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Edited Transcript of ACC earnings conference call or presentation 22-Oct-19 2:00pm GMT

Q3 2019 American Campus Communities Inc Earnings Call

AUSTIN Oct 24, 2019 (Thomson StreetEvents) -- Edited Transcript of American Campus Communities Inc earnings conference call or presentation Tuesday, October 22, 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

* Michael Bilerman

Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research

* Neil Lawrence Malkin

Capital One Securities, Inc., Research Division - Analyst

* Nicholas Gregory Joseph

Citigroup Inc, Research Division - Director & Senior Analyst

* Nikita Vyacheslav Bely

JP Morgan Chase & Co, Research Division - 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 morning, and welcome to the American Campus Communities 2019 Third Quarter Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Ryan Dennison, Senior Vice President, Capital Markets and Investor Relations. Please go ahead.

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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 Third 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; Kim Voss, Chief Accounting Officer; and Jamie Wilhelm, EVP of Public/Private Partnerships.

With that, I'll now turn the call over to Bill for his opening remarks. Bill?

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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 you all for joining us as we discuss our third quarter 2019 financial and operating results. As outlined in our interim update 1 week ago, we're very pleased to have increased the midpoint of our financial guidance by $0.02. This guidance raise was driven primarily by better core performance, including better-than-anticipated operating performance year-to-date, improved seasonal occupancy performance in the spring and summer months, facilitated by the advancement of our Next Gen systems and business intelligence initiatives, and our performance from our 2018 and 2019 developments.

The increased outlook also incorporated our recently completed lease-up, which produced economic rental revenue growth of 2% after taking into account our joint venture share of the Austin portfolio versus the 1.7% headline number. Outside of Austin, we experienced solid growth where our other 66 same-store markets collectively achieved 2.4% revenue growth, in line with the midpoint of our guidance for those markets.

We also provided an update to our current capital recycling plan, which includes the disposition of $250 million of previously acquired assets that we expect to trade in the low 4% cap rate range. As discussed widely at the National Multi-Housing Council Conference last week, cap rates for core pedestrian student housing continues to compress, providing us with the opportunity to generate significant value for our shareholders with reinvestment in our core development program with yields at the 6.25% and above range.

As we look forward to the '20-'21 lease-up, we're excited about the healthy fundamental environment with a lighter new supply for the fall of 2020. Specifically, we forecast new supply in our markets to decline 20%, to the lowest levels that we've seen in almost in 10 years. Moreover, less of our NOI is produced in the largest new supply markets.

With that, I'll turn it over to Jennifer Beese, our Chief Operating Officer, to get us started.

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

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Thanks, Bill. Looking at our 2019 same-store operational results, as seen on page S-6 of the supplemental, quarterly same-store property NOI increased by 0.4% on a 2.2% increase in revenue and an increase in operating expenses of 3.9%. The 2.2% revenue increase reflects a combination of the '18-'19 and '19-'20 academic years.

Turning to operating expenses. Marketing expenses increased as we continue to utilize both traditional mediums and enhance the digital and social channels in the final stages of the '19-'20 academic year lease-up. Having advanced our digital and social platforms throughout the year, we anticipate reductions in certain traditional methods, allowing for an inflationary growth profile moving into next year.

Our utilities expense on the other hand had continued a 3-year trend of flat to declining expense growth. Asset management initiatives continue to drive significant benefits on several fronts, including energy efficient LED installations and renegotiating cable, Internet and utilities agreements. Over the past 4 years, we have completed 100 LED projects and currently have an additional 30 underway with completion dates targeted through the first half of 2020.

We also continue to see benefits from our ongoing efforts to renegotiate and execute cable and Internet contracts. In 2019 alone, we will have completed approximately 30 of these contracts and have an additional 70 underway, targeting completion through 2020. Aside from the financial benefit, these contracts provide for better speeds and digital experiences for our residents of our communities.

Turning to our leasing results. As of September 30, 2019, our 2020 same-store portfolio was 97.4% occupied, a 40 basis point increase over our results from last year with a 1.4% rental revenue growth. This results in opening rental revenue growth of 1.7%. Adjusted to include only the company's 55% share of the Austin's portfolio, the effective same-store rental revenue growth which flows through FFOM is 2%.

Our 2019 development and presale communities came in at a very strong 98.1%, above our underwritten occupancy and long-term average of 97%. We are pleased that the ACC team once again produced industry-leading occupancy levels and continued our long-term track record of opening our new communities fully stabilized.

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 development. With regards to our 2019 own projects, we successfully delivered 3 communities totaling 2,376 beds and $297 million in development cost. These projects were developed on time and on budget and are anticipated to exceed their targeted year 1 yield. With regards to our 2 presale developments, we closed on The Flex of Florida State University during the third quarter, and we expect to close on 959 Franklin at the University of Oregon during the fourth quarter.

As Jennifer mentioned, our combined 2019 owned development and presales opened at a strong 98.1% occupancy.

Turning to our on-campus business. We delivered 5 third-party developments, bringing the total ACC deliveries for fall 2019 to 8 projects, 5,400 beds and $650 million in development costs, exemplifying our best-in-class development platform. In addition, we're very excited to announce that we've been awarded or in direct negotiation on 3 new on-campus projects on the campuses of Georgetown University, Texas State University and Northeastern University in Boston. We are working with Georgetown University to third-party development of 11-story, 476-bed project at their Capitol Campus in downtown Washington, D.C. In addition, as part of a highly competitive RFP process, ACC was selected as the third-party developer for Texas State University to build up to 2,800 beds on their campus. We have begun predevelopment services on the 900-bed first phase, which is anticipated to break ground in the first quarter of 2020 for a 2021 opening.

Finally, we're in predevelopment on a second ACE project at Northeastern University, where our first ACE development opened this year at 100% occupancy and was fully leased by February. The second project is targeting a 2021 start for a fall 2023 delivery. Overall, we continue to track a vibrant and expanding pipeline of on-campus P3 opportunities, and we remain well positioned in these pursuits for continued success.

