Education Realty Trust's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.18.14 | About: EdR (EDR)

Education Realty Trust, Inc. (NYSE:EDR)

Q4 2013 Results Earnings Conference Call

February 18, 2014 10:00 AM ET

Executives

Brad Cohen - ICR

Randy Churchey - President and CEO

Chris Richards - Senior Vice President and COO

Tom Trubiana - Chief Investment Officer

Randy Brown - Chief Financial Officer

Analysts

Karin Ford - KeyBanc Capital Markets

Paula Poskon - Robert W. Baird

Jana Galan - Bank of America Merrill Lynch

Alex Goldfarb - Sandler O'Neill

Nick Yulico - UBS

Ryan Burke - Green Street Advisors

David Harris - Imperial Capital

Operator

Greetings and welcome to the EDR Fourth Quarter 2013 Earnings Conference Call. At this time all participants are in a listen only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Brad Cohen of ICR.

Brad Cohen

Thank you, operator and good morning. During today’s call, management may make forward-looking statements. These statements are based upon current views and expectations. Such statements are subject to risks and uncertainties and other factors that could cause the actual results to differ materially from future results. Risk factors relating to the Company’s results and management statements are detailed in the Company's Annual Report on Form 10-K and other filings with the Securities and Exchange Commission. Forward-looking statements refer only to expectations as of the date on which they are made. EDR 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 Randy Churchey, President and Chief Executive Officer. Randy?

Randy Churchey

Good morning. Thank you for joining us for the EDR fourth quarter 2013 earnings call. For today’s call, I will make a few brief comments; Chris Richards, our Senior Vice President and Chief Operating Officer will review property performance in fall 2014 leasing; Tom Trubiana, our Chief Investment Officer will discuss acquisition, disposition and development activity and Randy Brown, our Chief Financial Officer will review the quarter’s performance.

Overall, I am pleased with our accomplishments in 2013. And as we began this year, our company and the student housing industry continued to perform well. In 2013, we improved our best-in-class portfolio of student housing communities through new developments, acquisitions and selected sales. We produced an industry leading increase in same-store revenue of 5% for the fall of 2013 leasing cycle. We purchased or delivered 346 million of new assets, increasing our gross asset base by 21%. We commenced construction on additional 433 million of new developments and pre-sale opportunities scheduled to open in 2014 and 2015, all of which have been pre-funded through our low leverage balance sheet. These new assets represented nearly 17% growth in our portfolio.

Included in these 2014 and 2015 new developments is a continuation of the University of Kentucky’s landmark on campus revitalization using EDR’s proprietary on campus financing program, The ONE Plan. All of this was accomplished, while maintaining an appropriately capitalized balance sheet.

As a result, our core FFO per share increased 17%. This 2013 increase in core FFO ranked EDR in the 98 percentile of all publicly traded REITs. Moving with the stellar operating investment performance, our 2013 total return to shareholders was disappointing. Unfortunately, our returns were hampered by changing investor sentiment for the student housing sector as the average total shareholder return for the sector was a negative 19%, easily the worse performing REIT asset class. We believe this negative investor sentiment is not warranted. Please refer to our Investor Relations tab on our website for information addressing the positive enrollment trends that are predicted for the sector through 2021, the manageable near term new supply and the modernization of student housing taken place in our industry.

Furthermore, just last week, the Pew Research Center released results from a study that concluded: One, the earnings gap between young adults with and without a bachelor’s degree has stretched to its widest level in nearly half a century. Young adults with just a high school diploma earn only 62% of a typical salary of college grads. Second, 9 of 10 college graduates ages 25 to 32, so that their bachelor’s degree had paid off or will pay off in the future. And third, young adults see significant economic gains from getting a college degree regardless at a level of student debt they have taken on.

The study concludes with this memorable quote. The only thing more expensive than getting a college education is not getting one. Our outlook for the student housing business and EDR is very positive. Our 2013 robust leasing results and the 2014 positive pre-leasing velocity provide objective evidence to validate our conclusion.

Let me make a few comments about our portfolio communities. Over the last four years, we have purchased more than 670 million of communities, developed 284 million of owned assets and disposed 237 million in smaller lower growth assets. These transactions have transformed our portfolio of communities into one the best located, strongest cash flow generating portfolios in the country.

At the end of 2013, our own communities had the following characteristics: Medium distance from campus of one tenth of a mile, average enrollment of over 25,500, average age of seven years, and average monthly rental rate of $638 per bed. This growth profile of our portfolio should endure due to its focus on well located communities at larger, more robust universities that are expected to see their enrollments continue to grow.

In addition to the stellar 2013 leasing cycle results, over the last four years, EdR has produced a market leading average annual increase in same-community revenues of 4.3%. We believe this type of organic growth will continue in the years ahead.

