Education Realty Trust, Inc. Q3 2008 Earnings Call Transcript

Education Realty Trust, Inc. (EDR)

Q3 2008 Earnings Call

October 28, 2008 10:00 am ET

Executives

Ken Avalos - Investor Relations

Paul O. Bower - Chairman of the Board, President, Chief Executive Officer

Randall H. Brown - Chief Financial Officer, Executive Vice President, Secretary, Treasurer

Thomas Trubiana - Senior Vice President, Chief Investment Officer

Craig L. Cardwell - Executive Vice President; President of Allen & O’Hara Education Services, Inc.

Analysts

Karin Ford - Keybanc Capital Markets

[Michelle Coe] - UBS

Anthony Paolone - J.P. Morgan

Analyst for Michael Bilerman - Citigroup

Michael Bilerman - Citigroup

Stephen Swett - Keefe, Bruyette & Woods

Napoleon Overton - Morgan, Keegan & Company, Inc.

[Lindsey Yau] - Robert W. Baird & Co., Inc.

Presentation

Operator

Welcome to the Education Realty Trust third quarter conference call. During today’s presentation all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions. (Operator Instructions) This conference call is being recorded today Tuesday, October 28, 2008.

I will now turn the conference over to Ken Avalos, Investor Relations.

Ken Avalos

Welcome to the Education Realty Trust third quarter 2008 conference call. During today’s call management may make forward-looking statements. These statements are based upon current views and current expectations. Such statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from future results expressed or implied by these statements. Risk factors related to the company’s results and management statements are detailed in the company’s annual report on Form 10K and other filings with the Securities and Exchange Commission. Forward-looking statements speak only of expectations as of the date on which they’re made. Education Realty Trust assumes no obligation to update or revise such statements as a result of new information, future developments or otherwise.

It is now my pleasure to turn the call over to Mr. Paul Bower, Chairman, President and Chief Executive Officer.

Paul O. Bower

Joining me on the call today is Randy Brown, our Chief Financial Officer. Also with us today to answer any questions you may have about operations is Craig Cardwell, President of our management subsidiary Allen & O’Hara Education Services, and to answer any questions on the acquisition and development front Tom Trubiana, Chief Investment Officer.

First I’d like to provide an overview of the quarter and some comments on the overall operating environment. I will then ask Randy to provide some additional details and discuss our updated guidance for 2008.

Our FFO for the third quarter of 2008 was a loss of $500,000 compared to FFO of $1.8 million in the third quarter of 2007. FFO per share unit was a loss of $0.02 compared to FFO of $0.06 per share unit in the third quarter of 2007 representing a year-over-year decline of $0.08 per share unit. The decline in FFO and FFO per share unit reflects nominal growth in core revenues offset by higher operating costs at the company’s same communities.

In addition the company received lower operating income contribution from operating its place portfolio compared to the lease revenue we received on the portfolio in the prior year. Although the rate of progress on improving the results on the place portfolio has been disappointing, we believe in the quality of the assets, and as we communicated when we took these over we expect to create value through intensive management over the coming years.

We will also continually evaluate each of these properties including the possibility of strategic dispositions. Lastly, we will be recognizing into income the final $200,000 from the place lease termination fee in the fourth quarter of this year.

The balance of the lower year-over-year results can be attributed to continued upward pressure on property operating expenses, specifically payroll related costs, marketing expenses as we try to drive occupancy in weaker markets, and higher utility costs.

On a same community basis the 2008/2009 lease year opened with an average rate growth of 5.1% and an occupancy decline of 0.8% excluding three properties in challenging markets that we have previously identified: Kalamazoo, Michigan, Gainesville, Florida, and Oxford, Mississippi. In total same community average rates for the 2008/2009 lease year grew 3.3% and occupancy declined approximately 2.6%. The place portfolio opened with an average occupancy of 81.9% compared with 87.8% one year ago.

The three properties I just mentioned have faced significant new supply in their respective markets while enrollment at each school is flat or declining. We will continue to focus on improving occupancy at these properties but know it will take time for the imbalance to at least reach a level of equilibrium, especially in Michigan.

As previously mentioned, a few key expense line items offset our progress on occupancy and rate and pressured our operating margin when compared to the previous year. Our third quarter same-store operating margin was 30.8% versus 33.9% in the third quarter of 2007. While we made progress slowing the rate of expense growth to 4.8% compared to 8% in the second quarter, that is not acceptable and we have already put in place a targeted cost reduction plan that should improve profitability going forward.

