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Edited Transcript of ACC earnings conference call or presentation 23-Jul-19 2:00pm GMT

Q2 2019 American Campus Communities Inc Earnings Call

AUSTIN Jul 25, 2019 (Thomson StreetEvents) -- Edited Transcript of American Campus Communities Inc earnings conference call or presentation Tuesday, July 23, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel B. Perry

American Campus Communities, Inc. - Executive VP, CFO, Treasurer & Secretary

* Jennifer Beese

American Campus Communities, Inc. - Executive VP & COO

* Ryan Dennison

American Campus Communities, Inc. - SVP, Capital Markets & IR

* William C. Bayless

American Campus Communities, Inc. - CEO & Director

* William W. Talbot

American Campus Communities, Inc. - Executive VP & CIO

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Conference Call Participants

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* Alexander David Goldfarb

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst

* Andrew T. Babin

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Austin Todd Wurschmidt

KeyBanc Capital Markets Inc., Research Division - VP

* Derek Charles Johnston

Deutsche Bank AG, Research Division - Research Analyst

* John Joseph Pawlowski

Green Street Advisors, LLC, Research Division - Analyst

* Nicholas Gregory Joseph

Citigroup Inc, Research Division - Director & Senior Analyst

* Samir Upadhyay Khanal

Evercore ISI Institutional Equities, Research Division - MD & Equity Research Analyst

* Shirley Wu

BofA Merrill Lynch, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the American Campus Communities 2019 Second Quarter Earnings Conference Call and Webcast. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference call over to Mr. Ryan Dennison, Senior Vice President of Capital Markets and Investor Relations. Mr. Dennison, the floor is yours, sir.

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Ryan Dennison, American Campus Communities, Inc. - SVP, Capital Markets & IR [2]

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Thank you. Good morning, and thank you for joining the American Campus Communities 2019 Second Quarter Conference Call. The press release was furnished on Form 8-K to provide access to the widest possible audience.

In the release, the company has reconciled the non-GAAP financial measures to those directly comparable GAAP measures in accordance with Reg G requirements. Also posted on the company website in the Investor Relations section, you will find an earnings materials package, which includes both the press release and 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 1 month. Our supplemental analyst package and our webcast presentation are one and the same.

Webcast slides may be advanced by you to facilitate following along. Management will be making forward-looking statements today as referenced in the disclosure in the press release, in the supplemental financial package and in SEC filings. Management would like to inform you that certain statements made during this conference call, which are not historical fact may be deemed forward-looking statements within the meaning of Section 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'd 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 will turn the call over to Bill for his opening remarks

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [3]

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Thank you, Ryan. Good morning and thank all of you for joining us to discuss our second quarter 2019 financial and operating results.

As you saw in last 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 remain focused on several important operational initiatives in front of us, including executing through the important final stages of our fall lease-up, administering our annual turn and makeready 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.

Pre-leasing for fall continues to be on track within our stated guidance range and we're especially pleased with the year 1 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 annually to fund our growth and execute on our highly accretive development pipeline while minimizing dilution to earnings.

With that, I'll turn it over to Jennifer to get us started.

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Jennifer Beese, American Campus Communities, Inc. - Executive VP & COO [4]

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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 a good summer leasing success at our apartment communities as well as solid levels of summer camps and conferences at our res hall 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 the 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 portfolio's leasing activity, our projection for opening same-store rental revenue growth is trending within our guidance range. As always, the last 5 to 10 weeks of the leasing season is the most critical. And as of today, we would estimate a final leasing result that is near or slightly below the midpoint of our guidance.

We also continue to be pleased with the lease-up progress for our fall 2019 developments, with this group of properties currently preleased 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.

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William W. Talbot, American Campus Communities, Inc. - Executive VP & CIO [5]

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Thanks, Jennifer. Turning first to own development, we are completing construction on our 2019 pipeline of developments and presales, which total 5 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 within our anticipated range. We expect to close on the 2 presale developments during the third quarter.