In summary, we’ve made great progress over the last four years in improving our portfolio, balance sheet, processes, and team while simultaneously delivering increases in shareholder value. Since this management team took over at the beginning of 2010, EdR’s total return to shareholders is 108%.

This return ranks EdR number one versus all public student housing REITs, number two versus all public multifamily REITs and number 23 of the entire REIT public universe of 120 companies or in the top 80 percentile. We are proud of this accomplishment and look forward to creating meaningful shareholder value in the years to come.

Lastly, this year we are celebrating the 50th anniversary of EdR’s invention of the public ownership student housing business with the opening of our student community, Grandville Towers on the University of North Carolina campus. Our company has a great history of being a pioneer in our industry, which we have continued with the recent on-campus housing transformation occurring at the University of Kentucky. We expect to build on this pioneering spirit as an industry leader in the student housing in the years to come.

Now Chris will discuss property operations.

Chris Richards

Thank you, Randy. We’re off to a solid start for fall ‘14 preleasing. Our same-store portfolio is 45.4% leased for fall ‘14, 5.5% ahead of this time last year. Based on our preleasing to-date, we are projecting fall ‘14 same-store net rental rates to increase 2% over the prior year. As a result, same-store total revenue is projected to increase in the range of 3% to 4% for the ‘14, ‘15 lease terms.

Please note on pages 9 and 10 of the earnings supplemental, we segregated the same-store properties by occupancies achieved in the last leasing cycle and also by geographic region and distance from campus. We think this gives additional transparency and insight into the current preleasing trends based on our portfolio mix.

Focusing on the occupancy tiers, it is encouraging that the aggregate preleasing for tiers one, two and three which represent same communities with prior year opening occupancy below 98% is 3.4% ahead of the prior year.

Moving to new communities, our aggregate new community’s preleasing is pacing as expected. A couple of properties of note: first, our new development at the University of Minnesota, The Marshall. The community was originally designed with 881 beds. We have increased the number of beds 13% to 994, by converting a number of rooms to double occupancy in response to student demand.

We are currently 32% applied and 27% leased. We recently announced the signing of a multiyear retail lease with Target Corporation for 20,000 square feet of retail space on the ground floors of this development for their new prototype, Target Express. Target Express is a smaller urban version of the suburban Target featuring grocery, pharmacy, electronics, home decor, beauty and University of Minnesota same product. We expect that this new amenity will be a valued addition to our student’s experience within our commercial.

Second our nearly 2,400 new beds opening in five communities at the University of Kentucky. As you may remember, our first asset, Central Hall was delivered last year and is currently 100% occupied. Similar to last year’s preleasing report, the preleasing of these 2014 UK assets are not in our preleasing numbers since we are waiting for the on-campus assignment process to be completed. However, demand has already exceeded bed by over 500 students thus far. These EDR-owned communities are clearly the choice of a vast majority of UK students.

In conclusion, we are experiencing a favorable leasing environment very similar to the last leasing cycle. Please refer to pages 11 and 12 of the supplemental where we summarized new supply and enrolment trends for the markets we serve. This information is substantially the same as in the third quarter supplemental. In total, it is anticipated that our 2014, that in 2014 our market will experience a 2.2% increase in new on and off-campus purpose built student housing beds versus a historic pre-year average annual enrolment growth in these markets of 1.4%.

This 2014 new supply and demand data is very consistent with that experienced in 2013 where we received a 5% same community revenue growth. This data, which only includes enrolment growth as an indicator as demand does not reflect pent-up demand or modernization for quality purpose built student housing.

The best indication of this pent-up demand is well occurred in the ‘13 leasing cycle at four markets where we encountered about 2,000 to 3,000 new beds in each market. At Florida State, new supply increased 4%, Georgia Southern 19%, the University of Mississippi 13% and the University of Missouri 10%. Each of these new supply increases easily surpassed the respective universities’ enrollment growth.

Our five properties in these markets aggregating approximately 3,000 beds achieved a 0.5% increase in same community revenue in the ‘13 cycle. Based on preleasing philosophy today for the ‘14 leasing cycle, we are estimating an average 3% to 4% increase in community revenue for these properties next academic year. We believe this is the best evidence of the pent-up demand or modernization that students have to meet the quality purpose built student housing.

I will now pass the call to Tom.

Tom Trubiana

Thank you, Chris. 2013 was an active year for external growth for EDR. During the past year we delivered 192 million of new developments and purchased 154 million of new assets. Please refer to page 13 of the supplemental for the listing of active developments and pre-sale projects.

In addition to the 2013 deliveries, we’re also developing or have a pre-sale agreement that once completed will add over 304 million of assets to the company’s owned asset portfolio in 2014. These developments pre-funded from our balance sheet are all proceeding as planned on time and on budget. We are reaffirming our targeted first year unlevered economic yield in the mid 7% range for these developments, including the pre-sale at Florida International University.

