American Campus Communities, Inc.
Q2 2019 Earnings Call Transcript

Published: 23 Jul 2019

[Operator:]

Good day and welcome to the American Campus Communities 2019 Second 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. Mr. Dennison, the floor is yours, sir.

[Ryan Dennison:]

Thank you. Good morning and thank you for joining the American Campus Communities 2019 second 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 in the company's periodic filings with the SEC. The company undertakes no obligation to advise or update any forward-looking statements to reflect events or circumstances after the date of this release.Having said that I 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; and Kim Voss, Chief Accounting Officer.With that, I’ll turn the call over to Bill for his opening remarks. Bill?

[Bill Bayless:]

Thank you, Ryan. Good morning and thank all of you for joining us to discuss our second quarter 2019 financial and operating results. As you saw on last night's release, it was another strong quarter for the company with 8% earnings per share growth over the same quarter prior year.Let me provide a high level overview of what the team will cover today. Our operational and financial results slightly exceeded our internal expectations with solid same-store NOI growth of 3.5% over the same quarter of the prior year. We’re pleased with our core operating performance year-to-date and we remain focused on several important operational initiatives in front of us including executing through the important final stages of our fall lease up, administrating our annual turn in make-ready process and ultimately in welcoming over 133,000 students, who will move into an owned or managed American Campus Community during the months of August and September.Preleasing for fall continues to be on track within our stated guidance range and we are especially pleased with the year one stabilization of our 2019 development pipeline. Also we will provide an initial outlook for the fall 2020 new supply, which is projected to decrease both on a national level and within our own markets.In addition, we continue to see a vibrant P3 environment fostering both ACE and third-party development opportunities. We also see a significant continued global institutional investment interest giving us a high degree of confidence in our ability to execute on the modest $100 million to $150 million needed annual to fund our growth and execute on our highly accretive development pipeline while minimizing dilution to earnings.With that I will turn it over to Jennifer to get us started.

[Jennifer Beese:]

Thanks Bill. As Bill mentioned, our second quarter 2019 same-store operational results slightly exceeded our budgeted NOI for the quarter. As seen on page S-5 of the supplemental, quarterly same-store property NOI increased by 3.5% with strong revenue growth of 3.2%. We were pleased with the revenue results for the quarter as we saw good summer leasing success at our apartment communities as well as solid levels of summer camps and conferences at our rental properties.Same-store expenses for the quarter came in at 2.9% with double-digit growth in repairs and maintenance category which was in line with our expectations as we communicated on our Q1 call. We had a tough expense comp in this category from onetime items that benefited the prior year's quarter. Excluding those onetime items, this category would have reflected expense savings of approximately 2% for the quarter.Utilities expense came in slightly below plan as the category continues to benefit from renegotiated cable and internet agreements as well as favorable electricity cost due to recently executed energy contracts and lower usage from our LED installs.Marketing expenses, one of our smallest categories from a nominal dollar standpoint had an elevated expense growth this quarter. We expect to finish the year at close to 10% growth in this category as we ramp up our digital and social marketing efforts as well as our university sports marketing activities, while we continue to explore eliminating some of the more traditional marketing efforts.Turning to our portfolios leasing activity, our projection for opening same-store rental revenue growth is trending within our guidance range. As always, the last five to ten weeks of the leasing season is the most critical and as of today we would estimate a final leasing result that is near or slightly below the midpoint of our guidance.We also continue to be pleased with the lease-up progress for our fall 2019 developments. With this group of properties currently pre-leased at 96% achieving first year stabilization at our anticipated yields.As always, we want to thank both our field and corporate teams who remain focused on completing our lease-up, managing our annual turn cycle, no-show process and preparing our properties for move-in and welcoming each resident to their new home.I will now turn the call over to William to discuss our investment activity.

[William Talbot:]

