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Education Realty Trust, Inc. (NYSE:EDR)

Q4 2008 Earnings Call

March 17, 2009; 10:00 am ET

Executives

Paul Bower - Chairman, President & Chief Executive Officer

Randy Brown - Chief Financial Officer

Craig Cardwell - President of Management Subsidiary, Allen & O’Hara Education Services

Tom Trubiana - Chief Investment Officer

Ken Avalos - Investor Relations

Analysts

Michelle Ko - UBS

Michael Bilerman - Citigroup

Joe Dossier - J.P. Morgan

Karin Ford - KeyBanc Capital Markets

Nap Overton - Morgan, Keegan

Lindsey Yau - Robert W. Baird

Andy McCullough - Green Street Advisors

Operator

Good morning ladies and gentlemen, thank you for standing by. Welcome to the Education Realty Trust fourth quarter conference call. During today’s presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions)

I would now like to turn the conference over to Ken Avalos of Investor Relations; please go ahead sir.

Ken Avalos

Thank you. Good morning and welcome to the Education Realty Trust fourth quarter and year end 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 the actual results to differ materially from future results expressed or implied by these statements.

Risk factors relating to the company’s results and management statements are detailed in the company’s annual report or Form 10-K 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.

With that, it’s now my pleasure to turn the call over to Mr. Paul Bower, Chairman, President and Chief Executive Officer. Paul.

Paul Bower

Thank you and good morning everyone. Joining me on the call today is Randy Brown, 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, the Chief Investment Officer.

This morning I want to update you on our progress across the strategic initiatives we provided last quarter, which were address on 2009 debt maturities, contain operating cost to evaluate disposition opportunities and generate development projects and management contracts.

I will also provide some commentary on the operating environment, and then I will close with some comments on our fourth quarter results. Randy will then discuss some of the key financial items from the fourth quarter and the 2008 year, as well as discuss our 2009 guidance.

Let me start by saying that our portfolio has been resilient in the face of a deteriorating economy. Since our last call the economy has continued to weaken, job losses have accelerated and the credit picture for consumers and corporations remains poor. Despite this adversity, the fundamentals of the student housing industry and the EDR portfolio remain stable.

To that end, excluding non-routine items, our fourth quarter and the 2008 annual results were inline with our previously issued guidance. In what is clearly an unprecedented economic climate, we are focused on managing our properties intensely and positioning the company to deliver the best results possible in this environment.

We are working diligently to push forward on the initiatives we outlined earlier, to further strengthen the company. With respect to our 2009 debt maturities, in early January we announced the signing of a $222 million credit facility with Fannie Mae. This facility allowed us to meet our previously stated objectives of refinancing the initial $185 million of debt at staggered maturities and favorable interest rates. Randy will provide more detail in his section on the amount drawn and the facility structure.

Looking forward, our team continues to work and have discussions with both banks and agency lenders, regarding the remaining $98.7 million set to mature in December of 2009. We continue to evaluate different financing options regarding that debt and we remain confident that we will execute a favorable transaction that benefits the company and shareholders, even in this difficult financing environment.

As was the case with the recent Fannie Mae facility and the associated debt we retired, we are closely monitoring the situation and expect to come to a favorable resolution, when the time is right. In the meantime, the cost of defeasance reduces each month and we have the opportunity to improve the valuation of the portfolio by increasing occupancies and NOI during the 2009, 2010 leasing cycle.

Operationally we made good progress on the cost containment front. This was especially important, since we had experienced some cost pressures in early 2008. As we outlined to you last quarter, management put in place a targeted cost reduction plan that focused on staff reductions, a wage and hiring freeze, and overall spending cuts and we have had cost reductions across all controllable categories. We were successful in proving profitability by reducing expense growth in the fourth quarter without adverse impact on our assets or customer satisfaction.

Regarding dispositions, we continue to evaluate our portfolio for assets that do not fit our strategic objectives or where we believe we have maximized value and therefore a sale is prudent. While interest in student housing remains strong and we may explore sale opportunities, at this point we have nothing specific to report. We continue to make progress on our existing fee development projects and are working towards generating new on campus and on balance sheet development opportunities.

During the fourth quarter, we announced that Allen & O’Hara Development Company, our third party development subsidiary was selected by East Stroudsburg University at Pennsylvania, to develop a $61.6 million on campus student housing project. This is our eighth project in the Pennsylvania system of higher education. It is slated for a 2010 delivery.

We also announced during the fourth quarter that the company has been awarded the management contract for an 11 story, 330 bed student apartment community, which is located across the street from Georgia Tech University in Atlanta and lastly, the project at the State University of New York, College of Environmental Science and Forestry that we mentioned last quarter, continues to move forward with land acquisition and building design.