During the fourth quarter, we completed the $54 million acquisition of The Varsity located two blocks from the University of Michigan. As I have mentioned in the third quarter earnings call, this pre-sale acquisition was in progress since last spring. The Varsity is a 415-bed community, which we acquired at 69% occupancy. This whole occupancy is in contrast to an overall pedestrian to campus occupancy rate exceeding 98%.

We attribute this slower opening occupancy to concerns about construction timing and prior management company issues. As a result of the lower than expected first year revenue, our purchase price was appropriately reduced. Based on the lower purchase price, the stabilized 2015 forecasted unlevered economic yield is in the mid 7% range, which is more in line with our yields on other development investments.

We are very cognizant that with the pull back in student housing equity valuations, our weighted average cost to capital has increased. We have been and we will continue to be disciplined investors.

Today acquisition pricing does not provide enough strength to our leading average cost to capital. Fortunately, our 2014 and 2015 development pipeline provides meaningful accretive external growth.

Today we are announcing two exciting new developments. The first is a $55.6 million development located in Jason to the North side of the University of Georgia campus (inaudible). This mix use development contains 292-beds and 266 units and 43,000 square feet of retail space. This project is being developed in partnership with Schenk Realty Group for an opening in summer of 2015. EDR as 50% owner and manager will invest $27.8 million on this development.

The second is a continuation of the landmark public private partnership at the University of Kentucky, which is systematically replacing outdated residence halls with modern state-of-the-art live/learn communities.

The UK Board of Trusties recently approved the 2016 deliveries comprising 1,141 beds at a total cost of $83.9 million. These UK developments will be funded developed and operated by EDR through our ONE Plan. The terms and condition of the EDR’s agreements with UK on the 2016 deliveries are essentially the same as all the prior deliveries. As with all of our developments, we are targeting unlevered first year economic yields between 7% m 8% on both of these developments.

Now to dispositions which we continue to pursue in our efforts to recycle capital to higher yielding opportunities. In December, we sold the Pointe at Western for $21 million. This community is located 2.3 miles from Western Michigan University and was built in 2000. The sales price represents a 6.3 nominal cap rate on 2013 operating results.

In addition, we have two other sales contracts with meaningful non-refundable deposits to sell the reserve on West 31st at The University of Kansas and College Station at Purdue University for an aggregate total sales price of $41.9 million. These two additional dispositions are scheduled to close in March. Since these are pending contracts, we will not be disclosing any additional information at this time.

For EDR, the most exciting external growth opportunity is for on-campus developments under our on-campus equity or ONE Plan. By the end of 2016, our portfolio of ONE Plan will include 525 million of these assets, with more to come. We believe this area of investing will continue to grow as more universities see the benefits of these successful partnerships. Most state universities face many of the same challenges, such as reduced support from constrained state budgets, older on-campus housing and demands on institutional funds for academic and support service initiatives. This declining state support for higher education is the norm.

These external factors provided great opportunities for companies such as ours and EDR is well-positioned to win these opportunities. Currently, the number of companies that have the proven on-campus development and management expertise, size, transparency and financial strength necessary to successfully compete for these university mandates is very limited. These requirements are EDR’s strength and they provide a strong barrier to entry into this market.

On page 14 in the supplemental, you'll find our third-party development summary. The Mansfield project is now complete, the Westchester and Wichita State projects are progressing on schedule and within budget, the Clarion University project is scheduled to begin construction this spring subject to execution of final payments and closing of financing and the East Stroudsburg project is still pending of real estate tax appeal by the university.

The 2014 business focus of the EDR investment team is on recycling capital for more ONE Plan development opportunities and the development of communities pedestrian to targeted campuses for 2015 deliveries and beyond that will be accretive to shareholder value.

With that report, allow me to turn the call over to our CFO, Randy Brown.

Randy Brown

Thank you, Tom and good morning everyone. Core FFO per share in the fourth quarter was $0.20 up 25% over last year’s fourth quarter of $0.16. For the year, core FFO was $0.55 per share, a 17% increase over 2013. On a same community basis, fourth quarter revenue was up 4.9% reflecting a robust fall of 2013 leasing results and operating expenses were up 6% resulting in a NOI improvement of 4.2%. Same community operating expenses in the quarter and for the year were higher than we expected predominantly due to real estate taxes.

For the past quarter, same community real estate taxes increased over 13% causing our same community operating expenses to be a little above the high-end of our previously communicated range. Excluding this spike in real estate taxes our same community operating expenses would have been 3.7%. Please refer to page six of our supplemental for listing of other key operating expense metrics.

Turning to our capital structure, at December 31, 2013 our debt to gross assets was 42.8% and our interest coverage ratio was 4.6 times. Our balance sheet strategy has been one that pre-funds all amounts to acquisitions and developments. Based on our financial analysis which includes the remaining funding requirements for the 2014, 2015 developments, on page 13, of the supplemental, our debt to gross assets at the end of 2014 and 2015 would be approximately 47% and the interest coverage ratio would be above four times. We are comfortable with these pro forma debt metrics.