Specifically, we have put in place selective staff reductions, a hiring freeze, and a moratorium on wage increases at both the property and corporate level. We are curbing discretionary spending as we work to improve our margins given the volatile and unsettled US economy. Rest assured we will be sensitive to our customers and the physical assets to avoid adverse reaction to these initiatives but considering these unsettled economic times we have determined that this is the prudent course of action for our company.

Randy will provide further detail on certain key revenue and expense items this quarter but I would say that generally we experienced many of the same property level expense trends that we saw in the second quarter but at a somewhat reduced level due to the efforts of our management team. These items are a direct reflection of the challenging economic environment. We have seen this in previous cycles and as conditions improve and management continues to focus on efficiency, expense growth will moderate.

The fundamentals of the student housing business remain sound. In this tough economic climate posting occupancy in the low 90s is reasonable and in combination with generating good rate growth provides for solid cash flow. The next lease cycle will provide some clarity on the overall impact of the current economic downturn. More importantly, the overall health of our business remains strong and we believe the demand for high quality student housing remains resilient.

Our third party development business continues to win contracts. During the quarter we were rewarded a third party development contract for a project at the State University of New York College of Environmental Science and Forestry in Syracuse, New York. This is a $22.9 million project slated for 2011 delivery that will generate approximately $1.1 million in fees.

Today I’m pleased to announce that we were awarded a contract for an on-campus development at East Stroudsburg University in Pennsylvania. This on-campus project may be multi-phased but the initial phase will generate approximately $1.6 million in fee revenue and has a 2010 delivery date. East Stroudsburg University is the eighth school in the Pennsylvania State System of Higher Education where we have developed new state-of-the-art housing. Including East Stroudsburg we now have produced 14 projects in Pennsylvania totaling 10,500 beds with an aggregate value of nearly $650 million.

We were also recently awarded Phase 4 of the Indiana University of Pennsylvania project. We expect to deliver this approximate $34 million project in August of 2010 and will generate fee revenue of $1.2 million.

Additionally, in October we were selected as the development team for a second residence hall project at Colorado State University Pueblo. This on-campus project paid $34.5 million development will generate fee revenue of $1.5 million and is scheduled for a 2010 delivery.

All of these projects are subject to further contract negotiation and financing contingencies.

Third party development revenue was up 150% over the third quarter of 2007 due to recognition of development fee incentives on the second phase of our Indiana University of Pennsylvania project. Even excluding this item, revenue was up nearly 50% and our third party fee business continues to grow. We continue to look to source additional development opportunities both third party and for our own balance sheet.

One of the key focuses of our strategy is development for our own balance sheet and we made good progress on that this quarter; specifically the reserve at Saluki Point at Southern Illinois University opened in August with 528 beds, 100% leased at favorable rents and with a significant wait list. The success of this project led us to start construction on the second phase late in the third quarter which will have 240 beds and open in August 2009. The second phase is already being well received by the market. We are seeing significant traffic and even receiving applications for the next school year.

We also were quite pleased to announce our first company-owned on-campus development project. This 423 bed project is located at Syracuse University and construction is underway with a scheduled fall 2009 delivery. The convenient leasing office is already open near campus and the community center is scheduled to open in February. To that end, traffic is good with inquiries being made and applications being taken. This project demonstrates that as campus housing ages we can provide a cost effective and highly desirable solution for both the school and its students.

Our third party management fee revenue was up 3% year-over-year for the third quarter. We continue to be active in the process of negotiating for new management contracts when and where the opportunity exists.

Unfortunately we recently received notice that our contract to manage a privately-owned portfolio in Lansing, Michigan was terminated. While we did a solid job operating these properties for the owner improving occupancy from 79% a year ago to 92% today, they have chosen to build their own property management infrastructure including hiring some of our people in Michigan and have terminated the contract in order to try and maximize their returns.

Lastly I’d like to comment on our balance sheet and capital structure in general. In what has been a period of extraordinary stress in the credit markets we continue to work to satisfy our debt maturities in 2009 while at the same time focusing on running the business and maximizing value for shareholders.

As we look out over the next couple of quarters, we expect to have a credit facility in place that will allow us to refinance our $285 million of 2009 maturities when we choose at staggered maturities and favorable interest rates. While we can’t announce the details of the facility, at this point we have signed a definitive term sheet and due diligence is underway and should conclude by year end.

Additionally, given the still strong pricing environment for student housing assets we are exploring the disposition of select assets including certain place portfolio properties that do not fit our strategic objectives or where we believe we have maximized value and a sale is prudent. We are confident that our strategy of recycling capital and reducing our debt is the right one to pursue.