With regards to 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 multiphase award anticipated to openly 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 2 projects, ACC is 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, '21 academic year, RealPage 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 openly 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 RealPage.

Within ACC's 68 owned markets, we are tracking 21,000 beds currently under construction for 2020 with a potential additional 1,100 beds planned but not yet under construction. Based on how many projects openly 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% in new supply.

We will update the market with respect to these potential deliveries on our third quarter call.

I will now turn it over to Daniel to discuss our financial results for the quarter.

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Daniel B. Perry, American Campus Communities, Inc. - Executive VP, CFO, Treasurer & Secretary [6]

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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 property operations as we saw higher-than-expected same-store revenue resulting from outperformance in backfilling short-term leases this year and higher summer camp and conference business at our residence hall properties.

We also continued to see some outperformance in utilities from our asset management initiatives.

As you heard from Bill, we are pleased with the outperformance we have achieved in the quarter so far this year, but we are not making any updates to our 2019 earnings guidance at this time as many of the traditional risks to earnings still exist in the completion of the fall 2019 lease-up, continued operating expense management throughout the year and the successful closing still to occur on one of the third-party development projects included in the midpoint of guidance.

Further, as implied by the 1.5% to 3.4% same-store NOI growth 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. While this will be neutral to NOI, during the initial 12 months of implementation, comparable quarters 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 3 quarters of 2020.

With that being said, you can refer to Pages S-16 and S-17 of the earnings supplemental to get complete details on each of the components of our 2019 guidance.

As usual, we will update our 2019 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 33.7%. Debt to total asset value was 38.3% and the net debt to run rate EBITDA was 6.7x. During the quarter, we took advantage of the attractive conditions in the bond 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 and 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 a net debt-to-EBITDA ratio in the high 5s to low 6s.

Consistent with our stated strategy of trying not -- trying to better match time capital raising with the delivery of our development pipeline each year to create less disruption in earnings growth, our current 2019 guidance includes approximately $100 million to $190 million in proceeds from dispositions and/or the sale of a minority joint venture interest in existing properties during the second half of this year.

With that, I'll turn it back to the operator to start the question-and-answer portion of the call.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question we have will come from Austin Wurschmidt of KeyBanc Capital Markets.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [2]

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So you mentioned in your prepared remarks that supply -- or sorry, I mean that pre-leasing 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 in what markets are you seeing the most softness relative to your initial expectations?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [3]

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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 5 to 10 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 that have us performing slightly below the midpoint. And so when we take the -- at this moment in time in the most recent trending, we're 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've continued to do well in, in San Marcos and some of the others and for the most regard, the leasing is on track and we always talk about this time of the year, it is the power of the 1s and the 2s. With 5 to 10 weeks left in the leasing season, the things that we're looking at as we close out that have the impact of, there can be even significant swing positive and negative are the late market demand in the next 5 to 10 weeks as compared to the historical trend, our execution on backfilling late cancellations. What you saw in our May numbers, our backfilling efforts there were significantly better than in years past and you saw about a 20% improvement from the historical diminishment in backfilling largely due to LAMS and next-gen initiatives. Also the no-show management and late-season leasing opportunities. And so, as Jennifer said, the guidance range is still in play. We have opportunities to still exceed the midpoint and to be slightly below the midpoint based upon those variables that I just went through.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [4]

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So again, just like market, you mentioned UT Austin, I mean Kennesaw State is one I think you've 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?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [5]

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Yes. At the Kennesaw, we saw softness about 8 weeks ago and the team has actually done incredible there. We've 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 Marcos is tracking to not be a diminution on this year's lease-up in terms of its revenue growth. And so overall, we've done very -- in Tallahassee, as I mentioned the team has just absolutely knocked the cover off the ball in terms of our improvement in that market. And so in the new supply markets, Austin is the only one we continue to track cautiously.