Now let me cover a few highlights and key statistics from the fourth quarter’s operating results. Occupancy on a sequential basis was steady with same community occupancy ending the quarter at 92.8%, compared to 93.7% at the end of the third quarter, but down from 95.6% at the end of the fourth quarter of 2007.

Occupancy excluding the three challenging markets we discussed last quarter was 94.0%. We continue to believe that low 90% occupancy is a fair target, given the extremely challenging economic backdrop and that combined with modest rate growth and strong cost controls, will generate solid cash flow during this down turn.

We delivered good year-over-year same store financial results in the fourth quarter. Same community net operating income increased a solid 6.3% over the fourth quarter of 2007. Our same community revenue per available bed increased 1.0% and same community operating expenses were reduced by 6.4% compared to the fourth quarter a year ago. The improvement in the operating margin was approximately 310 basis points year-over-year.

In addition to our previously announced debt defeasance expense, we recognized a $2 million impairment charge in the fourth quarter, which consists primarily of $1.6 million related to our Clayton Place property. We acquired Clayton Place, as part of the place transaction in 2006. It has the lowest current occupancy in that portfolio.

The supply demand picture around this property has dramatically worsened in the last year, as the university opened new beds and required first year students to live on campus. We continue to explore alternatives in this difficult market to see if it makes sense to sell the asset, given the competitive dynamics.

We also recognize a small $400,000 write-off of goodwill that was originally generated from the redemption of JPI operating partnership units in 2006 and deemed to have no current value due to current equity market conditions and share pricing.

Despite the noise, our results in the quarter and year-over-year showed improvement on a sequential basis from the cost side. Traffic across our portfolio remains steady and to-date we have not seen a material drop-off in occupancy, as a result of the economic pressures facing our students and their parents.

Currently, pre-leasing traffic is good and while we cannot predict what the end of the leasing cycle will produce, results to date are steady. As of March 12, 2009, approximately 50% of our same store beds have been applied for and 43% have been leased. That compares to 51% and 42% one year ago on this date.

The place portfolio is approximately 500 basis points ahead of the prior year in terms of pre-leasing. Keep in mind, the main difference between our definition of an application and a lease is the receipt of an executed parental guarantee, which can take time to obtain. What we consider an application is essentially a signed student lease, without this parental guarantee.

Leasing across our development projects is mixed to-date, but it is important to remember we are early in the process and the numbers are inconclusive at this point. Leasing at Phase II of the reserve at Saluki Point lags behind that of Phase I, which is somewhat unexpected. We expect the pace of leasing to accelerate as buildings and units are finished and prospects kind of experience the finished product.

Likewise, the lease up to-date at Syracuse is behind our expectations. However, given the fact that this is the first high end property of its type in that market and that we have not had a finished clubhouse or model apartment to show until recently, we are not overly surprised. We fully expect the rate of leasing to accelerate there shortly.

With that, Randy will take you through the key financial items of the quarter and year.

Randy Brown

Thank you Paul and good morning everyone. Before reviewing our financial results, let me address the rescheduling of this earnings call and the outcome. As we’ve previously disclosed via our 8-K filing and press release, we were unable to finalize our financial statements by the time that our earnings release was scheduled.

We needed additional time to complete an ongoing review of accruals for state sales and use taxes related to purchases from out of state vendors. This analysis is now complete and I’m pleased to report there were no material impacts to our financial statements as a result of this review.

Now turning to our operations, let me start with some comments regarding our same community operating results as shown on page six, of our fourth quarter 2008 supplemental package. For the fourth quarter of 2008, same community revenue, which includes our same apartment portfolio and University Towers, was $23.5 million, up 1% from $23.3 million in the fourth quarter of 2007. A 3.5% increase in rental rates offset a 2.8% occupancy decline, resulting in the modest revenue increase.

If you recall, our fall 2008 opening occupancy was approximately 260 basis points behind fall of 2007. So the 2.8% decline, fourth quarter 2008 occupancy is reasonable and understandable. We also anticipate this occupancy shortfall will be reflected in subsequent quarterly results throughout the remainder of the 2008, 2009 lease term.

Total community revenue for the quarter was $29.7 million, up $6.5 million or 27.8% from the fourth quarter of 2007, primarily due to the 2008 addition of the place portfolio, the fall opening of our property at Southern Illinois and modest internal growth. Referring to page seven of the supplemental, for the year ended December 31, 2008 same community revenue was $86.9 million, up 1.4% from the prior year’s $85.7 million. Rate was the major driver to this increased revenue.

Total community revenue for the year was $107.6 million, up $21.9 million or 26% over 2007. The primary reasons for this increase are due to approximately $19.5 million of additional rental revenue, resulting from the place portfolio takeover, $1.2 million of internal growth in our core portfolio and $1.2 million of revenue related to our southern Illinois development.