With that overview on our performance for the quarter and an update of our key business initiatives, let me now turn it over to Randy to provide some additional detail on our reported financial results and our updated guidance for the year.

Randall H. Brown

Let me start with some comments regarding our same community revenue. Referring to page 6 of our third quarter 2008 supplemental package, combined revenue for our apartment community portfolio and university towers was $19.4 million or essentially flat to the third quarter of 2007. Third quarter revenue for our same apartment communities decreased $222,000 or 1.2% for the quarter primarily due to a drop in occupancy of 190 basis points or $358,000 which was offset by a 260 basis point or $482,000 increase in rental rates.

Also impacting third quarter revenue was a reduction of $348,000 due to fewer occupied days during the turn period this August and the deferred effect of straight line. Approximately $186,000 of this amount relates to the straight lining effect of our current leases which will be recognized back into income over the remaining 2008/2009 lease term.

For university towers revenue was up $246,000 or 31.2% primarily due to a 4.4% rate growth or $100,000 and approximately $101,000 of additional revenue for the quarter due to more occupied days during the turn period this august.

Contributing to our third quarter combined same community revenue was the impact of our fall 2008/2009 leases which reflected a 70 basis point increase in net apartment rent. This growth is comprised of about 330 basis points of improvement in rate offset by 260 basis points decrease in occupancy. Excluding three of our most challenged properties, our same community rate growth is approximately 510 basis points with a slight occupancy decline of approximately 80 basis points.

Again referring to page 6 of the supplemental, combined same community expenses for our apartment community portfolio and university towers increased $615,000 or 4.8% on a quarter-over-quarter basis. This compares to an 8% growth in the second quarter. So while we made headway in expense containment, our results are not yet at an acceptable level and through the initiatives Paul outlined earlier we believe we can reduce labor costs and discretionary spending to levels that will allow our properties to operate closer to our historical profit margins for the year 2009 and beyond.

Much like the second quarter, third quarter expense growth reflected higher marketing efforts, increased property level payroll expense and higher utilities which combined contributed nearly 2/3 of the year-over-year increase. Marketing costs increased 32% or $107,000 over third quarter of 2007 along with a 17% increase in maintenance and repairs payroll of $149,000.

Regarding our third quarter turn cost results, based on year-to-date expenses incurred through the end of third quarter we expect our 2008 turn costs will be approximately $145 per bed which is slightly less than our plans.

Looking at the place portfolio, revenue for the quarter was $4.9 million and operating expense was $4.2 million resulting in NOI of $700,000. As we expected this NOI contribution was approximately $2.8 million less than the $3.5 million we received in lease payments from place properties in the third quarter of 2007 which in turn translates into approximately $0.10 less per share of FFO this quarter.

Turing to our third quarter corporate expenses, G&A expense for the period was $4 million which is consistent with our second quarter results of $3.9 million. Interest and other non-operating expenses for the third quarter were $6.5 million compared to $6.4 million for the same period last year. However given the recent spike in LIBOR rates, we expect our fourth quarter variable rate interest expense to increase at a faster pace than the level of this past third quarter.

As Paul mentioned, our balance sheet continues to be solid relative to our capital needs. Total debt of $446 million at September 30 represented approximately 58% of total assets. Of this, $18.6 million was outstanding on our credit facility as of September 30. Regarding this facility, it initially matures in March of 2009; however we have a one-year extension option available to us under the same terms as we currently have and we expect to exercise this option sometime in the fourth quarter of 2008.

Regarding the $285 million in debt we have coming due in 2009, approximately $187 million comes due in July of 2009 and the remaining portion of it is due in December of 2009. As Paul mentioned, we have signed a definitive master credit facility term sheet with one of the governmental sponsored agencies and due diligence is well underway.

Although I’m not prepared to disclose specific terms about the credit facility today, what we can say is that it will allow us to achieve the goals we’ve previously outlined which are to refinance our 2009 debt with staggered maturities at reasonable market interest rates and with the flexibility to economically sell assets if we choose to do so. We expect to close the master credit facility within the next 90 days.

Turning to our overall earnings guidance for the year, based upon our current estimates for our 2008/2009 lease term results projected expense growth for the balance of the year and given our year-to-date property operating performance, we are revising our FFO for the full year ended December 31, 2008 to be $0.94 to $0.97 per share unit.

Now let me turn the call back over to Paul for some closing thoughts.