Fortunately these 2014 and 2015 development and pre-sale opportunities will add nearly 17% to our total gross assets representing robust external growth for the company over the next two years. Last month we closed on an unsecured term loan for $187.5 million to our bank group. We used the proceeds to reduce our outstanding borrowings under our line of credit. Simultaneously we entered into interest rate swap agreements to convert these variable rate interest loans into fixed interest rates. The weighted average interest rate of the five and seven year term loans was 3.6%. Confirmation of these transactions has reduced our variable rate interest rate risk from 71% of total debt to 47% and has better lightered out our future debt maturities.

EdR has the financial strength and flexibility to fund all amounts developments while maintaining debt metrics well within acceptable multifamily ranges.

Now turning to our 2014 guidance. Based on our current expectations, our market conditions and operating results we expect full year 2014 core FFO per share to be in the range of $0.62 to $0.68, an increase of 18% over the 2013 at the midpoint. This estimate is based in part on the following assumptions. Same community portfolio, full year 2014 NOI being up 4% to 5% higher based on revenue growth of 3% to 5% and operating expense growth of 3% to 4%. This includes a 3% to 4% increase in leasing revenue for the fall 2014 lease term based on our preleasing to-date.

We believe our non-same store community portfolio will achieve or slightly exceed our initial underwriting. NOI contribution of $10 to $10.5 million from our 2014 company owned development deliveries and pre-sale transaction at Florida International University excluding ground rent and related pre opening expenses. 2014 third party development fees of $1.8 million which represents current active construction projects and process for 2014. Repayment of the $18 million second mortgage loan EdR made to the Johns Hopkins participating development and recognition of our $3 million construction loan guarantee fee.

The impact of 2014 FFO will be an increased of $1.7 million which is net of the foregone interest income related to the repaid second mortgage. We anticipate this transaction to close during the second quarter. Third party management fees of $3.7 million based on existing contracts. Total general and administrative expenses inclusive of development and management services of approximately $16.5 million; this represents a 16% over 2013 and excludes acquisition or development pursuit costs.

This increase is primarily due to the substantial growth in our owned portfolio as evidenced by the 21% increase in gross assets over the past year, the addition of $433 million of new developments being delivered in 2014 and 2015 and additional marketing and related costs associated with our one plan efforts. We believe this increase is a [prodded] and responsible investment for our future growth.

Ground lease expense of approximately $9.1 million which includes $4.8 million of non-cash straight line ground rent that will be excluded from core FFO. 2014 pre opening expenses of approximately $1 million associated with our 2014 and 2015 development deliveries, this expense represents nearly $0.01 of annualized FFO per share and are not added back for core FFO purposes.

For interest expense we estimate a range of $25 million to $26 million net of capitalized interest of between $4 million and $4.5 million. This interest expense range includes approximately $3.4 million or nearly $0.04 per share of additional interest cost related to recently closed term loans.

As mentioned in the earnings release our guidance does not assume any additional one plan developments, acquisitions, additional unannounced asset sales, new third party development and management contracts or the impact of any additional capital transactions. Please note our guidance range does include the reduction of approximately $0.04 of core FFO per share related to the sale of the Western Michigan property at the end of 2013 and the planned sale of the two assets mentioned by Tom.

Now with this overview, operator, please open up the line for questions.

Question-and-Answer Session

Operator

Thank you. We will now conduct the question-and-answer session. (Operator Instructions). Our first question comes from Karin Ford of KeyBanc Capital Markets. Please state your question.

Karin Ford - KeyBanc Capital Markets

Hi good morning. First question is just on the expense side. Can you talk about how much of your marketing expenses were up in the fourth quarter on a year-over-year basis and what type increase you are assuming or what per batch you are assuming in your 3% to 4% operating expense growth guidance for 2014?

Chris Richards

Hey Karen, in Q4 our marketing expense increased by 18%. We chose not to pull back on those expenses in Q4, because we have this great momentum which has effectively assisted us in the 550 basis points that we're ahead over prior year. I feel pretty confident that we're at an appropriate level and anticipate for ‘14 will have marketing increase in the range of 3% to 4%.

Karin Ford - KeyBanc Capital Markets

Okay, that's helpful. And then can you just talk about what the disposition pipeline looks beyond the ones that you've discussed in the press release how much additional you’re marketing and sort of what you think you're going end up selling for the year.

Randy Churchey

Yes Karin. Given our cause of equity today, it's prudent and we're constantly looking at our portfolio, it's proven and to recycle that capital. So, we do indeed have a pipeline of communities that we're looking at. We do have some dialog going on at this point in time and our intent is to match up the recycling of the disposition of those assets with new development opportunities. But it would be inappropriate way to give you a dollar amount at this point in time. But clearly it is a major part of our business focus for 2014.