Thanks Jennifer. Turning first on development, we are completing construction on our 2019 pipeline of developments and pre-sales which total five projects approximately 3,150 beds and $404 million in development cost and look forward to opening the projects in the fall. Developments are currently on time and on budget and will fully stabilize at opening yields as in our anticipated range. We expect to close on the two presale developments during the third quarter.With regards our on-campus partnerships, we are very excited to announce that we closed and commenced construction in July on our third-party on-campus development project with the University of California, Riverside marking our seventh successful closing within the University of California system.The 1,500 bed apartment project is our second project as part of the multi-phase award anticipated to ultimately deliver up to 6,000 beds on campus. The project is targeting a fall 2021 opening and ACC will manage the community upon completion. With the first two projects, ACC has anticipated to earn $11.7 million in development fees and $1 million in annual ongoing management fees.Overall, we continue to track a vibrant and expanding pipeline of on-campus P3 opportunities with colleges and universities continuing to turn to the private sector to address their housing needs.Finally, turning to new supply for the 2020/2021 academic year, real page AXIOMetrics is tracking 30,000 beds currently under construction nationally with a potential additional 12,000 beds planned, but not yet under construction. Based on how many projects ultimately start construction for 2020 delivery, new supply could range from 30,000 to 42,000 beds down from a total of 48,000 beds delivering nationally this fall, representing a decline of 13% to 38% in new supply nationally that is tracked by real page.Within ACC 68 owned markets, we are tracking 21,000 beds currently under construction for 2020 with a potential additional of 1,100 beds planned, but not yet under construction. Based on how many projects ultimately start construction for 2020 delivery, new supply could range from 21,000 to 22,000 beds down from a total of 29,200 beds delivering this fall in those markets representing a decline of 24% to 28% of new supply. We will update the market respect to these potential deliveries on our third quarter call.I'll now turn it over to Daniel to discuss our financial results for the quarter.

[Daniel Perry:]

Thanks William. Last night we reported the company's financial results for the second quarter of 2019, which at $0.56 of FFOM per fully diluted share grew 7.7% over the second quarter of 2018. As Jennifer discussed, overall this was slightly better than our expectations primarily due to the property operations as we saw higher than expected same-store revenue resulting from outperformance and back filling short-term leases this year and higher summer camp and conference business at our residence hall properties. We also continue to see some outperformance in utilities from our asset management initiatives.As you heard from Bill, we are pleased with the outperformance we have achieved in the quarter so far this year, but we were not making any updates to our 2019 earnings guidance at this time as many of the traditional risk to earnings still exist in the completion of the fall 2019 lease-up, continued operating expense management throughout the year and the successful closings still to occur on one of the third-party development projects included in the midpoint of guidance.Further, as implied by the 1.5% to 3.4% same-store NOI growth guidance we are maintaining for the year, we anticipate the remaining quarters of the year to experience less same-store NOI growth than the 4.3% achieved year-to-date. This is due to the slower seasonal revenue growth in the summer months and the 1.5% to 3% targeted rental revenue growth from the fall 2019 lease-up as well as tougher operating expense comps in the remaining quarters.Also, as we talked about on the last call, we will be transitioning to an outsourced solution for online resident payments starting this fall. As a reminder, historically these payments were initiated through our portal which required us to record a portion of the online payment as other income with an offsetting expense for the payment to the processor. With a fully outsourced online payment solution, both the required revenue and expense entries will be eliminated. Well, this will be neutral to an NOI during the initial 12 months of implementation, comparable quarterly same-store revenue and expense increases will be reduced by $700,000 to $800,000 and revenue growth rates will be reduced by approximately 40 basis points and expense growth rates by 80 basis points.Again, this change does not impact our NOI and is already reflected in our guidance figures for 2019. But, we will continue to remind you of the temporary effect it will have on same-store revenue and expense growth figures later this year and into the first three quarters of 2020.With that being said, you can refer to pages S-16 and S-17 of the earning supplemental to get complete details on each of the components of our 2019 guidance. As usual, we will update our 2019 guidance on the third quarter call for the final results of our lease-up and our expectations for the remainder of the year.Moving to capital structure, as of June 30, the company's debt to enterprise value was 32.7%. Debt to total asset value was 38.3% and the net debt to run rate EBITDA was 6.7 times. During the quarter, we took advantage of the attractive conditions in the mall markets and completed a $400 million bond offering to term out a portion of the balance on our revolving credit facility.As you will see in our capital allocation and long term funding plan on page S-15, we have not made any significant changes to the growth in funding plan. We continue to expect to meet our capital needs for the remainder of 2019 and then for 2020 and beyond through a funding mix of cash available for reinvestment, additional debt and approximately $100 million to $150 million per year in disposition, joint venture, and/ or equity capital. This will allow the company to maintain a debt to total asset ratio in the mid 30s and the net debt to EBITDA ratio in the high 5s to low 6s.Consistent with our stated strategy of trying to better match time capital raising with the delivery of our development pipeline each year to create less disruption in earnings growth, our current 2019 guidance includes approximately $100 million to $190 million in proceeds from dispositions and/or the sale of a minority joint venture interest in existing properties during the second half of this year.With that I will turn it back to the operator to start the question-and-answer portion of the call.

