American Campus Communities, Inc. (NYSE:ACC) Q2 2018 Earnings Conference Call July 24, 2018 10:00 AM ET
Ryan Dennison - Senior Vice President of Capital Markets and Investor Relations
Bill Bayless - Chief Executive Officer
Jim Hopke - President
William Talbot - Chief Investment Officer
Daniel Perry - Chief Financial Officer
Jennifer Beese - Chief Operating Officer
Kim Voss - Chief Accounting Officer
Jamie Wilhelm - Executive Vice President of Public Private Transactions
Alexander Goldfarb - Sandler O'Neill
Austin Wurschmidt - KeyBanc Capital Markets
Nick Joseph - Citi
Samir Khanal - Evercore ISI
Juan Sanabria - Bank of America
Drew Babin - Baird
John Pawlowski - Green Street Advisors
Michael Bilerman - Citi
Good day. And welcome to the American Campus Communities 2018 Second Quarter Earnings Conference Call and Webcast. All participants will be in listen-only mode [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions [Operator Instructions]. Please note this event is being recorded.
I'd like to turn the conference over to Mr. Ryan Dennison, Senior Vice President of Capital Markets and Investor Relations. Please go ahead.
Thank you. Good morning. And thank you for joining the American Campus Communities 2018 second quarter conference call. The press release is furnished on Form 8-K to provide access to the widest possible audience. In the release, the Company has reconciled the non-GAAP financial measures to those directly comparable GAAP measures in accordance with Reg G requirements.
Also posted on the Company Web site 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 Web site with the replay available for one month. Our supplemental analyst package and our webcast presentation are one and the same. Webcast slides may be advanced by you to facilitate following along.
Management will be making forward-looking statements today as referenced in the disclosure in the press release, in the supplemental financial package, and in SEC filings. Management would like to inform you that certain statements made during this conference call, which are not historical facts, may be deemed forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934, as amended by the Private Securities Litigation Reform Act of 1995.
Although, the Company believes the expectations reflected in any forward-looking statement are based on reasonable assumptions, they are subject to economic risks and uncertainties. The Company can provide no assurance that its expectations will be achieved and actual results may vary. Factors and risks that could cause actual results to differ materially from expectations are detailed in the press release, and from time-to-time, in the Company's periodic filings with the SEC. The Company undertakes no obligation to revise 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; William Talbot, Chief Investment Officer; Daniel Perry, Chief Financial Officer; Jennifer Beese, Chief Operating Officer; Kim Voss, Chief Accounting Officer; and Jamie Wilhelm, EVP of Public Private Transactions.
With this, I'll turn the call over to Bill for his opening remarks. Bill?
Thank you, Ryan. Good morning. And thank you all for joining us this morning as we discuss our second quarter 2018 results. Thus far, 2018 has been an exciting time for ACC, as well as for the broader student housing industry. As Willy will discuss in more detail, a significant number of transactions have proven our private market valuations, formerly in the low to mid 4 cap rate range for core properties located within walking distance to major Tier 1 universities.
The institutional buyer of these assets come from across the globe and includes new entrants, as well as legacy players looking to increase their allocations. With institutional investors now appropriately valuing, both the consistency of cash flows that have been proven out over the long term, along with substantial growth opportunity and what is still in industry in its infancy. For ACC, in particular, we’re pleased with the outcome of the strategic capital recycling activities completed during the quarter, including the sales of three property portfolio to Greystar and Goldman Sachs and the initiation of a joint venture with Allianz, commencing a relationship between the industries best-in-class company and the world's second-largest global real estate investor, as they make their debut direct investment in the U.S. student housing market.
Together, these transactions provided approximately $614 million of capital at an attractive 4.3% combined cap rate. We’re excited to reinvest these proceeds into our development pipeline with stabilized yields at 6.25 and above, a highly accretive capital allocation opportunity that we expect to create significant value for our shareholders over the long term.
With regard to our development pipeline; we’re extremely excited to announce that we have now executed an agreement to lease with Walt Disney World; that includes a fully negotiated ground lease, whereby we will lease land from Walt Disney World resorts; and under the structure, we will develop, own and manage housing for college student interns participating in the Disney college program. The anticipated commencement of this transaction during our 25th anniversary year is especially rewarding.
When we founded American Campus in 1993, our initial presentation to colleges and universities included four poster boards, one which was titled the Disney Way, where we conveyed our vision to emulate Disney in bringing best-in-class customer service and curb appeal to the student housing industry. This Disney approach has been a guiding principle for our company throughout our history. To now announce this partnership with Disney is an incredible honor and a validation that the American Campus team has and continues to deliver on our original vision, as we now embark to serve the student interns who were intimately involved in helping Disney deliver on their mission. We’re also excited to announce four additional on-campus development projects this quarter. ACC’s opportunity to modernize on-campus housing at the nation's universities continues to expand.
Turning to operations, preleasing and our expectations for the remainder of 2018, as Jim and Daniel will review. Property operating performance has been largely in line with plan through the first half of the year. Also, with just four to seven weeks left in the 2018, 2019 academic year lease up, we’re pleased to report that we continue to be optimistic about the potential for accelerating NOI growth as we move into 2019. Based on our current preleasing trajectory for the ‘18, ‘19 academic year, we expect our 2019 same store properties to generate opening rental revenue growth at or slightly above the midpoint of our 2.9% to 4.4% rental revenue guidance range.
As provided in our earnings materials; when taking into account the recently completed capital recycling and related capital market activities; slight time delays for two third-party projects which will now benefit 2019; and our updated 2018 same store property group NOI projections for the remainder of the year, we have revised our 2018 earnings guidance to a range of $2.28 to $2.34 per share.
With that, we’ll turn it over to Jim.
Thanks, Bill. As Bill mentioned, our second quarter 2018 same store operational results were in line with our expectations. As seen on Page S5 of the supplemental, quarterly same store property NOI increased 0.1% or 1.5% increase in revenue and an increase in operating expenses of 3.2%, consistent with the flatter growth profile for the first half of the year that we highlighted in the guidance discussion during our fourth quarter 2017 call.
Our revenue increase for the quarter reflected the results of our ’17, ‘18 academic year lease up compared to the prior year, which will also affect the portion of our Q3 revenue results when the current academic year has concluded. Expense growth in the second quarter was largely in line with our expectations. Consistent with the discussion on our Q1 earnings call, the property tax increases compared to the prior year quarter, were expected and were primarily driven by the assessments for our recently developed and acquired properties that entered our same store grouping in 2018.
