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Education Realty Trust, Inc. (NYSE:EDR)

Q1 2014 Results Earnings Conference Call

April 28, 2014 10:00 AM ET

Executives

Brad Cohen - ICR

Randy Churchey - President and Chief Executive Officer

Chris Richards - Senior Vice President and COO

Tom Trubiana - Chief Investment Officer

Randy Brown - Chief Financial Officer

Analysts

Paula Poskon - Robert W. Baird

Karin Ford - KeyBanc Capital Markets

Alexander Goldfarb - Sandler O’Neill

Ryan Meliker - MLV

Jana Galan - Bank of America Merrill Lynch

Dave Bragg - Green Street

Nick Yulico - UBS

Carol Kemple - Hilliard Lyons

Operator

Greetings and welcome to the EDR First Quarter 2014 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.

I would now like to turn the conference over to your host, Brad Cohen. Thank you Mr. Cohen, you may begin.

Brad Cohen - ICR

Thank you. 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 to the EDR first quarter 2014 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 very pleased with the progress we made during the first quarter. First quarter Core FFO per share increased 21% due to successful execution of our internal and external growth plans. Looking forward, fall 2014 preleasing has remained strong and we anticipate solid internal growth for late this year and much of next year, based on 3% to 4% increase in same community revenues. Also our company has outstanding embedded growth through our external growth initiatives.

We have announced 517 million new development deliveries through 2016 and increasing gross assets by 29%, all of which have been funded through our appropriately capitalized balance sheet. Importantly, $323 million or 62% of these new development deliveries are on-campus and 92% pedestrian to campus. These developments are at well known Tier 1 universities such as the University of Kentucky, Colorado, Connecticut, Minnesota and Georgia.

Including in our earnings supplemental is 2015 new supply information which shows the rate of increase has slowed by 9% in our markets from 2014. While this new information is encouraging, our focus on just new supply versus forecasted increased enrollment is only part of the story. Also in our earnings supplemental is a chart showing enrollment and supply growth in our markets for 2013 through 2015.

Enrollment growth has been steady at about 1.4%, while supply was a little higher at 2.2% in 2013 and 2014 and then a decrease to 1.8% in 2015. Given that the student housing market is generally viewed as a 95% average occupancy market, this small excess supply over enrollment has proven to be insignificant. For example, for fall 2013, Chris and her team produced a 5% increase in same-community revenue and for fall 2014 based on our current leasing velocity, we anticipate a 3% to 4% increase in same-community revenue.

These robust same community revenue increases in the base of a small excess amount of supply over enrollment is due to our best in class portfolio of assets, fantastic property operations teams and systems, and the modernizations of student housing taken place across the country. We believe this modernization has many, many years of opportunities still to be exploited.

On average, in our markets, 26% of students live on-campus, another 26% live in off-campus purpose built student housing and the remainder or 48% live in other housing, typically older duplexes or pass it investor single family homes.

This migration to newer purpose built student housing, both on-campus and off-campus has been a drive in our same-community revenue successes. We expect this to continue unabated.

Please refer to our Investors Relations tab on our website additional information, addressing the positive enrolment trends that are predicted for the student housing sector through 2021, the manageable near-term new supply, and the modernization of student housing taking place in our industry.

In closing, our outlook for the student housing business and our company remains very positive. The opportunities for EDR to create meaningful shareholder value, from both internal and external growth opportunities are outstanding. We have a team along with the financial resources to seize upon industry opportunities to continue growing the company, in the years ahead.

Now Chris will discuss property operations.

Chris Richards

Thank you, Randy. Although I am excited to discuss fall 2014 preleasing, first, let me highlight the current quarter same community revenue results.

In Q1 2014, same community revenue was up 3% over prior year. This was down from the 4.9% we reported in Q4 2013, due to the beginning of the year reclassification of the same-community pool, which added 6 additional communities. Three of these communities are in the process of being repositioned from a leasing perspective, and without the impact of these 6 assets, our same-store revenue would have been at 4.2%. To be abundantly clear, this is a reclassification from non-same community to same community and not a reduction in total EDR revenues.

Let me provide a little more color on these three assets. The first is a District on 5th at the University of Arizona, acquired in fall of 2012 immediately after lease up. The developer executed new event in the first two months of management, and the outcome was a poor reputation for this community. That negative experience pre-EDR impacted our leasing in the ‘13-14 year and we opened at 88%, which is reflected in the Q1 2014 results. We have since repositioned that assets into ‘14-15, we are 99% leased.