Karin Ford - KeyBanc Capital Markets

Okay. And one of your competitors has said that there is a pretty strong institutional bid for student housing assets even though the public companies aren't really participating that much that there is a big private bid. Have you seen that as well, can you talk about what you've seen for pricing and cap rates for student housing assets? And if there is strong pricing there would you consider selling one of your higher quality assets something pedestrian perhaps just to demonstrate the pricing and the bid that's out there?

Tom Trubiana

Sure. Obviously even though we have been out of the acquisition market for the last six, seven months, we monitor everything. And probably the most indicative of what our cap rates have been in 2013 is the recently received CB Richard Ellis report for 2013. And so 122 student housing property stated for about 2.8 billion. And actually if you back away the campus acquisition in Kayne Anderson portfolio that was purchased in 2012, those levels in 2013 or higher than the previous five years. And so that tells you there is interest. And then I guess another major take-away is the portfolio where the profile of interested parties that purchase this change, the public student housing REIT, we were only 8% of the transactions and which is substantially down from prior years. And the largest increase in transaction was from institutional investors, which we think is a very positive indication of the growing institutional investor levels of interest and the student housing space. So we think that bodes real well for the student housing industry.

As for cap rates, based on the CB Richard Ellis report and then dialogue that we’ve had with other key brokers in this space, indeed what we’re finding is institutional grade properties that are contiguous or true pedestrian to the court of campus, tier one institutions have been trading in the low to mid-fives. And there seems to be a larger spread, there may be what I personally though previously, when you get further from campus, because we’re seeing cap rates on those asset that are not pedestrian and maybe not tier one institutions, running a range from anywhere in the low sixes, which is what we just experienced when we closed, all that way upto the mid-sevens and in some cases even higher. So, it’s real-estate, location, location, location, tier one institution is the key and that’s where our focus is.

Randy Churchey

Karen, I’ll add one other piece to that. As you know since this management team took over in 2010, we’ve sold 40% of the assets that were in existence or in the portfolio then. And as you’ve seen from our sales, most everything that we’ve sold including the assets that Tom spoke of earlier today were mile out or two miles out or at campuses where the enrollment was not very great. We’re really done with that program. So this next set of assets that we’re going to be looking to possibly sell, will probably include an asset that’s a tier one, pedestrian to campus asset that for whatever reason we decide take good time to sell. So, I think that’s reasonably likely. With that said as you know our guidance does not assume any unannounced sales.

Karin Ford - KeyBanc Capital Markets

That’s helpful. Thanks for the color.

Randy Churchey

You’re welcome.

Operator

Our next question comes from Paula Poskon with Robert W. Baird. Please state your question.

Paula Poskon - Robert W. Baird

Thanks. Good morning everyone. A question for Chris. Chris, is the volatile weather in so many parts of the country impacted either your operating expenses or in particular your leasing efforts for next year?

Chris Richards

So, we did get impacted by polar-vortex one and it had an impact on 20 fewer assets actually, so it was wide spread across the country for us. As far as operating expenses go, of course anytime you have weather in a pipe thirst, you have extent that we’ve been able to take care of that and things will come out of that just fine. As far as leasing is concerned, our platform is a 100% online now. So from the student applying to the guarantor signing the guarantor form, everything they do, they can do online. So, we have a lot of fun with some of the weather and some marketing campaigns that went out having all sorts of cyber sales and polar specials to really keep our momentum going. So that has benefited us greatly through this weather circle.

Paula Poskon - Robert W. Baird

Great, thanks. And Tom, could you just remind us of the structure of the Johns Hopkins projects and what the triggers are for brining that relationship to close and would you consider doing a structure like that again?

Tom Trubiana

The Johns Hopkins, I know that was a unique financing, but it was needed that time because the due taxes and bond financing, there were very few insurers of the bond. So what EdR did, we received development fees, market development fees of 3% to 4% construction oversight fees because we guarantee the construction loan by (NYSE:PNC), we were to receive a $3 million of guarantee fee, and then we funded $18 million in the form of the second mortgage with the 10% interest rate and that escalated to 12% and then subsequently 14%.

It was always intended that the owner East Baltimore Development Inc of 501(c)3 would have the ability when markets became better to refinance the project and to pay off our second mortgage and to receive our guarantee fee. And we are being told by EBDI and Raymond James who is doing that underwriting that they did expect the close by the end of March. So we are hopeful that that goes forward but can’t really say, if it doesn’t, we will continue to put coupons at 10% and 12%. But right now, it is indeed scheduled to close.

And whether we would do that again, it is not our primary mode because it’s not at the same residual interest as you would in the ONE Plan like the Kentucky deal. So we are not actively marketing, but there could circumstances where it make sense and so we would look at that. It was not a chosen way with Johns Hopkins initially, but it was a creative way to problem solve for the university and to bring real value to EDR.