Adjusting for these properties, our second quarter year-to-date property tax growth would have been approximately 6.7%. We’re particularly pleased with the year-to-date expense growth in our controllable expense categories, which have increased only 1.9% over the first half of 2017. Growth in non-controllable categories during the same period has been 6%.
Turning to our portfolio’s leasing activity. As Bill mentioned in our release, our 2019 same store properties are trending around or slightly above the midpoint of our opening fall 2018-2019 academic year rental revenue growth guidance range of 2.9% to 4.4%. We are pleased with our growth profile as we look into 2019, and want to thank both our field and corporate teams who remain focused on completing our lease up, managing our annual term cycle and process and preparing our properties for move-in.
Reviewing new supply for 2019, Axiometrics is currently projecting 42,700 new beds nationally, an 8% decline in year-over-year new deliveries. However, it's worth noting that only 32,200 of those beds have actually commenced construction at this time, which would be 30% reduction from last year if no additional late cycle developments break ground. In ACC’s own markets, we’re currently tracking approximately 20,000 beds under construction, which reflect a decrease in new supply of 24%. There are an additional 9,000 beds planned that have not yet commenced construction, and we’re tracking these projects closely to see which, if any, break ground late in the window for delivery in 2019. We will update the market with respect to these potential deliveries on our third quarter call.
I will now turn the call over to William to discuss our investment activity.
Thanks, Jim. We made significant progress executing strategic investment initiatives during the second quarter. First, we sold three assets in May to a partnership of Greystar and Goldman Sachs for $245 million, at 4.1% economic cap rate on in-place revenues and projected operating expenses. We also successfully executed the sale of 45% minority interest and a portfolio of existing properties at 4.4% economic cap rate.
Our joint venture partner, Allianz Real Estate, is the second largest investor of real estate in the world with a long-term perspective, aligning well with our investment approach. Allianz desires to invest in more core pedestrian student housing over the long term and will be evaluated as another capital source to fund future growth initiatives. As evidenced by our highly accretive dispositions, investor interest in student housing has never been more robust. During both of the sales and JV process, we saw deep demand and fierce competition at our final pricing from both large global and domestic institutional groups.
With regards to the overall transaction market for student housing, elevated demands seen over the past three years continues. According to CBRE student housing report for the first half of 2018, transaction volume totaled $3.1 billion, 64% of all transactions were bought by institutional, international or fund investors. In addition, Greystar in conjunction with Blackstone, recently announced the acquisition of EDR for $4.6 billion and estimated cap in the high 4% range, further indicating the large and strong demand investing quality student housing, despite rising interest rates during the first half of 2018, overall cap rates for student housing decreased 19 basis points over 2017. And cap rates for core assets pedestrian Tier1 universities are now routinely valued in the sub-4% to mid-4% range according to CBRE. Demand is expected to remain strong for student housing investment well into the future.
Turning now to development. We are excited to announce that we have entered into an agreement to lease with Disney on the recently announced ACE project to develop, own and manage housing for college students participating in the Disney college internship programs at Walt Disney World near Orlando, Florida. The project incorporates the Disney education center on site, provides dedicated transportation to all the parks and resorts and offers a full suite of amenities designed for college students. The new community will replace existing housing owned or mass released by Disney to meet the current demand of college student intern housing.
In addition, Walt Disney World has announced a recently completed significant investment to the parks and resorts, including the recent opening of Toy Story Land and the upcoming new Star Wars: Galaxy Edge Land in 2019 at Hollywood Studios. Along with new resorts, retail and a gondola system in addition to significant reinvestment announced at Epcot Center. Our $615 million student housing development is expected to break ground in late Q4 of this year and delivering phases between May 2020 and May 2023 with 6.8% stabilized nominal yield projected following completion of the project.
The agreement to lease includes a fully negotiated 75 year ground lease for each parcel and accompanying agreement, and is binding upon both Disney and ACC subject to final project feasibility and receipt of all applicable development permits. Overall with regard to own development and presales for 2018 and 2019, they currently total 15 projects, approximately 10,100 beds and $1.1 billion in development costs. While 2018-2019 developments are located either on-campus or pedestrian to major Tier1 universities, and are targeting stabilized development yields between 6.25% and 7% and presale development yields between 5.7% to 6.25%, representing attractive spreads of 150 to 250 basis points over current valuations for stabilized assets within these markets.
Turning to on-campus. We are excited to announce four new awards this quarter. First, we’re working on a 400 bed ACE 3 development project with our existing partner Drexel University, which includes a new honors college and associated housing. We are also in the final stages of negotiation on a 570 bed ACE development on the campus of San Francisco State University. We’re pleased to announce we’ve been awarded new on-campus development project with Princeton University, which would be our third project on the prestigious campus.
The transaction structure and timing for that project is not yet determined. Lastly, we are awarded a new on-campus project at Concordia University, Texas in Austin, which is expected to be a third-party development. The full scope, feasibility, fee and timing of all four of these new awards are not yet finalized. In addition to these awards, we continue to pursue a deep set of on-campus opportunities and we’ll update the market as make continued progress.
I'll now turn it over to Daniel to discuss our financial results and 2018 guidance.
Thanks, William. As reported, total FFOM for the second quarter of 2018 was $72.6 million or $0.52 per fully diluted share. This was essentially in line with the second quarter of 2017 FFOM of $72.8 million and $0.01 below 2017 per share FFOM $0.53. With same store NOI relatively flat over the prior year and the lower first year occupancy and specific fall 2017 development deliveries, initial new store earnings accretion. The 1% decline in year-over-year earnings per share was primarily a result of dilution from the completion of three additional property dispositions not originally included in earnings guidance.
From a balance sheet perspective, as of June 30th, the Company's debt to enterprise value was 32.3. Debt to total asset value was 35.1% and the net debt to run rate EBITDA was 6.5 times. Also, our floating-rate debt now stands at 12.9% of total debt. During the quarter, gross proceeds and the closing of the Allianz joint venture, including $330 million of secured mortgage debt placed on the portfolio and the three additional property dispositions, we’re used to pay down approximately $46 million of secured debt on the sold properties, as well as $450 million of corporate level term loan debt and a portion of the outstanding balance on our revolving credit facility.