Paul O. Bower

Over our 45 years in the student housing industry we have seen many economic cycles, some worse than others and this one appears extremely difficult. But the best way for Americans to improve their economic position in any kind of economy is through education and we fulfill one of their fundamental needs, housing. It is clear that economic conditions have deteriorated since our last call and the market is increasingly challenging, but the long-term fundamentals of our industry remain positive.

Longer term the opportunities for our company on the internal and external side remain strong. We believe that we are well positioned from an operating and capital perspective to not only come through this cycle but make it through as a better company and to create value for shareholders in the years to come.

Before we take questions, let me once again outline the strategic initiatives of EDR at this point in time.

Number one. Refinance our 2009 debt maturities and extend our credit facility for an additional year. Number two. Evaluate the selective sale of certain assets to improve our balance sheet to provide working capital and to eliminate the negative stress on an otherwise performing portfolio. Number three. Reduce property operating costs and corporate overhead. Number four. Continue to seek and negotiate on-campus development projects that allow us to put EDR capital to work at attractive returns for our shareholders.

Now we welcome the opportunity to answer any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Karin Ford - Keybanc Capital Markets.

Karin Ford - Keybanc Capital Markets

My first question is on your line of credit, the extension for March 2009. Is that option to extend solely your option and is there any ability or terms that would allow the bank not to extend that option for you guys?

Randall H. Brown

The facility states that as long as we’re not in default at the time that we request the extension then it’s an automated extension. So as long as you’re not in default, then you can extend it.

Karin Ford - Keybanc Capital Markets

My second question is just related to the refinancing on the $285 million. Could you just talk about what your contingency plans are in case you don’t get the agency facility that you’ve got the term sheet on? What are your plans for asset sales, what stage you are in marketing and what type of cap rates you might be looking at?

Randall H. Brown

First of all, let me say that we are very, very confident in the place that we’re in right now with the agency that we referred to. We have been negotiating and have been working with both agencies for quite a while now and there’s still very much a demand today for student housing assets by the agencies. So we have a lot of comfort in thinking that we’re going to be able to have the commitment by the end of the year as an outline.

Should that not happen, as you mentioned we do have other alternatives. We do have assets that are unencumbered. Tom can speak to the cap rate question but I think there’s still a good viable market for student housing assets. There are other lenders that we’re aware of. There are balance sheet lenders that we have had conversations with [as is the life companies].

So there’s a number of opportunities to us should the agency not come through. But again we don’t know of any reason why they shouldn’t.

Karin Ford - Keybanc Capital Markets

Are you guys currently marketing any properties today?

Thomas Trubiana

We are not currently marketing any properties but indeed are evaluating the entire portfolio and as we wrap up our review of the 2009 budgets our intent would be coming to the market sometime in the fourth quarter with a group of properties for sale.

Karin Ford - Keybanc Capital Markets

As you’re preparing for the 2009/2010 school year and the pre-leasing picture there, what type of rent increases do you guys think you’ll be budgeting for and what do you think the occupancy picture will be going forward?

Craig L. Cardwell

We are in the midst of all that planning and generally we would offer response to that in connection with our guidance as we go forward. We do have some good plans in place. We do actually hope to see improved occupancy particularly in some of the stressed markets, and provided we’re able to accomplish that that will obviously help the entire portfolio. That’s as much as we can comment on right now.

Operator

Our next question comes from [Michelle Coe] - UBS.

[Michelle Coe] - UBS

Given that some of your markets are experiencing flat to lower enrollment levels and increase in supply like Kalamazoo, Michigan, Oxford, Mississippi and Gainesville, Florida, are you considering potentially selling some of these assets? Also, if you could just comment a little bit more about the five third party management service contracts that were terminated? I’m just wondering why they were terminated given that you helped occupancy improve so much.

Thomas Trubiana

I’ll answer the first part of that question. Clearly those troubled assets are on the list and being highly evaluated and really the key is what do we believe we can do on a go-forward basis? Can those properties be repositioned or strengthened for the next academic school year or leasing cycle? We already have significant market information about new products, future expectations for enrollment, etc. But clearly they are higher on the watch list but once again at this point in time we’ve not made any final decision as to what we’ll be taking to market.

I’ll defer to Craig on the second part of that question.

Craig L. Cardwell

With regard to the income stream that was in Michigan that was one contract that covered five different properties so it’s 5 and 1 or 1 and 5 but it was with one single owner. It was simply a situation where that ownership group had an asset management function in addition to the ownership function and we were the property management function that frankly did all the heavy lifting in the first year and a half. We got that portfolio up to a stabilized occupancy.