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Austin Todd Wurschmidt, KeyBanc Capital Markets Inc., Research Division - VP [6]

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Appreciate that. And then just one more for me. 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?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [7]

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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 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 of portfolio is only a 1%, which is the lowest number in about 6 years. When you look at the impact of NOI at our largest top 10 markets, it's down to 14% versus 18% this year, with only 5 of the top 10 markets having new supply. And so overall, and again, I would make the statement that an Axiometrics number nationally, RealPage 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 natural barriers to entry that exist in the markets that makes new development difficult and new supply difficult. And so, those numbers are very encouraging and also consistent with a trend that we have seen over the last 2 to 3 years. When you look at the markets where we see a repeating supply in 2020 where it also occurred in 2019, those markets are Champaign, Austin, Auburn and San Marcos. And we've done well in those markets. Again, Austin's the one that we're watching this year, we'll probably continue to watch for the next couple of years given the potential supply horizon there. Champaign, which had been a challenging market a couple of years ago, this year has gone extremely well for us. We're already full and had significant revenue growth. One of our better ones, about 6%. And so we feel we're well-positioned there and also with our current price point in the market compared to new supply. And so, on the new supply front, overall, it is a very positive picture in the fundamentals moving into 2020 both nationally for the industry and specifically to our portfolio.

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Operator [8]

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Next, we have Nick Joseph of Citi.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [9]

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Maybe just staying on same-store revenue. To maintain midpoint of guidance assumes a deceleration in the back half of the year to 1.9%. Is that 1.9% a good run rate for the first half of 2020 as well, given you expect the 2.3% growth for academic year '19, '20 lease-up and the 40 basis point drag from the outsourcing of the online resident payment processing that you mentioned?

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Daniel B. Perry, American Campus Communities, Inc. - Executive VP, CFO, Treasurer & Secretary [10]

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Yes. This is -- Nick, this is Daniel. That's right. With the -- just from an optical standpoint, you'll see that that impact of the portal fee elimination on revenue with an offsetting reduction in expenses about 40 bps on the revenue growth statistics and about 80 bps on the expense side. Obviously, as we've talked about going into this year, the variable to the total revenues, total same-store revenue growth can be other income and what we're able to project there in terms of any growth that we might see in other income and whether that's a positive or negative 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 bps off of that 2.25% would be midpoint, if that's where we end up, would be the right assumption.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [11]

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Okay. And then just on development. The Auburn development now looks like it's delivering in August versus July previously. Will it also impact the school year? And then is there any impact for opening a little bit later than expected on final numbers versus what you assumed in guidance initially?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [12]

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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 100% preleased, everything has gone great there, development is on time, on budget and fully leased. We'll stabilize in year 1 as anticipated. But just from a modeling perspective, revenue should begin consistent with the commencement of the academic year in August. We just have a handful of July early move-ins.

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Operator [13]

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And next, we have Alexander Goldfarb of Sandler O'Neill.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [14]

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Just a few questions. First, on the preleasing, Bill, and you guys have talked about this on prior calls based on the 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 a touch 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 a surprise that you guys are a touch below the midpoint given the commentary to date.

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [15]

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Yes, and Alex, I would say it's actually consistent from our commentary in that, again, we still have projections above the range and below the range and would say that right now, based on this moment projection with 5 to 10 weeks left, we're 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 in that we typically operate in an occupancy improvement over our competitive base between -- they're typically at 95% or slightly below and we're typically at 97% and slightly above. And so when you look at the positive tailwinds 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 drivers are little bit more limited in that the occupancy provides less upside for us and it's largely driven by the rate. And so I don't think there's 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 of the occupancy last fall coming in at the 97% that we're working off of. That doesn't give us quite as much upside as some of the other privates that are out there.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [16]

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Okay. And then a question for DP. If you look at guidance and you look at where you guys have been trending, you've been having a good year so far. It seems like internally, you guys have been buttoning up all the issues. You were better at the drop outs and the 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 in that you already know how your pre-leasing is coming in. And certainly, your pre-leasing 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?