This reduced our debt to total assets by 3.5 percentage points and our debt to EBITDA by half the turn. As you will see in our capital allocation and long-term funding plan on Page S15 of the supplemental, we intend to continue to manage our balance sheet for the long-term; as we execute on an attractive five-year development pipeline with the mix of debt, capital recycling and equity, taking advantage of the most attractive sources of capital available to us over the next five years; and ultimately target leverage in the mid 30s and sub 6 times debt to EBITDA. With that in mind, until we see an improvement in the cost of our equity, we will look to take advantage of the very high demand environment we are seeing for core student housing from private capital around the globe; during annual capital recycling program in the range of $100 million to $200 million per year.
Turning now to our earnings outlook. We are revising our 2018 FFOM guidance range to $2.28 to $2.34 per fully diluted share with $0.07 reduction at the midpoint, driven by $0.03 of dilution related to the incremental dispositions completed and the timing of closing and final financing structure on Allianz joint venture; $0.01 related to updated expectation on the timing of third-party development fee income; $0.02 related to lower NOI expectations; and $0.01 coming from other small adjustments to miscellaneous line items.
The following describes the primary assumptions behind each of these changes. First, the sale of a three property portfolio for $245 million during the second quarter was not originally contemplated in and guidance. This will result in the loss of $7.3 million in estimated NOI for the year, offset by approximately $4.2 million in interest savings from paying off floating rate debt with the proceeds, for a net reduction to projected FFOM of $3.1 million or $0.02 per share. The Company also completed the joint venture transaction with Allianz during the second quarter, and placed $330 million of 10 year secured mortgage debt on the portfolio at 4.1% interest rate, which was not originally anticipated as part of the transaction.
While this had the benefit of accelerating our planned reduction of our floating rate debt ratio, it will result in $1.3 million increase in interest expense for the year net of our partner’s 45% percent share of the debt and the $0.01 the projected FFOM. With regards to third-party fee income, we originally included third-party development fee income of $7 million to $10.2 million with $3.2 million range related to the assumed closing and commencement of construction on the UC Berkeley and Prairie View projects in late 2018.
At the midpoint, we only assume the UC Berkeley project commenced producing $1.5 million of fee income. Both projects are now expected to close in the first half of 2019, bringing down our midpoint of 2000 FFOM guidance by $0.01. Next, as discussed, we are maintaining our 2.9% to 4.4% percent same store rental revenue growth guidance and academic year 2018-19 lease up, which will be the predominant driver of the first three quarters of 2019 same-store NOI growth.
As it relates to the remainder of 2018 same-store NOI growth, we currently believe that 2018 financial same-store subgroup is trending toward the lower end of our original revenue expectations. Also, with regards to same-store operating expenses, we’re seeing higher initial indications of tax reassessments than originally anticipated, which along with the $500,000 in excess of winter storms costs incurred in the first part of the year, has increased our expectations for maintenance and utilities expense growth for the year. Accordingly, we have adjusted our guidance for 2018 same-store and new store NOI to reflect revised expectations, causing a net $0.02 reduction to FFOM guidance.
And finally, approximately $1.2 million and increased corporate depreciation and G&A costs associated with investment into our Next Gen systems contribute to further $0.01 reduction in FFOM guidance. These items, along with changes to other components of guidance that were net neutral to earnings expectations, are detailed on pages S17 and S18 of the earnings supplemental. With that, I'll turn it back to the operator to start the question-and-answer portion of the call.
We will now begin the question-and-answer session [Operator Instructions]. Our first question today comes from Alexander Goldfarb with Sandler O'Neill. Please go ahead.
Just two questions, the first on the guidance. Can you just walk us through -- every year, there’re few markets that seem to always fall out of bed. So can you just walk us through how you guys originally budgeted, how you bracketed, for any markets that maybe weak? And then if there’s not a better way, because the linkage this year is weird. You’re preleasing for the upcoming school year, you guys are at or actually better than midpoint. But for this year, it’s fallen off. Obviously, it’s taking a hit on the stock. So is there a better way that you guys can bridge it or provide guidance such that there’s more continuity in how we think about -- how we think about the current year heading into the forward year?
When we talk about our go-forward run rate with the lease up, we’re always talking about the following academic year. So in this case, as you mentioned, we’re very pleased where that 2019 same store groupings coming in with the 3.6%. Typically, you don't have as much of a deviation between your Q4 same store grouping and your go forward grouping. And if you look historically that it’s been nominal, maybe 20 to 30 different -- 20 to 30 bps difference in those on a historical basis. And that's why we did want to point out in this release so people didn’t have false expectations for Q4 of that trailing towards to the lower end of that 2.9.
I would point out -- I’ve read a couple of analyst comments on how is the fundamental in student housing. When you look at all the supply that everyone was concerned about and in our same store core properties, we’re talking about 2.9% growth rate and being 60 bps over the prior year I don't think that’s bad news. So hopefully the stock will recover when people get into that data a little bit. Where we did see some slippage in the guidance, and we’ve talked about -- when you look at the three core markets that we were focused on in terms of Austin, Tallahassee and College Station and go through what our guidance budgets were for those, as well as where they came in and how it relates to the broader fundamentals.
Austin continues to be a very strong market. And even in the face of the new supply that you see, you have rental rate growth of 4.5% in our portfolio. Where we see a little bit of a slippage in budget in guidance to Austin is in one property, the block, which is the furthest one of the West campus. And ironically, it was our lowest price accommodations that are slowing our lease up there. Students are absorbing the higher price closer in pedestrian, which again overall for the fundamentals I think is positive. And so Austin, we’re projecting about 120 bps of positive rental rate growth to -- rental revenue growth; rental rate is 4.5, which again I think is the strongest indicator you can give in terms of the strength of the market from the supply. But that is below what it was our midpoint of guidance by a little more than 250, 300 bps. And so Austin as a spread through the midpoint is down. But again, I would point out with good healthy rental rate growth.
College Station, again, only a few bps off there in terms of our budgeting to guidance, about 7 bps overall; there, we couldn't continue to be more pleased with the team's activities; we’re projecting College Station right now to be at -- right now, we’re at 97 versus 94 last year, we’re projecting 98; and so we're looking at about 430 of growth and occupancy there, rates of about 4% diminishment to 4.5. And so we are little bit of flatness there but again very good compared to the rest of market. Axiometrics had said the market is 85% leased with rents down 6.6, so significant outperformance, small blip to our guidance.