The other two assets that are in repositioning mode are two acquisitions at Texas Tech. Both of these assets were leased by the unit with lease terms expiring year round, essentially operating as multi-family. At acquisition we created a plan and have spent the last year adjusting the lease expiration cycles and realigning the operations of these communities. At opening for fall ‘14-15, our repositioning should be complete. Please remember that in total, all non-same communities, which include these three assets collectively hit their underwriting results for ‘13. We continue to pace favorably in our fall ‘14 preleasings. Our same community portfolio is 70.6% leased for fall, 3% ahead of this time last year. Today this preleasing has produced a 2% increase in same community rental rate.

Please note on page nine of the earning supplemental; we have segregated the same community properties by occupancies achieved in the last leasing cycle. With here we’re reacting as planned in both rate and occupancy velocity. As a result of our positive preleasing and the projected increase in net rents, same community total revenue is anticipated to increase in the range of 3% to 4% for the fall ‘14-15 lease term as we have previously communicated.

At our same Community University of Kentucky asset, Central Hall, you may notice that we did not show preleasing data for this community in the supplemental nor did we show activity for the additional 2,381 new replacement bed opening this August. The on-campus assignment process will be completed by May 15th and application demand has greatly exceeded available beds.

In total, our 2,982 beds at UK are 181% applied as of April 21st versus our other UK-owned beds which are 50% applied. We look forward to the ‘14 completions to meet the demands of the students looking to reside in this new housing in the hardest campus at the University of Kentucky.

Total applications for returning residents requesting housing at UK reached 2,184 as compared to 1,188 for the prior year, a pick-up of 84%. This is a clear indication that demand exists for upperclassmen to reside on-campus and that modernization is underway at the University of Kentucky. Our new communities are leased at 70.4% and are on target with our first year underwriting occupancy and net rate.

In summary, I am extremely pleased with the marketing efforts and sales success from our team on the ground. Occupancy and net rental revenues are tracking in line with our annual budgets, and we have four months remaining in the preleasing cycle to again produce market-leading leasing results.

I will now pass the call to Tom.

Tom Trubiana

Thank you, Chris. Good morning. During the past four years, a major focus of EDR’s business plan has been to reposition our portfolio by divesting assets that are further from campus or that serves secondary or tertiary campuses. And to redeploy the proceeds to acquire and develop communities either on-campus or pedestrian for tier one universities. Our goal is to create a best-in-class portfolio that would deliver long-term value to shareholders.

During the past four years, we have sold 19 communities representing 48% of the assets EDR-owned prior to January 2010. The communities that we sold during the past four years have the following characteristics: Primary located in secondary and tertiary markets; average distance from campus 2.1 miles; average university enrollment 19,400 full time students at an average rental rate of $323 per month.

During the same four year period, we acquired $670 million and developed and opened 284 million of high quality assets that includes following comparative characteristics: All located in tier one markets; average distance from campus 0.26 miles, and if you exclude the differentiated cottage product, 0.1 miles; average university enrollment 27,600 full time students at an average rental rate of $762 per month which is more than double the rent of the assets that we sold. Today, 74% of our NOI is from assets either on or pedestrian to campus. By the end of 2016, 25% of the cost of our assets will be on-campus.

In keeping with our efforts to recycle capital to higher yielding opportunities, in March we closed on the two previously announced sales contracts, the reserve at the University of Kansas and College Station at Purdue University for an aggregate total sales price of $41.9 million. The distances to campuses for these two communities are 3.5 miles and 3.3 miles respectively. The weighted average economic cap rate on these two dispositions was slightly over 6%.

Looking forward EDR has outstanding embedded external growth through the 517 million of development deliveries and pre-sale opportunities through 2016, an increase in gross assets of 29%.

Please refer to page 14 of the supplemental for a listing of active developments and pre-sale projects. These developments pre-funded from our balance sheet are all preceding this plan 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.

The metrics of our external growth from announced developments are compelling, the medium distance to campus is well on-campus. The average distance to campus is 0.1 miles. Average university full-time enrollment 26,400 students and the average rental rate is $831 per month.