Turning now to our capital cycling (sic) [recycling] activities. We are currently under access agreement and in the final stages of due diligence on the disposition of Landmark serving the University of Michigan in Ann Arbor for $100 million in gross proceeds. The sale represents a 4.1% economic cap rate on in-place revenue and projected operating expenses. The sale is expected to close in the fourth quarter. In addition, we're in negotiations on an approximately $150 million of additional dispositions expected to close in late fourth quarter at a projected low 4% economic cap rate.

With regards to new supply within ACC's 69 owned markets, we are tracking 22,500 beds for fall 2020 delivery, a decrease of 20% in new supply compared to 2019 and the lowest amount of supply since 2011. Total supply as a percent of enrollment is only 1%, the lowest amount in 9 years and 30 basis points below our long-term average. There are 42 markets experiencing no new supply in 2020 with new supply occurring in 27 of our 69 markets, down from 38 markets of new supply in 2019. Supply as a percent of enrollment in new supply markets is only 2.2%, 40 basis points below our long-term average. In addition, only 17% of our NOI is derived from assets within the top 10 supply markets, down from 22% in 2019 when excluding our on-campus assets of ASU that do not compete with the off-campus market.

I'll now turn over the call 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. As we reported last night, total FFOM for the quarter of 2019 was $64.1 million or $0.46 per fully diluted share, which was in line with our expectations for the quarter. Compared to the third quarter of 2018, total FFOM increased $3.5 million or 5.7%, and FFOM per share increased $0.02 or 4.5%, driven primarily by increased NOI from owned properties, especially from our 2018 and 2019 new developments and higher third-party development and management fee income.

Last week, we published the final results of our fall 2019 lease-up and updated our 2019 earnings guidance raising the midpoint $0.02 to $2.42 per share. The increase in the midpoint of guidance was primarily due to an increase of $1.9 million in expected NOI to be contributed by our new store properties and $400,000 in increased FFOM contribution from same-store properties net of our joint venture partner's share of NOI.

Third-party fee income is expected to be $1.4 million lower as the UC Berkeley development project is now expected to commence in 2020 offset by lower overall interest expense for the year due to a better interest rate environment than anticipated. We also updated the components of guidance affected by the plan of change in recycling activity which William discussed, but this is net neutral to FFOM guidance for the year.

With that being said, you can refer to pages S-18 and S-19 of the earnings supplemental to get complete details on each of the components of our 2019 guidance update.

Moving to capital structure. As of September 30, the company's debt to enterprise value was 33.6%. Debt to total asset value was 39.1%, and the net debt to run rate EBITDA was 6.5x. As you will see in our supplemental on page S-17, we have updated our capital allocation and long-term funding plan to reflect the completion of the 2019 owned developments and the purchase of the presale development at Florida State University. Including all developments now under construction for delivery through 2023 and all remaining presale development funding requirements, we have $690 million in remaining capital needs, which we expect to fund through a mix of cash on hand, cash available for reinvestment and approximately $100 million to $150 million per year in disposition, joint venture and/or equity capital. This will allow the company to target a debt to total assets ratio in the mid-30s and a net debt-to-EBITDA ratio in the high 5s to low 6s.

As discussed, we are in various stages of negotiation on $250 million of the planned asset dispositions. Pro forma for the completion of these dispositions, debt to total asset value would be 37%, and net debt to run rate EBITDA would be 6.2x. As always, we will continue to monitor the market conditions and access the most attractive sources of capital relative to our investment pipeline throughout the next 4 years.

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 our first question comes from Austin Wurschmidt of KeyBanc.

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

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With good line of sight on the $250 million of disposition proceeds, I guess, I'm just curious if this, in your view, reduces any need for equity in sort of the near to medium term? And to the extent that private market pricing holds at existing levels. I guess I'm curious if you'd consider strictly funding your development needs over the next few years with dispositions, at least for the foreseeable future.

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Daniel B. Perry, American Campus Communities, Inc. - Executive VP, CFO, Treasurer & Secretary [3]

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Yes, Austin, this is Daniel. Yes, if you look at our capital long-term funding plan page, we lay out there the planned funding of the current development pipeline with a mix of $425 million to $625 million in that equity type capital, whether it be dispositions, joint venture or otherwise. And with the $250 million that we anticipate executing on in the fourth quarter, that would leave us with about $70 million in needs per year. You should expect that we will probably be in the immediate term be doing after this year that $100 million to $150 million and while we see the spread between the low 4% cap rates on dispositions and being able to recycle that into the 6.25% developments, that's what we really like. Obviously, we're talking about a 4-year plan and the environment will be ever-changing, and so we will continue to watch all of the options and use what we think is the best for producing earnings growth and enhanced NAV.

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

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Appreciate the thoughts there. And then I was just curious, one, could you give us a little detail on the -- or thoughts around the decision of not providing forward academic year revenue guidance? And then as you do go through that process, any plan to tweak your model or your approach to forecasting as you think about 2020, '21 school year given what you saw in a market like Austin this year and you've seen in some other markets where supply has been a little bit more impactful than maybe originally anticipated?

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

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Austin, this is Bill. Obviously, as we look at -- the first thing we did is we looked at the guidance practices of the other residential REITs and realized that we were really one of the very few that were giving color this early on to the 2020 rental revenue guidance. And so for us, we felt like, you know what, we should take advantage of having the best data we possibly can to guide the market where we should and felt it would be more appropriate to wait until that first quarter where we get to do the Q4 call. Certainly, we'll have more color and more insight as it relates to all markets and the reaction to new supply and the recovery of Austin as we do that. And so I think it's probably the most prudent practice for us to undertake and will result ultimately in perhaps having little better data points than we would as we're kicking off the year.

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Operator [6]

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Our next question comes from Nick Joseph of Citi.