Tallahassee was the third market. This is the market where we’re probably going to see negative rental revenue growth moving into next year. In hindsight we may have been a little too aggressive with rate in the early part of the leasing season where we had the greatest velocity last year. We started in that market at 4.5% rate increase we’re going to end it about flat. And we have one property there, Stadium Center that is trending behind in occupancy. And so those are the three in Austin, which is again 120 basis points of growth going into next year is the projection but below where we had budgeted at the midpoint of guidance. But overall, the fundamentals remain very strong with that to trending at that 2.9%.
And then second question, Daniel, I think you guys said that you're on $100 million to $200 million of recycling a year. If we just look to next year, you’ve got $260 million of remaining spend on developments. And then there's the presale, the core spaces, another 154. So can you just jive, should we be really expecting $200 million in recycling for next year with the balance debt financed or the other things, because obviously you guys sold a bit more than expected this year that took down numbers. So just trying to get a handle on how we should think about next year given the outlays and the $100 million to $200 million of generic recycling.
Generically, you should assume about $100 million to $200 million in annual capital recycling. Obviously, that's just going to have a lot to do with what the prevailing capital market conditions are. And whether or not, we think that at that time it makes sense to do it through equity, capital or debt. We look at the management of that balance sheet over the long term. We’re not just looking at the funding of next year. We’re looking at the funding of all of our commitments, which including Disney, goes up for 2023. And so when we see good cost of capital and we think it’s appropriate to warehouse the cost of capital then we will. But at this point, if all things equal, we would look to fund about $100 million to $200 million of that with disposing the rest within 2019.
The next question comes from Austin Wurschmidt with KeyBanc Capital Markets. Please go ahead.
On the supply detail you provided, you mentioned the 20,000 beds under construction across your markets. Can you give us a sense of where that supply is going to head next year versus some of the markets that you outlined for this year?
Absolutely Austin -- and that continues to be a bright spot in the sector as we do continue to see supply go down as Jim mentioned, in the Axiometrics national numbers and as we see in our own, in terms of what’s under construction. Also, when you look at the top three next year much better for us than it was this year where we had three top markets were our two, four and six number of markets in terms of holding. Top of the list next year are, Arlington, San Marcos and Austin appears again in number three. Arlington is a very small market for us. Sam Marcos is a market where assets are extremely well positioned from a location and a competitive pricing structure, the planned beds coming in there.
Candidly, we looked at a couple of the developments. We couldn’t make the numbers work, because the pro forma rents were about $350 higher than what we’re charging in the market. So we think we have good pricing power in that. And as we said, Austin has 4.5% rental rate growth, and so it continues to be resilient from a growth perspective. So looks pretty good for us next year going in. Also, William was telling me this morning that his team was reviewing the data that the new supply coming in next year is spread over about 10 more markets than it was this year, about 35 plus versus 25 plus this year; so more evenly distributed as we see it in those top redevelopment sites and barriers to entry, continuing to hinder folks that want to get in close to campus.
And then property taxes has been something you guys have spoken about and talked about, how the upward pressure really is from the newer development assets upon their reassessment, with the large development pipeline ACE transactions at this point. When do you think property taxes could subside?
It’s hard to say. I think a lot of the above inflationary growth you’ve seen in property taxes, because as Jim mentioned, even excluding the development and acquisition property stabilizing for the first full year, we were at 6.7% growth in property taxes, that's above the average property expense growth and above what you hoped for the long-term; the reality is assessors are getting up to speed on the market in these smaller college municipalities; they’re realizing the market value of those purpose built student housing modern products; and assessments are catching up.
Now at some point, you would expect that with those being caught up that you would see more of normalization in the growth rate in property taxes. And it’s hard for us to say when that will fully play out. But certainly, we don't believe that these growth rates in property taxes are going to be the stable long-term growth rate. But hard for us to pinpoint when we would expect that to normalize.
But it's fair to say that outside of some of those presale deals, you’re not going to get the significant double digit type increases that you're getting right now on development properties being reassessed?
Lastly, I guess just talking about -- touching on the funding plan. So you up the funding needs through 2023 but lowered the pro forma leverage as you mentioned below six times. And I was just curious if that was a function of the three additional ACE deals that you're working through right now, or if you see additional deals in the pipeline? Or is that just a range that you're more comfortable with at this point in the cycle and longer-term? What -- the upped equity capital needs since you updated…
I think the reality is -- in trying to give a full funding outlook through 2023 is obviously a bit of abnormal situation, and that we’ve got this Disney project that’s multiple phases over five years. And so we’re really given a very long-term look. And so as we looked at how we wanted to present that to the market coming into this earnings call, we said look, over the long term, we know that really what we’re going to be trying target leverage is in that mid-30s% and sub-6 times debt to EBITDA.
And given that long of a time period, I think nobody would be surprised that over a five-year time period, we would be thinking about all aspects of the capital markets and all sources of capital available to us, and so we wanted to lay that out. And as you would expect the ranges that you see there for debt and equity type capital are a third and two-thirds in line with that leverage that we’re targeting over the long-term. So that was the thought process that went into updating how we wanted to reflect that to market.
Next question comes from Nick Joseph with Citi. Please go ahead.
I just want to go back to reconciling the 2018 calendar year same store revenue guidance introduction to maintaining academic year pre-leasing guidance. Since you’re starting with the calendar year guidance, how is year-to-date same store revenue growth trended versus expectations? And then how much lower do you expect the back half to be versus initial guidance?
So first half of the year has pretty much been in line, Nick; second half of the year, obviously, is where we’re coming down. We were trending or guiding towards more of the midpoint of that range for the 18 group as well. As normal, we were expecting that there wouldn't be much of a difference in the rental revenue growth profile of the two groups. So with that coming down, you're talking about 80 bps that we’re reducing the back half of the year in terms of rental revenue growth. The other part of that is just bringing in other income expectations a little bit in the back half of the year, but that's obviously a small percentage of total revenue and less of an impact.