For EDR, the most exciting external growth opportunity is for on-compass development ownership under our ONE Plan. By the end of 2016, our portfolio of ONE Plans will include 527 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 universities face many of the same challenges, reduced support from constrained state budgets, older on-compass housing and demands for institutional funds for academic and support service initiatives.

This declining state support for higher education is the norm. The modernization of on-compass housing focused on student success and live learn communities represents a significant opportunity for EDR to invest in the other shift of on-compass communities that provide us with the best risk adjusted returns.

These external factors provide a great opportunity for companies such as ours and EDR is well positioned to win these opportunities. Currently, the number of companies that have the proven on-compass development and management expertise, size, transparency and financial strength necessary to successfully compete for these university mandates is very limited.

These requirements are EDR strengths and they make and provide a strong barrier to entry into this market. In 2014, 24% of EDR’s NOI will be from ONE Plan assets. On page 15 of the supplemental, you will find our third party development summary, the Mansfield project is now complete and we will soon be closing out the construction phase of the project.

The Westchester and Wichita State projects are progressing on schedule and within budget. The Clarion project is scheduled to begin construction next month subject closing to the financing and the East Stroudsburg project is still pending a real estate tax appeal by the University.

Earlier this month, the Annual Student Housing Business Interface Conference held in Austin. EDR was once again honored by winning an industry leading five INNOVATOR awards during the conference. 2400 Nueces at the University of Texas, Austin earned two premier awards, best on-campus development and best on-campus public private partnership. University Towers at North Carolina State University won best off-campus vendor operator solution for utility cost savings. 929 at Johns Hopkins won best on-campus vendor operator solution by increasing bandwidth speed tenfold. And in conjunction with Landmark, the Best Off-Campus Amenities Package Award was won by the EDR owned The Retreat at State College.

These awards are particularly gratifying because of the winners are selected from the panel of non-EDR related judges that are our peers in industry and they clearly show that EDR continues to be a major innovator in the student housing industry as we celebrate our 50th Anniversary.

Lastly, our external growth priorities are as follows: Deliver all 11 2014 developments on-time and within budget; win more on-campus ONE Plans; strength EDR portfolio by divesting of assets with less future upside to fund targeted higher yielding developments; create a meaningful pipeline of wholly-owned and JV off-campus developments for 2016 and beyond; and monitor the acquisition marketing.

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

Randy Brown

Thank you Tom and good morning everyone. I am pleased to report that EDR delivered another quarter of strong financial performance. Core FFO per share in the first quarter was $0.17, an increase of 21% over the comparable quarter in 2013. Total community revenue for the quarter increased to a record high of $50.7 million and nearly 29% increase over first quarter of 2013.

Net operating income was $28.5 million, up over 31% compared to last year’s first quarter as the financial impact of new communities continued to grow significant growth in our quarterly income stream. For the first quarter of 2014, same community NOI increased nearly 2%, resulting from a 3% growth in revenue as compared to last year and same community operating expenses increased 4.6%.

The increases in operating expenses were due to two primary factors: One, a 7% increase in utility expenses as the country experienced the coldest winter in the last four years; and two, a 15% increase in real estate taxes. Excluding utility costs, our same community direct operating expenses would have been flat to first quarter of 2013 and total operating expenses would be up 3.6% which is consistent with our yearly guidance.

The increase in real estate taxes is consistent with our full year 2014 expectations and we continue to project an annual growth of same community expenses to be in the range of 3% to 4% for 2014. Our capital structure and related debt metrics continue to reflect our capital management strategy of maintaining a flexible, well capitalized balance sheet.

EDR’s percentage of unencumbered assets now stands at approximately 61% of our total portfolio. For the trailing 12 months as of March 31st, our interest coverage ratio was 4.5 times, net debt to adjusted EBITDA was 6.2 times and debt to gross assets was 43%.

We remain focused on our strategy to have sufficient balance sheet capacity to pre-fund our capital commitments. Based on our financial analysis, which includes the remaining funding requirements for the 2014, ‘15 and ‘16 developments shown on page 14 of the supplemental, we estimate our debt to gross assets will range between 47% and 49% and interest coverage ratios would be above 3.9 times throughout this year three year period. We are comfortable with this pro-forma debt metrics.

And finally, turning to 2014 guidance. Based on our current expectations of market conditions and operating results, which include the reclassification within our same community portfolio, we reaffirm our expected full year 2014 core FFO per share range of $0.62 to $0.68.