As you know Michigan in general is challenged in this economy, certainly much more so than many other states. We believe it was just a good opportunity for the owner to trim the overhead, we being part of that overhead, once the heavy lifting was behind them. It was pretty much as simple as that. There were no hard feelings. It was a good opportunity for them to move forward with a more stable property situation than what they bought into.

[Michelle Coe] - UBS

I was just wondering if you could give us a sense of how much payroll and utilities expenses could rise going forward given you do have some initiatives for cost cutting?

Paul O. Bower

We’re working on those budgets as Tom said a minute ago and we just don’t have it all pulled together to be able to give you a specific number, but we think it will be substantial.

Operator

Our next question comes from Anthony Paolone - J.P. Morgan.

Anthony Paolone - J.P. Morgan

Randy, can you tell us how many assets are currently unencumbered or say what percentage of NOI is unencumbered?

Randall H. Brown

We have about seven properties that are unencumbered right now. I don’t have the NOI percentage.

Anthony Paolone - J.P. Morgan

Do you anticipate that those will be needed to get the Fannie/Freddie loan done?

Randall H. Brown

Right now we don’t have the final commitment in hand but it could be that we may put some debt on those properties and take debt off some of the currently unencumbered properties to give us the flexibility to do some asset dispositions at the appropriate time.

Anthony Paolone - J.P. Morgan

It sounds like you might anticipate having some unencumbered assets after all of this still?

Randall H. Brown

Potentially yes.

Anthony Paolone - J.P. Morgan

In terms of looking at the economic backdrop on your business, you guys have done this for a long time. Can you comment on in past downturns what impact you’ve seen on student housing with respect to either occupancy or rental rates?

Paul O. Bower

We’ve been through three or four of these over the years. I can’t say that any of us have experienced anything like what we’re in right now. The others seemed fairly short term and we did suffer some softening of rental rate increases for a year or two and maintained the low 90s occupancy. We don’t think that gets jeopardized. That’s part of the mantra that we talk about saying that this business is somewhat recession resistant. However I think we’re in new times and we hate to speculate about how this is going to play out.

Anthony Paolone - J.P. Morgan

How do you prepare for the upcoming leasing season? What types of things are you prepared to do, whether it’s offering rent concessions, do you manage to occupancy instead of rent? I’m just trying to understand strategically how you prepare for the upcoming leasing season.

Craig L. Cardwell

We started those discussions actually in the mid-summer with the acknowledgement of where we were in some of the stronger markets and some of the markets that were more challenged. We put in place a plan for this coming fall that we expect to be very aggressive. There are some places where you can still manage to rate and get the occupancy and there’ll be some schools where we have to manage a little more to occupancy, as you might imagine; some of those more challenged markets. But on balance much I think is going to depend on how family jobs hold up.

One of the things that we do know and has been the case in the past recessions is that enrollments year-over-year have generally always held up because more kids do go to school or return to college or go back for a Master’s or a second undergraduate degree, and frankly they stay in school longer because class sizes become larger as states cut budgets for state institutions. So from the enrollment side we expect the enrollment to be there. We don’t have any real good clear visibility on what we’ll be able to do for sure with rate. But as Paul mentioned, occupancy should hold together.

Anthony Paolone - J.P. Morgan

On cap rates, can you point to any pretty recent trades or transactions out there in the market that you’ve seen where you can identify maybe what some sense of market cap rates might be for your products?

Thomas Trubiana

I will tell you in general there’s been a lot of product that has come to market and with the current turmoil and difficulty on the debt side, very little has actually traded. I would suggest for instance [Marcus Neilchap] just put out a listing of properties that are on the market and what they believe the cap rates are for product that would be similarly priced to ours. That report reflects approximately a 6.5 cap rate, California being less, and if you’re truly within close walking distance to campus probably something better than a 6.5. I guess I would point you to the markets in [Neilchap] leasing study that just came out this week.

Anthony Paolone - J.P. Morgan

Those are asking cap rates more or less?

Thomas Trubiana

Yes.

Anthony Paolone - J.P. Morgan

As you look out to next year in the backdrop again, how do you think about the dividend at this point?

Paul O. Bower

As I said, we’re working on the budgets for 2009. We’re integrating the cost savings that we’ve put into place and then we’re going to roll that all up, which we have not completed yet. Beyond that we present it to the Board and the Board will consider the situation based on what that tells us.

Anthony Paolone - J.P. Morgan

Do you know what your taxable income is? Do you have room if you really wanted to cut the dividend a lot to retain some cash? Do you have that ability?