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Nicholas Gregory Joseph, Citigroup Inc, Research Division - Director & Senior Analyst [7]

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Maybe following up on Austin's question, you talked about supply being down 20% next year, but there always seems to be a market or 2 with elevated deliveries or that adversely impacts results, with Austin being that market this year. What markets should we keep an eye out for over the next 12 months that are most at risk for underperformance?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [8]

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Yes. As we talked about in the prepared comments, next year's new supply line is up very favorably for us on virtually all fronts as we look at the metrics. When you look at the top 3 markets this year, it's Gainesville, Tempe and Champaign. Tempe will just basically eliminate from concern in that all of our on-campus ACE assets there candidly do not compete in any way, shape or form with the new supply and apartments coming online. When you look at Gainesville, we have a very small percent of our NOI there, 1.64%. We have 3 assets that are very well positioned from a price perspective and that range between an average rate of $562 to $775 where new supply is coming in on average probably about $250 to $300 per bed in excess of that. Also in Gainesville, while it's the lead market with over 3,200 beds, surprisingly about 1,600 of those beds are dry properties and so our assets will also have a better product position. Same type of situation when you look at Champaign, which is the #3 market on the list, at just over 1,900, and -- I'm sorry, just over 1,800. And in that regard, our average rates range from a low of $433 to $786. And so we're in really good position from a pricing perspective and also from a concentration of our NOI overall, we're at 17% market at risk NOI versus 22% in the last several years.

The one thing I do want to comment on, Nick, and certainly Austin had an impact on us in terms of this year's numbers, but we would point out that we truly believe that, that is a 1-year absorption issue. And when you break down and look at what did happen in the Austin marketplace this year, there is actually quite a silver lining as it relates to the continued story of the absorption of modernization. And I'll take a few minutes to go through some of the data. And as you all know, Austin continues to represent the most mature purpose-built student housing market in the country. And with the UNO, the zoning ordinance that was passed in the '05-'06 range, that really eliminated a lot of the barriers to entry there.

Austin this fall has reached a point where new purpose-built supply equals 48% of enrollment, which is more than double the 23% average for the remainder of our portfolio, and it also has 34% pedestrian beds supply as a percent of enrollment, nearly 3x the average of the rest of our portfolio at 12%. And as everyone knows, UT has an enrollment cap, enrollment typically fluctuates 500 to 700 beds up and down off of that 50,000. And with all of that said, Austin overall this year, and this is based on our internal data where we track 40 purpose-built properties, apartment products, 35 of them being same-store from last year. And surprisingly, overall, the Austin market, including the add of the additional 2,000 beds, overall apartment occupancy in the West Campus submarket went up from 95.5% last year to 96.2%. There were actually a total of 2,029 more students living in the apartments pedestrian-to-campus than they were last year.

Now when you look at the same-store assets and how they performed, 27 of the apartment products are in West Campus of a same-store nature. Overall, occupancy actually ticked up 20 bps to 95.7% to 95.2%. Now there were winners and losers in that same stores as the short-term absorption took place, and we had a couple properties that were in that negative category.

From our estimation, there were a total of 16 properties that had some occupancy diminution. We believe based on our tracking of lease-up and rents that about 11 had negative rental revenue growth. But overall, that same-store market we looked and we believe rents were flat. And so the big loser in Austin were the dry properties in the Riverside submarket where we saw occupancy dip down to 83.2%. And so when you look at the long-term trending in Austin, the facts continue to support that the long-term absorption of modernization continues to take place with students continuing to migrate closer to campus. And while you do have 1-year absorption issues, which this year we saw that we were impacted by, last year, you had 4 properties that had 1-year absorption issues that ended up below 85% and each of those 4 properties restabilized this year at 96%. And so overall, the long-term prognosis on new supply modernization continues to be positive even in Austin with some short-term volatility that you saw, that we experienced and some others did this year as those beds came in.

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

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That's very helpful. And then, in terms of, you talked in the past about the potential for maybe longer term being a consolidator within the space. What's your appetite today for acquisitions or presale deals?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [10]

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Yes. Obviously, with where market cap rates are today and our cost of capital, we continue to be out of the acquisitions game and continue to look at the high-yielding new development as our immediate growth. I will say when you look on a long-term horizon, when you look over the next 5 to 15 years, certainly we expect American Campus to be the long-term consolidator. And ultimately, when you look at what has been a drag on internal growth rate over the last 5 years, a lot of that drag on our internal growth rate has been the fact that we are out of the acquisition game and we deliver our development assets, as you saw this year, they're 98% completely stabilized from occupancy, and so the really own only real juice we have on internal growth is rate. And so when we think about the company's long-term prospects for internal growth rate, we certainly see a time down the road when the cycles change and our cost of capital is more appropriately aligned, when we get the benefits of growing and becoming and benefiting from the scale contribution again, coupled with the occupancy upsides that we continue to see in other companies portfolio. So one thing that remains constant, if you were at the National Student Housing Conference last week, is that American Campus continues to perform 200 to 300 basis points better in occupancy than all of our competitors. And so when we do get to a point when M&A and consolidation again make sense for the company in the long run, we'll see our internal growth rates continue to benefit like they did in the past from both those improvements and others' operations and from scale.

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Operator [11]

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Our next question comes from 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 [12]

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Just a few things. First, on the marketing expense. And I'm sorry, if you -- it's been a busy morning, so sorry if you addressed this upfront, but obviously, it was a big jump this year. And I think you guys have talked about more online or social media spending, which obviously these avenues have been out there for a while. So maybe you could just talk about marketing spend, what your thoughts are going forward, especially a number of years ago, it was elevated, you guys brought it back down, but it also seems like it was more prevalent in the existing assets versus the new development given when you look at total NOI growth, it was pretty strong versus the same-store NOI growth. So maybe you could just share where you think marketing expense is going? And what was really the driver of this year that made it stand out versus previous years?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [13]

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Yes, Alex, as you -- as we finish out this year, we would expect marketing expenses for the calendar year to come in at about $185 a bed versus last year $162, so about a 13% increase. Certainly, in this quarter, you saw the finish out of the lease-up for this academic year. And so while social media certainly has played a larger and larger role candidly over the last 5 years, this year was really, I would say, a pivotal transformational year as we talked about where we've become much more sophisticated in terms of the implementation of some of the digital and social media, which also candidly has much better metrics that we're able to evaluate in terms of what works versus what doesn't. And we were able to start to eliminate quite a bit of our traditional marketing expenses while ramping up the social media.