And then over last two years, you produced guidance both for FFOM and same-store versus initial expectations, which has clearly weighed on the stock. So what gives you the confidence to tell the market that you're at or above the midpoint for preleasing with another month to ago than into more occupancy or rate driven versus initial expectations?
The occupancy and certainly, Nick, as we look at our 2017 growth properties that are rolling in for next year, a lot of them are virtually done. And so a lot of those occupancies are locked-in with also the rate growth locked-in that gives us good color in; and so when we look at the range on the remaining 18 same-stores where we’re comfortable in terms making that projection for ’19 toward the midpoint.
I do want to say the fundamental -- we're very excited about fundamentals as we go through the various categories of lease up. The 2017 developments that came online last year, it just absolutely crushed in this year's lease up, did phenomenally well with rental rate growth and are going to be near capacity. Also, our 2018 developments continue to trend really well. They’re already at 94% preleasing and we’re projecting them to be over 95%, and so full stabilization of what’s coming online.
Also, the three markets last year, Texas, tech Illinois and Champaign, all recovered extremely well, so good positive story all the way around. Again, as I mentioned in my comments, the biggest drag on our budget actually was Austin, but it has positive rental rate growth of 120 bps and that’s isolated at one asset. When you look at our range of rates in Austin, there are from 2.0% to 7.5% at the property with that supply coming on. And so only one asset there really did us, and still we got some time left, but right now we’re conservative perhaps in our projections based on what we’re seeing.
The 17 assets that are rolling into the 2019’s same store pool. What’s occupancy for preleasing today versus where they started this past academic year?
94.4 versus final of 87 -- and that’s as of today and we’re projecting that group to be closer to 97 at the end.
The next question comes from Samir Khanal with Evercore. Please go ahead.
But can you provide any color on how your developments are going, maybe 2018 those that are close to come online in the near term. Are there any developments that are maybe taking longer to stabilize, possibly where you’re maybe seeing a two-year lease up at this point?
No, and that’s what -- we just commented on, actually that property grouping is already at 93.3 and we’re projecting to be over 95. And so we’re seeing full stabilization of those 2018 deliveries in the first year, which again for us, has always been the norm. And we thought last year was an exception in terms of some unique circumstances. So we’re very glad to see that historical trend back on track.
And just generally, I guess my second question. I mean you’ve done over $600 million of dispositions this year. You certainly got developments coming online. You got the organic growth, which is a tailwind for growth. But again, you’ve got the dispositions that will be headwind for FFO growth over the next 12 to 24 months. And I guess, internally, how do you balance your strategy to achieve bottom line growth, FFO growth versus selling assets at this time to take advantage of favorable pricing out there?
That's certainly something that has been a headwind and an uphill battle through the last five years. As we’ve talked about on prior calls, the slowdown in earnings per share growth has been a focus of the Board and the management team. But we don't want to not manage our balance sheet and add value creating assets to the portfolio that are going to drive value for the long-term as opposed -- or instead of doing that. When you look back over those last five years, we sold $1.7 billion in assets.
A lot of those early sales through 2014, ’15,’16, were more non-core properties that we were selling in the fixed range on an economic basis. And the impact of that from a nominal basis is 30 basis points higher. That really is where you see a slowdown in your ability to drive earnings during that time period. We’re redeploying that capital into a lot of developments, at 6.25 and above, but that's not going to create a ton of accretion. However, it should as it improves the quality of overall portfolio, providing much more stable NOI growth profile.
Now as you look at current 2018 and into ’19, the capital recycling we’re doing is of more core type assets where we’re selling in the low fours, and redeploying that into that 6.25 development pipeline. That puts you in a much better position to create earnings growth. And so I think what you'll see over the next couple years as now that we’ve called out a lot of the non-core assets and the type of capital recycling we’ll be doing, we’ll be at a much better cost of capital in the short-term that puts you in a position to execute on your plan, while still creating value and earnings per share at the same time.
Our next question comes from Juan Sanabria with Bank of America. Please go ahead.
Just going back to the guidance question. What would the ’18, ’19 same store revenue number would be if you stripped out the benefits from easy comps for the 2017 deliveries where you missed the initial lease up?
That would be the 2.9 and that was -- my opening comments in terms of the core portfolio, is producing 2.9% growth in a year that folks were concerned about the supply impacts. And so we’re very pleased, ‘19 look fantastic at that 3.6 getting to where we can start to generate toward the higher end of the historical range. But 2.9% is right at the midpoint of our historical performance over the last 10 years. And so that's why we pointed out the Q4 numbers so that just people would see the variation between the 2.9 and 3.6 as we move from ’18 and ‘19.
So the ‘17 deliveries, the lease up of easier comp gets you to that midpoint or slightly above?
And then just going back to your comments about the same store results this year and taking down the expectations for the back half of ’18 for the same store year. Am I right to categorize it as just really driven by the University of Texas, and you’re saying it was really just one asset that drove the miss. Is that right way to think about it?
Actually, it’s not just Austin. So we talked about three focus markets, still went through the College Station pretty much came in line with expectations, just a small decrease there; Austin very specific to one asset that being meant to explain that we’re not seeing a broader market performance an issue in Austin more of an asset specific performance; Tallahassee it’s been a little more market wide with the supply that’s going on there; we did see a couple of assets coming relatively in-line with expectations, but the majority assets there are definitely feeling the pressure of the supply in the market.
We do have one other market, Huntington, that’s not a market issue. It’s one asset we own in that market at Marshall University that we’re taking 150 beds off-line this fall, and really just decided we need to do that this summer so obviously, subsequent to the guidance at the beginning of the year. And that's about a 15 bp drag on that rental rate growth or rental revenue growth for the 2018 same store group. And we’re taking those beds off-line just because we’ve got to perform some non-routine maintenance in terms of skin work on the exterior of the buildings there.
We’re leaving that in same-store because we don't take properties out of same store for small issues like that unless we’re truly redeveloping the property, we keep it in same-store. But it does drag about $350,000 on revenue growth and 15 bps on the rental revenue growth percent.