Randall H. Brown

Yes. For ’08 forecast taxable income is pretty small right now. If you’re asking can we reduce our dividend and still maintain our REIT status given the REIT rules on distribution of taxable income, I think the answer is yes.

Operator

Our next question comes from Analyst for Michael Bilerman - Citigroup.

Analyst for Michael Bilerman - Citigroup

Are the expiring ’09 debt maturities part of CMBS?

Randall H. Brown

Yes, they are.

Analyst for Michael Bilerman - Citigroup

Are there any restrictions on how you retire those?

Randall H. Brown

In what regard?

Analyst for Michael Bilerman - Citigroup

In terms of timing?

Randall H. Brown

There is a window in which you can refinance without any kind of yield maintenance for those tranches.

Analyst for Michael Bilerman - Citigroup

So you’re comfortable that the facility will fall in time for those windows?

Randall H. Brown

Yes. Let’s just talk about the July piece, the $187 million that I referred to. The earliest that we can pay that off is May of next year. Our intentions are to have a new credit facility in place that will allow us to not only pay those off in May if we choose but also to pay them off early if we choose. Of course that would require us to incur some defeasance costs if we did that.

Analyst for Michael Bilerman - Citigroup

I know you haven’t’ provided much detail on the asset sales. Do you have a dollar target in mind?

Randall H. Brown

We do not at this point in time.

Analyst for Michael Bilerman - Citigroup

Do you have any specifics on which place assets you might market?

Randall H. Brown

We’re under review and looking at all of that.

Michael Bilerman - Citigroup

You talked a little bit about reducing leverage. You’re not putting out any targets of asset sales or potential dividend reductions. How do you view your leverage today from a debt-to-gross-asset or a fixed charge perspective and where do you think you need to take it?

Randall H. Brown

As I said to debt-to-total assets, they’re at 58% right now which is still on the high end. We’ve always talked about being 50% or less in that regard. We used to talk about leverage as a percentage of enterprise value but given the volatility with all the REIT stock I don’t know that that’s a good valid measurement anymore.

Regarding our debt covenants, the fixed charge ratios I think on our supplemental it shows that we’re in good position there. The key is to make sure that we maintain that good position going forward. For any kind of asset sales, any kind of debt reductions we’ll definitely be keeping those covenants in mind when we’re going forward and when we’re doing our budgeting and firming up our strategic plan for next year.

Analyst for Michael Bilerman - Citigroup

On the facility that you’re negotiating with the agencies, does your existing line of credit effectively depending upon how you do this other facility, will that go away or do you expect that to stay in place?

Randall H. Brown

As I mentioned, our intentions are to extend our corporate credit facility one year, sometime in the fourth quarter. Our plans are to keep that in place.

Analyst for Michael Bilerman - Citigroup

You expect your total proceeds level out of this new facility to be in excess of the $285 million or will you have to draw down on your corporate credit facility to fund the difference?

Randall H. Brown

I really couldn’t say right now but our intentions are at this point not to draw down any excess on the credit facility with the agencies. Our intentions are to be able to refinance what we have, stagger out the maturities and do so at rates that are market interest rates.

Analyst for Michael Bilerman - Citigroup

But you may have to either put new assets in? I’m just trying to get a sense of do you think for the same level of assets in the same facility, would you get at the same level of proceeds or will you have to put new assets in? I’m just not sure where things are.

Randall H. Brown

Obviously a lot of that’s going to depend on what the final terms of the credit facility is which obviously we don’t have that in place. A lot of it’s going to depend on the ’09 operations as well and what the budgets are. As Paul mentioned, we have cost cutting efforts and initiatives underway right now.

Our intentions are as I mentioned earlier because we want to have a flexibility of possibly selling asset that currently had debt on them, we want to structure things in such a way that we can sell those assets in the most economical fashion and not have to incur yield maintenance for defeasance on any new debt. So it may be that we do put some new unencumbered assets into this facility as a substitution for those assets that we want to take out. It could be a blend of both.

Analyst for Michael Bilerman - Citigroup

The $285 million, what’s the leverage ratio debt-to-gross assets right now on just those pieces?

Randall H. Brown

The credit facility we’re looking at will allow you to go up to 70% I believe.

Analyst for Michael Bilerman - Citigroup

Within that facility?

Randall H. Brown

Yes.

Analyst for Michael Bilerman - Citigroup

Where does the $285 million stand today relative to undepreciated book?

Randall H. Brown

We’re not prepared to go into that right now but let’s just say that the facility that we’re working on should enable us to be able to meet all our ’09 debt maturities at the time in which we decide to refinance those.