And so for example, in a direct mail and newspaper advertising, year-to-date we're down about $700,000 in those categories, but that was offset by about $1 million to $1.2 million in digital social media. So as we look at the next academic year, which begins in Q4 of this year, we think we've hit a point of stabilization right at that $185, which is historically -- is below our historical run rate. When you look on the long term, we certainly got down low at the end of some of the traditional marketing years back in '15 and '16, but that $185 a bed, we think, now is a good run rate to think of in terms of inflationary growth with marketing inflation I would say 3% to 5%. And I think we'll have better opportunities to hone our marketing costs over the next 5 years. As we do switch more to the digital social media, again, you have much better ability to measure the effectiveness of those than you do traditional mediums with some of the sophisticated software management tools that we have like Sprinklr that the team is employing.

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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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But Bill, are you expecting it to be up again double-digit next year?

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

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No. As I said, we would now expect the next academic year starting in Q4 of this year through Q3 of next year to be inflationary, 3% to 5% increases in marketing expenses.

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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, the next question, again, goes back to the value creation that you guys have in the development versus your same-store. I think you guys stand out in that your same-store, if I'm not mistaken, includes JVs at 100%, whereas, my understanding is that an apartment at the same-store excludes JVs. So on a comparative basis, would you guys look to adjust your same-store definition to mimic what your multifamily peers have? And then two, provide sort of a pro rata NOI growth because clearly it's what the developments are really driving, whereas your same-store is being weighed down by whether it's Austin this year or something else that's an issue in another year, it sort of masks the total growth that you guys provide. So I guess, you guys thinking about making your same-store definition closer to what the multifamily guys for comparison? And then two, providing a pro rata NOI growth so we can really get the picture from an economic basis what you guys are driving?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [17]

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At this point in time, the only joint venture that we have on the books is really that Austin property. And for example, last year, Austin performed pretty close to the mean of the entire portfolio. And so there was really no differentiation in the economic growth rate. This year, we felt compelled, obviously, to point it out given that there was a material difference in terms of backing out that JV economic interest, in terms of the 1.7% versus the 2.0% we obviously would have pointed that out that it worked the inverse also if it overstated as a headline number. Certainly, as our portfolio grows and if JVs become a more prevalent part of the portfolio that it makes sense to appropriately separate and categorize that, we would certainly do so. Certainly, we will continue to do what we did this year and making sure if there is any differentiation in people understanding what the growth rate is, we would continue to point that out as we did in demonstrating that the real growth rate this year that hits FFO and our earnings internally is the 2.0% versus the 1.7%.

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Operator [18]

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Our next question comes from Shirley Wu of Bank of America.

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Shirley Wu, BofA Merrill Lynch, Research Division - Research Analyst [19]

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So this is a follow-up on an earlier question about your '20-'21 fall guidance. So as you start to think about next year's guidance, how are you thinking about the macro environment? And any potential assumptions on maybe a macro slowdown or recession?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [20]

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Yes. And this is where the -- the one color we would provide as we kick off the 2020 leasing season is if you look back at our historical supplementals and you look at what we released in terms of this year's supplemental where we give the final breakdown of the portfolio as it relates to properties that are 98% and above, properties that are 98% to 95% and properties that are below 95%, if you look at the last 10 years in supplementals and certainly focus on the last 5 years, which is more relevant of the portfolio that we have today, you'll see as we kick off this year's leasing season, we have much better growth metrics based on our historical performance in the portfolio this year than we did last year. And you see, kicking off this season, currently 64,729 of our beds are at the category of 98% and above. And in that category of properties, we have excellent history of growing rental rate in terms of contributing to our growth. I think the range has been 2.2% to 3.1% revenue growth over the last 5 years in that category. Also you can see we have a little bit of a growth in the less-than-95% category going from 18.9% of our beds to 19.4%. And in that category, we have always also produced historical growth ranging from 2% to 8% and having great contributors to occupancy. And the middle category of 95% to 98% is the only area that we have ever had any negative growth, and that has candidly also been few and far between, I only think 3 in the last 10 years. And that part of our portfolio is down this year as we kick off the leasing season, only 13% of our beds.

And so when you look at the historical context of our growth rate by category of property based on those occupancy we just covered, this year's portfolio lays out pretty well in terms of pricing power in our best occupied properties and also occupancy upside in those below 95% with that middle category that's always the hardest to grow being smaller. And so we would say overall, and you couple that with the supply picture that we talked about, and the portfolio lays out candidly better this year than it did last year.

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Shirley Wu, BofA Merrill Lynch, Research Division - Research Analyst [21]

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Okay. So also going back on to your fall leasing, besides UT Austin, were there any markets that did better or worse than you had expected, whether that's on the rate growth side or on the occupancy front?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [22]

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All in all, in the other 66 collective markets, things came in pretty much as expected. Certainly, not all markets are positive, but we didn't expect all markets to be positive. And so overall, Austin was really the only market where we saw a material diminishment that was candidly obviously a little worse than we had anticipated and hoped for, but is based on my earlier comment that we believe is based on short-term absorption. As always, we have properties that outperform and slightly underperform, but for the most part, everything was in the margin of tolerance and expectance.

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Operator [23]

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Our next question comes from Drew Babin of Baird.

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

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Development pipeline question. Looks like the development pipeline kind of 2021 and beyond is obviously very Disney heavy. And I was just curious kind of what the remaining opportunity set looks for potential adds to the '21 pipeline and beyond? Obviously, a lot of third-party opportunities could come in your way. I mean -- and it was good to see the announcement on Northeastern, but any other guidance there on the pipeline beyond what's currently presented?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [25]

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Yes. And certainly, the numbers are somewhat down from historical years. And I would say, first, that's related to the fact in a constrained capital environment, we've obviously been very selective. And so the off-campus transactions we've been very prudent on and put some of those transactions on hold. Allocating and first the capital we have available towards those on-campus ACE transactions that are excellent yields with 6.25% above with very low risk. As we look at the 2021 pipeline, we're getting close to that being obviously fully baked and would be very unusual to have something come in from this point in time forward.