Paula Poskon - Robert W. Baird

And Tom, can you just characterize how you are seeing the pace of RFPs from universities for ONE Plan deals coming through? Is it, would you characterize it still accelerating or decelerating any change in that?

Tom Trubiana

Yes, I have a type A personality. So the pace of it I would refer it to be quicker, but these are universities. We are currently having dialog with approximately 24 universities in various stages I mean just purely exploratory. And there are some 11 RFQs or RFPs that are in process now. And I can’t tell you that all of those will generate P3s.

I think what’s important though in the vast majority of these cases if the Chief Financial Officer, we’re seeing an increasing number of cases where it’s the universities and Board of Trusties are the catalyst behind looking for creative ways to finance the need in new student housing. And they’re obviously trying to do that so as to not adversely impact the schools’ bond ratings and then to preserve their debt capacity for other purposes. So while we are seeing more activities, we would love to see more final results. And, but it is picking up, there is no question about that.

Paula Poskon - Robert W. Baird

Thanks very much.

Operator

Thank you. Our next question comes from Jana Galan with Bank of America Merrill Lynch. Please state your question.

Jana Galan - Bank of America Merrill Lynch

Hi, thank you. Looking at your preleasing stats, it looks like the Midwest University markets are running a little bit last year. I was curious if there was anything specific occurring there that you can point to?

Chris Richards

Actually, I've got five assets that sit in the Midwest and I've got an assets that's way ahead and I've got an asset that's flat and I've got a couple that are behind. But in particular the University of Missouri in the Midwest is the asset that is I guess the most troubling. They had significant 10% new supply last year; they've got more new supply this year. And they got significantly ahead with the pulling more [check] struggles with lots of tiebreaking and some really, really tough weather. In the Midwest, the University of Missouri and Columbia is really my struggling asset.

Jana Galan - Bank of America Merrill Lynch

Thank you, Chris. And then do you have a detail on what percent there have been renewals?

Chris Richards

I do actually, we are currently today out of the leasing that I've got total 45% that I'm leased, 41% are renewals and that's 100 basis points ahead last year where at this time we were 40% of our leasing was renewed.

Jana Galan - Bank of America Merrill Lynch

Thank you. And then just one quick question on, Randy relative to the taxes are you expecting any other new assessments or additional tax builds for 2014?

Randy Churchey

Well as you know, and I think we've said in the past that we typically receive our tax notices towards the back-end of every year. So at this point, we're basically just building in our normal inflation for ‘14. We won't know exactly what the final tax assessments are until the second half of 14.

Jana Galan - Bank of America Merrill Lynch

Thank you.

Randy Churchey

Welcome.

Operator

Our next question comes from Alexander Goldfarb with Sandler O'Neill. Please state your question.

Alex Goldfarb - Sandler O'Neill

Good morning.

Randy Churchey

Hey.

Alex Goldfarb - Sandler O'Neill

Just going to the, on the preleasing bucket by distance, the one to two mile bucket is behind by 8.5%, but the two mile and over bucket is ahead. Is that a reflection of mostly the two mile plus bucket as cottage and therefore sort of students are willing to drive for cottage, but anything left over a mile that's regular kind of products student aren’t really as interested any more. Is that how we could read it or other things [got]?

Chris Richards

That’s exactly it, [Alex].

Alex Goldfarb - Sandler O'Neill

Okay. So as you guys sell stuff I know, Mr. Churchey you said, you may sell a pedestrian asset, but I would assume that one to two mile bucket over the next few years, we will see that demonstrably shrink or not necessarily the case?

Randy Churchey

Well has demonstrably shrank over the last four years, I would expect it will continue to shrink.

Alex Goldfarb - Sandler O'Neill

Okay. And then on the G&A front, I expect it would be 16% higher this year with the growth in asset, how scalable the platform is in a sense of as you guys continue to grow, should we expect G&A to grow at the same sort of pace or are there sort of structural things where now that the company is of a certain size, you needed certain new people in place to now handle a bigger asset price?

Randy Churchey

Yes. Alex, this is Randy. As we mentioned, we grew our gross assets this past year about $346 million, which is an increase of about 21% and then on top of that, Tom and his team has planned an additional $430 million of new investments. With all these phenomenal growth, we did that with only G&A increase of about 3.7% in ‘13. So in order to sustain the type of growth, we had to add additional support.

So we currently, I believe and I think this team believes that we have now scalability and we would not anticipate our G&A growth going up at this kind of pace year-after-year. But we’ve done a phenomenal job and Tom and Chris has done a phenomenal job in growing our business with just a little bit of G&A growth over the past year, year and half.

Alex Goldfarb - Sandler O'Neill

Okay. So it’s a more of a not one-timeish, but it’s sort of reassess the platform to be able to handle the bigger increase, the company should be able to grow from here on out we won’t necessarily see this until some point in the future when the company gets to such a size that it needs to increase further, is that the way to think about it?