[Operator:]

Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] And the first question we have will come from Austin Wurschmidt of KeyBanc Capital Market. Please go ahead.

[Austin Wurschmidt:]

Good morning everybody. Bill, you mentioned in your prepared remarks that supply, sorry, I mean preleasing is tracking below or at the midpoint of your expectations at this point. Do you think supply is having a greater impact than you originally projected and what markets are you seeing the most softness relative to your initial expectations?

[Bill Bayless:]

Sure and if you take Jennifer's prepared remarks where she talked about at this moment current trending has us near or just slightly below the midpoint. With five to ten weeks left in the leasing season, our projection models, we have best case scenarios that have us still performing above the midpoint. And we have worst case scenarios and have us performing slightly or below the midpoint. So when we take at this moment in time in the most recent trending, we are just slightly below the midpoint in those projections. And so, I would say largely relatively on track with expectation on leasing.When you look at the markets, Austin is a market we continue to focus on in terms of the impacts of new supply. Taking Austin out of the equation, the other high supply markets we talked about earlier in the year, we continue to do well in same markets and some of the others. And for the most regard, the leasing is on track and we always talk about this time a year, it’s the power of the ones and twos with five to ten weeks left in the leasing season, the things that we are looking at as we close out that have the impact that can be significant swing positive and negative or the late market demand in the next five to ten weeks as compared to their historical trend.Our execution on back-filling, late cancellations which you saw on our main numbers, our back-filling efforts there were significantly better than the years past and you saw about a 20% improvement from the historical diminishment in back-filling largely due to the lamps and next gen initiatives. Also the no show management and late fees and leasing opportunities. And so, as Jenifer said, the guidance range is still in play. We have opportunities to still exceed the midpoint and to be slightly below the midpoint based upon those variables that I just went through.

[Austin Wurschmidt:]

So again, just like market you mentioned Utah, Austin I mean [Kansas States] one I think you mentioned in the past. Texas State has come up in the past as well as Tallahassee, any of those markets that have continued to see softness or that are underperforming a little at this point?

[Bill Bayless:]

Yes. [Kansas] we saw softness about eight weeks ago and the team has actually done incredible there. We have had a very strong lease up finishing out through the last weeks, given up a little bit on rate, but done very well there. Also San Marcus is tracking to not be a diminution on this year's lease-up in terms of its revenue growth. And so overall, we have done very well and Tallahassee as I mentioned the team is just actually not cover off the ball in terms of our improvement in that market and so in the new supply markets Austin is the only one that we continue to track cautiously.

[Austin Wurschmidt:]

Appreciate that and then just one more for me. I appreciate the early detail on the supply figures. Just curious looking back, what probability would you place on those numbers being kind of good final supply figures for 2020 and then can you point to some markets next year where you see the heaviest level of deliveries?

[Bill Bayless:]

Yes and I got to tell you this is the positive headline of this call. And that is the new supply dynamics moving into 2020. As William talked about, in our range where we see a decrease of 24% to 28% that 24% is based upon projects where there has actually been a shovel in the ground and they are underway for construction and the 28% is the 1,100 other potential beds that are planned but not yet a shovel in the ground and we have to see whether or not they truly get underway to be delivered next year. And so, those numbers are fairly solid and just about any way you slice and dice the data, it is a positive story in terms of the new supply in our portfolio.Total new supply as a percent of enrollment portfolio is only at 1% which is the lowest number in about six years. When you look at the impact of NOI at our largest top ten markets, it's down to 14% versus 18% this year with only five in the top ten markets having new supply. And so overall, and again, I would make the statement that in AXIOMetrics number nationally, real page AXIOMetrics is down 13%. That decrease is in no way due to a lack of interest or desire to do development in the space. But rather it is the nature barriers to entry that exist in the markets that makes new developments difficult and new supply difficult.And so, those numbers are very encouraging and also consistent with the trend that we have seen over the last two to three years. When you look at the markets where we see repeating supply in 2020 where it also occurred in 2019, those markets are Champagne, Austin, Auburn and San Marcus and we have done well in those markets. Again Austin is one that we’re watching this year we will probably continue to watch for next couple of years given the potential supply horizon there.Champagne which had been a challenging market a couple of years ago, this year has gone extremely well for us. We are already full and had significant revenue growth, one of your better ones about 6%. So we feel we are well positioned there and also with our current price point in the market compared to new supply. And so, on the new supply front overall it is a very positive picture in the fundamentals moving into 2020 both nationally for the industry and specifically to our portfolio.