As we look at the -- and you look at the supplemental, we have a large backlog of on-campus awards. There are some defined third-party deals in there, but you still have excellent opportunities for ACE transaction, the Cal Berkeley transaction is in the pipeline or yet to be determined what will be third-party and what will be ACE, also the Princeton transaction. And so you do have good opportunity of deals already awarded that can still contribute to own development. The other thing that we're looking at is we have the most vibrant P3 shadow pipeline that we've ever had. Right now, transactions that we're either in a direct negotiation or tracking upcoming procurements is close to 4 dozen. And so we continue this to be one of the most vibrant P3 pipelines available, and we also do have some excellent land parcels off-campus that when the time is right and the capital environment is right, we'll also choose to execute on those when it's prudent.

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Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [26]

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That's helpful. And then one question just on the final leasing presentation on S-9 of the supplemental. Schools of occupancy below 95%, I would assume I believe Texas is in that category. But if you go back to some schools that have had some oversupply the last couple of years, Texas Tech, Texas A&M, Florida State, what else is sort of in that, that below 95% occupancy bucket currently?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [27]

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Yes, and when you look at -- and candidly Texas Tech and Florida State are not. Again, most of those properties, and much like we talked about Austin having the opportunity to recover, those markets have done quite well in terms of their short-term absorption and now stabilization. I would also point out that markets can cross over the bucket. For example, we have 2 properties in Austin that are in that below 95%, 2 apartment products. We have 3 that are in the 95% to 90% -- actually 2 95% to 97% and one is in 98%. And so the market's performance can crossover. Some of the other -- we've got some assets, we got an asset in Purdue that had some significant upside, University of Arizona, one at VCU, UT Arlington and one in Eugene in Oregon. So more of a smattering of one-off assets in markets than any particular market in and of itself being categorized.

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Andrew T. Babin, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [28]

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Okay. Appreciate the color. And one last one for me. Looking at the off-campus properties and the property tax environment, some of the apartment REITs have had some success getting property tax assessments successfully appealed or millage rates. And just curious kind of looking out to 2020, do you believe property tax growth could conceivably moderate given that cap rates have kind of been low for a couple of years now? Or do you expect the kind of Texas, Florida property tax heavy states to continue to drive that?

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Daniel B. Perry, American Campus Communities, Inc. - Executive VP, CFO, Treasurer & Secretary [29]

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Yes, that's -- the real driver is Texas and Florida, Drew. And we're still in the process of finalizing appeals and assessments in those states. And so we really just need to see how that all shakes out before we have a real hand on what we think it will do next year. As you recall, our guidance for this year was in the 4% range. We feel like we are coming in somewhere close to that. So we did -- but we just need to see where it finishes out before we have a real feel for what next year should be.

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Operator [30]

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Our next question comes from Derek Johnston of Deutsche Bank.

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Derek Charles Johnston, Deutsche Bank AG, Research Division - Research Analyst [31]

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Just a quick follow-up to the pipeline. How challenging has it been to find development opportunities that meet the 6.25% plus target development yield?

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

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Yes. First, you have to bifurcate it by on-campus and off-campus. In the on-campus transactions, we have a vested partner. And so the universities that are bringing the land to the table, obviously, their greatest concern is having adequate supply and affordability for their students. And so they're viewing their land as contribution into the transaction as to putting together a good transaction is a win-win for all parties, most importantly students and affordability. And so you don't have the same type of pressures associated with the driving up costs from a land perspective. Also you have a vested interest partner with you in getting through what is typically a university-controlled entitlement process versus very expensive off-campus entitlement processes and the like. And so the environment on-campus is quite different than off. In the off-campus market, yes, I mean, you have heavy competition for sites, you're seeing land pricing tick up. You still have, and this is what we love about our space, you have significant barriers to entry. And you have what is typically cumbersome entitlement processes that we are very adept and able to get through given our reputation with colleagues and universities and the approach that we take toward building living-learning environments that are usually viewed positively by the communities in which we attempt to develop off-campus.

With that said, as I mentioned earlier, you have seen a slowdown in our off-campus pipeline given the competitive environment and where we're choosing to allocate our capital based on the best risk-adjusted opportunities. Certainly, we would expect in the years ahead to continue off-campus development. We've got numerous properties already in our land bank that are in the predevelopment stages for the future, but we'll execute on those when the time is right and our cost of capital enables us to do so.

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Derek Charles Johnston, Deutsche Bank AG, Research Division - Research Analyst [33]

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Excellent. And I guess, just a quick one on tariffs and maybe labor costs. So how much of an impact are they both having on development yields? And are they fully or partially offset by the lower cost of capital environment we're seeing today?

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

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Yes. And obviously, tariffs is something that we track in terms of not only new materials and construction, but also on our existing repairs and maintenance of existing assets that we have in place. And the team has done a great job in terms of sourcing alternate products to where we haven't been majorly impacted in that regard. Obviously, as it relates to labor cost in the construction markets, that's geographic in terms of where the greatest impacts are. And we have been on-campus where the majority of our own development pipeline has been. Again, we tend to be isolated from some of the larger contributors that are driving up price, largely land pricing. And so we probably have a little better opportunity to weather that given the nature of our on-campus transactions where land is not the variable for us that's pushing up cost as it is for others.

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Operator [35]

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Our next question comes from Samir Khanal of Evercore.

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Samir Upadhyay Khanal, Evercore ISI Institutional Equities, Research Division - MD & Equity Research Analyst [36]

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Most of my questions have been answered, but one last one for me here. When I -- Daniel, when I look at the -- your expense forecast here and -- I mean year-to-date, you're tracking about 2.5%. But I'm just trying to dig in a little bit deeper here to see what gets you to the high end of that range, which is kind of 2.6% to 3%. So what gets to the upper end of that sort of 3% because it would kind of, basically it'd say that you would have to have a ramp-up in 4Q. Is it property taxes, is it marketing? Sort of what are we missing here?

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Daniel B. Perry, American Campus Communities, Inc. - Executive VP, CFO, Treasurer & Secretary [37]

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Yes. I think really when you're giving your guidance for the last part of the year, you're watching where -- you're finishing out your tax appeals as we talked about earlier, seeing if you feel like there are any additional accruals to take there that would be appropriate. We're still watching on the repairs and maintenance side if we have any incidents that occur that we have heavy incident response cost related to. We always need to maintain a contingency for that possibility. And so obviously, you can have in other areas, things that just come in higher than you're expecting and you're really just maintaining the contingency for that.