Operator

Our next question comes from Stephen Swett - Keefe, Bruyette & Woods.

Stephen Swett - Keefe, Bruyette & Woods

Randy, I’m not sure if I missed it. Did you update your expectations for third party fees for full year 2008?

Randall H. Brown

No, I didn’t. But I think you can see given where we arrived in third quarter, we’re going to obviously be in excess of the targeted amount that we provided in our guidance. In our guidance we had said between $8.5 million and $9.5 million. I think based on what we’ve been able to achieve in the third quarter, that numbers’ going to be closer to $11 million to 11.5 million for both development and management fees.

Stephen Swett - Keefe, Bruyette & Woods

On the expenses within the place portfolio, can you just give a little more color on what portion of those expenses were normal turn versus maybe one-time expenditures to get those properties where you wanted them maintenance wise?

Stephen Swett - Keefe, Bruyette & Woods

Frankly, a lot of those expenses were not one-time because in fact we had cases where you had a substandard Internet systems, substandard cable service that had to be brought up to standard and that will help drive rents in the future. We didn’t incur what we believe to be extraordinary turn costs. In some communities it was a little bit up but it was actually less in turn than in basically stabilizing the operation to a standard that will help drive rent forward. You have to get the expenses lined up so the kids accept the customer service and believe in the customer service so you can get the going forward rents.

Operator

Our next question comes from Napoleon Overton - Morgan, Keegan & Company, Inc.

Napoleon Overton - Morgan, Keegan & Company, Inc.

The lead banks on your existing credit facility are?

Randall H. Brown

It would be Keybanc and then we also have Regents as a participating bank, Allied Irish, Commerce Bank, that’s all that comes to mind.

Napoleon Overton - Morgan, Keegan & Company, Inc.

The development at Syracuse, is that on target to get your foundation poured before the freezes threaten?

Thomas Trubiana

Yes. We are indeed on schedule. Foundations are being poured. In fact the schedule calls for the clubhouse to be open in February so we’re quite comfortable that the project will be completed on time for fall opening next year.

Napoleon Overton - Morgan, Keegan & Company, Inc.

Randy, I could do it on the back of an envelope, but would you care to quantify or approximate the impact of the five terminated management contracts on an annualized basis to fee income?

Randall H. Brown

Sure. Keep in mind that those management fees are taxed so they come into our QRS. For ’08 it’s about $246,000 after tax.

Paul O. Bower

That’s for ’09.

Randall H. Brown

No, that’s our ’08. That’s what we had for ’08. Also keep in mind that we’re getting a termination fee in ’08 as well. The fourth quarter impact is very minimal.

Napoleon Overton - Morgan, Keegan & Company, Inc.

So there’s a termination fee there in the fourth quarter and there’s also a remaining portion of the termination fee on the place property’s lease termination in the fourth quarter?

Randall H. Brown

That’s correct.

Napoleon Overton - Morgan, Keegan & Company, Inc.

Which kind of leads me to the next question. On the midpoint of your guidance for ’08 dropped about a nickel. What portion of that was a third quarter variance to budget versus fourth quarter kind of ongoing numbers? Could you share that with us?

Randall H. Brown

I think if you just reflect on the third quarter change, we lost about $0.10 in FFO because of the shortfall in the place NOI compared to the base rent that we got last year. We lost about $0.02 in same-store operating expenses. They were running about $0.02 higher than they were in third quarter on a same-store basis. We picked up about $0.04 I believe it was in higher development fees. So net net we lost $0.08 third quarter versus third quarter of last year. That in and of itself plus the results of our ‘08/’09 fall leasing and given where we are same-store operating expense growth wise, it leads us to believe to lower than guidance.

Napoleon Overton - Morgan, Keegan & Company, Inc.

You’ve got three markets that you referred to the last couple of quarters that are challenged this year due to supply issues. Looking forward, you pretty much know by now what markets are going to be impacted for the ‘09/’10 school year. Are there markets that are going to be impacted next year with meaningful supply issues beyond Michigan, Florida and Oxford?

Craig L. Cardwell

We pretty much identified the markets we think that might be the most challenged and you have those before you. There may be some other minor incursions but frankly given the situation in the credit markets, there’s been a lot of projects that might have started in the past but don’t have a chance of starting or getting out of the box now. If not just deferred, they’ve been flat out canceled.

We believe that much of the oversupply gain for probably the next couple of school years is largely behind us and as it’s been said by others, in the past and currently we’ve been less affected in almost any situation by enrollment and much more by the indifference of developers putting in supply that’s not needed.