[Austin Wurschmidt:]

Appreciate the thoughts. Thanks Bill.

[Operator:]

Next we have Nick Joseph of Citigroup.

[Nick Joseph:]

Thanks. Maybe just staying on same-store revenue. The maintained midpoint and guidance seems to be acceleration in the back half of the year to 1.9%. Is that 1.9% of good run rate to the first half of 2020 as well given the expected 2.3% growth for academic year 2019/2020 lease-up in the 40 basis point drag from the outsourcing of the online resident payment processing that you mentioned?

[Daniel Perry:]

Yes. Nick this is Daniel. That's right. Just from a optical standpoint, you'll see that that impact of the portal fee elimination on revenue with an offsetting reduction in expenses about 40 bips on the revenue growth statistics and about 80 bips on the expense side. Obviously, as we've talked about going into this year, the variable to the total same-store revenue growth can be other income and what we're able to project there in terms of any growth that we might see in other income and whether that's a positive or negative contributor to overall revenue growth.We will give the guidance on that on our fourth quarter call, but in terms of rental revenue growth taking 40 bips off of that two and a quarter would be midpoint if that's where we end up would be the right assumption.

[Nick Joseph:]

And then, just on development. The Auburn development now looks like delivering in August versus July previously. Will those impact full year and then is there any impact for being a little bit later than expected on final numbers versus what you assumed in guidance initially?

[Bill Bayless:]

No, not at all and that's just candidly an administerial cleanup in terms of when we actually expect revenue generation to occur. We have a handful of July move-ins, but you all should be modeling that property and it's a 100% pre-leased. Everything has gone great there, development is on time, on budget and fully leased. We will stabilize in year one as anticipated. But just from modeling perspective, revenue should begin consistent with the commencement of the academic year in August. We just have a handful with July early move-ins.

[Nick Joseph:]

Great, thank you.

[Operator:]

Next we have Alexander Goldfarb of Sandler O’Neill.

[Alexander Goldfarb:]

Good morning down there. Just a few questions. First on the pre-leasing goal and you guys have talked about this on prior calls based on various industry conferences. But overall, the trends for this year in general were pretty favorable and I understand that the private companies have the benefit of being private. So they don't have FD because they don't have D.For you guys, you're still sort of within the range, you're touched below but obviously it sounds a little bit different from the narrative that we've been hearing over the past few months. So maybe you can just provide a little bit more color and maybe it's just perspective on sort of you guys running your portfolio at 96-97 versus the private guys running 95 plus and maybe that's where the delta is, but it does come as a little bit of surprise that you guys are a touch below the midpoint given the commentary to-date?

[Bill Bayless:]

Yes Alex, I would say, it's actually consistent from our commentary and yet again we still have projections above the range and below the range and would say that right now based on this moment projection with five to ten weeks left, we are just slightly below the midpoint. And you hit on exactly the case in point as to what the differentiation is between us and the private company competitors and that we typically operate in an occupancy improvement over our competitive base between, they are typically at 95 or slightly below and we are typically at 97 and slightly above.And so, when you look at the positive tailwinds and the fundamentals that the sector does have at this moment in time, other folks have opportunity to start to close the gap between their own portfolios and our best in class portfolio from an occupancy perspective, where this year our growth driver is a little more limited and that the occupancy provides less upside for us and it's largely driven by the range. And so, I don't think there is any change whatsoever in terms of the industry fundamentals and the positive messaging that you have heard at the past conferences and we have a good solid comp off of the occupancy last fall coming in at the 97 that we are working off of. It doesn't give us quite as much upside as some of the other privates that are out there.

[Alexander Goldfarb:]

And then a question for DP, if you look at guidance and you look at where you guys have been trending you have been having good year so far. It seems like internally you guys have been buttoning up all the issues. You are better at the drop outs and back-fills and yet it would seem like your number should be towards the high end. So maybe you can just go through the variables, because obviously in your guidance originally you knew that the back half would be a little tougher. You knew that you have to wait for that Berkeley deal to come in, the timing of the JV or outright sales like those items haven't really changed.So maybe you could just talk about what would prevent you from being towards the high end based on where you are and that you already know how your preleasing is coming in and certainly your preleasing is not at the low end, which again suggests that it's pretty much on track. So what are the things that would prevent you from getting towards the high end of earnings guidance?