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

Question-and-Answer Session

Operator

Thank you. We will now be conducting the question-and-answer session. (Operator Instructions). Thank you. Our first question is from the line of Paula Poskon with Robert W. Baird. Please proceed with your question.

Paula Poskon - Robert W. Baird

Thank you. Good morning everyone.

Randy Churchey

Good morning.

Chris Richards

Good morning.

Paula Poskon - Robert W. Baird

A question for Randy Brown. Randy, are you assume that the year-over-year decline reported decline in same-store revenue because of the addition of the assets the additional six assets that the same-store pool is within your guidance, is that correct?

Randy Brown

That’s correct Paula.

Paula Poskon - Robert W. Baird

So, I am just kind of trying to reconcile why we didn’t have I think candidly a better heads-up on that, particularly at the Investor Day a couple of weeks ago? Can you just kind of talk about what moving pieces are that reaffirms guidance?

Randy Brown

Sure Paula. When we gave our original same community revenue guidance was between 3% and 5% and our first quarter revenue growth was obviously 3% after the reclassification. And so in the past as we do every year we have a reclassification or change in our same community portfolio mix, in the past that that change hadn’t materially impacted any of the guidance that we’ve given in the past. This year, this quarter because of the three repositioning properties that Chris mentioned and high inside we should have better anticipated how those reclassifications would have altered our same-community growth profile beyond the fall 2013 lease up numbers that we gave, and going forward we’ll do a better job of that.

But as you mentioned and let me reiterate again that our Core FFO per share guidance is not changed by this reclassification. Those six properties that were added to the same-store mix were budgeted and we continue to expect the results that we saw in the first quarter to continue to as rest of the year. So, they were anticipated as part of the overall NOI change in our core FFO.

So on high inside, we should have done a better job of looking at those and anticipating to really be impacted of three repositioning properties in our same-store and possibly readjusted our same-store guidance, when we gave that in the fall. If you just look at our same-store guidance, the original guidance of between 3% and 5% and we also anticipated fall of ‘14 same-store of an increase in revenue between 3% and 4%. So if you kind of factor in where we stand right now with a 3% to plus say 4% growth for the next seven months in same-store.

I think the overall full year revenue growth is probably going to be closer to 3% to 4% rather than three to five. But again let me say again that does not impact our core FFO guidance that we gave at the first of the year.

Randy Churchey

Let me just add one thing to that, I think Randy said well, when we release fall final preleasing on September 30 of 2014 we will gave that guidance for the following year at that time. We should have done at this time around, but again we did not think it was a significant event.

Paula Poskon - Robert W. Baird

Okay, thanks Randy. And as question for Tom, I know we talked a little bit about this at the Investor Day, but could you just for the benefit of everyone talk about the Georgia State the RSP there and what, how you guys are thinking about that?

Randy Brown

Yes, actually about the same day as our recent Investor Day. We didn’t indeed receive and actually we call it RFQ because of the process that are going to go through will narrow the number of people that have shown interest down to three no more than four, which I think we probably can almost at this point in time, because there is not that many folks and that have the way to fall to do with. Look, it’s the most compelling thing about the University System of Georgia is that you’ve got a major system that to looking to privatize in some former fashion in order to problem solve some of the challenges they have into achieve their goals.

And so, we have reviewed the mountain of information, we are studying and there is still more information particularly financial performance more detail. So I think that what will end up happening predicting is the system will pick a partner to try to work through that they think will best help achieve their goals.

This portfolio, while there are a couple of universities of substantial size, the majority of them are smaller and that means underwriting both the university and potentially having some kind of deal structure that would protect your downside, all that is yet to be seen. So are we analyzing it, absolutely once again because of it being primarily smaller institutions, it’s probably going take some creativity and real partnering in order for us to make good economic sense for everyone.

Paula Poskon - Robert W. Baird

Thanks very much. That’s all I have.

Operator

Our next question comes from the line of Karin Ford with KeyBanc. Please proceed with your question.

Karin Ford - KeyBanc Capital Markets

Hi, good morning. My first question is just on expenses. The 300,000 that you mentioned in utility costs from extreme weather, is that just the extraordinary piece of the increased or I mean should we expect that to go away assuming the weather gets better from here?