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Samir Upadhyay Khanal, Evercore ISI Institutional Equities, Research Division - MD & Equity Research Analyst [38]

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Got it. Got it. And I guess, one more for Bill. It's been a year since you announced the Disney College Program. I guess what are the learnings kind of on that side? And maybe can you talk about sort of the opportunities that exist maybe with other corporates at this point?

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

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Yes. And certainly, we continue to just be thrilled with the partnership with Disney, and development and construction there is going extremely well. I also think Disney is very pleased in terms of the progress we've made and their perspective of our development platform and product development. We'll be opening Phase 1 in May of 2020, and everything is on schedule and on budget. There's virtually no stabilization risk in that project as we mentioned that the program is just moving over students from prior properties that were master leased. And so that -- we'll probably end up doing an Investor Day down there some time next year to get people a look at that and see it firsthand. Once that's up and running, I certainly think that -- and what makes Disney so unique for us is that it fits right in the wheelhouse of the market that we've always served. And that it is the 18- to 22-year-old college students, and it's right in the wheelhouse of all of our operational systems. It is, however, at the same time, in essence, a workforce housing project.

So certainly, I think that there's opportunities for other companies to look at what we've done in partnership with Disney who had the ability to bring land to the table to solve the affordability problem for their workers. And so could that lead -- it certainly can serve as the model for other companies. Could it lead to other opportunities for us? Sure, it might. We certainly like the structure of Disney in terms of the proven market and the low-risk stabilization of the entire partnership.

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Operator [40]

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Our next question comes from Neil Malkin of Capital One Securities.

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Neil Lawrence Malkin, Capital One Securities, Inc., Research Division - Analyst [41]

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First question. Other revenue on a per occupied bed basis has been down like 1% or 2% this year. What is causing that? And then, do you think that's going to revert to sort of a lower inflationary type growth next year and into 2021?

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Daniel B. Perry, American Campus Communities, Inc. - Executive VP, CFO, Treasurer & Secretary [42]

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Yes. This is Daniel, Neil. On other income, it's always hard to drive just a straight consistent kind of inflationary growth in other income because the primary driver of it is your app and admin fees, damage fees, parking fees, your summer camp and conference business does fall in there in the second and third quarters. And so you're not changing your app and admin fees by 2% every year. It's more of a, ever so often on a cycle basis, you might make a bigger increase to them. The other thing I'll point out is, in the fourth quarter, we are expecting a little bit of a lower growth in other income that's driving that number for the year because in the state of New York, they are no longer allowing app and admin type fees. And so immediately, we have to eliminate those for the start of this new academic year. We'll look for other ways to replicate that as far as our total revenue overall, but in the immediate term, it is an elimination of a prior fee that we received in the state of New York.

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Neil Lawrence Malkin, Capital One Securities, Inc., Research Division - Analyst [43]

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Okay. And then could you maybe give some color on the Next Gen system? You talked about some better-than-expected results in the seasonally less-occupied summer months. And then also can you use that or those types of systems to drive sustained OpEx savings?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [44]

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Yes to all of those. And certainly, the -- we've been talking about Next Gen for the last 2 to 3 years. And the biggest advancement in Next Gen that you saw pay dividends in the current year was the improvement in our historical attrition rate from fall to spring and then also spring to summer. And that where originally LAMS was developed as a future period leasing season, the Next Gen advancement brought all of the LAMS sophistication into every aspect of leasing, including throughout the current year. And that coupled with the business intelligence and live market survey data that we have really just gave us better purview to be able to not only execute in the field, but also corporately to have oversight of that entire process. And so that is something that continues to bring a level of advanced sophistication to everything that we're doing. I'm sorry, the second part of the question?

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Neil Lawrence Malkin, Capital One Securities, Inc., Research Division - Analyst [45]

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Can you leverage those types of things, you mentioned efficient LEDs, et cetera. Can you...

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [46]

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Absolutely.

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Neil Lawrence Malkin, Capital One Securities, Inc., Research Division - Analyst [47]

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Better OpEx performance.

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [48]

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Yes, absolutely. The one thing -- when we look at our BI initiative and we, as any prudent company in America is today, are obsessed with tracking every piece of data related to every aspect of our operations. And so as we undertake our asset management initiatives and have the ability to track all points of data in our portfolio through the BI, it's going to give us opportunity to identify, refine and implement all aspects of our operations to gain efficiency. We mentioned in leasing, the very conversation we had about leasing and utilizing the tools like Sprinklr that we have to have bad data to continue to fine-tune, you can literally take through all major line items of your operating expenses.

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Neil Lawrence Malkin, Capital One Securities, Inc., Research Division - Analyst [49]

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Okay. Great. And then just last one for me. The third-party developments that you guys have, what's the likelihood of converting that into a management contract? What's the retention, I guess, or how...

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [50]

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Very high. Very high. When you look at the third-party on-campus, typically we're at 50% or better, where if they hire us to do the development, they also engage us to do the ongoing management. And those can be wonderful long-term relationships, where UC Irvine would be one that we would point to where we've done all that development since 2002 on-campus and have been retained for all of it. And so that is the best sourcing of third-party management that is consistent to just continue on with the colleges and universities as a service provider.

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Operator [51]

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Our next question comes from Nikita Bely of JPMorgan.

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Nikita Vyacheslav Bely, JP Morgan Chase & Co, Research Division - Analyst [52]

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On the low supply outlook in 2020 that you mentioned, is there a trend in the private capital market pulling back? Or is it this lower supply primarily just a matter of mix for you across your markets?

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Daniel B. Perry, American Campus Communities, Inc. - Executive VP, CFO, Treasurer & Secretary [53]

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When you look at the supply, as Bill mentioned, it's really because as more and more developers are focusing on those pedestrian assets at these major Tier 1 markets, there's a lot of barriers to entry. And so it's not a lack of capital wanting to invest within the space, this is a lack of opportunity to invest that capital with those true core pedestrian type assets. So that's what you're seeing really drive down the supply in the majority of our markets.

