behind that. So we think that pipeline is pretty much set, it’s smaller than it has been over the last few years, will require between 2019 and 2020 about $100 million to $150 million in dispositions, which we think is very manageable. And obviously for the pipeline beyond that, we will continue to look at opportunities to raise all types of equity type capital to continue to manage our leverage levels. The stock itself right now is not at a level that we think is quite yet appropriate for raising common equity. So we will continue until that changes to look at the capital recycling program through whether it's straight dispositions or joint venture as our main source and try to time that up as best we can with the development pipeline.

[Michael Bilerman:]

That's helpful color. I guess, if this call was two weeks ago, would you have said the same thing about where the stock was at just over $48?

[Daniel Perry:]

I mean, probably, yes. We're -- NAV, at least consensus NAV is up in the 50-51 range right now. While using an ATM minimizes the discount that you get through a regular offering, it’s still below NAV and we have held ourselves to that. And we think we can get a better cost of capital through the capital recycling program right now.

[Michael Bilerman:]

Great. Thanks for the color.

[Bill Bayless:]

And Michael, right now at this moment in time and again, the key is that 275 basis point spread. I mean, when you do look at the larger components of development pipeline being Disney, and if it's way too early to say anything if Berkeley is going ACE, but if it did go ACE. Those are transactions that are so highly accretive, that there's plenty of risk mitigation in terms of any movement in market rates to be more accretively be able to fund them on a timing basis than going out right now and doing a major delevering.

[Michael Bilerman:]

Thanks.

[Bill Bayless:]

Thank you, Michael.

[Daniel Perry:]

Thank you.

[Operator:]

And our next question comes from Drew Babin with Baird. Please go ahead with your question.

[Drew Babin:]

Hi, good morning.

[Bill Bayless:]

Hey, good morning.

[Drew Babin:]

Most of my questions have been answered. I just had one more on the lease-up this year. I know from the beginning this year you highlighted four state as a market that was seeing a decent amount of supply. I was just -- and I know last quarter you're relatively optimistic on how lease up was shaping up there. I was hoping for just kind of an update qualitative if need be on Fortiss Bay [ph], how that’s shaping up? And I guess if it is doing better, kind of what's driving that progress relative to last year's is it a better understanding of the product, is it student just wanting to be closer to campus? Just any color you could provide on FSU would be very helpful.

[Bill Bayless:]

Yes, in FSU absolutely was the market that we highlighted at the beginning of the year is one of the ones we were most concerned about what the historical supply over the last year coupled with another year of strong supply coming in. The market as a whole was somewhat behind again this year. We continue to be very fortunate and that we're facing 13% ahead on velocity and have given up minimal rate, we're about 3% down on rate, but 13% up on current velocity. So we have the opportunity there to have rental revenue growth by exceeding last year’s occupancy, which is about 92%. Obviously, we always want to pay tribute to our approach to data and how we do business and the implementation of our marketing program, I've got to give a huge shout out to the American Campus team. And when we had our leadership conference last fall, the Tallahassee team came to Jennifer and I and said we're going to do it this year. And they were very passionate and very tenacious. And what I tell the story, one of the things that I have to say is you cannot in any way sell short the human resource implementation that is taking place. And that the team is just simply passionately out working every other competitor in the market. Again, using the best data and the best platform available, but they are outperforming what I think any company's expectation would be in this marketplace. So big shout out to them.

[Drew Babin:]

Great, that's helpful. And, I guess, the obvious follow on would be are there any other markets that are sort of emerging as outliers relative to expectations as the year progresses, either on the positive side or negative side? I know you know some of the Texas State universities have very strong enrollment growth and coming off of a lower base at A&M and Texas Tech a couple years ago. Does anything surprise you? Is anything sort of been an outlier relative to initial guidance or expectations?

[Bill Bayless:]

Well, we -- and certainly we're in a total of 92 university markets. So you look at all of them the major markets we look at as we talked about the beginning of the year, we're going to always -- we're going to keep a close eye on Austin, where you have new supply coming in. Texas State also is on that list. And in both cases, we see those markets as more manageable than we expected Florida State to be, which again the team has outperformed. We got a couple small markets where we don't have a lot of presence, Kennesaw State is one in Atlanta, that the market velocity is running a little slow this year, but plenty time there. And that's historically a late market. Lubbock, which you mentioned, continues to recover extremely well. And we're running ahead of last year, which was running well ahead of the other year. So not a lot of surprises in this market champagne also was two years ago, which was one of the markets, we’re also doing extremely well there too. And so all-in-all pretty good picture when we look at the individual markets where we expected to be soft this year. But as Daniel said, and I reiterated in my comments, it's only April, we got three months left in the leasing season. It's never over till it's over, we got to tenaciously implement till the very end, and hopefully we’ll report a good number on September 30th, all implementation going well.

[Drew Babin:]

Great, appreciate the color. Thank you.

[Operator:]

And our next question comes from Samir Khanal with Evercore ISI. Please go ahead with your question.