Regarding fourth quarter property operating expenses, I again refer you to page six of our supplemental, which shows same community expenses decreased to $639,000 or 6.4% on a quarter-over-quarter basis. This compares to a 4.8% growth in expenses due to the third quarter.

So, we made significant progress in expense containment affecting almost every controllable expense category through the initiatives Paul outlined earlier and while we will continue to focus on minimizing labor costs and discretionary spending throughout 2009, we also recognize that achieving such large cost improvements in future quarters will be a challenge for our properties as we strive to maintain a first class environment for our residents.

As a result of the improved expense controls, combined with the increase in revenue, same community NOI for the fourth quarter rose $841,000 or 6.3% versus the same period in 2007. Same community operating margin was 60.2% versus 57.1% in the fourth quarter 2007, a 310 basis points improvement and a direct reflection of our cost containment efforts.

Regarding our fee business, third-party development revenue was $2.1 million up 1.1%from the prior year same quarter. On the management fee front, revenue of $1 million in the quarter was up 5% over the previous year comparable quarter, primarily due to the addition of two new management contracts in 2008.

Turning to our fourth quarter corporate expenses, corporate general and administrative expenses increased $0.7 million to $4.5 million as a result of a $700,000 write-off of costs related to a project we are no longer pursuing as a company owned development. Excluding this write-off, G&A was $3.8 million or $200,000 lower than the third quarter and flat with the fourth quarter of 2007, as our cost containment efforts and staffing reductions implemented in the fourth quarter began to bear fruit.

Net interest and other non-operating expenses for the fourth quarter were $11.2 million compared to $6.4 million for the same period last year. Included in other non-operating expense was a $4.4 million defeasance charge, which is slightly higher than the $4 million we previously announced.

Regarding our capital structure, we continue to view our balance sheet as solid relative to our capital needs and our recent signing of the $222 million Fannie Mae credit facility helped dramatically reduce the balance sheet refinancing risk. As a reminder at the end of the fourth quarter, the company had drawn $198 million in additional loans under the facility, which was mostly used to retire the $185 million of secured first mortgage debt that was due to mature in July of this year.

The initial draw consists of fixed rate loans of approximately $16 million, $72 million and $60 million with maturities of 5, 7 and 10 years respectively. The average annual fixed interest rate is 6%. We also drew $50 million and five year variable interest rate loans that were priced at 3.82% per annum at closing.

Total debt of $473 million at December 31 represented approximately 53% of total gross assets. Of this, $33 million was outstanding on our corporate credit facility as of December 31. This facility is slated to mature on March 30, 2009; however we meet all current requirements for an automatic one year extension starting in March under the existing terms.

Regarding the $98.7 million of debt maturities we have in December of this year as Paul mentioned, we continue to work with both agencies regarding potential refinancing options. As was the case with our recently closed Fannie Mae facility, we anticipate executing a transaction to refinance the December maturities when it makes the most sense for our shareholders from a pricing and portfolio value perspective.

Now turning to our earnings guidance for 2009; based upon our current estimates, we expect FFO per share and unit to be in the range of $0.70 to $0.80 for the full year ended December 31, 2009. Our 2009 earnings guidance is based in-part on the following assumptions.

For the same apartment community portfolio, fall 2009 net apartment rent growth of 1.5% to 2%, operating expense growth of flat to 2%, and full year NOI growth of flat to 3%. For the former place portfolio, fall 2009 net apartment rent growth of approximately 2% to 5%, annualized operating expenses growth of flat to 2%, and NOI growth of flat to 5%. Third-party development fees of $5 million to $5.5 million excluding potential incentive development fees, third-party management fees of $3 million to $3.5 million.

This range reflects the loss of approximately $400,000 in fees related to the termination of a fine property portfolio in Michigan, in October 2008. 2009 corporate general and administrative expense were approximately $14.5 million to $15 million; interest expense ranging between $26 million and $26.5 million, net of capitalized interest of $500,000 to a million, and income tax expense ranging from $1 million to $1.5 million.

Please note that our guidance does not include the seasons or financing costs related to the refinancing of existing debt or credit facilities, the occurrence of any dispositions, acquisitions or additional wholly-owned developments during the year or the addition or termination of third-party management contracts.

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

Paul Bower

Thank you, Randy. We continue to position our assets and the company to weather what is clearly an historic, challenging economic cycle. The privatized student housing industry has existed for almost half a century through many types of recessions and will survive this period of economic uncertainty. Education Realty Trust will remain among the leaders in the industry.