[Daniel Perry:]

Sure Alex and let me go through that in two components. First, in terms of NOI and then in terms of FFO overall. When you look at the first two quarters of the year, we produced 4.3% same-store NOI growth and our midpoint is 2.5%, so certainly understand just everybody trying to continue to get a better feel for how the second half of the year is expected to play out.Our midpoint of rental revenue growth for the fall is 2.25. If you just think about normal inflationary expense growth of 3%, that would get you down into a range of NOI growth in the mid-to-low one's that would combine with that to put you close to your same store NOI growth mid-point.We talked a little bit about tough comps on the expense side. I mean, even though we're talking about 3%, that's not necessarily significantly high operating expense growth. You still have to consider that we've been able to drive below that. When you look at 2018 second half of the year excluding repairs and maintenance where you have incident response cost for hurricanes and things like that.And property taxes, the expense growth was 1.7%; so had very low growth last year. And we saw in the second half of last year a lot of the benefits of the energy efficiency initiatives that are helping us drive those savings and utilities and so when you start to lap those deployments in the second half of this year and when you start seeing less benefit from those.So, we only have about 30% of our property taxes and settled at this point, it's hard for us to anticipate fully where that will all finish out. We're still holding our 4% a little over 4% projection in property tax growth but it is a variable that wants us requires us to maintain a range there.And then, we're just entering hurricane season and that is something we can't control, we don’t know what we will have in terms of incident response cost there this year; last year was a very light year. And so, if we have anything on the heavy side of the equation, that would lead to greater growth in repairs and maintenance.And so, that's where we get to maintaining that mid-twos same store NOI growth target for the rest of the year. And then, in terms of overall FFO, we do still have a third party fee deal to close; that's $1.8 million in fees or for 2019 at UC Berkeley. As you've heard us talk about, there is a lawsuit between a city and university with regards to the fees that they'll have to pay as for their environmental proof-of-process.And we want to see where that sells out. It could impact the timing of commencement of that project. We think that they'll ultimately come to agreement but we just don’t know when that will occur. We didn’t expect that project to start until Q4, so there's still time for them to come to agreement but again another variable in the FFO equation that makes us want to just continue to see things develop as we move through the third quarter.

[Alexander Goldfarb:]

Okay, thank you.

[Bill Bayless:]

Thank you.

[Operator:]

And next we have Samir Khanal of Evercore ISI.

[Samir Khanal:]

Good morning, guys. I guess, in the past you've talked about the ongoing efforts to control operating expenses to asset management initiatives. I guess, how much is left to do on that as it relates to controllable expenses at this point?

[Bill Bayless:]

I mean, as I just discussed, we deployed a lot of our LED initiatives and also peak billing our usage reductions throughout the portfolio last year. We are still continuing to deploy some of those this year but a lot of that started in the second half of last year and so you're seeing it occur in the first half of this year.And we'll get a little bit of help from it but it starts to roll off as you get into the second half of this year. We continue to explore opportunities on the multi-asset efficiencies that we've talked about where we have multiple properties in the market. And we look at strategies from a marketing standpoint; from a staffing standpoint; from a maintenance standpoint that will allow us to control expenses there.And then of course we talked about on the marketing side that we are really doubling up right now in terms of our traditional marketing efforts that have driven our marketing expenses historically and a much bigger move into social and digital marketing.And as we really start to get our process and our strategy oriented around that digital and social media marketing and we can eliminate more of the traditional marketing efforts that will allow some improvement over the growth levels that we're seeing right now in marketing.And of course we are always scrubbing the portfolio for opportunities on national purchasing agreements, contracts with vendors that we can use our footprint to take advantage of and other types of asset management initiatives. So, we will continue to try to control expenses as much as we can, we always have the on control those are property taxes.But on some of the things that others have seen whether be on payroll increases across the country, our approach there has been able to a lot more has allowed us to keep those expenses in check and we expect that to continue as well.

[Samir Khanal:]

Okay, that's it from me, guys. Thank you.

[Bill Bayless:]

Thank you.

[Operator:]

Next, we have Drew Babin of Baird.

[Drew Babin:]

Hey, good morning.

[Bill Bayless:]

Hey, good morning.

[Drew Babin:]

Quick question on UT Austin last year I think in the West Campus market, you saw some of the higher end more amenities better located product that kind of generally lease up faster and be a product out at the block, those types of assets maybe took a little longer to kind of fill-in.Is that what you're seeing once again this year and is there anything you're doing to I think last year some of the Castilian demand I think was kind of diverted out of the block or do we something -- to do as maybe strategically being done there. Could you just talk a little more in depth about how that's coming together in Austin?