[Samir Khanal:]

Good morning, guys, Bill or Daniel, you made some comments on the development side, but just kind of sticking to that, what should we be modeling for development completions over the next few years, kind of beyond 2020. I know we've talked about sort of $400 million in the past. But it sounds like you're kind of -- the numbers could be lower. And I guess what's driving that number to be lower, is it sort of higher labor costs, construction cost sort of development yields, you're not kind of achieving just kind of any color around that would be helpful.

[Bill Bayless:]

No, and I think we've talked about over the years the run rate being anywhere from $300 million to $500 million, we had that one outlier year-over-year where we had $600 million come into play. The $300 million to $400 million run rate, we're a little below that right now, in terms of next year delivery, which is more just a natural progression of deal selection. The off campus transactions we have slowed down just given the scrutiny of what's taking place in the market. And again, most of our competitors who are chasing sites take a different approach than we do where we do the build for the masses, not the classes and whole price point deal [ph]. All the other developers in the space tend to be still continuing to build at pro-formas attempting to capture the first spot top 5% socio economics. And so they're using only the highest rental rate point in the market in their performance, and looking at 800 bed deals plus to make those numbers work. And so, we're patient, we've seen that again before. Those will be the acquisition opportunities 36, 48 months from now that have a lot of upside as you can then buy below replacement cost. And we look forward to those days as we did back in 2009, 2010 and 2011. And so when you look at the on campus transactions, which is where the bulk of the shift has now been in the development pipeline, and you see that continue to be, the diminishment in the dollars in the pipeline right now is the diminishment in the off campus development not the on. And so the P3 transactions on campus continue to be a robust pipeline of opportunity. We're incredibly pleased as we've continue to say over the years and certainly this quarter is the probably the pinnacle of it, in terms of the flagship institutions that are undertaking the P3 model as the main stay delivery, and Cal Berkeley again being the pinnacle of that from a quality of institution perspective, that is mainstreaming it. We also love being the only public company in the space now in that arena and think it is absolutely a huge competitive advantage for us. And so continue to see a steady pipeline there into the future. So I'd say the $300 million to $400 million a year probably a good long-term number, you will see years where it fall slightly under that and if all things came together perfectly some years where it came in slightly over that. But I think it's probably still a good numbers that $300 million to $400 million.

[Samir Khanal:]

Okay, and then -- thanks for the color. I guess, my second question is getting back to sort of the guidance for same-store NOI, you've kept the range consistent, it's sort of 1.5% to 3.4%. I guess, what needs to happen that kind of get you to the low end of the range, and you've done 5.1% in the first quarter you kind of take the average for the next three quarters, you're doing about 50 basis points to get to the low end, I guess, which seems pretty low, I guess what am I missing here being that it's a pretty low bar to cross here.

[Daniel Perry:]

Yes, I mean, this is Daniel, in that low end, you’re obviously allowing for the lower lease up for the fall at the 1.5% end of the 1.5% to 3% range that we gave for this fall’s lease up. And at the high end, you're allowing for the surprises that can happen in expenses and where we can get surprised by expenses is obviously in the non-controllable areas. Property taxes are big one, insurance certainly, that market can be difficult at times, and then you have incident response costs in your repairs and maintenance area that sometimes can come in unexpectedly. We try to allow for it in the contingency and that's what you see at the higher end of our expense growth, which is driving the lower end of potential same-store NOI growth.

[Samir Khanal:]

Okay. Thank you, guys.

[Operator:]

And our next question comes from John Pawlowski with Green Street Advisors. Please go ahead with your question.

[John Pawlowski:]

Thanks. Are any of your schools currently revisiting mandatory on campus requirements for upperclassmen, in addition to a few that have hit the last few years?

[Bill Bayless:]

John, there's none that have publicly put statements out or proposals in front of their board of regents at this point in time, but it's something that we always monitor. We have a maybe somewhat of a unique view on that. For the most part, we view colleges and universities having the first year students on campus as a long-term positive, and that the most likely student to live in an American campus community where we have private off campus properties that compete in the open market, the most likely students to live with us is a student who is migrating from on campus. And that the way that we run our academic program and our Residence Life program and location to the classroom, we like to position ourselves as the non-university academic alternative for the upperclassmen that are being forced off campus and can no longer live on. And so, when the universities are implementing a first year housing program, we look at that as broadening the target market base. There always may be that one year where you're concerned about losing some potential freshmen in markets where you have it. But after that first year, our history shows us that is a net positive. And then, certainly, in markets where we are building on campus housing, sometimes we like to initiate the conversation of those housing requirements where we have on campus products. And so it's something we monitor closely and always keep a strategic per view on how we may be impacted on a short term basis and a long-term basis, but overall net on the long-term we view those decisions as net positive not net negative.

[John Pawlowski:]

Understood. But on the off-campus side is that statement hold in a negative demand or a negative enrollment growth school. Take a Portland State, take a Missouri, Marshall University, I mean you're losing bodies in aggregate. So is it kind of a race to the bottom where the university tries to fill its own coffers at the expense of your off campus communities, if they are well located?