The challenges that Americans are facing during this economic crisis will reinforce the value of higher education, and the associated demand for student housing should continue to increase overtime. Our near term objectives remain consistent. We will continue our focus on addressing our upcoming maturities, exacting stick vigilance over our corporate and property level costs, evaluating disposition opportunities as a means to reduce leverage and provide working capital and generating new on-campus development projects and management contracts.

2009 and perhaps beyond, will continue to pose challenges for the economy, consumers and corporations. We are managing the company to make it through this period in strong financial and operational shape and prepared to capitalize on opportunities for our company on the internal and external side.

We thank you for your interest and attention and now we welcome the opportunity to answer any questions you may have.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Our first question comes from the line of Michelle Ko with UBS.

Michelle Ko - UBS

Hi, I was just wondering; aside from the three week markets that you have, Kalamazoo, Gainesville and Oxford, are you seeing any other particularly weak markets shaping up in the fall of ‘09 leasing season?

Craig Cradwell

Michelle, this is Craig Cardwell. As a matter of fact, we are not. There are some that are a little bit ahead and some that are a little bit behind, but overall when you look at the trends in both traffic and leasing, we don’t anticipate adding any additional communities to that list.

Michelle Ko - UBS

Okay great, and are you seeing an increase in students moving out due to financial reasons, like maybe transferring to community college or transferring to a school nearby home? Are you seeing those types of trends increasing?

Craig Cradwell

Thus far we have not seen that trend and we do not know of course whether that might occur this fall, whether there might be some changes, but at this point we have not seen that trend. As a matter of fact, the fact that we are a little bit low in occupancy than we were a year ago, basically emanates from the fact we started out a little bit lower and it tends to trend down as the academic year progresses. So, we have not seen any result along those lines at this point.

NEW SPEAKER

Okay and just lastly, for the upcoming leasing season, are you offering any concessions and if so, how much?

Paul Bower

We’re offering spot concessions just as any other community would, in selected markets to meet the markets, but it’s not any more or any less than we’ve offered in the last couple of years.

Michelle Ko - UBS

Okay, and if you could just remind us, how much that would be, I guess?

Paul Bower

Well, we don’t release that information specifically and it’s built into our net apartment rent number.

Michelle Ko - UBS

Okay, great. Thanks so much and good quarter.

Paul Bower

Thank you.

Randy Brown

Thank you.

Operator

Thank you. Our next question comes from the line of Michael Bilerman with Citigroup; please go ahead.

Michael Bilerman - Citigroup

Good morning, David Toti’s on the phone with me as well. Can you go over, the recent facility you’ve got; you drew by 200 out of the 220; what’s the condition of getting the additional proceeds?

Randy Brown

This is Randy Brown. Basically, the remaining portion, the remaining balance that can be drawn down was based on the unencumbered properties that were not refinanced and based on their current operations at the time that we entered into that facility in December. So, there’s really no other condition; it’s there for us to pull down on it whenever we need.

I think if we, and Tom you may have some more specifics on this, but I think if we wait six months beyond December, that Fannie would have to go back and re-underwrite based on the then operating results, but they’ve already been more or less pre-qualified, I guess this is a good way of putting it.

Michael Bilerman - Citigroup

But this is, you have ten assets that are unencumbered, four from the place acquisition and then six from the core, which are all secured for the revolver?

Randy Brown

That’s correct.

Michael Bilerman - Citigroup

So, which assets get you to the other $20 million bucks?

Randy Brown

It’s the four properties that are currently unencumbered that are not pledged.

Michael Bilerman - Citigroup

The four place assets?

Randy Brown

Right.

Michael Bilerman - Citigroup

And so those assets have about $70 million of costs, so you’d only get $20 million on the $70 million?

Randy Brown

No, I’m not saying that we would only get the remaining 20 from those four, but those four have all been under-written and we can put in any combination that we want to in order to drawdown on the remaining. We may only put in two of the four to put on the remaining $20 million.

Michael Bilerman - Citigroup

Right. I guess what was underwritten in the 222? I mean, how much more asset value needs to be put in to drawdown the $20 million?

Randy Brown

I’m not exactly sure which of the four unencumbered properties were looked at by Fannie, but it wasn’t a combination of the four.

Michael Bilerman - Citigroup

Okay and maybe it’s turning to the place debt that’s rolling at the end of the year. That $99 million, can you talk a little bit about where coverage is today? Understand that the place portfolio is obviously underperforming, where you think it can get to, but just talk about where coverage is relative to rate for those assets?

Paul Bower

Well we we’ve never gone into discussions about coverage’s and that regard. We’re not prepared to talk about that today. Suffice it to say that our goal is to get that portfolio back more to a historical level based on our leasing efforts and as it’s shaping upright now, we’re ahead of where we’re last year, so we’re feeling good about that.