[Bill Bayless:]

And Austin continues to be over the last five years and this year and kind of looking into the next two to three one of the most prolific new supply marked in the country. And that it is unique in Austin that the City of Austin because of there's such an overall housing affordability crisis.Did the University Overlay District which is one of the few pedestrian submarkets near our major university in America that is actually encouraging and eliminated the barriers to entry related to high density development. And so, all of the development you see taking place given the land cost and also construction pricing, each year the new products tend to be the highest priced product price points in the market.And you don’t see this in all markets nationally, it is somewhat unique to Austin. You continue to see the new highest priced products released first. And so, we continued this year to see the new deliveries that are at the highest price point, that already add a significant premium to our block TX and Jefferson 26 properties or 26 West properties continues to lease first.And so that did continue this year. As we look at new supply coming in the future there's absolutely going to come a point to where you have a over built situation at the absolute highest price point in the market which at some point you put some pricing diminishing ability on some of the second third generation two to three year old new supply.But that's probably going to occur in 2021, 2022. We continue to have a good price point. The Block property for example you can still lease there as low as $399 per accommodation. And so, really our product positioning in that case endpoint is to compete with the drive submarket on Riverside and offering accommodation and price points where students can still walk to class versus having to drive Interstate 35.But we do see the upper socioeconomic properties continue to lease very quickly but that is candidly where the invest the long-term investment risk is in the market is at that higher price point. And so, often is the market that even with the new supply, we always continue to do well from a year-over-year revenue growth perspective this year continues to be a little tougher than usual.But overall, we like our product positioning and that with our strategy had built for the mass is not the classes but longer term installation that we have from new supply is the more affordable price point in the spread that does still exist with our products especially in the apartment sector to the new apartment supply coming in.Castilian and Callaway House tend not to be as impacted by the new supply which our campus has continued to be all new apartment supply and so they operate somewhat independently of that and built directly correlate to the apartment development.

[Drew Babin:]

Okay, that's helpful. And then just one more from me, the overhead related to the third-party business is if you look at kind of what has cost year-to-date versus the full-year guidance, so it was like there's some uptick in the rest of the year.I know there is some expense, there is some payroll reimbursement dynamics in that number. Is that backend loaded where you're going to see those higher revenues and higher expenses in those segments or are the third-party kind of the overhead cost increasing in the second half of the year?

[Bill Bayless:]

No Drew, we did see a little bit of benefit in the second quarter relative to our expectations and in terms of how that third-part expense trending has played out. We're reserving our expectations there as we continue to pursue third-party projects and a lot of those expenses are in that line item.And so, just depending on the activity throughout the rest of the year and the cost associated with that whether not the savings that we've seen there will ultimately materialize or turn out to be a timing thing we just are withholding expectations on that for the time being.

[Drew Babin:]

Okay, that's all from me. Thank you.

[Bill Bayless:]

Yes.

[Operator:]

And next, we have John Pawlowski of Green Street Advisors.

[John Pawlowski:]

Thanks. Bill or Jennifer, circling back to followings are being slightly below the midpoint. I guess, everybody has got a different definition of slightly. Or are we talking 10 basis points or are we talking 50 basis points?

[Bill Bayless:]

Yes. And again, first of all when Jennifer said we're trending near the midpoint, I would take near as above or below the midpoint and when we talk slightly typically when we talk slightly we're talking zero to 30 bips.

[John Pawlowski:]

Okay. Just so we get a sense for the breadth of strength or weakness, what how much of the portfolio is trending below the 1.5% low-end?

[Bill Bayless:]

And this is where what we always talk about, at the end of every lease up, rather than focusing on particular properties, it really comes down to the execution of what we refer to is the onesie's and twosie's. and then we will have our employee call after every earnings call each quarter we do an employee wide call and the focus of tomorrows call is the execution on the four variables that I talked about in terms of the execution and backfilling of late cancellations and no-show management.And that, when you look at our leasing projections, you typically have more than half the portfolio, 80 properties where you have vacancies that exist with candidly in our projections about 40 properties that have between one and 10 beds being vacant.And when you're within one to 10 beds being vacant, it really comes down to execution on your backfilling and no-show process that can have been meaningful 30 basis point to 40 basis point different in terms of execution of filling in the places that you can.And so, really for us the key to performance and in terms of finishing at the midpoint or above or below the midpoint isn’t looking at the 1% or 2% or 5% properties where you have double-digit vacancies that you hope to excel but it's really in the execution that each and every asset of those one's and twos.And so, that's the focus of the company. And candidly, when Alex asked his question previously, where we have always outperformed our competition and the reason that we operated that 150 basis points to 200 basis points better with the competitors and what ultimately makes the difference in our final numbers as it relates to whether we're slightly above or slightly below the midpoint is in the execution of those 80 to 90 properties where we can make those incremental differences where you have the best opportunity to do just one or two better versus just focusing on the properties where you have more significant diminishments your original projections.