Randy Brown

Hi Karin this is Randy Brown again. Yes I would say that’s safe to assume, we always include some inflationary growth in our budgeting process for utilities and we certainly did that this year, we didn’t anticipate the unusually cold weather that we had this past quarter, so that was certainly an anomaly, but I think that is definitely not a good run rate going forward.

Karin Ford - KeyBanc Capital Markets

Okay. And then how do you get to the 3% to 4% 2014 expense guidance from the 4-6% that you did in 1Q?

Randy Brown

Well, again like I said, we did anticipate that being some increase in utility cost this year, we didn’t anticipate the big jump in the first quarter. We still have a comfortable range, comfortable increase in our budget over prior year for all the operating expenses, so just based on our current forecast, we still are very, very comfortable with that 3% to 4%.

Randy Churchey

On top of that we realize it’s only $300,000, so it’s well that’s significant in any one quarter that utility excess for the year that’s really not much.

Karin Ford - KeyBanc Capital Markets

Okay. Next question just on Kentucky with your projects there over 180% applied for, can you talk about where you expect the occupancy to be, where that was versus your underwriting and what impact that might have on your development yield there?

Randy Churchey

Yes, since you brought up development yield, I can say (inaudible) we underwrote the entire Kentucky portfolio at 95% occupancy during the academic school year because the property is leased on a per semester basis, and very, very little occupancy in the summer months.

If you look at Central Hall which has been up and operating we maintained 99% or close to 100%, we clearly with this level of demand, we clearly will open it higher than the 95% that these projects were underwritten. And it will have a positive impact to our returns.

Karin Ford - KeyBanc Capital Markets

Do you have a sense for when the next approval or allocation for the next log of Kentucky will come?

Randy Churchey

That’s kind of interesting. Candidly, we’re saying to our team look we have some 2,381 beds to be delivered in 2014 and while we’re confident that they will be completed on time and within budget. We’re saying look for the next couple of months, let that be out focus. Interestingly the university is saying, common guys we want to sit and talk about 2017. And so, and we’ll do that with all of this keep in mind this is primarily the placement housing and to tall top towers that has almost 5,000 students who either be demoed or repurposed as we go forward.

So, Karin we’re going to keep our focus on making sure our 2014 but probably in the next 30 to 60 days, we’ll start those preliminary dialog about 2017 deliveries.

Karin Ford - KeyBanc Capital Markets

Thanks. And then just last question is for Chris, you just talk about what the -- how the lease up is going for your private competitors in your market? How do you feel like your rent growth that you’re achieving so far is comparing to what you think the market is doing?

Chris Richards

The last conversation that we really had Karin was a private towards that interface, so that’s been three weeks ago or so. And for the most part, everybody was having very healthy results. Leasing velocity was ahead, rates were up 1, 2, 3 based on what they tell you.

So, lease-up I think for all the private is going very well.

Karin Ford - KeyBanc Capital Markets

Thanks very much.

Operator

Our next question is from the line of [Jeffrey Pill] with Goldman Sachs. Please proceed with your question.

Unidentified Analyst

Hi, good morning.

Randy Churchey

Good morning.

Unidentified Analyst

Just turning to your active projects in your on-development pipeline, you had about $250 million in ‘14 and about $128 in ‘15 and then about $83.9 million in ‘16. Just wondering if your ‘15 and ‘16 pipelines get to the level that you’re currently after 2014?

Tom Trubiana

Yes Jeff, this is Tom. Actually for the 2015 it would be very difficult to pull something together at this stage; supposedly there could be a joint venture or something down the road. But unless someone is well down the road, highly unlikely that you will see any additional 2015 deliveries. And then of course 2016 we are working on a number of initiatives and there is plenty of time to increase the 2016.

Unidentified Analyst

Okay. Thank you. And do you expect your on-campus equity plan to be a large part in ‘16?

Tom Trubiana

We’d certainly like for it to be. We’re having a lot of dialogue, but as you know we don’t control that process, it seems to take longer than any of this would like.

Unidentified Analyst

Okay. Thank you.

Tom Trubiana

You’re welcome.

Operator

Our next question is from the line of Alexander Goldfarb with Sandler O’Neill. Please proceed with your question.

Alexander Goldfarb - Sandler O’Neill

Good morning. Randy Brown, did you -- to Paula’s question, are you saying on the revenue front that you are more likely to be in the 3 to 4 range rather than 3 to 5 or you’re saying 3 to 4 as expenses?