Napoleon Overton - Morgan, Keegan & Company, Inc.

Just to make sure I understand what you’re saying there is you would expect the same markets to be the challenging markets next year. You really don’t expect many new oversupply markets to be of an impact in next year’s fall leasing?

Craig L. Cardwell

Correct.

Operator

Our next question comes from [Lindsey Yau] - Robert W. Baird & Co., Inc.

[Lindsey Yau] - Robert W. Baird & Co., Inc.

With the increase in guidance on the development fees, the fee incentives, is that something we can expect going forward?

Randall H. Brown

I think the third quarter reflected some one-time cost savings incentive development fee payments that we received. So going forward while we do have those types of cost savings incentive clauses in our development contracts, I would not model those out in ’09 because it’s contingent on how well the project comes in versus budget. While we have been very good at bringing projects in under budget, there can be no guarantees that that will continue going forward.

Craig L. Cardwell

Historically those fees are more in the range of what we provided earlier this year in our ’08 guidance initially which was $8.5 million to $9.5 million on a combined basis for both development fees as well as third party management fees.

[Lindsey Yau] - Robert W. Baird & Co., Inc.

Going back to operating results no-shows looking at the fall leasing reports, do you have any insight into what drove those no-shows?

Craig L. Cardwell

There were two specific universities that the registrar of the university was surprised that they did not reach their enrollment objective. So it was a surprise to the university, a surprise to on-campus housing and a surprise to us. This was not widespread across the entire portfolio owned, joint venture or management. It was very specific to a couple of schools. Usually in a situation like that there ends up being a new admissions officer and registrar after an event like this. We don’t view that as being any broad-based event. We just happened to be at the wrong school at the wrong time.

[Lindsey Yau] - Robert W. Baird & Co., Inc.

So that didn’t have anything to do with pushing rents at those universities?

Craig L. Cardwell

No.

[Lindsey Yau] - Robert W. Baird & Co., Inc.

Looking at the tax expense, I noticed it’s a lot higher than it was year-over-year. What was the reason for that?

Randall H. Brown

It was because of the incremental growth in our development fees for the quarter. Those are taxable. They come in through our TRS.

Operator

Our next question comes from Karin Ford - Keybanc Capital Markets.

Karin Ford - Keybanc Capital Markets

The two on-balance sheet development projects, do you have specific construction financing on those or are you pulling down funds off your line to build those?

Thomas Trubiana

On the Syracuse project we indeed have placed a loan on that with Regents Bank. Essentially in that particular case it’s 505 of the development cost and we were very pleased because it’s 110 basis points over the 30 day LIBOR and actually gives us a five-year period. It’s kind of a mini perm for the last two years.

Then with the second phase of the reserve at Saluki Point and the Carbondale, we’ve actually gotten a term sheet for it so that will also be outside debt placed by Regents Bank. In that particular case the first phase of the Carbondale project is also at 110 basis points over the 30 day LIBOR. The second phase showing the spread changes are 200 basis points over the 30 day LIBOR. But we do indeed have financing in place for those.

Karin Ford - Keybanc Capital Markets

Randy, you mentioned that higher LIBOR rates were going to impact you guys in the fourth quarter. Can you just tell us what impact LIBOR had on your revised guidance numbers?

Randall H. Brown

I’m not prepared to give that right now. It’s sufficient to say that our variable rate debt did increase. You can see that on our balance sheet. The LIBOR spike didn’t really happen till towards the end of the third quarter and more into the fourth quarter. You can draw from that comment what you will but it’s reasonable to assume that our interest rates related to that line of credit basically is what it is our interest rates will increase because of that.

Operator

Our next question comes from Napoleon Overton - Morgan, Keegan & Company, Inc.

Napoleon Overton - Morgan, Keegan & Company, Inc.

Is the increased emphasis on potential asset sales a lender driven emphasis or otherwise?

Randall H. Brown

No. Not at all. It’s otherwise.

Operator

Management, there are no further questions. I’ll turn it back to you for closing comments.

Paul O. Bower

Once again we thank everyone for participating, for your attention and interest here today. We hope to see many of you at [Nareet] in about four weeks. Until then we appreciate your support.

Operator

Ladies and Gentlemen, that will conclude today’s teleconference. If you would like to listen to a replay of today’s conference, please dial [inaudible] or 1-800-405-2236 and enter the access code of 11120622 followed by the pound sign. We thank you again for your participation today and at this time you may disconnect. Have a nice day.

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