And then Daniel just another one for you, on the leverage and eventually wanted to get to 6 times or below on debt to EBITDA. What’s the timing you think you get there? And would you be inclined to do it sooner rather than later with maybe more opportunities from developers that may have gotten over their skis or what have you? And why the change from the previous target, is it just because you want to be well positioned in case things turn, or if you can…
No, I think it’s a target. We communicated it’s our goal of being in the mid-30s on a debt to asset basis and 6 to sub-6 times debt to EBITDA, there is nothing new there. We are updating this funding plan sheet since the last call given that we are showing Disney over a five-year term, and really reflecting the long-term goal to bring that down or to maintain that in those ranges. The reality is the 6.5 times, today if you bring on the developments for this fall that are a few weeks away from coming into operation, you are at sub-6 times. So that ebbs and flows as you go through your development cycle, because you’re funding all of the development.
And this quarter is always the peak of our debt to EBITDA. You got all the funding pretty much completed on your development pipeline or the vast majority of it, and no EBITDA associated with it. And then you've already started funding for the following fall. So we will continue to manage it for the long-term with the stability of our operational performance. I know we’re bringing down NOI growth, but we -- it is a very tight band that it stays in. And that stability allows us to think about things over the long-term and make adjustments and raise capital when we see it appropriate. And so we don't do it based on just a specific date that we’re trying to it -- buy more, buy opportunistic access to capital.
And if I could, can I just ask one last question on Disney. and how you think about the relative risk there versus a typical ACE deal when there’s -- from my understanding, there’s no necessary corporate guarantee from Disney and corporate strategies, I think maybe more apt to change than universities. And the relative returns that you guys are thinking about for Disney versus ACE deals are, and lastly maybe just the appetite for other corporate housing type opportunities?
As you look at Disney and the Disney college program, and I urge people to just Google and read the Wikipedia. It’s a long-established program that’s been an integral part of how they manage their workforce. The demographics of it and the stability of it were easy to research and easy to document. And as William talked about, the substantial growth and investment that Disney is making into the additional expansion of the parks and the revitalization of some of the parks, from our perspective, takes the demand well beyond what we’re currently building. Candidly, the biggest part of the negotiation for Disney was they wanted to make sure that they had the right to build additional housing because they felt long-term what we’re building is not going to suffice.
And as part of that, they agreed to a first fill, which we’ve tried to get from every university we've ever negotiated with and have never gotten it once, which is that Disney building the additional beds for the program, we get all of our beds filled before a single student goes into the other. And beyond that also, we have provisions for shadow market. And if Disney have a total of 85,000 other employees and then as a third tier backup -- and we design some flexibility in the units, it can roll into the hospitality portfolio for Disney, at which point, they would take over the management, we wouldn’t, which is even better. Candidly, that’d be the most profitable if it ever happened. And so a lot of back up there, lot of opportunity and one that we are extremely excited about.
The other thing that I would point out, we’re already seeing this in every conversation that we have. Disney is held in the highest regard by everybody, in terms of being the world's best-in-class customer service and curb appeal oriented company. And so the intangible benefit for us and having Disney sought us out and privatizing what is a very integral part of their program to us is adding a significant amount of credibility with colleges and universities. You take the Disney award coupled with being the only publicly investment-grade rated company left in the space, we’re really excited about what it’s going to do for the rest of our P3 prospects, going forward.
The next question comes from Drew Babin with Baird. Please go ahead.
Question on the same store expense growth cadence for the back half of the year. Looks like the new guidance implies about 2.5%. I was hoping you could talk about 3Q versus 4Q. I know in 3Q, there easier comps, or there is some hurricane impact to last year. If you could give us some sense of how that may trend that would be helpful?
If you just look at the third quarter, as you talked about, we do have a little easier comp on the expense side. We’re looking at above -- certainly, well above the average for the year in the third quarter more in the 4% range; where the fourth quarter is not as easy a comp; in fact, pretty tough comp on the expense side; so expecting a little higher growth in expenses in the fourth quarter; that will bring, just in the math given that the flattish growth in same-store NOI in the first half of the year, that fourth quarter would have to be in the more in the 1% range.
And question on the third party developments. If you could give us a reason for the slight delay in the timing of a couple of those projects moving from the end of ’18 into ’19 that would help. And is there anything that would indicate that you might see more slight delays in commencement of some of these projects?
No, those two specific projects were just instances where we’re working with the university working through the process, thought it was prudent to start to delays, moving from last part of 2018 into the mid part of 2019. Certainly, we still expect both of those transactions to occur. It’s just a little bit of a timing start delay. And certainly, that's not any indication of widespread timing across the on-campus. In case of A&M transaction, it was a new form of third-party financing that we were looking at but the University was interested in pursuing the has the longer lead time on it, and so that’s all that’s all that slipped at. And in the Berkeley case, originally that was on little bit of a fast-track program from the University, it’s now following more of the ordinary cycle to make sure that all the stakeholders are pleased with the process.
And then last question and I guess more philosophical question. The universities, ASU, Texas A&M, where you can see some slippage of new supply but enrollment growth has been very healthy at these universities. And generally a lot of supply and when it impacts the market and then things catch up and stabilize over time. Has any of the weakness at the University of Texas, Austin and Tallahassee universities, where enrollment is capped or relatively capped. Does that make you a bit hesitant or where you’re potentially overextending in markets where you may be counting on obsolescence, maybe a little too much offset new supply?
Always, when we get into our investment criteria and how we protect ourselves, Austin has been -- we talked about Austin a lot of this call, I want to go through some numbers on Austin. Let me give you the stats, where we’re leasing, what rate growth is in Austin by some assets today; the Castilian is 95% with 7.5% rental rate growth; Crest at Pearl 98.5% with 3.28% rental rate growth; 26 West, 98.3% with 2.5% rental rate growth; [indiscernible] 97.7%, 3.29%; Callaway House, 99.5%, 6.29%; and the only one that’s a drag is the block that we are talking about at 87.4% with 2.2% growth.
And what we talked about is unique about the block and actually what we’re little surprised to see is our lowest price accommodations in West campus that doubles or what is lagging as students are choosing to pay the higher price for the higher end products that you saw all our highest end product at least. And so I don’t see any weakness in Austin from a growth perspective. So it really -- and then you have an enrollment cap there for 30 years. And so we continue to see all of the new modern housing absorbed at the higher price points and so certainly, our asset position in Austin.
Now those lower-priced beds are about four blocks from campus and so you do have some of that newer high-priced development inside a couple of the buildings there at the block, which typically we’ve seen students in the past still choose that lower cost alternative, in Tallahassee we saw the exact opposite, are little further away, lowest priced alternatives, completely full with rental rate growth. And it was more of the -- where we got aggressive on rate, the higher price. We always take in the consideration in Roman as an equation and also new supply and our product position.