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Daniel B. Perry, American Campus Communities, Inc. - Executive VP, CFO, Treasurer & Secretary [17]

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Sure, Alex. And let me go through that in 2 components. First, in terms of NOI and then in terms of FFO overall. When you look at the first 2 quarters of the year, we produced 4.3% same-store NOI growth and our midpoint is 2.5%. So certainly understand just trying to -- everybody trying to continue to get a better feel for how the second half of the year is expected to play out. Our midpoint of rental revenue growth for the fall is 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 1s that would combine with that to put you closer to your same-store NOI growth midpoint. We've talked a little bit about tough comps on the expense side and 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. 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 in utilities. And so you start to lap those deployments in the second half of this year and you start seeing less benefit from those. So we only have about 30% of our property taxes in and settled at this point. It's hard for us to anticipate fully where that will all finish out. We're still holding our 4% or 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 costs there this year. Last year was a very light year. And so if we have anything on the heavy side of the equation that would lead to greater growth in repairs and maintenance. So that's where we get to maintaining that mid-2s same-store NOI growth target for the rest of the year. And then in terms of overall FFO, we do still have a third-party fee deal to close, that's $1.8 million in fees for 2019 at UC Berkeley. As you've heard us talk about there is a lawsuit between the City and the University with regards to the fees that they'll have to pay as part of their environmental approval process. We want to see where that settles out. It could impact the timing of commencement of that project. We think that they'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.

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Operator [18]

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And next, we have Samir Khanal of Evercore ISI.

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Samir Upadhyay Khanal, Evercore ISI Institutional Equities, Research Division - MD & Equity Research Analyst [19]

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

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Daniel B. Perry, American Campus Communities, Inc. - Executive VP, CFO, Treasurer & Secretary [20]

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As I just discussed, we deployed a lot of our LED initiatives and also, peak billing hour usage reductions throughout the portfolio last year. We are still continuing to deploy some of those this year but a lot of that started in the second half of last year. And so you're seeing it occur in the first half of this year. We'll get a little bit of help from it, but it starts to roll off as you get into the second half of this year. We continue to explore opportunities on the multi-asset efficiencies that we've talked about where we have multiple properties in a market and we look at strategies from a marketing standpoint, from a staffing standpoint, from a maintenance standpoint that will allow us to control expenses there. And then, of course, we've talked about on the marketing side that we are really doubling up right now in terms of our traditional marketing efforts that have driven our marketing expenses historically and a much bigger move into social and digital marketing. And as we really start to 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 improvements over the growth levels that we're seeing right now in marketing. And then, 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. You always have the uncontrollables of property taxes, but on some of the things that others have seen, whether it be on payroll increases across the country, we -- our approach there has been able -- or has allowed us to keep those expenses in check and we expect that to continue as well.

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Operator [21]

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Next, we have Drew Babin of Baird.

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Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [22]

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Quick question on UT Austin. Last year I think in the West Campus market, you saw some of the higher end, more amenitized, better located product kind of generally lease up faster than your product out at The Block. Those type 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 are doing to -- I think last year some of the Castilian demand I think was kind of diverted out to The Block or there was something -- there was maybe strategically being done there. Can you just talk a little more in depth about how that's coming together in Austin?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [23]

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Yes. And Austin continues to be over the last 5 years and this year and candidly looking to the next 2 or 3, one of the most prolific new supply markets in the country. And it is unique in Austin that the city of Austin because there is such an overall housing affordability crisis, did the University overlay district, which is one of the few pedestrian submarkets near a major university in America that is actually encouraging and eliminated the barriers to entry related to high-density development. 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 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 leased first. And so we continued this year to see the new deliveries that are at the highest price point that are at a significant premium to our Block, Texan Jefferson 26 properties or 26 West properties continue to lease first. And so that did continue this year. As we look at new supply coming in, in the future, there is absolutely going to come a point to where you have an overbuilt situation at the absolute highest price point in the market, which at some points you put some pricing diminution ability on some of the second and third generation 2- to 3-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 in point is to compete with the drive submarket on Riverside in offering a combination and price points where students can still walk to class versus having to drive Interstate 35. But we do see the upper socio-economic properties continue to lease very quickly but that is candidly where the invest -- the long-term investment risk is in the market is at that higher price point. And so, Austin is 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 with our strategy of build for the masses not the classes. The 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 off-campus has continued to be all new apartment supply. And so they operate somewhat independently of that and don't directly correlate to the apartment development.