Michael Bilerman - Citigroup

Where does NOI for the entire place portfolio, if you look at 4Q annualized or about $10 million of NOI; looking at the full year, you’re about $8 million. What would be sort of the forecast for 2009, of NOI from the entire place portfolio?

Paul Bower

Well, I think you just have to take what we’ve provided in the guidance and layer in where we’ve been and kind of draw your own conclusions from that.

Michael Bilerman - Citigroup

But somewhere within an $8 million to $10 million NOI, is that sort of where the ballpark would be?

Paul Bower

Again, you just need to kind of use your own assumption in that model and use the guidance that we’ve given you.

Michael Bilerman - Citigroup

Well, that’s what I’m trying to get; the fourth quarter is at a good run rate for the portfolio or is it with your seasonality in the fourth quarter that would take it more toward what your year was, which was about $8 million?

Paul Bower

I don’t know that there’s any seasonality in those numbers.

Michael Bilerman - Citigroup

So, probably if we say $10 million, it’s about a 5% yield on costs; if the assets that are secured by the loan, the coverage would be light. That’s what I’m trying to figure out, this $100 million that’s rolling, it would appear, debt to cost as in the 70% range. One of the assets, Clayton Place, you took an impairment that’s a 25% of the loan balance. I’m just trying to understand how that debt gets replaced or where equity is going to come to re-equitize the portfolio?

Paul Bower

That’s a fair question, but given the fact that we have four unencumbered assets, given the fact that we’re working hard to improve the NOI and given the fact that the underwriting is going to be based on the rents in place for this fall, we have a lot of confidence that we’ll be able to refinance just based on those assets.

Michael Bilerman - Citigroup

Refinance, but probably you have to put in some equity, right?

Randy Brown

I’m not prepared to say that.

Operator

Thank you. Our next question comes from the line of Tony Paolone with J.P. Morgan. Please go ahead.

Joe Dossier - J.P. Morgan

Good morning, guys. Joe Dossier [Ph] hear on the line. A question regarding the development write-off you took in the quarter, I don’t know if you can go into detail, but was that an on campus deal related to some land maybe you were holding or anything else you were pursuing?

Tom Trubiana

It’s Tom Trubiana, let me fill that question. During the past year, we were working on a significant off campus development that was in close proximity to a major campus. Through that process, we had a reason to believe that that project would receive favorable real estate tax treatment, because it was in an enterprise zone. We subsequently learned in the fourth quarter that that was going to be rejected and so it no longer made sense to be a company-owned development.

While we maybe exploring other avenues, we felt it prudent to go ahead and expense those pursuit costs at this point in time, because there could be no assurance that we’ll succeed in restructuring the deal on that particular project.

Joe Dossier - J.P. Morgan

Okay. Regarding the same store expense reduction in the fourth quarter, were some of those one-time items, because it would seem like they are more recurring than maybe the full year ‘09 expenses and it could be a little bit better than flat to up 2%.

Craig Cardwell

Joe, this is Craig Cardwell. We don’t really look at the fourth quarter items as really one time items. As was introduced previously there was a general line of the expense reduction, which had to do with hiring freezes, some staff reductions and some other, by choice minimization of some costs lines that we had in the past that we thought would produce, that had not produced the kind of economic output that we had hoped or believed in the past. So, I don’t think that we would consider anything in the fourth quarter, specifically a one-time item.

Joe Dossier - J.P. Morgan

So, I mean if you saw a 6% decline in the fourth quarter, if you 1Q, 2Q and 3Q ’09, wouldn’t you see something closer to that magnitude as suppose to flat to slightly up or..?

Craig Cardwell

Well, I guess one could infer that. One way to look at it is the fall was mild weather wise and the weather doesn’t always treat you well. So, utility costs could move, obviously there is municipal pressures on real estate taxes that could move up. So there are cases where we may have to market more than we currently plan on, we don’t anticipate that at this time. So, there are a number of ways that costs can be impinged and could be adversely affected from what happened in the fourth quarter.

The fourth quarter is clearly the most stable quarter in the year. You have the most stable enrollment; you really haven’t ramped up a lot of your marketing costs for the year and generally you would have somewhat more stable costs in that quarter anyway. There is less noise from the operations side.

Randy Brown

Yes, I guess what Craig is saying Joe is I wouldn’t use that 6% savings as your run rate for ’09, because there is always going to be things that come up. You have storms; you just have a multitude of different things that can come up. While we are very proud of the reductions that our property management team was able to achieve and I think I’ve said in my remarks, we’re not prepared to say that that’s something that is probably going to continue into ‘09, we do expect there to be improvements, but plus 6% is a pretty big cost savings.