The other thing that we look at is some of the disposition choices that we make. We’re now getting ahead of that curve where we see where there may be some future weakness coming in growth based on competitive supply and how we directly compete in making those strategic decisions of when do you harvest some of that value, as Daniel talked about in the recycling program. And so I would -- there's not always a direct correlation between supply coming in and immediate absorption and long-term growth rates. And again, Austin, continues to be the poster child for that but certainly is one extreme of examples.
So I guess phrasing differently, should the block recover either here very late in the game and lease up or next year, where does that incremental demand for the block come from? Is that from obsolete off-campus or your on-campus inventory…
There's a couple things that you can do with the block. One, the block is a unique product and we still lease adjoining several as we did when we bought it. It’s the only one that’s leased in a different leasing structure. And it was working well for 10 years and eight years and we didn’t want to upset the applecart. It also has variation and it can lease as shared or private. And so over the years, we configured it to maximize occupancy. And this is the first year that we saw a shift away from those shared products where there’s the opportunity to reconvert those veterans back to the higher price.
Austin, the thing that continues to happen here is that students want to be closer and closer to campus. Also, the new beds -- and again the overall -- we have growth in Austin. And so there is more upside in the block next year, we’ll look at re-pricing and the differentiation to be shared in private. But we continue to Austin as a strong vibrant market with growth.
The next question come John Pawlowski with Green Street Advisors. Please go ahead.
William, can you take us through the thesis on San Francisco State, I know it’s a smaller university and perhaps doesn’t rank as high on the research Carnegie classification system?
When you look at San Francisco State, it’s little over 29,000 students. It’s one of the largest campuses within the very large California state system. When you really look at what’s going on specifically with the housing at San Francisco State, they currently have little over 3,800 or about 13% of enrollment, which is 100% occupied. And they currently have a waitlist of over 3,000 students. There’s a high demand for those students to live on campus and affordable accommodations. So very attractive from a supply demand metric when you can work in conjunction with the University to provide that supply, really why that particular university fit within our on-campus investment.
And second question from me, given the phased approach for Disney and rapid rise of construction costs that doesn't seem to be slowing down. Could you remind us what percent of the total construction costs for Disney is locked in today? And if construction costs continue to clip is there any risk to the 6A stabilized yield?
So as we are under the agreement to lease, we still have until we break ground in late Q4 to work through final GMP, of which that we do have returns and feasibility out if those returns pressure. We have priced in escalation, the contractor has priced an escalation. And then once we break ground, we will be under GMP for all phases all the way through 2023 with appropriate escalation built-in and that risk coming to the general contractor.
So in Q4, once you break ground on phase one, the 6A on the class size is completely locked-in?
Correct, and we feel good. We put significant escalation and cushion to allow for what we believe if there is still construction pricing from now until then.
Next question is a follow-up question from Nick Joseph with Citi. Please go ahead.
It’s Michael Bilerman here with Nick. Bill, I want to get your views on earnings and cash flow growth relative to NAV. And the reason I asked is if you look over the last five years, you basically had no earnings growth. But at the same time, you’ve increased the balance sheet by call it, $2.25 billion to $2.5 billion of assets. Your leverage is down a little bit but not meaningfully. You had, cal it, long-term average of 3% same-store growth. You’re sitting today with $1.24 billion commitments of future funding with about $350 million in cash and free cash flow over those years to fund it, still leaving you with another $1 billion of things to sell or raise capital to do that. And I recognize cap rates have compressed in the sector and I recognize there’s lot of institutional interest. But at what point or do not care about cash flow and earnings growth for the company and for shareholders?
We absolutely do care about cash flows and earnings growth and understanding importance of it in and are highly focused on it. Daniel gave a fairly elaborate answer to similar question earlier which I won’t regurgitate all of it. But certainly if you look since 2013, which is the five-year point from which you’re referring to, we’ve gone through about $3 billion in dispositions with about $3 billion in matching funding through a combination of equity. And also the asset sales that unfortunately took place at that time, we’re at a much higher cap rate, that’s when we’re selling the value add drive properties closer to six economic gap, which from a nominal basis, add about 30 basis points to that coupled with the delay and match funding on those developments, which has really caused the drag on that earnings growth.
The other thing that has happened simultaneously, over those five years -- one of the things that we measure and the board looks at it is we run annual productivity numbers on an ongoing basis to our G&A and the overall scalability organization. And today, we own and are spreading our G&A over the same number of assets that we were in 2013. We also have been making substantial investments into our Next Gen operating system in terms of creating efficiencies which we’re also in the final stages of. And that’s also played a role in this.
For the reasons that Daniel went through when we look at the capital recycling activities that we’re looking at going forward with the portfolio of being now consisting of core pedestrian assets where the assets that we will recycle when that is most prudent decision to make in terms of the capital stack that we’ll have available to us, we’re going to be in much better situation in terms of the spread or the high accretion of what we're selling to that development pipeline that we’re reinvesting in, you couple that with the completion of Next Gen. And one of the things we made a strategic decision to do that our expense numbers that have been very good when you look at our margin improvement and our asset management initiatives, they have been held back though by the G&A allocation of Next Gen being spread over a non-growing base properties.
As we complete Next Gen, one, we will -- we have a third party management division that has historically only managed assets for the properties that we have developed on campus. We have the ability to expand that business significantly within that third-party division that doesn't take away from our focus of our core operating group, and allow us to be much more efficient in utilizing the Next Gen systems and the G&A and further reducing some of our internal cost and efficiency.
And when you couple that with -- and again, the conversation that Daniel went through earlier on the call; with the ability to recycle capital at much better cap rates now; and hopefully, be able to match time those dispositions a little better, given the depth of the institutional market; where before we sold -- the 19 properties we sold at the end of 2016; my recollection was $0.31 drag on earnings per share last year, 2017 rather. And so we’ve much better opportunities in terms of where cap rates are; what are the properties that we are putting into that capital recycling pool; the ability to more efficiently match fund through onesie-twosie's whatever we need to sell to match fund that development pipeline versus doing the whole strategic disposition of all the value add that we’d undertook aggressively; and you couple that with the completion of Next Gen and the ability to be more efficient to scalability; that should translate into earnings per share.