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Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [24]

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

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Daniel B. Perry, American Campus Communities, Inc. - Executive VP, CFO, Treasurer & Secretary [25]

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Now Drew, we did see a little bit of benefit in the second quarter relative to our expectations in terms of how that third-party expense trending has played out. We're reserving our expectations there as we continue to pursue third-party projects and a lot of those expenses are in that line item. And so just depending on the activity throughout the rest of the year and the cost associated with that whether or not the savings that we'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.

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Operator [26]

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

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Analyst [27]

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Bill or Jennifer, circling back to fall lease-up being slightly below the midpoint, I guess everybody has got a different definition of slightly. So are we talking 10 basis points? Are we talking 50 basis points?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [28]

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Yes. And again, I would say, 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 0 to 30 bps.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Analyst [29]

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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?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [30]

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And this is where -- what we always talk about. The -- at the end of every lease-up, rather than focusing on particular properties, it really comes down to the execution of what we refer to as the onesies and twosies. And we'll have our employee call every -- after every earnings call each quarter, we do an employee-wide call and the focus of tomorrow's call is the execution on the 4 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 1 and 10 beds being vacant. And when you're within 1 to 10 beds being vacant, it really comes down to execution on your backfilling and no-show process that can have a meaningful 30 to 40 basis point difference in terms of execution of filling in the places that you can. And so really for us, the key to performance in terms of finishing at the midpoint or above or below the midpoint, isn't looking at the 1 or 2 or 5 to 10 properties where you have double-digit vacancies that you hope to excel, but it's really in the execution at each and every asset of those 1s and 2s. And so that's the focus of the company and candidly, and Alex asked this question previously, where we have always outperformed our competition, the reason that we operated at 150 to 200 basis points better than 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 1 or 2 better versus just focusing on the properties where you have more significant diminishment to your original projections.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Analyst [31]

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No. I understand it's an execution game. Again, I'm talking 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?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [32]

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Yes. We're not going to give that statistic in terms of property by property in terms of -- again, it's combination of the roll up. Each and every year, you have a handful of properties, 5 to 10, to where you have some what I would say is material diminishment to your midpoint projections that you have at the beginning of the year and you also have 5 to 10 that significantly outperform your midpoint projections. So it tends to be a fairly balanced pro and con to each of those categories.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Analyst [33]

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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 additional school exits on the horizon?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [34]

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No. I would say we're probably in the seventh inning stretch on the portfolio refinement. My favorite statistic and this really gets into what 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 and 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, our recycling of about $100 million to $150 million a year over the horizon of the next -- through 2023 and we look 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'll see that refinement continue. Certainly, as you look at the evolution of market selection, we have more thoroughly defined over the last 3 to 5 years that our investment we prefer to be in Power-5 conference and Carnegie R1 institutions, we still do have a handful of markets left, probably 5 to 7 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-5 conference and R1 institutions. And so again, I would say at this point in time, looking to the current portfolio, middle of the seventh, may be 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 3 to 10 years is when all this global capital will just come into the space and is now in the new development stage, in 3 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. So it's an ongoing process.

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Operator [35]

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(Operator Instructions) And the next question we have will come from Shirley Wu of Bank of America.