[Bill Bayless:]

Yes, what you'll find out though, that even in those and again, the typical markets that we're operating in overall have net positive enrollment growth over the long-term, Use Mizzou as an example, that'd be a good one where you sell something out of the ordinary in terms of a dip in enrollment. The universities on average only have 22% beds as a percent of on campus enrollment and they typically reserve all of those beds for the first year incoming students whether they have a housing requirement or not. The main reason most universities do not have a housing requirement is because they don't have enough beds to fulfill it. And that's the reason they don't require students to live on campus because they can't. Even in a declining environment the on-campus beds that are the best located typically don't have an issue filling. Certainly when you look at what happened at Mizzou, your off-campus properties that were a drive from campus and Mizzou only has 22% beds as a percent of enrollment where you saw softening was in your off-campus beds that were a drive from the university. Our property at Mizzou which is located across the street drawing the entire enrollment downturn was 100% occupied and the university did much, much better. And so, we don't necessarily see the universities that are implementing that mission typically does not have to do with, economically, we need to fill our beds they have no problem filling their beds it’s whether or not they have capacity to serve the number of first year students that are entering.

[John Pawlowski:]

Okay, understood. Thanks.

[Daniel Perry:]

Thank you.

[Operator:]

[Operator instructions]. And our next question comes from Daniel Bernstein with Capital One. Please go ahead with your question.

[Daniel Bernstein:]

Hi. Good morning.

[Bill Bayless:]

Good morning.

[Daniel Bernstein:]

Most questions have been answered, I think, I had more of a broad question, if you’re thinking a couple of years out, most of your recent wins have been more third-party or management. Do you see the business tilting a little bit more towards a management business versus an equity owned business for you over time, or it’s -- I mean, it's hard to predict where the capital markets will be and I'm sure you'd like to own more assets, but do you see it tilting a little bit more towards the management business than an owned equity business.

[Bill Bayless:]

No, we don't, we continue to see a mix of opportunity. Certainly, we have always -- our company started as a third-party developer and manager. And it's in that arena where we built our brand among colleges and universities. And that's a great business for us. In terms of not only building our brand, but also enabling us to have more credibility in getting through entitlement processes off-campus, because of the relationships that we've harvested in that arena. Over the long-term, again, we're continuing to be in an industry that is highly underserved. As we talked about Mizzou, the average university only provides 22% beds as a percent of enrollment, the average age of those beds is 53 years old. Most of what we're doing in that arena continues to be replacement housing. Some universities and again whether a university decides to do a third-party transaction or an equity transaction almost always has to do 100% with their balance sheet capacity. So Arizona State is the example of an ACE University, where President Crowe's mission was I'm going to preserve every ounce of capacity that I have for research and academic facilities. And allow someone else's balance sheet to handle the housing. Other universities have a balanced approach to that based on what their funding is. And so we think those choices in the future will continue to be diverse choices by university. We're agnostic as to what methodology fits them best, and whether we play the role of third-party provider, or equity owner. And I also think again with 22% of the beds being off-campus. The off-campus market continues to be 3 times the size of on-campus, and will continue to be that in that ratio at public universities. And while things have slowed down right now from an acquisition and M&A perspective, that's a moment in time in the cycle. And so, as we think about our company over the next 10 to 15 years, the greatest opportunity that we see before us right now, you have a lot of capital coming into the space that is partnering with private companies that have historically been merchant developers that have built and flip, built and flip, built and flip. And now that those merchant developers have institutional capital that has a longer hold period for the first time, you have these development platforms that are building scale for the first time in managing 20, 30, 40 property portfolios. And candidly, their forte is not operations. And so with some great product that’s been built nationally in great locations, we think there's going to be a significant amount of opportunity left in merchant developers that have become holders for the first time that because of market conditions will do okay. But when this company was really producing earnings per share, is when we're in M&A activity where we've got 200 to 400 basis points of occupancy and operational efficiencies that we can bring to bear along with rental rate economics over the initial investment period. And so, I think, those days are ahead of us, again, 36, 48 months on the horizon, but there's going to be more opportunity in that arena than we've ever had before.

[Daniel Bernstein:]

Okay. So it’s more of just where you are in the cycle in it than a change in MO.

[Bill Bayless:]

Correct, although we love that third-party fee revenue, make no mistake, that's great income.

[Daniel Bernstein:]

I agree. That's really all I had, I’ll hop off. Thanks.

[Operator:]

And ladies and gentlemen this will conclude our question-and-answer session. I'd like to turn the conference back over to Mr. Bill Bayless for any closing remarks.

[Bill Bayless:]

Yes, we'd like to thank you all for joining us for Q1. As we said at the beginning, it was a very good quarter that we're very pleased with. It's early in the year we've got a lot of work to do. And I want to thank the team for all of their hard work and effort and their commitment to finish strong through this lease up and continuing to deliver the type of results that we've talked about today. Thank you so much.

[Operator:]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.