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Nikita Vyacheslav Bely, JP Morgan Chase & Co, Research Division - Analyst [54]

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You're talking about operating costs bunch on the call, but if you were to put some numbers and brackets around it on the controllable costs of your operating expenses, I mean, how much more opportunity is there to drive them down? And what do you think that number could be, basically everything other than taxes over the next few years, like what do you think that number is running at?

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Daniel B. Perry, American Campus Communities, Inc. - Executive VP, CFO, Treasurer & Secretary [55]

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Yes. I mean, Nikita, we're not going to get into giving guidance yet over the next couple of years, but what we'll say is if you look at the last 6 years, our controllable costs have averaged 2.3%. That's compared to total OpEx growth of 2.5%. So -- and I'm not even including utilities there in the controllable costs, which, of course, we have seen real benefits from our asset management initiatives there where over the last 4 years, we've only grown -- pretty much been flat and over the last 6 years, 1.3% average growth in utilities. As we move forward into 2020, Jennifer in her prepared remarks talked about that we have another 30-plus properties that we're deploying our LED conversion projects too, we have another 70-plus cable and Internet agreements that we are renegotiating. And we continue also to convert our apartments from carpet to vinyl flooring, which is helping us reduce repairs and maintenance costs when we have to clean and repair carpet at turn, there's some CapEx savings in there as well. And so all of those things are asset management initiatives that we will continue to use to help control the controllable expenses in the coming years and hopefully perform in line with this lower growth that we've seen over the last 6 years.

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Nikita Vyacheslav Bely, JP Morgan Chase & Co, Research Division - Analyst [56]

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Got it. And I guess, maybe the last one. On the -- you talked about the range for expenses. I mean coming -- with 1 quarter left, what would get you to the high or the low end of the full year guidance? I mean at this point, on the earnings side, is it really just disposition timing as such?

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Daniel B. Perry, American Campus Communities, Inc. - Executive VP, CFO, Treasurer & Secretary [57]

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Yes, the disposition timing isn't going to have a huge impact on it because it's so late in the year, the variability is just on -- the impact on earnings is just not that much. It will be a little bit on what ultimately comes out in terms of the same-store and new store NOI and then also to the extent we have any more or less in terms of incentive fees on our management contracts. And so just throughout the portfolio or throughout the company, just little areas that you're allowing for any contingencies that could occur through the remainder of the year.

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Operator [58]

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Our next question comes from John Pawlowski of Green Street Advisors.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Analyst [59]

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Jennifer or Bill, I was hoping you could provide some commentary on what you're seeing in the shadow mom-and-pop market in terms of setting rents and how that can impact next year regardless of what happens to purpose-built supply? Because the reason I asked, if we went back to, call it, 2014, where supply was really high and you gave me a 5-year supply growth forecast ahead of time. And you told me you're going to sell out of lower-quality schools and get more infill. That supply on purpose built has come down, but we really haven't seen the organic growth you'd expect from that backdrop. So what are we seeing in the shadow market?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [60]

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Yes. And actually when you look at the growth of the last 5 years versus the 5 years prior, when you look at our internal growth profile, say, that the changing parameter, rental rate growth has actually been stronger for us in the last 5 years than it was from 2005 to 2013. And the 2005 to '13 rental rate contribution to our internal growth rate was 213 bps. From 2014 to 2018, rental rate growth was 260 bps. So rental rate growth has actually improved over that 5-year supply period, not diminished. The slowing down on our growth rate was related to the comments I made previously in the call, is that we're in the high-growth rate of acquisitions and M&A. We had about 109, 110 basis points of annual improvement in terms of occupancy growth from others that we were assimilating in and also from the benefits of scale as we were growing during those years. And so the pricing power of the portfolio has actually increased over the 5 years that you're referencing, again, from the 210 basis point average to about 260. The shadow market, it's hard to -- certainly, you got to look market by market to be able to offer specificity. But when you look at the larger global trends, the mom-and-pop properties are the ones that are being candidly redeveloped and pushed out of the market. And that typically those are absentee landlord products that are lower quality, don't offer a level of service and their pricing power has been diminished as you look at the higher-quality new product coming online.

Certainly, the example that we gave in Austin where you have the most mature development that has taken place, as I mentioned earlier on the call, 2,029 more students are living in the purpose-built specific design new product. There's been no enrollment growth, so every bit of that migration has been from the shadow market that you're referencing. And so that is not something that we believe has been a driver to drawing down growth rate at all. That continues to be the fling of that product, the attractiveness to the growing occupancy and pricing power that we have had over the last 5 years.

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John Joseph Pawlowski, Green Street Advisors, LLC, Research Division - Analyst [61]

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Okay. But taking a step back from a forecasting basis, when we talk about new supply going on 20%, supply has been coming down on purpose built for a while. Candidly, you've missed full year NOI growth guidance 5 of the last 7 years despite these positive trends you're seeing. So should we be putting a lot of confidence on the variable that the purpose built supply is coming down 20% next year? What are we missing?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [62]

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Yes. Well, the fact you've had 14 straight years of same-store NOI growth is what I would say is the first point that you're missing and the stability of cash flows. While there certainly may be misses in there, when you look at the lack of volatility in the range of those items, it continues to be still, in our perspective, the best risk-adjusted real estate investment you can make over the long term.

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Operator [63]

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Our next question is a follow-up from Nick Joseph of Citi.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [64]

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It's Michael Bilerman with Nick. Bill or Daniel, just a question about sort of asset sale process and moving the route of doing JV relative to now selling assets outright. And if I remember last year's execution, I think it started down the road of outright sales and then morphed into doing a joint venture. Just talk us through sort of what changed in this process? How you think about JV versus outright sales, holding onto stakes and assets and getting fees versus selling the assets outright?

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Daniel B. Perry, American Campus Communities, Inc. - Executive VP, CFO, Treasurer & Secretary [65]

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Yes, Michael, this is Daniel. And last year was a similar process to this year in that anytime we're looking at doing capital recycling, we will run a dual track process. So at the same time that we're talking with potential joint venture partners about a portfolio that we would joint venture with them or just straight dispositions, we'll take both to market. We want to make sure that we're looking at all options and we're using the best cost of capital. And that analysis is different for a joint venture portfolio where the idea is to maintain an interest in those assets because we like the NOI -- long-term NOI growth profile of those properties and want to continue to have an investment in them.