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Shirley Wu, BofA Merrill Lynch, Research Division - Research Analyst [36]

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So for 2Q revenue, it's even higher than expected with a 10 bps acceleration of same-store revenue, which is slightly different than your usual deceleration from 1Q to 2Q. How should we think about that contribution for -- from the short-term lease backfilling? And how should we expect that to flow into 3Q as well?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [37]

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Yes. One of the initiatives that we've talked about as part of our next-gen initiatives is having better corporate controls and oversight over what we refer to as current period leasing. And if you follow the company historically and the people that it always -- had come in for investor [towards seeing] LAMS demonstration. LAMS was originally designed as a future period leasing season for the next academic year where we had all of our business intelligence and sophistication. And what next-gen has done is has evolved LAMS into having a major impact and full purview into the current period leasing season, which is your December backfilling leases, your summer backfilling leases, also something we refer to as a May-to-May initiative where you undertake 12-month leases commencing in May versus doing a stub summer period and then in August. And so as the company has advanced its next-gen initiatives, this year, you're starting to see improvement in both, that December diminishment between Q4 and Q1 and you're seeing it again from Q1 to Q2. And so we would say that, that is something that we have seen continued improvement as we continue to add sophistication to our next-gen systems. And something we hope over the next 2 to 3 years will continue to derive benefit and you see some of those historical trends in seasonality that may be better. Now the one thing that we do always point out though and we started this point out about 3 or 4 years ago, a lot of the new development does tend to be in the on-campus ACE transactions in residence hall-style products. And so from a seasonality perspective as those on-campus assets tend to be more academic year, you may see a little bit of difference in the seasonality trend but we're hoping to do better in terms of the year-over-year, quarter-to-quarter diminishment from each quarter to the sequential.

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Shirley Wu, BofA Merrill Lynch, Research Division - Research Analyst [38]

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Great. That's good color. So also moving on to your marketing expenses. You mentioned that you're moving on to more social and digital methods. Could you give a little bit more color on what you're actually doing? And maybe a little bit on the fourth initiative that you mentioned briefly in your prepared remarks?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [39]

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Yes. And this is something that for the -- we serve a very sophisticated demographic in terms of the 18- to 22-year-old student that is the power user of social media, digital media and technology. And so there has certainly been an evolution in our marketing program over the years in terms of -- you go back even 5 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'm not equipped to say all the ones that our marketing team that it is very much in touch and much younger than I am and understand these things into our day-to-day interaction. The -- where you see the duplication between traditional marketing efforts and social and digital media, really goes as the year progresses. And 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 and digital -- social media and digital marketing tools that we have. As you get later in the leasing season and some of your target markets become students who are transfer students and first year incoming students that are not currently in the market, the social and digital media becomes a little bit more complex and that's where we tend to still fall back on some of the more traditional direct mailings, mailings to parents and also on-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 activities are through the university athletic sports marketing programs and we also continue to refine those. And so those are the 3 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.

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Operator [40]

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And it looks like we do have a question that will come from Derek Johnston of Deutsche Bank.

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Derek Charles Johnston, Deutsche Bank AG, Research Division - Research Analyst [41]

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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 6.25% to 6.8%. Last year in 2Q, you guys were 6.25% 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 missed this.

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William W. Talbot, American Campus Communities, Inc. - Executive VP & CIO [42]

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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 6.25% to 6.8%. They're already fully preleased at 96%. So yes, our targets are still very much in line with as we had previously stated.

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [43]

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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% to 4.25% for Class A pedestrian through the development yields of the 6.25% north that we're producing. And you know it's amazing from our perspective that 15 years after going public, we have the widest spread we have ever had between our development investment opportunities and current market cap rates.

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Operator [44]

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And Mr. Johnston, any further questions, sir?

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Derek Charles Johnston, Deutsche Bank AG, Research Division - Research Analyst [45]

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That will do.

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Operator [46]

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It looks like we're showing no further questions at this time. We're going to conclude our question-and-answer session. I would like to turn the conference call back over to Mr. Bill Bayless, CEO, for any closing remarks. Sir?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [47]

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Yes. We like to thank all of you for joining us today as we've 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, through 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 and close, we continue to see a vibrant P3 market as William discussed and a really positive outlook as 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.

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Operator [48]

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