Randy Brown

3 to 4 is the expense guidance, Alex and that hasn’t changed.

Randy Churchey

I think Paula’s question was dealing with revenue?

Alexander Goldfarb - Sandler O’Neill

No, that’s why I am asking, I didn’t know, it sounded like you were saying you’re more likely to have revenue of 3 to 4 rather than 3 to 5?

Randy Brown

Yes. I think with this new re-class portfolio that we have for same-store; I think you just do the math that we talked about. It could transit from the 3 to 5 than to 3 to 4.

Alexander Goldfarb - Sandler O’Neill

Okay, okay. I just want to make sure that I heard it properly. And then in your Hopkins at the Investor Day you said it should close in the next 30 days, I’m assuming is that still on track, we should [steal] the $3 million in the second quarter?

Randy Brown

Alex, actually the status of that has not changed; I keep getting good reports from EBDI and Raymond James that there still is an outstanding issue that needs to be resolved with John Hopkins. So, while documents are prepared and everyone is optimistic that we’ll get that closing, it’s never done until it’s done.

And the other thing that I would add to that is as part of the process and appraisal was done on the property and it turned up very favorable. And so we’re cautiously optimistic that this closing will go forward, which is a primarily [taxes] and bond financing. Part of it if it doesn’t with the appraisal that was given we’ll be able to refinance it via other means.

Alexander Goldfarb - Sandler O’Neill

Okay, okay. And then just finally, going back to the Investor Day where you guys gave 2015 guidance, were you assuming that your variable rate debt remains at the level it is now or is that guidance assume that that came down and therefore the interest rate on your debt is a little bit higher than what it is right now?

Randy Churchey

Alex, this is Randy. That was assuming where we are today with all of our rates both variables and fixed.

Alexander Goldfarb - Sandler O’Neill

Okay. And that assumes that the balance whatever is being spent from here to there is all at the current variable like line of credit rate?

Randy Churchey

That’s correct, with inflation built into LIBOR spread over that three year period.

Alexander Goldfarb - Sandler O’Neill

How much is built into that, how much are you guys including?

Randy Churchey

We typically include depending on what we can [gain] from outside economies anywhere from 25 to 50 basis points.

Alexander Goldfarb - Sandler O’Neill

Okay.

Randy Churchey

The existing level.

Alexander Goldfarb - Sandler O’Neill

Okay. So that includes an extra 25 to 50 on top of where it is today?

Randy Churchey

That’s correct.

Alexander Goldfarb - Sandler O’Neill

Okay, great. Thank you.

Operator

Thank you. (Operator Instructions). Our next question is from the line of Ryan Meliker of MLV. Please proceed with your question.

Ryan Meliker - MLV

Hey, good morning guys. Most of my questions have been answered, but I was just hoping you could give a little color. Paula asked about University of Georgia obviously last week on ACC’s call we heard about [Butler], you guys are obviously very engaged with the University of Kentucky and the new investment you talked a lot about, an increased level of interest. Can you just give us a little bit more color and any specifics you might be able to share or other universities that are looking at doing full sleeper or on-campus housing redevelopment?

Tom Trubiana

Yes. First of all congratulations to ACC on winning Butler and we certainly have knowledge of that and so there was a tight contest, but congratulations. And then the way a lot of these processes are working, we’re finding more and more of the universities selecting a partner that they choose to work with and that’s indeed with Butler.

So, currently we have nine active RFQs or RFPs that are in some form of procurement process. Most of them tend to be; in fact the majority of them means of financing is not known a couple of them they clearly did prefer an equity plan. And so, how many will end up becoming a third-party or equity is to be determined.

We’re also having dialogue based on someone having interest or having toward or call Kentucky with about 30 other institutions that are in that what I would call preliminary stages considering putting that some kind of an RFQ or RFP.

And as far as universities are completely doing their housing, there is nothing at this point in time that’s as comprehensive as Kentucky, but there are some that are very needy until as far as the number of beds. So, unfortunately that’s about as specific as I can be at this point in time.

Ryan Meliker - MLV

Okay. That’s helpful. So, out of those nine universities that you do have RFPs and RFQs out for, none of them are currently for full sweep of on-campus housing like what is being discussed at Butler and what you guys are doing at University of Kentucky?