[John Pawlowski:]

Now, I understand it's an execution game. Again, I'm talking the extreme, so at this point 10 weeks out, how much of the portfolio is trending below the low end, not slightly below the midpoint but below the 1.5% low end.

[William Talbot:]

Yes. But we're not going to give that statistic in terms of property by property in terms of but again it's a combination of the roll up. Each and every year you have a handful of properties five to 10 to where you have somewhere what I would say is material diminishment to you midpoint projections that you have at the beginning of the year.And you also have five to 10 that significantly outperform your midpoint projections. So, it tends to be a fairly balanced pro and con to each of those categories.

[John Pawlowski:]

Okay. One longer term question from me. I guess what inning are we in on the portfolio transformation and is the current school list pretty steady stay or are additional school exits on the horizon?

[Bill Bayless:]

No, I would say we're probably in the seventh inning stretch on the portfolio refinement. My favorite statistic and this really gets in the way when Daniel was talking about the operational efficiencies, I believe the portfolio today while our growth over the company's history has been largely 65% acquisition and M&A because of our dispositions typically being properties that we bought in larger M&A portfolios that did not meet our investment criteria. 56% of the portfolio today consists of American Campus program, designed and developed communities. And so, it's a much higher quality base and we believe we can put all of our expertise into the design and the operations of properties which then does translate into better operating cost, better capital cost and the like.When you look at the remaining portfolio and as Daniel talked about our capital needs in his script are recycling of about $100 million to $150 million a year over the horizon of the next through 2023 and we look at the funding out of Disney and then we have always said historically that we're looking at 2.5% to 3% of our portfolio on a long-term ongoing basis to continue to refine.And you will see that refinement continue. Certainly as you look at the evolution of market selection, we have more thoroughly defined over the last three to five years that our investment we prefer to be in power of five conferences in Carnegie R1 institutions. We still do have a handful of markets left probably five to seven where we had done M&A transactions, where we ended up at schools that don't meet that criteria that over the long term we would expect through our disposition to exit out of and we would expect the large majority of our investment activity to take place in those more targeted power five conference and R1 institutions.And so again, I would say at this point in time looking to the current portfolio, middle of the seventh maybe even top of the eighth in that regard, but that will be over time. And as we get, I think the greatest opportunity for the company going forward over the long term horizon of three to ten years is when all this global capital that has come into the space and is now in the new development stage in three years or so there's going to be a lot of good M&A acquisition opportunities for us that we intend to be positioned to continue to be the industry consolidator and as we get back to expanding our portfolio beyond just our own development then that's going to foster different recycling opportunities on the long term based on those initiatives. It's an ongoing process.

[Operator:]

[Operator Instructions] And the next question we have will come from Shirley Wu of Bank of America. Please go ahead.

[Shirley Wu:]

Hey guys thanks for taking the question. So for your same-store revenues, you came in higher than expected with tons of acceleration of same-store revenues which is slightly different than your usual deceleration from 1Q to 2Q. So how should we think about that contribution from the short term lease back-filling and how should we expect that to flow into 3Q as well?

[Bill Bayless:]

Yes, one of the initiatives that we've talked about is part of our next gen initiatives is having better corporate controls in oversight over what we refer to as current period leasing. And if you follow the company historically and the people that have always, they come in for investor towards seeing the lamps demonstration, lamps was originally designed as a future period leasing season to the next academic year where we had all of our business intelligence and specification.And what next gen has done is, has evolved lamps into having a major impact and full per view into the current period leasing season which is your December back-filling leases, your summer back-filling leases also something we refer to as May-to- May initiative where you undertake 12 month leases commencing in May versus doing a stub summer period net in August. And so, as the company has advanced its next gen initiatives, this year you start to see improvement in both that December diminishment between Q4 and Q1 and you are seeing it again from Q1 to Q2.And so, we would say that that is something that we have seen continued improvement as we continue to add sophistication to our next gen systems and something we hope over the next two to three years will continue to drive benefit and you see some of those historical trends and seasonality that maybe better.Now the one thing that we do always point out though and we started this point out about three or four years ago, a lot of the new development does tend to be in the on-campus ACE transactions and residence hall style products. And so, from a seasonality perspective as those on-campus assets tend to be more academic year, you may see a little bit of difference in the seasonality trend, but we are hoping to do better in terms of the year-over-year, quarter-over-quarter diminishment from each quarter to the sequential.