But make no mistake, Michael, we are focused on growing earnings; we understand the markets’ frustration with earnings being stagnant for that five-year period; and we hold it equally to how we value the importance of increasing the value of the real estate and NAV; and know that it’s our job to grow both of those in tandem.
It just feels as though if we go back to all of the calls for last five years, I would say there was always a view towards growth, recognizing the dispositions were dilutive. But I would say that you and your management teams have always talked more positively about the future. And we’ve sat here for five years and haven’t gotten anything. And so I worry a little bit that it’s common and then you get these disappointments every year when it doesn't. And so I don't know if you have to put out a official three year type forecast; some of your multifamily peers do that in terms of strategic plan of really sizing up the pieces as we move forward from here; so that investors can start thinking about the building blocks of ’19, ’20, ‘21 when you should have this growth come about, so that they're not surprised; or maybe it doesn’t, because you have drags from the capital raising or other things. But I don’t know if you want to give that some thoughts in terms of providing more clarity to the marketplace?
We definitely will give it some thought. And hopefully, the one thing that we've also the -- for the reasons you’re discussing, we’ve had an impaired cost of capital in the public markets, which has also limited our alternatives that have been available to us. That’s part of why we undertook the strategic joint venture. That simultaneously lining up with the private market appetite now for student housing, and being well established in that cap rate compression give us more alternative than we did have in the past. And so I do think we’re in a much better situation. If we’re also fortunate enough that the cost of capital does return to the public market then also it’s just more arrows in our quiver and what levers to pull in terms of the ATM, equity funding, along with potential capital recycling to help us manage those earnings per share. Certainly, when you look at in years that we were producing the greatest growth for our shareholders is when we add all the source of capital available to us to choose from. We have more now than we certainly have in the last five years. But we will give thought to what you said in terms of showing the longer term trajectory.
Well, in public markets, there’s a weighing machine and a sentiment indicator about what shareholders’ value, it’s not NAV you can monetize because you had a public peer do that; but there public markets definitely has an ongoing and meeting those expectations; and exceeding those expectations; and having smart capital allocation decisions; all wrapped into an equity price. But I’d a quick question -- second question is for Daniel. On the 17 assets that are part of the pool that’s coming in next year. What is the revenue, the annual revenue contribution for those? I am getting to probably about $100 million. I don't know if that's the right number or not just thinking about…
That’s probably right, Michal. On a core quarter, meaning before the academic year, your revenue is about $28 million. So taking seasonality into consideration, you're probably sitting right around $100 million.
So the change that you had with the current pool being weaker and then the development properties being better than your forecast, I mean, you’re talking probably about 250 basis point spread relative to your original forecast, just for the 17 assets. And about 30 or 40 basis points lower for the core. Is that right?
Actually, a little lower on the core, we were in that mid range of about 3.65 for the core, we’re coming in lower end around, so it’s about 70 bp, 5 bps on the core. And then, yes, pretty significant out performance on the 17 additional properties that are bringing -- are helping sustain that midpoint going into…
And you would have forecasted 95% in your original 2.9 to 4.4 for those 17 assets, and now they’re coming in at 97. That’s the differential?
I think we were a little below that 95% area on the 17 new same store properties for ’19. And we’re right now projecting coming in -- let me look here -- 97-ish.
[Operator Instructions] The next question is a follow-up question from Austin Wurschmidt with KeyBanc Capital Markets. Please go ahead.
So when we think about the $100 million to $200 million of annual dispositions. How should we think about the types of assets that you’d consider selling relative to the three assets you sold to the Greystar/Goldman joint venture and into the Allianz joint venture?
I would say think of them very similarly. And again, the portfolio today is a much more consistent portfolio of core Class A pedestrian to campus assets. And so for us its always about analyzing what is -- based on all the variables that we talk about, again, which Drew earlier asked the question, yes, we do consider enrollment, but certainly look at new supply in our current asset positions. We also look at -- one of the most strategic things that we saw in some of our recent disposition decisions, we haven’t sold many ACC developed properties. And that we would never fully dispose of any. And that our properties have market research and product designed behind them to withstand the long-term and always to be to best positioned.
In some cases, we’re selling assets that we bought that have excellent locations but they're not ACC floor planned, they’re not ACC full specifications. And so as new supply comes in, they don't have the same type of growth rate. And so we’ll continue to prune our portfolio to always look at where do we think we have maximized value, where do we have slowing growth rates. We’ll sell properties where we think we have harvested the most value and it’ll be detrimental to our growth, and we’ll joint venture properties where we may have had substantial accelerated growth rate and more coupon-clipping type growth that we’re happy to own a part of going forward with partners. And so we’ll continue to make the same type of decisions as you've seen us make this year related to dispositions and/or joint ventures.
So why we can’t obviously predict how demand for assets are going to shake out in the next six to 12 months or so. It seems fair to assume that you would look to sell assets in the mid-4s on an economic basis, high-4s, low-5s on a annual basis over the next -- over the timeframe -- over that timeframe?
Absolutely, those will be the assumptions that you should be making. And that we’re looking to do accretive dispositions that we can have a good spread to create value into those development deals.
And then just lastly a clarification, so on the 2.9% that you expect on the 2018 same store pool and call it in the fourth quarter of this year. Does that account for any potential melt that could occur from a little bit of occupancy losses as school starts?
You’re talking about from the no-show process in fall…
Yes, we take into account working through no-shows as school starts.
At this time, this will conclude today's question-and-answer session. I’d like to turn the conference back over to Bill Bayless for any closing remarks.
We’d like to thank you all for joining us. Again, we are excited as we look toward 2019 with the same store properties for ’18 being at the 2.9% growth, the same store grouping going into ’19 at 3.6. And as I mentioned our 2017 development is fully stabilizing from next year, coupled with our 2018 lease ups expected to fully stabilize in year-one. We see positive trends in the fundamentals of the space going forward.
I’d also like to reach out and thank each and every member of the American Campus team. This is crunch time for us. Let’s lease every single bed going forward as we can, all those onesies and twosies of the properties that are full, let’s manage the no-show process and get rate of return to welcome the 130,000 students that will move into our communities. And so thank you to the team for all the hard work that you do. And thanks to all of you for joining us today, and we look forward to talking with you after the move-in.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.