Joe Dossier - J.P. Morgan

Okay, then last question. On the three assets in the troubled markets, as you look out, what’s sort of the ultimate game plan there? I mean, do you hope to sell those; do you think you may need to put some CapEx into them to reposition them or do you think it’s just a matter of waiting and hoping the markets turnaround and you can release in that increase or increase the occupancies that way?

Paul Bower

Well as we said I think last quarter, two of the three markets we had very much hoped that we can get back on track. The one in Michigan is another story, because of the economy of Michigan. So, I would say two of the three definitely have upside and Michigan at this point in time is sort of an unknown.

Joe Dossier - J.P. Morgan

Okay. Thank you.

Operator

Thank you our next question comes from the line of Karin Ford with KeyBanc Markets. Please go ahead.

Karin Ford - KeyBanc Capital Markets

Hi, good morning guys. Well, to focus a little bit on the debt side first. It look like from the K that, your borrowing base on our line had been reduced from $100 million to $51 million roughly. Can you just talk about what triggered that change and how you expect the borrowing base to trend through the year?

Randy Brown

This is Randy. I don’t think that changed just in the fourth quarter; it’s always been a function of how many assets we have in the collateral pool. There wasn’t any change in covenants or anything that triggered that, it was just a matter of how much is available based on the assets in that pool right now Karin

Karin Ford - KeyBanc Capital Markets

Okay, so your $16 million available based on that borrowing base as of December 31, do you expect that availability to increase or decrease through the course of the year?

Randy Brown

It actually is based on the NOI of those assets in that pool. So, as those assets improve their NOI, the availability goes up.

Karin Ford - KeyBanc Capital Markets

Okay, so you expect that to be the case I guess probably as you roll through the rent increases of the ‘09, 2010 school year right?

Randy Brown

We would hope so.

Karin Ford - KeyBanc Capital Markets

Okay. Next question is just on the December debt maturity; is that debt resource?

Randy Brown

It’s non-recourse.

Karin Ford - KeyBanc Capital Markets

Non-recourse, okay and can you just tell us what the agency under-writing criteria are for student housing these days? What coverage ratios and loan-to-value metrics are under-writing?

Tom Trubiana

Karin, this is Tom Trubiana. Basically what we found in the under-writing of the portfolio we did previously, generally they are looking for a 130 debt coverage ratio, but that is based off of the most recent three months revenue annualized and trailing 12 months expenses, which is why that is so important with the place portfolio that we indeed have a continued success with our lease up; and depending upon whether you are looking at Freddie or Fannie, the loan-to-value ratio can be as high as 75% or 70%.

Karin Ford - KeyBanc Capital Markets

Okay. So, you think they will be willing to give you credit for the 2009, 2010 leasing up-tick potentially on the place portfolio?

Tom Trubiana

I can only tell that you that was indeed the case with the loan refinancing we just recently completed in December and we certainly hope that it would be treated the same as it relates to the place portfolio. We have no reason to know that it would be any difference.

Karin Ford - KeyBanc Capital Markets

Okay and do you expect to have to pledge any of the four unencumbered; I know you said probably a couple of them are going in the previous Fannie facility; are you expecting to pledge any of the other unencumbered to either the line or to this new facility?

Paul Bower

I don’t anticipate putting any additional assets into the corporate credit facility pool. I would anticipate that we would have to put some mortgages on some of the unencumbered assets, either through the Fannie facility or any new facility that we may put in place to take out the $99 million at the end of the year.

Karin Ford - KeyBanc Capital Markets

Okay. Just last question as to some leasing; on the pre-leasing side it looked like from the February pre-release to today, you guys were a little bit ahead in February. You are a little bit behind today, should we read anything on that trend?

Craig Cardwell

Karin this is Craig Cardwell. I don’t think you ought to read anything into that trend. If you look at the same-store basis, it’s roughly where it was a year ago and the basis point changed. Really it’s just a matter of leases, its not hundreds and hundreds of leases.

So you’ll see just the change in March, for instance. Just the variation by a week in spring break, since this is a big spring break month, it has an affect on whether your leasing might run a little bit ahead or a little bit behind in any particular week. So, we don’t read anything into that at this point.

Karin Ford - KeyBanc Capital Markets

And what occupancy level do you guys have underwritten for the 2009, 2010 school year in your’09 guidance?

Randy Brown

Well, Karin we haven’t provided that as you can he tell it’s basically a function of rate increase and occupancy improvements. So, still as Paul said it’s still somewhat early, but on a blended basis, we feel pretty comfortable with the Net Apartment Rent growth for fall of ‘09.

Karin Ford - KeyBanc Capital Markets

Okay and I think you had said previously, you are expecting that to be roughly 2.5% is that right?