[Shirley Wu:]

Great. That's great color. Some of the things onto your marketing expenses, you mentioned that you’re moving onto more social and digital media. Could you give a little bit more color on what you are actually doing and maybe a little bit on the sports initiative that you mentioned briefly in your prepared remarks?

[Bill Bayless:]

Yes. And this is something that for the - we serve a very sophisticated demographics in terms of the 18 to 22 year old student that is the power user of social media, digital media and technology. And so, there has certainly been an evolution in our marketing program over the years in terms of, you go back even five years ago the largest expenses in our marketing programs were direct mailings and more traditional promotions on campus. Where today those efforts are very much Facebook, Instagram, I am not equipped to say all the ones that the marketing team that is very much in touch and much younger than I am and understand these things into our day-to-day interaction.Where you see the duplication between traditional marketing efforts and social and digital media really goes as the year progresses and that when you look at our most likely target markets early in the leasing season, it's the students who are living on campus. It's the students who are in the market and when you develop your social media strategy, it's much easier to implement that and know where those students are and what their behaviors are through sophisticated social media and digital marketing tools that we have.As you get later in the leasing season and some of your target markets become students who are transfer students and first-year incoming students that are not currently in the market. The social and digital media becomes a little bit more complex and that's where we tend to still fall back on some of the more traditional direct mailings, mailings to parents and also on-campus direct interaction promotional activities through the orientation programs and the like.And so that's where when Daniel refers to we're still doing some of the double implementation. You tend to see that later in the leasing season having a little more of the cost impact versus the overage. The other area where we continue to see and this goes hand-in-hand with our strategy of multi asset markets is that once we build scale in a market we have found that our most effective marketing activity are through the university athletics sports marketing programs and we also continue to refine those. And so those are the three components of the evolution of our marketing strategies and the marketing spend and why you see a little bit of the uptick over last year's cost as we balance those initiatives out.

[Shirley Wu:]

Great, thanks for the color guys.

[Operator:]

It looks like we do have a question that'll come from Derrick Johnson of Deutsche Bank.

[Derrick Johnson:]

Hi everyone, good morning. I'm sorry if I missed this, but can you just give an update on the targeted stabilized development yield? I see today you're at six and a quarter to 6.8. Last year in 2Q you guys were six and a quarter at the low end and 7%. So is the low-end safe here and any just update given all the info we've heard about rising costs and labor shortage and stuff like that? And I apologize if I miss this, thank you.

[William Talbot:]

Yes. Hi, this is William Talbot. As we stated in the prepared remarks, we do anticipate for the 19 deliveries to deliver within that stated range of six and a quarter to 6.8%. They're already fully pre-leased at 96%. So yes, our targets are still very much in line with as we had previously stated.

[Bill Bayless:]

And I would comment this continues to be along with the new supply outlook that we talked about which is very positive on this call. The real investment thesis for American Campus in the sector today is the spread between current market cap rates being at the 4 and 4 and quarter for class A pedestrian through the development yields of the six and the quarter North that we are producing. It's amazing from our perspective that 15 years after going public we have the widest spread we’ve ever had between our development and investment opportunities in current market cap rates.

[Operator:]

And Mr. Johnson any further questions, sir?

[Derrick Johnson:]

That will do. Thank you very much.

[Operator:]

Yes, sir. It looks like we are showing no further questions at this time. We will go ahead and conclude our question-and-answer session. I would like to turn the conference call back over to Mr. Bill Bayless, CEO for the closing remarks. Sir?

[Bill Bayless:]

Yes, we would like to thank all of you for joining us today as we talked about and we want to thank the team. We are very pleased with our performance year-to-date with both our financial and operational results. At this point in time Q2 slightly exceeding our expectations. We are pleased with our preleasing and as Jennifer mentioned do expect to be near the midpoint. We still have the opportunity to be above or below. Also we want to talk about in close, we continue to see a vibrant P3 market as William discussed. And a really positive outlook at it relates to 2020 supply.And with that I would like to thank the American Campus team members and thank them in advance for the hard work that they are going to do to finish out this lease-up and create value for you. Thank you very much.

[Operator:]

And we thank you sir, and again to the rest of management team also for your time today. Again the conference call is now concluded. At this time you may disconnect your lines. Thank you. Take care and have a great day everyone.