Randy Churchey

That’s exactly right.

Alex Goldfarb - Sandler O'Neill

Okay. Final question is, and maybe you touched on this in your opening comment, but on the development page, page 11 where you have more supply versus expected enrollment growth, obviously the credit care would say, oh my god it’s oversupplied and it’s going to be an issue. The proponent would say, hey the new supply is replacing aging stock so it’s not really commensurate. What’s the way that we should read this page?

Randy Churchey

Well Alex, I think the last comment you made is the most accurate. Remember what we’ve been saying is that 2013 new supply was really about the same level that we’re experiencing in 2014. And in 2013 Chris and her team delivered 5% increase in same-store revenue. And so we move over ‘14 with essentially the same dynamic and so far we’re projecting a 3% to 4% increase in same-store revenue on the back half for the year for the ‘14, ‘15 leasing cycle.

So, what we’ve been saying all along is that the supply demand dynamics are okay, we’ve got to figure in on the demand side this modernization or this pent-up demand more students’ due demand, new purpose builts to in-housing is the types of housing that I lived in when I was in college.

So we are very comfortable with ‘14 supply and demand. And then moving to ‘15, we are little bit early to start projecting what 2015 demand is because it’s based on the calendar that can be a few things still add to the pipeline.

And when we do our Investor Day at the University of Kentucky in April, we will have the 2015 demand information of new supply information. But anecdotally, we believe with construction cost going up the way they have and with the REITs increased weighted average cost of capital, we think 2015 supply is going to be add or little bit lower than the 2014 new supply in our markets. And we feel with that level is manageable.

Alex Goldfarb - Sandler O'Neill

Okay. Thank you.

Randy Churchey

You’re welcome.

Operator

(Operator Instructions). Our next question comes from Nick Yulico with UBS. Please state your question.

Nick Yulico - UBS

Thanks. Good morning. On the development spending, can you just give the dollar amount for 2014?

Randy Brown

If you look at page 13 of the supplemental we have both the grand total amounts and the amounts that are still to be funded.

Nick Yulico - UBS

Right. I am just wondering how much of the 2015 spending is going to be spent in 2014?

Randy Churchey

Can you give that Randy?

Randy Brown

I don’t have that with me, but it’s approximately 50% in ‘14 and probably 50% in ‘15 it averages that may.

Nick Yulico - UBS

Okay got you. And then just so if I remember correctly the pre-sale you still need to actually spend the full amount of the $43.5 million?

Randy Brown

Correct.

Nick Yulico - UBS

Okay. And I guess just in the past you said that you could, your leverage would go up to a, it would go up but still at a comfortable enough level if you had to fund the entire 2014-15 type one with increasing eventually using all debt. Is that still the case today do you think?

Randy Brown

Yes. That is the case. When you look, you got to remember a few things when you’re doing the computation. First the business does generate positive cash flow in ‘14 and ’15. So if you look at page 13 of the supplemental you can see the amounts in ‘14 and ‘15 that still need to be funded. And when you if you assume that we fund that with debt and with the available positive cash flow from our business the debt to total gross asset at the end of ‘14 and ‘15 goes to about 47%. So an increase from today’s 42% or 43% level.

Our interest coverage ratio would still be over four times. So we deemed as if you will that it’s pre-funded because we have the necessary capacity both liquidity wise and debt metric wise to handle these commitments.

Nick Yulico - UBS

Okay, that's helpful. And then just my last question relates to the new development announced at the University of Georgia. Did this at all relate to the process that's going on right now with the Georgia (inaudible) University system possibly doing a sell or we have all or a big portion of its student housing?

Randy Churchey

It does not. This is clearly a private transaction, wonderful location directly across from the university not far from the main gates but it has no relationship to what the system is doing.

Nick Yulico - UBS

Okay. And you guys able to provide any update on how that process is doing along, I think the way you talked about was that maybe in May there could be a decision, I mean there were some assets being marketed in the winter in Georgia?

Randy Churchey

Basically, as far as the Georgia system, initially they were pushing for what many of us thought was an over aggressive schedule for 2015 deliveries. Because significant portion of this was new housing, the other portion was monetizing existing housing. So they have indeed tabled it and rescheduled and in fact there are some additional universities that maybe joining that portfolio. And then one other item to our understanding that they are also going to be seeking state legislative approval to try to take the properties off the real estate tax rule. So, they want to run that process. So this is going to happen much later than what they initially indicated. And so we would probably be looking more like mid-summer before they would come up with their formal RFQ/RFP.

Nick Yulico - UBS

Okay, thanks. Very helpful.

Operator

Our next question comes from Ryan Burke with Green Street Advisors. Please state your question.