Randy Brown

For the core, or the legacy portfolio?

Karin Ford - KeyBanc Capital Markets

Yes.

Randy Brown

The guidance shows a net apartment rent growth of 1.5% to 2%.

Karin Ford - KeyBanc Capital Markets

Got it, okay. Thanks very much.

Randy Brown

Karin, one other thing too; I guess on your comment about being somewhat behind, we’re actually a little bit ahead on the leased stats for the same.

Karin Ford - KeyBanc Capital Markets

Right, I was looking at just applied for metric.

Randy Brown

The applications are behind a little bit and honestly I think Craig, this is your area more than mine, but that personally doesn’t surprise me. I would think that people may be holding back just a little bit waiting to see what the economy looks like; but all in all, the main thing is getting the leases in place and getting signed by both students and parents and Craig’s team is doing pretty good from that standpoint I believe.

Karin Ford - KeyBanc Capital Markets

Fair enough. Thanks.

Operator

Thank you. Our next question comes from the line of Nap Overton with Morgan, Keegan. Please go ahead.

Nap Overton - Morgan, Keegan

Yes, good morning. Could you remind us or could you update us on what the development cost total and spent year-to-date remaining to be funded on the Carbondale Phase II and Syracuse developments are?

Randy Brown

I don’t have those latest numbers handy Nap. I think the last time that I looked at it; we had about $10 million left to go on the Syracuse funding and on Phase II, that’s all 100% financed by a construction loan and I don’t know where we stand on that right now Tom, do you?

Tom Trubiana

Yes, actually the contractor on that project is pretty late in the invoicing. So at this point in time we’ve incurred about 23% of the cost to-date, but once again as Randy said, that Phase II is 100% financed by regions bank.

Nap Overton - Morgan, Keegan

Okay and that development of that project is on time and on schedule to open for the fall 2009 school year?

Tom Trubiana

That is correct.

Nap Overton - Morgan, Keegan

Okay and then one other thing; are you pursuing any additional company owned development projects at this time?

Tom Trubiana

At this point in time, we are actually short-listed on several on campus, company owned opportunities and we have explored other off campus, but nothing at this point in time that we could announce that we’d be going forward with, but particularly as we look at the dynamics of on-campus housing, we particularly have an interest in that particular investment opportunity.

Nap Overton - Morgan, Keegan

So, you are still pursuing on-campus opportunities, but off-campus opportunities for your own balance sheet are pretty much off the table?

Tom Trubiana

I wouldn’t say off the table, but given the current capital market situation and somewhat our tight capital availability, we’re going to be very selective as we look at those opportunities.

Nap Overton - Morgan, Keegan

Okay, yes. That’s why I was asking the question. Okay, thanks.

Operator

Thank you. Our next question comes from the lane of Lindsey Yau with Robert W. Baird Please go ahead.

Lindsey Yau - Robert W. Baird

Good morning. I was going back to the Fannie facility. If I recall correctly, there is a possibility for an expansion to $300 million, is that option still available?

Tom Trubiana

Yes, it’s actually a part of the facility. It’s based on us going back and requesting to increase it and its then based on their availability and also based on their then under-writing criteria at the time. So, while we do have the ability to go back and up size it, it really is at their discretion.

Lindsey Yau - Robert W. Baird

Okay and how does that relate to the discussion we were having about the additional $20 million available from the amount you have drawn already?

Randy Brown

Yes, the $222 million is basically in place based on the under-writing of properties that are currently unencumbered. That is not part of the up sized situation that I just mentioned to you.

Lindsey Yau - Robert W. Baird

Okay and then going back to the pre-leasing, could you just give a little bit more color on the challenge markets. It looks like they are out pacing last year pretty well, any reasons for that?

Craig Cardwell

Well, this is Craig Cardwell. As you’re in a market, every year you understand a little bit more about how it operates, when either employment or enrollment or supply is affected and we basically adjusted to those new realities and made the changes necessary to improve our leasing.

Lindsey Yau - Robert W. Baird

And is that through rental rate decreases or concessions?

Craig Cardwell

In both combination of those and the change in marketing plans and maybe a change in how we spend CapEx, it’s all the ingredients that you would put in the pot to stir it to have a more effective outcome.

Lindsey Yau - Robert W. Baird

Okay and then about rental rates, can you tell me a little bit about how they’re comparing to how the universities are increasing their rates for next year?

Paul Bower

Yes, I can. Well as you know, most universities don’t set their rates until sometime in the late spring or summer, based on what state legislatures mandate. So, we don’t know what those are going to be, but it certainly appears that those rates on campus are going to be pretty high because of other state cutbacks. For our own rate, roughly right now where we are, at about 2% for the core end place, about 2% rate increase.