Tom Trubiana

Well, I mean because it’s out there publically, I guess the closest to that is University of California, Merced, which is a new campus that’s growing and all and they have an RFQ that came out about a week ago for 1,900 beds. But all of these need to do research and make sure that they make sense and whether that’s going to be tax exempt for, in our case the one-time is not yet determined. But majority of intensity initially are kind of one-off deals or help us figure out a master plan related to our housing.

Ryan Meliker - MLV

Fair enough. That’s helpful. Thanks for that Tom.

Tom Trubiana

You are welcome.

Operator

Our next question is from Jana Galan with Bank of America Merrill Lynch. Please proceed with your question.

Jana Galan - Bank of America Merrill Lynch

Thank you. Good morning. Just a quick question for Chris on leasing; total new community leasing momentum is slightly slower than the same communities. Is this kind of university specific or more of a marketing focus this year on the same-store?

Chris Richards

Actually with the new communities if I -- what I don’t report because Kentucky is kind of in a different situation, but if you take the new communities including my deliveries for ‘14 including Kentucky which we’re assuming will be 100%, our new communities are actually at 85%.

Jana Galan - Bank of America Merrill Lynch

Okay. And can you comment on how you see marketing spend ranging for the remainder of the year? Does it fall into that 3% to 4% of same-store expense growth?

Chris Richards

Yes, absolutely. Our Q1 marketing spend came in at $43 [above] which is right on target with what we anticipated and falls within our guidance for the year.

Operator

Thank you. Our next question comes from the line of Dave Bragg of Green Street. Please go ahead with your question.

Dave Bragg - Green Street

Thank you, good morning. This is a follow up on the initial conversation on the reclassified same-store pool. For the three assets that you discussed in detail, how do the results for this academic year differ from your initial underwriting at the time that you bought them?

Randy Churchey

Zero.

Dave Bragg - Green Street

Okay. And that’s interesting to watch, what we’re used to seeing from EDR and ACC is better revenue growth or significantly better revenue growth in the second year. Is this something that we should expect going forward with the new non same-store or communities that come in a year from now or this an outlier then of three assets in this one specific year?

Randy Churchey

We think it is an outlier event. When you focus to next year, I think there is all assets that will have the same type of timing differential. And based on pre-leasing today, it will actually boost the numbers in the first quarter versus the fourth.

Dave Bragg - Green Street

Okay, that’s helpful. Thank you. Another question is even after you adjust for those six -- the net addition of those six properties, you have revenue growth of 4.2% in the first quarter, down from 4.9% in the fourth quarter. Historically, you’ve had much more stability between 4Q and 1Q. So can you talk to that sequential decline of 70 basis points?

Randy Churchey

Sure. And again it is 70 basis points, so it’s not much of a number. What happens in the first quarter is we have spring leasing, some years we lease better in the spring than other years. As you can imagine what we’re doing in the fall leasing campaign, we really don’t open up many short-term leases because we want to force everybody to do a full 12 month lease. But once leasing is in the bag that’s when you’d say in December we open up spring leasing. So, you have two dynamics going on, you have the spring leasing this year versus last year, and then every year you have some fall out. And depending on the circumstances of the individuals, we have the ability to keep them and make their parents pay for the full year, but depending on the circumstances and so forth [summer] led out. So, net-net, it’s a reduction this of year 70 basis points, usually it’s a plus or minus 1% each year.

Dave Bragg - Green Street

Thank you.

Randy Churchey

You’re welcome.

Operator

Our next question is from the line of Nick Yulico of UBS. Please go ahead with your question.

Nick Yulico - UBS

Thanks. I just had a question about Kentucky and the ground lease there; I want to make sure I understand some. I think that project the way the ground lease works is that it’s calculated as a percentage of the revenue but then -- of the buildings, but then I also ask for an opportunity for you, I guess kind of make a certain return. And so I am wondering as how does as that project does better or worse than your expectations, are you able to capture the full upside to that or is there kind of a cap since I think you guys have guided some sort of a minimum return specified in the ground lease?

Tom Trubiana

This is Tom. So, each year’s deliverables have a slightly different percentage of revenue that the university we see is a base rent. And so the more non-revenue generating space, live, learn and classrooms that may indeed reduce that percentage. Generally it’s ranged from 10% to higher around 15%, but each year it could be different depending upon the needs of the university, although while underwriting to absolute return for EDR.