Ryan Burke - Green Street Advisors

Hi good morning. Your guidance for 1% to 2% increase on occupancy for the upcoming academic year would mean that the portfolio reaches let’s call it 95% plus occupancy, which I believe is a level that hasn’t been reached since 2007. Just curious how much more room you feel you have to grow occupancy into the future given that the portfolio of today, really looks a lot different than it did in 2007?

Randy Churchey

But we still think there is room in occupancy. We probably, when there is a decision that needs to be made, that's a 50-50 decision. We probably make that decision more times and not to increase rate rather than increasing occupancy. So I don’t think that we are ever going to reach the 97.5%, 98% range, because we just make decisions a little bit different.

But I do think with the evolution of the portfolio that we could get into that 97 range, not this year, but in the next few years.

Ryan Burke - Green Street Advisors

Got it. Thank you. And then separate question on pre-leasing, the new same-store pool for leasing purposes consists of 24,000 beds that's about a 15% increase due to addition of 13 deliveries and some if not all the 2012 acquisitions? Can you provide your pre-leasing progress on the legacy pool, so that would pre-leasing progress on the plus or minus 21,000 beds that comprise the same-store pool at 3Q ‘13?

Randy Churchey

Yes. I think you’ve stumped to see or we didn’t really separate the portfolio in such a manner. I guess we’ll post that on our investor relations tab of the website sometime later today, I don’t know that answer.

Ryan Burke - Green Street Advisors

Fair enough, thank you. That’s all for me.

Operator

Our next question comes from Craig (inaudible) with Wunderlich Securities. Please state your question.

Unidentified Analyst

Yes, hi guys. Good morning. I had a few questions. A couple of quarters ago there were few markets that were more challenging in which you had to make some adjustments. I believe it was UC Berkeley and Riverside, Notre Dame. And I wanted to see if we could get some color on how those adjustments have impacted leasing velocities of those properties?

Chris Richards

Yes. We made some rate adjustments in both of those California assets significant rate adjustments last year at both of those California assets in order to get our occupancy back to appropriate level. And so we’re slowly growing that rate again to get back and to maintain our occupancy and still get some rate growth out of those deals.

The Notre Dame asset the plan that we had in place and kind of 24-month out marketing program that’s in place with that university unlike any other I have ever experienced has worked beautifully and Notre Dame is significantly ahead in occupancy.

Unidentified Analyst

Okay, great. Thanks.

Operator

Thank you. Our next question comes from Karin Ford with KeyBanc Capital Markets. Please state your question.

Karin Ford - KeyBanc Capital Markets

Hi. Just one quick follow-up for Randy Brown. It looks like after the January term loans that you did you have roughly $170 million balance still out of your line, is your plan to run with that number outstanding on the line or do you think you’ll do an additional longer-term debt deal later in the year?

Randy Brown

We don’t have any plans right now Karin to do on the longer-term debt deal or turn anything else out. Equity termed out, the $187.5 million off the December revolver we have about $330 million left under our facility and then of course we’ve got about over $600 million of unencumbered assets that could be levered as well. But having said that, currently we don’t have any plans to do any longer term debt.

Karin Ford - KeyBanc Capital Markets

And just any update on pursuit of a potential unsecured rating?

Randy Brown

Yes, great question. We have in the past been talking with rating agencies about all of our credit metrics that is something that we and the board continuing to focus on, it’s something that we have in our longer term plans. I can’t give any guidance yet as and when do we may publicly pursue that, but we are in conversations with rating agencies and are continually maintaining and monitoring our credit metrics, so when we are at the point which we can lock such a thing, will be teed up and ready to go.

Karin Ford - KeyBanc Capital Markets

Thanks very much.

Operator

Our last question today comes from David Harris of Imperial Capital. Please state your question.

David Harris - Imperial Capital

Yes, good morning. I have a question on the variable debt exposure following on from the prior question. And forgive me if I have missed this in your comments. And if I do a pro forma number including your term loan, it looks like about close the half your debt is variable. I just wanted if you could just comment on how comfortable you feel about that and if you are guidance specifically included any change in your variable rate costs as we go through the year?

Randy Churchey

Yes. Every year we have factor in increases in LIBOR rates. And this year is certainly no different. I did mentioned in my comments that because of the terming out and the entering into the swap agreements of the $187.5 million that are variable rate exposure went from 71% down to 47% that 47% is still a little on the high end of our preference, but it’s not extraordinary. Our longer terms goal is to be around 30% to 35% exposed to variable rate. So that’s where we are right now. We do have increases built into our guidance for LIBOR, but we are basically running with our current level of fixed rate debt.

David Harris - Imperial Capital

Okay, thank you.

Operator

Thank you. There are no further questions at this time, I will now turn the conference back over to management for closing remarks.

Randy Churchey

Well, thank you for your time and attention today. And we look forward to updating you on our results in few months. Thank you.

Operator

This concludes today’s conference. All parties may disconnect. Have a great day.

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