Lindsey Yau - Robert W. Baird

Okay, great. Thank you.

Operator

Thank you. Our next question comes from the line of Andy McCullough with Green Street Advisors; please go ahead.

Andy McCullough - Green Street Advisors

Good morning. Just follow-up to Michael Bilerman’s question earlier, what is the average lease term on the place asset?

Paul Bower

The average lease term, you mean the student leases?

Andy McCullough - Green Street Advisors

A student leases, correct.

Paul Bower

It’s typical, it’s 11.5 months.

Andy McCullough - Green Street Advisors

There would be a little bit of seasonality in that number, right? You can’t just analyze fourth quarter NOI?

Paul Bower

Well, you can’t analyze fourth quarter NOI because you have the turn in the third quarter. Generally there’s always a lit bit of occupancy drift, whether it’s the place or a core or a highly stabilized asset from the beginning of the fall in August or September, until the next July. There’s going to be a few people that drop out and don’t comeback to school and change their plans, so I would say you can't really use the third quarter and multiply that by four.

Randy Brown

Yes, fourth quarter; and there’s always higher marketing expense in the first and second quarter. So, no Andy, you’re right. You couldn’t just analyze that fourth quarter number.

Andy McCullough - Green Street Advisors

Okay and then with respect to your dividend, how far can you cut your dividend from current levels before you run into problems with recompliance?

Paul Bower

No, we haven’t looked at it from that NOI, but I think for this year, I don’t know that we have any taxable income parse. So, I would think that that level is going to continue for ‘09. So, I think we have our ways to go that we potentially could reduce our dividend by, before we have any concerns about interfering with our rate status in that regard.

Andy McCullough - Green Street Advisors

Okay and then just one last question on your revolver. Are you in any kind of preliminary talks to replace that and any idea what kind of new capacity or borrowing base or interest rate would be on that new revolver?

Paul Bower

We are absolutely in conversations right now with not only the current lead agent on that revolver, but other new potential leads. Can’t really share with you right now, what the terms of that would be, but I think it’s safe to assume that the cost of the corporate facility will increase.

Andy McCullough - Green Street Advisors

What about capacity?

Paul Bower

We are still looking at having $100 million facility in place. In the current facility, we have an accordion feature to up size that, but again it’s all based on how many assets you put into the pool. So I would assume that that availability would probably remain the same. I don’t know, I haven’t heard of any changes in the methodology in which pledged assets are valued or methodology in a way that the availability may change.

Andy McCullough - Green Street Advisors

But if I understand correctly, you need to use the four unencumbered assets to get up to that $100 million total capacity and if you have to use those to refinance the place portfolio you might not be able to get to the $400 million on the new revolver, correct?

Randy Brown

That’s potentially correct. I think you have to look at it and say “Okay, which gives you the most loan proceeds basically, by putting them and pricing them in the corporate facility, thereby increasing the availability under that or by putting them into some other facility, such as a Freddie or Fannie facility” and I think you have to weigh that those two options.

Andy McCullough - Green Street Advisors

Okay great. All my other questions were answered. Thank you.

Operator

(Operator Instructions) We do have a follow-up question from the line of Karin Ford; please go ahead.

Karin Ford - KeyBanc Capital Markets

Hi, just another question on the agencies. We’ve heard anecdotally on the multi-family side that they’ve pulled back a little bit on markets and potential assets that they might be interested in lending on going forward.

Have there been any discussions with them about sort of whether they’d look at the place portfolio and the sort of second facility differently than they looked at the portfolio they financed in January and is there still appetite from them for assets like the portfolio, even though they are still quoting sort of turn around mode?

Tom Trubiana

Karin, this is Tom. As you can well imagine we have been in dialog for sometime with both agencies related to that. They are fully aware of the status of those properties, both in size and market and at least to-date we’ve not had any indication. There’s been I guess I would call it a competitive interest to place with them on those properties. It doesn’t mean it can’t change in the future, but to-date that’s been encouraging.

Karin Ford - KeyBanc Capital Markets

Okay. That’s helpful. Thanks.

Operator

Thank you and at this time we have no further questions in the queue.

Paul Bower

All right. Thanks again everybody for participating in our call today. We appreciate your interest in our company and we look forward to communicating again with you in the near future. Thank you very much and have a nice day.

Operator

Thank you ladies and gentlemen. This concludes the Education Realty Trust fourth quarter conference call. If you’d like to listen to a replay of today’s conference, please dial 303-590-3000 or 1800-405-2236 followed by the passcode 11128034. ACT would like to thank you for your participation. You may now disconnect.

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Source: Education Realty Trust Inc. Q4 2008 Earnings Call Transcript
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