So, our required return doesn’t change, what changes is, the base ground rent. And indeed because the alignment of interest is so important when we have a 75 year partnership, there is a provision for them to have received participating ground rent after EDR in any year you run a test in if we have a return on and a total return of our capital above 9% then the university in that given year would participate and receive a small percentage of anything above that particular return.

And so we have the projects continue to do well, instead of the university getting participating ground rent in year 45, it might be year 42. But it creates that alignment of interest that’s so important with this kind of partnership.

Nick Yulico - UBS

Okay. And so how is -- I mean how is the accounting for all this going to work as far as ground lease expense over the next couple of years, because it’s really not much in your numbers right now?

Randy Churchey

Our numbers; so as Tom was saying, they are giving 10% to 15% of revenue as ground rent and that’s what’s been recognized in the financial statement. So, to your earlier question, we do capture most all of that excess benefit from 100% occupancy versus 95% through the ground rent being only 10% to 15% of revenue. I mean going forward I think the way the accounting works is whenever we get to a point where they get participating rent that’s when that start being accrued.

Tom Trubiana

That’s true.

Nick Yulico - UBS

Right. So, that’s what my question is as of now is that actually -- are they actually getting any benefit so that this year as you stabilize mortgage projects, is that benefit to the university as a payment going through your ground lease this year or next year?

Randy Churchey

Yes.

Nick Yulico - UBS

Okay.

Randy Churchey

As they are getting 10% to 15% of revenue any excess of that as well. They get 10% to 15% revenue that’s going to the income statement.

Nick Yulico - UBS

Okay. And there is no, presuming there is no way for you to be straight lining this ground lease?

Randy Brown

It’s variable. We do not straight line that, it’s whatever the ground rent payment is every year. So, the base rent is base rent, if it’s a base rent plus in the excess beyond our return as Tom mentioned, it will recourse that beyond the straight line.

Randy Churchey

Yes. The only way a straight line comes to effect is when you guarantee some percentage increase per year and that’s not guaranteed.

Nick Yulico - UBS

Okay.

Randy Brown

One point we want to add because well indeed there is base ground that is percentage of revenue, the university is from that they are paying for the [risk] like services first responders, grounds and landscaping and doing the collection of the rents. So, those are costs that we’re incurring, but we’re incurring it through the ground rent payment we make to the university.

Nick Yulico - UBS

Okay. And then is there -- I forget if this was specified for your 2015 guidance. Did you specify what the ground lease impact is going to be next year for 2015?

Tom Trubiana

No, we didn’t get into specific details beyond just sort of an indicative core FFO range and growth.

Nick Yulico - UBS

Okay. So, I mean, but how should we think about this ground lease impacting should be more impactful next year your numbers than this year?

Randy Churchey

Well, I think what we did in the ‘15 guidance is we showed you NOI improvement based upon the new deliveries. So, obviously that number includes reduction for ground rent.

Nick Yulico - UBS

Okay. All right, thanks.

Operator

Thank you. Our last question is coming from line of Carol Kemple of Hilliard Lyons. Please go ahead with your question.

Carol Kemple - Hilliard Lyons

Good morning.

Randy Churchey

Good morning

Chris Richards

Good morning.

Carol Kemple - Hilliard Lyons

Do you currently have any assets for sale?

Randy Churchey

Yes we do.

Carol Kemple - Hilliard Lyons

Can you say how many?

Randy Churchey

Not right now. We’re not ready to do that yet.

Carol Kemple - Hilliard Lyons

Okay. You all mentioned that like it’s going to be a little bit off before you all start looking at acquisitions, is there anything that you are currently looking at?

Randy Churchey

I am sorry, there are. As you know the way that cycle works in a student housing businesses, most transactions occur in the late third quarter and fourth quarter with a little bit of dribble over into the first. So, there is not a lot of assets that are on the market today, but there are some. And we are looking at those.

Carol Kemple - Hilliard Lyons

Okay. Thank you.

Operator

Thank you. At this time for closing comments, I will turn the floor back to management.

Randy Churchey

Well, thank you for your time today. And for many of you, thank you for being at our Investor Day at the University of Kentucky, we really appreciate it. And to our team in the field, thanks for the robust preleasing results today. And now let’s finish the call. I look forward to seeing many of you at May read in a few weeks. Thanks all.

Operator

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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