Where when we're selling outright, we may think that the longer-term NOI growth profile of those assets is not as good in our eyes, and so comparing that to the valuations that we're seeing on the different options. Last year, we elected to execute on both because we were announcing -- or I would say that was in 2017 when we started the process. We were announcing the joint venture -- the Disney transaction, and so had the additional capital needs that we thought made sense to go ahead and execute on both transactions.

This year, we ran dual process again. When we looked at it, we thought the straight dispositions on the assets that we were looking at with buyers were what made the most sense given the long-term NOI growth profile forecast we had to those properties, and so we elected to execute on those. Part of the decision process is the fact that on a joint venture, you are able to mitigate a little bit of the dilution of the capital recycling program because you are getting management fees and asset management fees that help on that scale side. So we have a great relationship with Allianz who we have the Austin portfolio with. They want to do more transactions with us, and we will continue to analyze portfolios with them and look to execute on transactions in the future.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [66]

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Well, I guess, how should we think about the pool of assets you took to market in terms of size as well as the assets themselves on how the process changed? Because you're obviously generating more proceeds than you'd thought originally, but if you were going to stick with the same sort of 45%, 55% structure, it would have led to a JV likely incorporating a greater asset value or more assets in that versus selling the assets outright. Am I reading that correctly?

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Daniel B. Perry, American Campus Communities, Inc. - Executive VP, CFO, Treasurer & Secretary [67]

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Yes, I don't think the size was a real influence of it. We were certainly looking at options with our joint venture partner that were -- for portfolios that would have produced even more proceeds to the $90 million to $180 million that we had guided to for this year. It just so happened on the assets that we picked to take to market this year that the total valuation of those was up towards that $250 million. So I don't -- nothing really to read into it, more just what we ended up taking with the buyers.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [68]

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And how should we think about what's remaining in the portfolio that would be sort of below a targeted average or be viewed as noncore. My sense was in the prior years, you had really called the bottom part of the portfolio. As we think about future sales and going down this road of selling stuff that you'd want to hold an interest in, like how much more of the portfolio? Is it 15%, 20% or something more?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [69]

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This is Bill, Michael. The -- we've talked about, on an ongoing basis, there is always the bottom 2% to 4% of your portfolio where you believe you have slowing growth trends or potentially based on individual market conditions, NOI growth trends that could be moving in an opposite direction. And so we continue every year to do a full assessment, a 3-year and a 5-year NOI projection of every asset in the portfolio. We always look at that bottom. They can be based on individual asset or dynamic changes in market conditions that drive when we think timing is appropriate. For the most part, when you look at the quality of the portfolio, the fine-tuning has all been completed as it relates to the proximity of the campus and the true transformation of the portfolio that was pre-GMH and those larger M&A deals where we have for the most part eliminated all dry properties. And so now it's just fine-tuning the NOI, calling off the bottom and reinvesting that in the higher yield growth.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [70]

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My second question is just on sort of leasing strategy between new leases and renewals. Obviously, being in the student housing business, you have a very targeted tenant base being the students. Some of those students graduate and therefore are not able to renew their leases, but you do have a good base of students during their college years that renew. Can you talk about sort of the strategies that you're employing on a renewal basis where that renewal percentage is and how high you can drive that over time?

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [71]

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Yes. And this is something that you literally look at market by market and asset by asset. And that while we certainly appreciate all of our existing tenants and view them as the person that we love to continue on with us next year, we don't want to do it at a discount to market if we don't have to. And so in our strongest assets and our strongest markets, our renewal policy will be that everybody renews that market. If we are in a market where we believe that new supply may be an impact or there is a softness, then we'll look at a preferred pricing structure for our renewal residents. Typically, it's only a $5 to $10 discount to the new market rates that we establish. One of our main market messages, it's expensive to move and it's a great inconvenience to move. And so while, again, we love our current residents and we always want to do right by them, we will price according to market conditions as to whether or not there should be any discounts. I would say across the portfolio, typically you'll see a $5 to $10 renewal pricing differentiation between 25% to 40% of the portfolio with the remainder typically being at market rates.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [72]

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What's your cost? I assume you're going to have to put some CapEx into a turn. So from just our return on invested capital perspective, aren't you better off renewing at a slight discount to market than having to repaint, recarpet, redo? I assume the students are very good in their apartments, they're taking very good care of everything.

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [73]

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Yes. Well, right now, our renewal ratio this year is about 40%, which is excellent, 39.6%. Historically, we'll always give a long-term average at about 35%. And certainly, you do have -- the marketing costs given what we do these days is more of the social media and the, what I'll say, a shotgun type marketing, hit the masses of the market. Whether you're renewing 75% of your -- whether you're open market leasing 75% of your property or 60% of your property, there's really not a direct variable on the marketing costs. As it relates to the turn costs, obviously, there is some savings related to that retention. Now it's not a straight 100% because part of what we do in our business is partial turns. And you may have 2 students in a year graduating and moving out and 2 staying and you still have to turn the kitchen and living area -- the bedroom area, and spruce up and clean. So it's not a dollar for dollar, although -- and also the other thing I'd point out, when you look at that 40% renewal ratio, in our off-campus apartment products which still make up 75% of the overall portfolio, when you factor in typically that we're housing sophomores, juniors and seniors and about 1/3 of those are graduating the institution, that 40% renewal is getting pretty darn close to your potential market of renewal. And so it's pretty darn high, and we feel as though we are capturing at the appropriate levels. And again, it's market by market and asset by asset, whether we attempt to do that in any type of discount to encourage that renewal versus thinking we can push to open market.

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Operator [74]

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This concludes our question-and-answer session. I would like to turn the conference back over to Bill Bayless for any closing remarks.

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William C. Bayless, American Campus Communities, Inc. - CEO & Director [75]

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We'd like to thank you all for taking the time to chat with us as we closed out the lease-up for this year and we're able to refine our guidance. We look forward to seeing you all at the NAREIT Conference next month.

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Operator [76]

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